SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
OR
{_} TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ______________to______________
Commission file number 000-22673
SCHICK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3374812
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31-00 47th Avenue, Long Island City, NY 11101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 937-5765
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes | | No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
----------
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 7, 2000 was approximately $ 18,220,731. Such aggregate
market value is computed by reference to the average of the closing bid and
asked prices of the Common Stock on such date.
As of March 7, 2000, the number of shares outstanding of the Registrant's
Common Stock, par value $.01 per share, was 10,136,113
DOCUMENT INCORPORATED BY REFERENCE
NONE
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Table of Contents
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Item of Form 10-K Page
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Part I
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 23
Part III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners And Management 31
Item 13. Certain Relationships and Related Transactions 33
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K F-1
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PART I
ITEM 1. BUSINESS
Schick Technologies, Inc. (the "Company") designs, develops and
manufactures innovative digital radiographic imaging systems and devices for the
dental and medical markets. The Company's products, which are based on
proprietary digital imaging technologies, create instant high resolution
radiographs with reduced levels of radiation.
In the field of dentistry, the Company's CDR(R) computed dental radiography
imaging system was introduced in March 1994 and has become a leading product in
its field. The CDR system uses an intra-oral sensor to produce instant, full
size, high resolution dental x-ray images on a color computer monitor without
film or the need for chemical development, while reducing the radiation dose by
up to 80% or more as compared with that required for conventional x-ray film.
The Company also manufactures and sells the CDRCam(R) 2000, an intra-oral camera
which fully integrates with the CDR system, and the CDRPan(TM), a digital
panoramic imaging device. The Company is also developing other products and
devices for the dental field in addition to newer versions of its current
products.
In the field of medical radiography, the Company manufactures and sells the
accuDEXA(R) bone densitometer, a low-cost and easy-to-operate device for the
assessment of bone mineral density and fracture risk. Additionally, the Company
is developing a digital mammography device which, it believes, will offer high
quality diagnostic capability at a reasonable cost, and has commenced
development of a general digital radiography device for intended use in various
applications, including mobile medicine, orthopedics, podiatry, veterinary
medicine and industrial non-destructive testing.
The Company's core products are based primarily on its proprietary
active-pixel sensor ("APS") imaging technology. In addition, certain of the
Company's products are based upon its proprietary enhanced charged coupled
device ("CCD") imaging technology. APS allows the fabrication of large-area
imaging devices with high resolution at a fraction of the cost of traditional
technologies. APS technology was originally developed by the California
Institute of Technology and licensed to Photobit Corporation; it is sublicensed
to the Company for a broad range of health care applications.
The Company's objective is to be the leading provider of high resolution,
low-cost digital radiography products. The Company plans to leverage its
technological advantage in the digital imaging field to penetrate a broad range
of diagnostic imaging markets. The Company believes that its proprietary
technologies and expertise in electronics, imaging software and advanced
packaging may enable it to compete successfully in these markets. Key elements
of the Company's strategy include (i) expanding market leadership in dental
digital radiography through expanded sales channels, further product
enhancements, and increased marketing activities; (ii) broadening the marketing
of accuDEXA(R) to the medical market through a combination of direct sales and
other distribution channels; (iii) introducing new products based on patented
and proprietary APS technology for digital mammography and other medical and
industrial applications; and (iv) enhancing international distribution channels
for existing and new products.
The Company's business was founded in 1992 and it was incorporated in
Delaware in 1997. On July 7, 1997, the Company completed an initial public
offering of its Common Stock. Proceeds to the Company after expenses of the
offering were approximately $33,508,000.
On December 27, 1999, the Company established a strategic relationship with
Greystone Funding Corporation ("Greystone") and entered into a Loan Agreement
with Greystone which provides for the establishment of a credit facility for the
Company in an amount of up to $7.5 million. In connection with this Agreement,
as amended and restated on March 17, 2000, Greystone designees were appointed to
the Company's Board of Directors and key executive management positions. The
Company believes that the Greystone line of credit will be used to provide it
with working capital and help facilitate future growth. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's offices are located at 31-00 47th Avenue, Long Island City,
New York 11101. The Company's
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telephone number is (718) 937-5765, and its web site address is
http://www.schicktech.com.
PRODUCTS / INDUSTRY
Dental Imaging
X-ray imaging, or radiography, is widely used as a basic diagnostic
technique in a broad range of medical applications. To produce a conventional
radiograph, a film cassette is placed behind the anatomy to be imaged. A
generator, which produces high energy photons known as x-rays, is positioned
opposite the film cassette. The transmitted x-rays pass through soft tissue,
such as skin and muscle, and are absorbed by harder substances, such as bone.
These x-rays then form a latent image upon the film. After exposure, the film is
passed through a series of chemicals and then dried.
Film, however, has certain inherent limitations, including the time,
operating expense, inconvenience and uncertainty associated with film
processing, as well as the cost of disposal of waste chemicals and the need for
compliance with environmental regulations. Furthermore, the radiation dosage
levels required to assure adequate image quality in conventional film raise
concerns regarding the health risks associated with exposure to radiation. Also,
conventional film images cannot be electronically retrieved from patient records
or electronically transmitted to health care providers or insurance carriers at
remote locations, a capability which has become increasingly important in
today's managed care environment. While x-ray scanning systems convert x-rays
into digital form, they add to the substantial time and expense associated with
the use of conventional film and do not eliminate the drawbacks of film
processing.
Digital radiography products have been developed to overcome the
limitations of conventional film. These systems replace the conventional film
cassette with an electronic receptor which directly converts the incident x-rays
to digital images. The first system to employ certain aspects of this technique
was Computed Radiography(TM) ("CR"), a "near real time" system, in which a laser
scanner reads the x-ray image from a specially designed cassette. While CR
allows the images to be electronically displayed and stored, it does not achieve
instant results, and employs a large, costly scanning system. Other technologies
which allow for instant acquisition of digital x-rays have been developed,
including CCD arrays and amorphous silicon panels, neither of which is well
suited for imaging large areas due, respectively, to high cost and limited
resolution.
Dentists, who typically perform their own radiology work, represent the
single largest group of radiologists in the world and the dental industry is, in
terms of unit volume, the largest consumer of radiographic products and
equipment.
The Company believes that there is a potential market for approximately 1.1
million digital dental radiography devices worldwide. According to the American
Dental Association, there are approximately 150,000 practicing dentists in the
United States. The Company believes that each of them, on average, operates 2.5
radiological units, creating a potential market of 375,000 digital dental
radiography devices in the United States. In addition, the Company believes that
there are approximately 600,000 practicing dentists in the world's major
healthcare markets outside of the United States and, the Company believes that
each of them, on average, operates 1.25 radiological units, creating a potential
market of 750,000 additional devices.
The Company believes that Dentists have a particularly strong motivation to
adopt digital radiography. Radiographic examinations are an integral part of
routine dental checkups and the dentist is directly involved in the film
development process. The use of digital radiography eliminates delays in film
processing, thus increasing the dentist's potential revenue stream and
efficiency, and reduces overhead expenses. The use of digital radiography also
allows dentists to more effectively communicate diagnosis and treatment plans to
patients, which the Company believes has the potential to increase the rate of
patients' treatment acceptance and resulting revenues. Finally, the dosage
required to produce an intra-oral dental x-ray, which is high when compared with
other medical radiographs, can be reduced by up to 80% or more through the use
of digital radiography.
The Company's principal revenue-generating product is its CDR(R) computed
dental radiography imaging system.
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The Company's CDR(R) system is easy to operate and can be used with any dental
x-ray generator. To produce a digital x-ray image using CDR(R), the dentist
selects an intra-oral sensor of suitable size and places it in the patient's
mouth. The sensor converts the x-rays into a digital image that is displayed on
the computer monitor within five seconds and automatically stored as part of the
patient's clinical records. CDR(R) system software allows the dentist to perform
a variety of advanced diagnostic operations on the image. The sensor can then be
repositioned for the next x-ray. As the x-ray dose is significantly lower than
that required for conventional x-ray film, concern over the potential health
risk posed by multiple x-rays is greatly diminished. The process is easy and
intuitive, enabling nearly any member of the dental staff to operate the CDR(R)
system with minimal training.
The Company manufactures digital sensors in three sizes which correspond to
the three standard size conventional x-ray films. Size 0 measures 31 x 22 x 5mm
and is designed for pediatric use; size 1 measures 37 x 24 x 5mm and is designed
for taking anterior dental images; and size 2 measures 43 x 30 x 5mm and is
designed to take bitewing images. All of the Company's CDR(R) sensors can be
sterilized using cold solutions or gas. The typical CDR(R) configuration
includes a computer, display monitor and size 2 digital sensor. Since mid-1998,
the computers sold by the company as a component part of the CDR(R) system have
been manufactured exclusively by Dell Computer Corporation, pursuant to an
agreement between the Company and Dell.
The Company began selling its intra-oral camera, the CDRCam(R), in early
1997 and introduced the CDRCam(R) 2000, a redesigned version of the product, in
November 1999. CDRCam(R) fully integrates with the CDR(R) system to provide
color video images of the structures of the mouth. Since their introduction in
1991, intra-oral cameras have become widely accepted as a dental communication
and presentation tool. CDRCam(R) is "ETL Listed." ETL is a North American Safety
Mark indicating compliance with safety standard UL-2601-1.
In March, 1999, the Company commenced the sale of its digital panoramic
imaging device, the CDRPan(TM). This device, which is designed to be retrofitted
into conventional panoramic dental x-ray machines, replaces film with electronic
sensors and a computer. This obviates the need for film and provides
instantaneous images, thus offering substantial savings in terms of time and
costs. Additionally, the CDRPan easily integrates with practice management and
other computer software applications.
Bone Mineral Density / Fracture Risk Assessment
Assessment of bone mineral density ("BMD") is an essential component in the
diagnosis and monitoring of osteoporosis. Osteoporosis is a disease that causes
progressive loss of bone mass which, in serious cases, may result in bone
fractures and even death. Osteoporosis can develop over the course of many years
without apparent symptoms, until bone is sufficiently degenerated and fractures
occur. The National Osteoporosis Foundation has estimated that approximately 200
million people suffer from the disease worldwide, which affects one out of three
postmenopausal women and one out of ten men over the age of 70. In the United
States, an estimated 28 million people suffer from the disease or have low bone
mass, placing them at increased risk for osteoporosis. The total estimated
health care cost of osteoporosis in the United States, including indirect costs,
is approximately $14 billion annually.
Until recently, osteoporosis was considered neither treatable nor
preventable. Because effective treatments are now available and because
osteoporosis may be preventable if detected in its early stages, the demand for
BMD diagnostic equipment has significantly increased. Because of the large
population segment which could benefit from BMD testing, the Company believes
that there is a need for a practical, instant, cost effective, precise, compact
and easy-to-use BMD testing device for the primary care physician. Primary care
physicians consist of internal medicine, family, geriatric and OB/GYN practices.
These practices represent approximately 172,000 potential testing sites in the
United States alone. Traditional BMD assessment devices have been large, costly
and difficult to operate, and are mainly found in large hospitals and diagnostic
imaging centers. It is estimated that in 1999, there were approximately 6,000
such BMD assessment devices in use in the United States.
The Company has developed an innovative BMD assessment device to assist
doctors in the diagnosis of low bone density and prediction of fracture risk.
This low-cost and highly precise diagnostic tool, which is marketed under the
trade name accuDEXA(R), assesses BMD more quickly, accurately and easily than
any comparable product currently on the market, while using a minimal radiation
dosage. It is a point-of-treatment tool, designed for use by primary
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care physicians as an integral part of a patient's regular physical examination.
In December 1997, the Company received clearance from the United States Food and
Drug Administration ("FDA") for the general use and marketing of the accuDEXA(R)
as a BMD assessment device; in June, 1998, the FDA granted the Company
additional clearance for its marketing of the accuDEXA(R) as a predictor of
fracture risk.
Based on APS technology, accuDEXA(R) is a small self-contained unit capable
of instantly assessing the BMD of a specific portion of the patient's hand, a
relative indicator of BMD elsewhere in the body. This device is the first BMD
assessment instrument that is virtually automatic, requiring little operator
intervention, calibration or interfacing other than the entry of relevant
patient data into a built-in touch sensitive LCD screen. The device requires no
external x-ray generator or computer and it exposes the patient to less than 1%
of the radiation of a single conventional chest x-ray. To perform a test using
the accuDEXA(R), the patient places his or her hand into a positioner and, upon
activation by the operator, the device automatically emits two low-dosage x-ray
pulses. The patient's bone density and fracture risk information is displayed on
the screen in less than 30 seconds. The accuDEXA(R) is "ETL Listed." ETL is a
North American Safety Mark indicating compliance with safety standard UL-2601-1.
Mammography
Breast cancer is the leading cause of cancer death among women in the
United States between the ages of 40 and 55, and the second leading cause of
cancer death among all women in the United States. According to the American
Cancer Society, approximately 180,200 new cases of breast cancer were diagnosed
and approximately 43,900 women died from the disease between 1997 and 1998. The
annual cost of breast cancer screening and diagnosis in the United States alone
is estimated at $6 billion. Successful treatment of breast cancer depends in
large part on the early detection of malignant lesions in the breast. According
to the National Cancer Institute, the five year survival rate decreases from
more than 90% to 72% after the cancer has spread to the lymph nodes, and to 18%
after it has spread to other organs such as the lungs, liver or brain.
Mammography techniques have not changed significantly over the past 20
years, although slight improvements have been made in x-ray film quality. A
major drawback of current mammography systems is their limited ability to image
dense breast tissue, typically found in women under the age of 50, resulting in
an unduly high rate of `false positive' test results and the concomitant
consequences: unwarranted surgical biopsies, significant cost and great anxiety
and concern to the patient. According to the American Cancer Society, women
under age 50 experience significant incidence of breast cancer, with 23% of
breast cancer cases detected in women under age 50.
Another limitation of conventional mammography is the time and cost
required to develop the film. Time is particularly problematic in the case of
stereotactic needle biopsies, in which a hollow needle is inserted into the
breast to obtain a tissue sample of a suspected lesion. Multiple mammograms must
be obtained during the procedure in order to properly position the needle.
According to the National Center for Health Statistics' November 1998 report, in
1997-1998, approximately 324,000 breast biopsies were performed in the United
States, of which up to 208,000 were stereotactic needle biopsies.
Digital mammography offers significant advantages over current film-based
systems, yielding higher contrast, improved resolution and lower radiation
dosage. Digital mammography may be especially useful in screening women under
the age of 50 because of its enhanced ability to image the denser breast tissue
typically found in younger women. Clinical testing has shown that digital
mammography, as compared with non-digital devices, can increase accurate
diagnosis by 20%. Digital mammography also provides instant images allowing for
real time stereotactic needle biopsies.
In January 2000, General Electric Company received clearance from the FDA
to market the first screening digital mammography system. Three other
manufacturers, Trex Medical Corporation, Fuji Medical Systems and Fischer
Imaging Corporation, are preparing clinical trials for digital devices. The
Company believes that the price range for these devices will likely exceed
$250,000.
According to the 13th Edition of Medical & Healthcare Marketplace Guide, as
of 1998 there were approximately 14,000 screening mammography machines in the
United States located in approximately 9,500 facilities and the
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Company believes that there were approximately 15,000 additional screening
mammography machines in other major health care markets. The market for
mammography machines is driven by increased awareness of breast cancer risk, the
emphasis on early detection, the growing number of stereotactic needle biopsies
and the advancement of digital technology.
The Company has developed a method of producing high quality digital
mammography sensors at a cost which, it believes, will be substantially lower
than its competitors' existing and proposed systems. The Company believes that
its digital mammography sensors will yield higher contrast, improved resolution
and lower radiation dosage than current film based systems, will be especially
useful in screening the denser breast tissue typically found in women under the
age of 50 and will allow for real time stereotactic needle biopsies. Clinical
testing has shown that, in comparison with non-digital devices, digital
mammography can increase accurate diagnosis by 20%.
The Company's proprietary technology allows the fabrication of high
resolution, large-area devices at low cost. The Company has manufactured a
prototype of an 10" x 6" sensor and currently plans to commence clinical trials
this year. The Company has not yet filed for FDA clearance of this device. There
can be no assurance that the Company will file for such clearance or that the
FDA will grant such clearance. See "Government Regulation."
General Digital Radiography
The Company is also developing a mobile 8"x 10" digital radiography system
for various applications. This unit is targeted primarily for peripheral x-ray
images, such as orthopedic and podiatric. The unit is also suitable for
veterinary and non-destructive testing applications. Management believes that
the unit will be available for sale by mid-2001, pending clearance by the FDA.
There can be no assurance that the Company will file for such clearance or that
the FDA will grant such clearance. See "Government Regulation."
Schick X-Ray Corporation
On September 24, 1997, the Company completed the acquisition of certain
assets of Keystone Dental X-Ray, Inc., a manufacturer of x-ray equipment for the
medical and dental radiology field, for $1.5 million in cash. The acquired
assets were integrated into the Company's former subsidiary, Schick X-Ray
Corporation ("Schick X-Ray"). In August 1999, Schick X-Ray was dissolved and its
operations absorbed by the Company.
MANUFACTURING
The Company's products are manufactured at its facility in Long Island
City, New York, which includes a 2,300 square foot controlled environment sensor
production facility. This facility is subject to periodic inspection by the FDA.
The Company has invested in automated and semi-automated equipment for the
fabrication and machining of parts and assemblies incorporated in its products.
The Company's quality assurance program includes various quality control
measures from inspection of raw materials, purchased parts and assemblies
through in-process and final inspection and conforms to the guidelines of the
International Quality Standard, ISO 9001. In August 1998, the Company was
granted ISO 9001 certification.
The Company manufactures most of its custom components itself in order to
minimize dependence on suppliers, for quality control purposes and to help
maintain process propriety. While the Company does procure certain components
from outside sources which, are sole suppliers, it believes that those
components could be obtained from additional sources without substantial
difficulty, although the need to change suppliers or to alternate between
suppliers might cause significant delays in delivery or significantly increase
the Company's costs. The Company procures its APS and CCD semiconductor wafers,
a significant component of its products, each from a single supplier. Extended
interruptions of this supply could have a material adverse effect on the
Company's ability to produce its products and its results of operations. The
Company's manufacturing processes are, for the most part, vertically integrated,
although selective outsourcing is employed to take advantage of economies of
scale at outside manufacturing facilities and to alleviate manufacturing
bottlenecks. Certain components used in existing products of the Company, as
well as products under development, may be purchased from single sources.
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DEPENDENCE ON CUSTOMERS
During fiscal 1999, a single customer, Henry Schein, Inc., accounted for
annual sales by the Company of $7.2 million, or 15.8% of annual sales. During
fiscal 1998 and 1997, no single customer accounted for more than ten percent of
the Company's annual sales. During fiscal 1999, 1998 and 1997, respectively,
sales of approximately, $6.0 million, $7.1 million and $3.9 million were made to
foreign customers.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The Company seeks to protect its intellectual property through a
combination of patent, trademark and trade secret protection. The Company's
future success will depend in part on its ability to obtain and enforce patents
for its products and processes, preserve its trade secrets and operate without
infringing the proprietary rights of others.
Patents
The Company has an active corporate patent program, the goal of which is to
secure patent protection for its technology. The Company currently has issued
United States patents for an `Intra-Oral Sensor For Computer Aided Radiography,'
U.S. Patent No. 5,434,418, which expires on October 16, 2012, a `Large Area
Image Detector,' U.S. Patent No. 5,834,782, which expires on November 20, 2016,
a `Method and Apparatus for Measuring Bone Density,' U.S. Patent No. 5,582,647,
which expires on September 24, 2017, an 'Apparatus for Measuring Bone Density
Using Active Pixel Sensors,' U.S. Patent No. 5,898,753, which expires on June 6,
2017, a 'Dental Imaging System with Lamps and Method,' U.S. Patent No.
5,908,294, which expires on June 12, 2017, an 'X-ray Detection System Using
Active Pixel Sensors,' U.S. Patent No. 5,912,942, which expires on June 6, 2017,
a `Dental Imaging System with White Balance Compensation,' U.S. Patent No.
6,002,424, which expires on June 12, 2017, and `Dental Radiography Using an
Intraoral Linear Array Sensor,' U.S. Patent No. 5,995,583, which expires on
November 30, 2019. In addition, the Company is the licensee of U.S. Patent No.
5,179,579, for a 'Radiograph display system with anatomical icon for selecting
digitized stored images,' under a worldwide, non-exclusive, fully paid license.
The Company also has two additional patent applications currently pending before
the United States Patent and Trademark Office.
The Company is the exclusive sub-licensee for use in medical radiography
applications of certain patents, patent applications and other know-how related
to complementary metal oxide semiconductor ("CMOS") active pixel sensor
technology (collectively, the "APS Technology"), which was developed by the
California Institute of Technology and licensed to Photobit Corp. from which the
Company obtained its sub-license. The Company's exclusive rights to such
technology are subject to government rights to use, noncommercial educational
and research rights to use by California Institute of Technology and the Jet
Propulsion Laboratory, and the right of a third party to obtain a nonexclusive
license from the California Institute of Technology with respect to such
technology. The Company believes that, as of the date of this filing, except for
such third party's exercise of its right to obtain a nonexclusive license to use
APS Technology in a field other than medical radiography, none of the foregoing
parties have given notice of their exercise of any of their respective rights to
the APS Technology. There can be no assurance that this will continue to be the
case, and any such exercise could have a material adverse effect on the Company.
Additionally, the agreement between the Company and Photobit Corp. requires,
among other things, that the Company use all commercially reasonable efforts to
timely introduce, improve and market and distribute licensed products. There can
be no assurance that the Company will comply with its obligations under its
agreement with Photobit Corp., any such failure to comply could have a material
adverse effect on the Company.
Trademarks
The Company has been issued PTO trademarks by the United States Patent and
Trademark Office for the marks (i) "CDR" for its digital dental radiography
product; (ii) "CDRCam" (both textual and stylized) for its intra-oral camera
(iii) "QuickZoom" (both textual and stylized) for a viewing feature in its
digital dental radiography product; and (iv) "accuDEXA" for its BMD assessment
product. The Company has three additional trademark applications pending before
the PTO.
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Trade Secrets
In addition to patent protection, the Company owns trade secrets and
proprietary know-how which it seeks to protect, in part, through appropriate
Non-Disclosure, Non-Solicitation, Non-Competition and Inventions Agreements,
and, to a limited degree, employment agreements, with appropriate individuals,
including employees, consultants, vendors and independent contractors. These
agreements generally provide that all confidential information developed by or
made known to the individual by the Company during the course of the
individual's relationship with the Company is the property of the Company, and
is to be kept confidential and not disclosed to third parties, except in
specific limited circumstances. The agreements also generally provide that all
inventions conceived by the individual in the course of rendering services to
the Company shall be the exclusive property of the Company. However, there can
be no assurances that these agreements will not be breached, that the Company
would have adequate remedies available for any breach or that the Company's
trade secrets will not otherwise become known to, or independently developed by,
its competitors.
GOVERNMENT REGULATION
Products that the Company is currently developing or may develop in the
future are likely to require certain forms of governmental clearance, including
marketing clearance by the United States Food and Drug Administration (the
"FDA"). The FDA review process typically requires extended proceedings
pertaining to product safety and efficacy. The Company believes that its future
success will depend to a large degree upon commercial sales of improved versions
of its current products and sales of new products; the Company will not be able
to market such products in the United States without FDA marketing clearance.
There can be no assurance that any products developed by the Company in the
future will be given clearance by applicable governmental authorities or that
additional regulations will not be adopted or current regulations amended in
such a manner as to adversely affect the Company.
Pursuant to the Federal Food, Drug and Cosmetic Act, as amended (the "FD&C
Act"), the FDA classifies medical devices intended for human use into three
classes: Class I, Class II, and Class III. In general, Class I devices are
products for which the FDA determines that safety and effectiveness can be
reasonably assured by general controls under the FD&C Act relating to such
matters as adulteration, misbranding, registration, notification, records and
reports. The CDRCam(R) is a Class I device.
Class II devices are products for which the FDA determines that general
controls are insufficient to provide a reasonable assurance of safety and
effectiveness, and that require special controls such as promulgation of
performance standards, post-market surveillance, patient registries or such
other actions as the FDA deems necessary. The CDR(R) system, CDRPan(TM) and
accuDEXA(R) have been classified as Class II devices.
Class III devices are devices for which the FDA has insufficient
information to conclude that either general controls or special controls would
be sufficient to assure safety and effectiveness, and which are life-supporting,
life-sustaining, of substantial importance in preventing impairment of human
health, or present a potential unreasonable risk of illness or injury. Devices
in this case require pre-market approval, as described below. None of the
Company's existing products are in the Class III category.
The FD&C Act further provides that, unless exempted by regulation, medical
devices may not be commercially distributed in the United States unless they
have been cleared by the FDA. There are two review procedures by which medical
devices can receive such clearance. Some products may qualify for clearance
under a Section 510(k) procedure, in which the manufacturer submits to the FDA a
pre-market notification that it intends to begin marketing the product, and
shows that the product is substantially equivalent to another legally marketed
product (i.e., that it has the same intended use and that it is as safe and
effective as a legally marketed device, and does not raise different questions
of safety and effectiveness than does a legally marketed device). In some cases,
the 510(k) notification must include data from human clinical studies.
Marketing may commence once the FDA issues a clearance letter finding such
substantial equivalence. According to FDA regulations, the agency has 90 days in
which to respond to a 510(k) notification. There can be no assurance, however,
that the FDA will provide a timely response, or that it will reach a finding of
substantial equivalence.
7
<PAGE>
If a product does not qualify for the 510(k) procedure (either because it
is not substantially equivalent to a legally marketed device or because it is a
Class III device), the FDA must approve a Pre-Market Approval ("PMA")
application before marketing can begin. PMA applications must demonstrate, among
other things, that the medical device is safe and effective. A PMA application
is typically a complex submission that includes the results of clinical studies.
Preparation of such an application is a detailed and time-consuming process.
Once a PMA application has been submitted, the FDA's review process may be
lengthy and include requests for additional data. By statute and regulation, the
FDA may take 180 days to review a PMA application, although such time may be
extended. Furthermore, there can be no assurance that a PMA application will be
approved by the FDA.
In February 1994, the FDA cleared the Company's 510(k) application for
general use and marketing of the CDR(R) system. In November 1996, the FDA
cleared the Company's 510(k) application for general use and marketing of the
CDRCam(R). In December 1997, the FDA cleared the Company's 510(k) application
for general use and marketing of accuDEXA(R). On June 4, 1998, the FDA granted
the Company additional clearance to market accuDEXA(R) as a predictor of
fracture risk. In December 1998, the FDA cleared the Company's 510(k)
application for CDRPan(TM). The Company has not yet submitted a 510(k)
application for digital mammography sensors. There can be no assurance that the
Company will submit such application or that it will obtain FDA clearance for
such products.
In addition to the requirements described above, the FD&C Act requires that
all medical device manufacturers and distributors register with the FDA annually
and provide the FDA with a list of those medical devices which they distribute
commercially. The FD&C Act also requires that all manufacturers of medical
devices comply with labeling requirements and manufacture their products and
maintain their documents in a prescribed manner with respect to manufacturing,
testing, and quality control activities. The FDA's Medical Device Reporting
regulation subjects medical devices to post-market reporting requirements for
death or serious injury, and for certain malfunctions that would be likely to
cause or contribute to a death or serious injury if malfunction were to recur.
In addition, the FDA prohibits a device which has received marketing clearance
from being marketed for applications for which marketing clearance has not been
obtained. Furthermore, the FDA generally requires that medical devices not
cleared for marketing in the United States receive FDA marketing clearance
before they are exported, unless an export certification has been granted.
The Company must obtain certain approvals by and marketing clearances from
governmental authorities, including the FDA and similar health authorities in
foreign countries, to market and sell its products in those countries. The FDA
regulates the marketing, manufacturing, labeling, packaging, advertising, sale
and distribution of "medical devices," as do various foreign authorities in
their respective jurisdictions. The FDA enforces additional regulations
regarding the safety of equipment utilizing x-rays. Various states also impose
similar regulations.
The FDA review process typically requires extended proceedings pertaining
to the safety and efficacy of new products. A 510(k) application is required in
order to market a new or modified medical device. If specifically required by
the FDA, a pre-market approval ("PMA") may be necessary. Such proceedings, which
must be completed prior to marketing a new medical device, are potentially
expensive and time consuming. They may delay or hinder a product's timely entry
into the marketplace. Moreover, there can be no assurance that the review or
approval process for these products by the FDA or any other applicable
governmental authorities will occur in a timely fashion, if at all, or that
additional regulations will not be adopted or current regulations amended in
such a manner as will adversely affect the Company. The FDA also regulates the
content of advertising and marketing materials relating to medical devices.
Failure to comply with such regulations may result in a delay in obtaining
approval for the marketing of such products or the withdrawal of such approval
if previously obtained.
The Company is currently developing new products for the dental and medical
markets. The Company expects to file 510(k) applications with the FDA in
connection with the digital mammography sensors currently under development by
the Company, and other future products, including its general digital
radiography sensors. There can be no assurance that the Company will file such
510(k) applications and/or will obtain pre-market clearance for the digital
mammography sensors or any other future products, or that in order to obtain
510(k) clearance, the Company will not be required to submit additional data or
meet additional FDA requirements that may substantially delay the
8
<PAGE>
510(k) process and result in substantial additional expense. Moreover, such
pre-market clearance, if obtained, may be subject to conditions on the marketing
or manufacturing of the digital mammography sensors which could impede the
Company's ability to manufacture and/or market the product. There can be no
assurance that the digital mammography or general digital radiography sensors or
any other products which may be developed by the Company will be approved by or
receive marketing clearance from applicable governmental authorities. If the
Company is unable to obtain regulatory approval for and market new products and
enhancements to existing products, it will have a material adverse effect on the
Company.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, governmental regulations may
be established that could prevent or delay regulatory clearance of the Company's
products. Delays in receipt of clearance, failure to receive clearance or the
loss of previously received clearance would have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition to laws and regulations enforced by the FDA, the Company is
subject to government regulations applicable to all businesses, including, among
others, regulations related to occupational health and safety, workers' benefits
and environmental protection. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Distribution of the Company's products in countries other than the United
States may be subject to regulations in those countries. These regulations vary
significantly from country to country; the Company typically relies on its
independent distributors in such foreign countries to obtain the requisite
regulatory approvals. The Company has obtained the "CE mark," necessary for the
marketing of its products in the member countries of the European Union. The CE
mark is a European Union symbol of adherence to quality assurance standards and
compliance with the European Union's Medical Device Directives. The Company has
developed and implemented a quality assurance program in accordance with the
guidelines of the International Quality Standard, ISO 9001. In August of 1998,
the Company was granted ISO 9001 certification. The Company's current products
also have been awarded the "ETL" and "CSA" marks. These are North American
safety marks which indicate compliance with U.L. Standard 2601.
PRODUCT LIABILITY INSURANCE
The Company is subject to the risk of product liability and other liability
claims in the event that the use of its products results in personal injury or
other claims. Although the Company has not experienced any product liability
claims to date, any such claims could have an adverse impact on the Company. The
Company maintains insurance coverage related to product liability claims, but
there can be no assurance that product liability or other claims will not exceed
its insurance coverage limits, or that such insurance will continue to be
available on commercially acceptable terms, or at all.
RESEARCH AND DEVELOPMENT
During fiscal 1999, 1998 and 1997, research and development expenses were
$4.4 million, $3.9 million and $1.4 million, respectively.
9
<PAGE>
BACKLOG
The backlog of orders was approximately $2.1 million and $.7 million at
March 8, 2000 and March 8, 1999, respectively. Such figures include
approximately $741,000 and $269,000 of orders on hold pending credit approval at
March 8, 2000 and March 8, 1999, respectively. Orders included in backlog may
generally be cancelled or rescheduled by customers without significant penalty.
EMPLOYEES
As of March 1, 2000, the Company had 185 full-time employees, engaged in
the following capacities: sales and marketing (45); general and administrative
(32); operations (89); and research and development (19). The Company believes
that its relations with its employees are good. No Company employees are
represented by a labor union or are subject to a collective bargaining
agreement, nor has the Company experienced any work stoppages due to labor
disputes.
SALES AND MARKETING
Dental Products
In the United States, the Company markets and sells its products through a
direct sales and third-party distribution system.
The direct sales system incorporates dental trade shows and professional
seminars, advertisements in dental periodicals, journals and other publications,
direct mail and product announcements. The Company employs approximately 33
direct sales representatives who are located throughout the United States and
are organized into territories. A sales and marketing support staff of
approximately 10 individuals, based at the Company's offices in New York,
supports the direct sales force by planning events and developing promotional
and marketing materials. In addition, the Company has an in-house sales program
which focuses on universities and continuing education programs. As of March 1,
2000, CDR(R) had been sold to 47 of the 55 dental schools in the United States.
The Company also employs a government sales program to sell directly to the
Armed Services, Veterans Administration hospitals, United States Public Health
Service and other government-sponsored health institutions.
During fiscal 1999, the Company broadened its sales strategy by negotiating
distribution agreements, both domestically and internationally. In the
international market, the Company sells the CDR(R) system via independent
regional distributors. There are currently approximately 59 independent CDR(R)
dealers, covering over 70 countries. A dedicated in-house staff provides the
foreign distributors with materials, technical assistance and training, both in
New York and abroad.
In addition the Company's dental products are currently marketed and sold
domestically through a group of approximately 24 independent dealers. These
sales constitute approximately 40% of the Company's total domestic sales of
dental products. Henry Schein, Inc.'s subsidiary, Sullivan-Schein Dental Corp.,
sells the CDR(R) system abroad under its own trade name, "easyray(TM),". The
Company's goal is to utilize its leading position in the industry, secure as
many productive sales channels as possible and to rapidly penetrate additional
segments of the international market.
BMD / Fracture Risk Assessment
The Company sells the accuDEXA(R) primarily through a direct sales force
and, to a limited degree, established independent distributors of medical and
radiological equipment. To date, accuDEXA(R) sales have taken place primarily
within the United States, with a relatively small number of sales (less than 3%)
abroad. The primary end-users for accuDEXA(R) are primary care physicians,
including OB/GYN practices, and osteopathic and geriatric specialists.
Pharmaceutical companies are currently involved in wide-scale osteoporosis
education and awareness programs targeted at physicians. A number of such
companies, including Novartis Pharma AG, Wyeth-Ayerst Laboratories, Eli
10
<PAGE>
Lilly Co. and Merck & Co., currently have FDA-approved therapies for the
treatment of osteoporosis. The Company believes that several other companies,
including Procter & Gamble, Boehringer-Mannheim GmbH, Sanofi-Synthelabo, Inc.
and Pfizer Inc. , have additional products that are currently in clinical
trials. The Company expects that the efforts of pharmaceutical companies to
develop medicines and treatment programs will result in the expansion of
doctors' involvement in initial screening and routine management of
osteoporosis, thereby increasing the market for BMD assessment devices. The
Company intends to capitalize on these efforts both in the United States and
abroad.
The Company has successfully completed a number of research studies and has
collected normative reference data for the accuDEXA(R) databases. These research
studies addressed issues of long-term importance such as the detection of
osteoporosis and patient risk for bone fracture. The Company has established
normative reference databases for Asian female, African-American female,
Hispanic female, Caucasian female and Caucasian male populations. The Company
will utilize these databases to address the needs of healthcare markets in
different countries and regions and expects them to positively impact upon sales
of accuDEXA(R) abroad. The Company is currently conducting research studies to
investigate the accuDEXA's ability to successfully monitor a course of therapy
over a period of time.
Mammography
The Company's sales strategy will be to market its mammography devices
through a direct sales force as well as through third parties, including
established manufacturers in the mammography market.
COMPETITION
Competition relating to the Company's current products is intense and
includes various companies, both within and outside of the United States. Many
of the Company's competitors are large companies with financial, sales and
marketing, and other resources which are substantially greater than those of the
Company. In addition, they may have substantially greater experience in
obtaining regulatory approvals than that of the Company. In addition, there can
be no assurance that the Company's competitors are not currently developing, or
will not attempt to develop, technologies and products that are more effective
than those of the Company or that would otherwise render the Company's products
obsolete or uncompetitive. No assurance can be given that the Company will be
able to compete successfully.
Dental Products
A number of companies currently sell intra-oral digital dental sensors.
These include Trex Medical Corporation's Trophy Radiologie subsidiary,
Provisions Dental Systems, Inc., Sirona Dental Systems., Cygnus Imaging, Inc.,
and DMD. In addition, Dentsply International and Soredex Corporation sell a
storage-phosphor based intra-oral dental system. The CDR(R) system has thus far
competed successfully against other products. If other companies enter the
digital radiography field, it may result in a significantly more competitive
market in the future. Several companies are involved in the manufacture and sale
of intra-oral cameras, including Dentsply International Inc., Welch-Allyn Co.,
Henry Schein Co., Ultra-Cam, Air Technics and DMD. Digital panoramic dental
devices are manufactured by several companies, including Sirona, Signet, Sorodex
and Planmeca. Of those, only the device manufactured by Signet is designed to be
incorporated into existing conventional panoramic devices.
BMD / Fracture Risk Assessment
Two other companies, Lunar Corporation and Norland Medical Systems, Inc.,
are currently marketing peripheral BMD densitometers. Several companies
including Lunar, Hologic, Inc. and Norland are marketing peripheral ultrasound
devices. A number of other companies have submitted 510(k) applications to the
FDA seeking clearance to market other devices. Two companies, Ostex
International Inc. and Metra Biosystems, Inc., have developed biochemical
markers which indicate the rate at which the body is resorbing (i.e., breaking
down) bone. Another potential competitor of the Company's accuDEXA(R)is the
Osteogram 2000, manufactured by CompuMed Inc., a peripheral screening test
employing RA technology, conventional hand x-rays and computer analysis.
11
<PAGE>
Mammography
The companies in the digital mammography market include the following
manufacturers of traditional mammography devices: GE Medical Systems, Fischer
Imaging, Trex Medical, Instrumentarium Imaging, Philips and Siemens.
FORWARD-LOOKING STATEMENTS
This Form 10-K Annual Report contains forward-looking statements that
involve risk and uncertainties. All statements, other than statements of
historical facts, included in this Annual Report regarding the Company, its
financial position, business strategy and plans and objectives of management of
the Company for future operations, are forward-looking statements. When used in
this Annual Report, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "objectives," "plans" and similar expressions, or the negatives
thereof or variations thereon or comparable terminology as they relate to the
Company, its products or its management, identify forward-looking statements.
Such forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of various factors,
including, but not limited to, those contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Annual Report
and the "Risk Factors" set forth in Exhibit 99 to this Annual Report. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
ITEM 2. PROPERTIES
The Company presently leases approximately 103,000 square feet of space in
Long Island City, New York. This space houses the Company's executive offices,
sales and marketing headquarters, research and development laboratories and
production and shipping facilities. The Company believes that such space will be
adequate for its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company and/or certain of its officers and former officers, are
involved in the proceedings described below:
I. The Company is a named defendant in two lawsuits instituted by Trophy
Radiologie, S.A. (`Trophy S.A.'), a subsidiary of Trex Medical Corporation. One
lawsuit was instituted in France and the other in the United States.
The French lawsuit was filed in November 1995, in the tribunal de Grande
Instance de Bobigny, the French patent court, and originally alleged that the
Company's CDR(R)system infringes French Patent No. 2,547,495, European Patent
No. 129,451 and French Certificate of Addition No. 2,578,737. These patents, all
of which are related, are directed to a CCD-based intra-oral sensor. Since
filing its lawsuit, Trophy S.A. has withdrawn its allegation of infringement
with respect to the Certificate of Addition. Trophy S.A. is seeking a permanent
injunction and unspecified damages, including damages for its purported lost
profits. The Company believes that the lawsuit is without merit and is
vigorously defending it.
The lawsuit in the United States was filed in March 1996 by Trophy S.A.,
Trophy Radiology, Inc., a United States subsidiary of Trophy S.A. (`Trophy
Inc.') and the named inventor on the patent in suit, Francis Mouyen, a French
citizen. The suit was brought in the United States District Court for the
Eastern District of New York, and alleges that the Company's CDR(R) system
infringes United States Patent No. 4,593,400 (the `400 patent'), which is
related to the patents in the French lawsuit. Trophy S.A., Trophy Inc. and
Mouyen are seeking a permanent injunction and unspecified damages, including
damages for purported lost profits, enhanced damages for the Company's purported
willful infringement and an award of attorney fees. The Company believes that
the lawsuit is without merit and is vigorously defending it. The Company's
counsel in the United States suit has issued a formal opinion that the CDR
system does not infringe the 400 patent.
12
<PAGE>
In addition, the Company has counter-sued Trophy S.A. and Trophy Inc. for
infringement of United States Patent No. 4,160,997, an expired patent which was
exclusively licensed to the Company by its inventor, Dr. Robert Schwartz, and
for false advertising and unfair competition. The Company believes that its
counter-suit is meritorious, and is vigorously pursuing it.
On September 12, 1997, after having been given permission to do so by the
Court, the Company served two motions for summary judgment seeking dismissal of
the action pending in the United States District Court for the Eastern District
of New York, on the grounds of non-infringement and patent invalidity. On
February 22, 2000, oral argument on these motions was heard by the Court. The
motions are currently pending.
While the Company believes such suits against it are without merit, there
can be no assurance that the Company will be successful in its defense of any of
these actions, or in its counter-suit. If the Company is unsuccessful in its
defense of any of these actions, it could have a material adverse effect upon
the Company. Moreover, regardless of their outcome, the Company may be forced to
expend significant amounts of money in legal fees in connection with these
lawsuits.
II. In late 1998 through early 1999, nine shareholder complaints purporting
to be class action lawsuits were filed in the United States District Court for
the Eastern District of New York. Plaintiffs filed a Consolidated and Amended
Complaint on or about May 27, 1999 and, on or about November 24, 1999, filed a
Second Amended and Consolidated Complaint (the "Complaint"). The Complaint names
as defendants the Company, David B. Schick, Thomas E. Rutenberg, and David
Spector (collectively, the "Individual Defendants"), as well as
PricewaterhouseCoopers LLP.
The Complaint alleges, inter alia, that certain defendants issued false and
misleading statements concerning the Company's publicly reported earnings in
violation of the federal securities laws. The Complaint seeks certification of a
class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and does not specify the amount of damages
sought.
The Company has retained counsel, believes that these lawsuits are without
merit, and intends to vigorously defend them. On or about February 11, 2000, the
Company and the Individual Defendants filed a Motion to Dismiss the Complaint.
As these actions are in their preliminary stages, the Company is unable to
predict their ultimate outcome. The outcome, if unfavorable, could have a
material adverse effect on the Company.
III. In August 1999, the Company, through its outside counsel, contacted
the Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings.
See "Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Matters Relating to Restatement of Financial Results."
The SEC has made a voluntary request for the production of certain documents.
The Company intends to cooperate fully with the SEC staff and has provided
responsive documents to it. This matter is in a preliminary stage and the
Company cannot predict its potential outcome.
The Company may be a party to a variety of legal actions (in addition to
those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud,
governmental investigations, and intellectual property related litigation. In
addition, because of the nature of its business, the Company is subject to a
variety of legal actions relating to its business operations. Recent court
decisions and legislative activity may increase the Company's exposure for any
of these types of claims. In some cases, substantial punitive damages may be
sought. The Company currently has insurance coverage for some of these potential
liabilities. Other potential liabilities may not be covered by insurance,
insurers may dispute coverage, or the amount of insurance may not be sufficient
to cover the damages awarded. In addition, certain types of damages, such as
punitive damages, may not be covered by insurance and insurance coverage for all
or certain forms of liability may become unavailable or prohibitively expensive
in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1999.
13
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
The Company's Common Stock began trading on The Nasdaq National Market
under the symbol "SCHK" on July 1, 1997. Prior to such date, there was no
established public trading market for the Company's Common Stock.
By letter dated September 15, 1999, the Company was advised by the Nasdaq
Stock Market's Listing Qualifications Panel (the "Panel") that the Company's
Common Stock would no longer be listed on the Nasdaq National Market effective
with the close of business on September 15, 1999. The Panel's action was based
on the Company's inability to timely file its Annual Report on Form 10-K for the
fiscal year ended March 31, 1999 and Form 10-Q for the quarter ended June 30,
1999, as well as the revenue recognition and sales practices which had been the
subject of an investigation by the Audit Committee of the Company's Board of
Directors and had led to the filing delays and the need for the restatement of
the Company's financial reports.
The Company timely requested a review of this decision, in accordance with
Nasdaq Marketplace Rules, and was advised, by letter dated October 25, 1999,
that the Nasdaq Listing and Hearing Review Council would review the Panel's
decision and would likely issue its decision in April 2000.
Since the delisting of the Company's Common Stock, there has been no
established trading market for such stock, which has been trading in the
over-the-counter market.
The following table sets forth, for the period indicated, the high and low
sales prices of the Company's Common Stock, as quoted on The Nasdaq National
Market.
Fiscal Year Ended March 31, 1999 High Low
First Quarter 27.50 13.75
Second Quarter 19.50 14.50
Third Quarter 20.00 7.50
Fourth Quarter 10.375 3.938
Fiscal Year Ended March 31, 1998 High Low
First quarter n/a n/a
Second Quarter 30.75 15.50
Third Quarter 29.00 17.50
Fourth Quarter 28.75 19.125
On March 7, 2000, the closing bid and asked prices per share of the
Company's Common Stock in the over-the-counter market, as reported by National
Quotation Bureau LLC, were $ 2.50 and $ 2.54 per share, respectively. Such
prices represent quotations between dealers, without dealer mark-up, mark-down
or commission, and may not represent actual transactions. On March 7, 2000,
there were 181 holders of record of the Company's Common Stock. However, the
Company believes that the number of beneficial owners of such stock is
substantially higher.
To date, the Company has not paid any dividends on its Common Stock. The
Company currently intends to retain future earnings to finance the growth and
development of the Company's business and does not anticipate paying any
dividends in the foreseeable future. The payment of dividends is within the
discretion of the Board of Directors and will depend upon the Company's
earnings, its capital requirements, financial condition and other relevant
factors.
On July 7, 1997, the Company's initial public offering (the "Offering") of
1,750,000 shares of its common stock, $.01 par value per share (the "Common
Stock") was completed. The Company's registration statement on Form S-1
(Registration No. 333-33731) was declared effective by the Securities and
Exchange Commission on June 30, 1997.
14
<PAGE>
As part of the Offering, the Company granted to the Underwriters over-allotment
options to purchase up to 262,500 shares of Common Stock ("the "Underwriters'
Option"). On July 10, 1997, the underwriters exercised the Underwriters' Option
purchasing 262,500 shares of Common Stock from the Company.
The aggregate net proceeds received by the Company from the Offering and as
a result of the exercise of the Underwriters' Option, after deducting
underwriting and commissions and expenses were $33,508,731. During the period of
July 1, 1997 through March 31, 1999, such net proceeds have been applied as
follows: (i) $1,606,000 for leasehold improvements; (ii) $5,248,000 for plant
and equipment; (iii) $1,450,000 to purchase certain assets of Keystone Dental
X-Ray Corp.; (iv) $1,250,000 to purchase a 5% interest in Photobit, Inc.; (v)
$1,512,833 to pay the notes payable and interest in the amount of $144,296 to
Merck & Co., Inc.; and (vii) the remaining $22,442,000 was used in its entirety
for working capital purposes and to fund the Company's substantial operation
losses in 1999. None of the net proceeds were paid, directly or indirectly, to
directors, officers, controlling stockholders, or affiliates of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from, and are qualified
by reference to, the audited financial statements of the Company for the period
indicated. The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in ITEM 7 and the Financial Statements included in ITEM 8 of this
Report.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue, net $ 2,726 $ 6,804 $ 16,101 $ 38,451 $ 45,605
-------------------------------------------------------
Cost of sales 1,501 3,343 7,907 17,658 34,611
Excess and obsolete inventory -- -- 114 -- 5,466
-------------------------------------------------------
Total cost of sales 1501 3,343 8,021 17,658 40,077
-------------------------------------------------------
Gross profit 1,225 3,461 8,080 20,793 5,528
-------------------------------------------------------
Operating expenses:
Selling and marketing 517 1,620 4,961 10,645 18,440
General and administrative 560 1,388 2,054 3,954 7,338
Research and development 150 458 1,418 3,852 4,354
Bad debt expense -- -- 34 164 5,598
Patent litigation settlement -- -- -- 600 --
-------------------------------------------------------
Total operating expenses 1,227 3,466 8,467 19,215 35,730
-------------------------------------------------------
Income (loss) from operations (2) (5) (387) 1,578 (30,202)
Total other income (expense) (22) (108) 35 1,111 244
-------------------------------------------------------
Income (loss) before income taxes (24) (113) (352) 2,689 (29,958)
Provision (benefit) for income taxes -- -- -- 328 (352)
-------------------------------------------------------
Net income (loss) $ (24) $ (113) $ (352) $ 2,361 ($29,606)
-------------------------------------------------------
Basic earnings (loss) per share $ (0.00) $ (0.02) $ (0.05) $ 0.25 ($ 2.96)
-------------------------------------------------------
Diluted earnings (loss) per share $ (0.00) $ (0.02) $ (0.04) $ 0.24 ($ 2.96)
-------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 128 $ 525 $ 1,710 $ 6,217 $ 1,415
Working capital (deficiency) 35 1,240 5,518 33,745 2,902
Total assets 1,615 4,395 11,060 51,674 29,386
Total liabilities 1,289 3,026 4,973 9,565 16,850
Retained earnings (accumulated deficit) (1,091) (1,203) (1,556) 805 (28,801)
Stockholders' equity 326 1,369 6,087 42,109 12,536
</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
applciations.
The Company's revenues during fiscal 1999 were derived primarily from sales
of its CDR(R) and accuDEXA(R) products. The Company recognizes revenue on sales
of its products at the time of shipment to its customers and when no significant
vendor obligations exist and collectability is probable. Revenues from the sales
of extended warranties are recognized on a straight-line basis over the life of
the extended warranty, which is generally a one-year period. The Company
utilizes both a direct sales force and a limited number of distributors for
sales of its products within the United States. International sales are made
primarily through a network of independent foreign distributors. In fiscal 1999,
1998 and 1997, sales to customers within the United States were approximately
87%, 82% and 76% of total revenues, respectively. The Company's international
sales are made primarily to distributors in Western Europe, Russia, Australia
and South America. The Company intends to expand its business in other
international markets, including Asia. All of the Company's sales are
denominated in United States dollars.
Costs of sales consists of raw materials and computer components,
manufacturing labor, facilities overhead, product support, warranty costs and
installation costs. The Company procures its APS and CCD semiconductor wafers, a
significant component of its products, each from a single supplier. The Company
believes that sourcing from a single supplier provides certain competitive
advantages to the Company. Extended interruptions of this supply, however, such
as occurred during the fourth quarter of fiscal 1998, could have a material
adverse effect on the Company's results of operations.
Excess and obsolete inventory expense relates to the overstocking or
obsolescence of various dies and/or obsolete X-Ray inventory that the Company
may not use or otherwise salvage and from changes in technology, including
sensors, cameras and associated electronics and the Company's phase-out of
production of its CCD sensors (as well as its first generation of APS sensors)
in favor of its new APS sensors.
16
<PAGE>
Operating expenses include selling and marketing expenses, general and
administrative expenses and research and development expenses, and bad debt
expense. Selling and marketing expenses consist of salaries and commissions,
advertising, promotional and sales events and travel. General and administrative
expenses include executive salaries, professional fees, facilities, overhead,
accounting, human resources, and general office administration expenses.
Research and development expenses are comprised of salaries, consulting fees,
facilities overhead and testing materials used for basic scientific research and
the development of new and improved products and their uses. Research and
development costs are expensed as incurred. Development costs incurred to
establish the technological feasibility of software applications are expensed as
incurred. Bad debt expense is a result of product shipments which were
determined to be uncollectible or not collected.
Results Of Operations
The following table sets forth, for the fiscal years indicated, certain
items from the Statement of Operations expressed as a percentage of net
revenues:
Year ended March 31,
-----------------------------
1999 1998 1997
----- ----- -----
Revenue, net 100.0% 100.0% 100.0%
-----------------------------
Cost of sales 75.9% 45.9% 49.1%
Excess and obsolete inventory 12.0% -- 0.7%
-----------------------------
Total cost of sales 87.9% 45.9% 49.8%
-----------------------------
Gross Profit 12.1% 54.1% 50.2%
-----------------------------
Operating expenses:
Selling and marketing 40.4% 27.7% 30.8%
General and administrative 16.1% 10.3% 12.8%
Research and development 9.5% 10.0% 8.8%
Bad debt expense 12.3% 0.4% 0.2%
Patent litigation settlement -- 1.6% --
Fiscal Year Ended March 31, 1999 as Compared to Fiscal Year Ended March 31, 1998
Net revenues increased 18.6% to $45.6 million in fiscal 1999 from $38.5
million in fiscal 1998. This increase was principally attributable to an
increase in sales of the Company's accuDEXA(R) bone mineral density assessment
device that rose to $12.8 million from $4.1 million in sales in fiscal 1998
following the product's introduction in December 1997.
Fiscal 1999 revenues were negatively impacted by a rate of return for the
Company's products, which was higher than the historical return rate for the
Company's products. In addition, revenues were negatively affected by an
increase in reserves for goods which may be returned in the future. Provisions
for returns are comprised of actual returns and estimates for future returns.
The increased return rate for CDR is believed to be attributable to several
factors including the following:
The Company has experienced technical problems in transitioning its CDR
product line from CCD sensors to APS sensors. Shipments of the Company's initial
version of its new APS sensor for the CDR product, which were primarily
delivered from April 1998 through August 1998, exhibited a high failure rate and
other technical problems. The Company has provided for replacements of systems
where practical and provided for anticipated returns for units which were not
upgradeable. In September 1998, the Company began shipping a new version of the
APS sensor which has exhibited a lower failure rate than the initial version.
Customers currently own approximately 250 units of the initial version. The
Company continues to work to improve the reliability and enhance the
self-diagnostic capabilities of the CDR product.
17
<PAGE>
The Company's single user CDR System requires minimal installation.
Commencing in September 1998, the Company initiated a program in coordination
with its computer supplier, in which the supplier installed all single-user CDR
Systems. As a result of logistical problems in implementing this program, the
supplier's installations experienced significant delays, which led to a higher
than normal rate of return for single user systems shipped in this period.
Starting in January 1999, the Company resumed direct management of its single
user CDR installations.
The Company also experienced a higher than normal rate of returns of
accuDEXA units. The Company believes that these returns are due to several
factors, including the following:
First, shipments of accuDEXA experienced a higher than expected failure
rate due to several reasons, including shipping damage, as well as humidity and
temperature sensitivity of several components included in the initial design of
the product. The Company has taken steps to address these problems and believes
that failure rates relating to such damage and sensitivity have dropped
significantly. In this regard, the Company currently expects to implement a
number of additional improvements to accuDEXA, to further increase reliability,
in the first half of fiscal 2001.
Second, the Company initiated a change in its sales policy which affected
accuDEXA sales made from May 1998 through November 1998. During that time, the
Company waived its customary 10% deposit which it had charged to customers prior
to shipment of goods. In December 1998, the Company changed its credit policy,
requiring prepayment from non-dealer customers.
Total cost of sales increased 127.0% to $40.0 million (87.9% of net
revenues) in fiscal 1999 from $17.7 million (45.9% of net revenues) in fiscal
1998. The increase in cost of sales is attributable to (1) change in product
sales mix and customer mix; (2) expense to upgrade products for CDR customers;
(3) increased warranty expenses; (4) greater than expected returns; and (5)
excess capacity resulting from expansion of the Company's personnel and
facilities in support of sales projections that were not achieved. Excess and
obsolete inventory reserve provisions were $5.5 million (12.0% of net revenues)
in fiscal 1999 compared to none in fiscal 1998. These reserves arose largely
from the overstock of various dies and/or obsolete X-Ray inventory that the
Company may not use or otherwise salvage and from changes in technology,
including sensors, cameras and associated electronics, including the Company's
phase-out of production of its CCD sensors (as well as its first generation APS
sensors) in favor of its new APS sensors.
Selling and marketing expenses increased 73.2% to $18.4 million (40.4% of
net revenues) in fiscal 1999 from $10.6 million (27.7% of net revenues) in
fiscal 1998. This increase was attributable primarily to the hiring and training
of new salespeople and a significant expansion in the Company's marketing
activities in support of sales projections that were not achieved.
General and administrative expenses increased 85.6% to $7.3 million (16.1%
of net revenues) in fiscal 1999 from $4.0 million (10.3% of net revenues) in
fiscal 1998. The increase was attributable primarily to increase in payroll and
facilities expenses as the Company expanded its capacity in support of sales
projections that were not achieved, as well as certain professional expenses
that had not been anticipated.
Research and development expenses increased 13.0% to $4.4 million (9.5% of
net revenues) in fiscal 1999 from $3.9 million (10.0% of net revenues) in fiscal
1998. This increase was attributable principally to increased research and
development expenses associated with the enhancement of the accuDEXA, bone
mineral density assessment device and to the CDR system as well as continued
development of a mammography system. All research and development costs are
expensed as incurred.
Bad debt expenses were $5.6 million (12.3% of net revenues) in fiscal 1999
compared to $.2 million (.4% of net revenues) in fiscal 1998. The increase is
attributable to (1) shipments to a distributor which were determined to be
uncollectible during fiscal 1999 ($1.0 million); and (2) other sales which were
not collected subsequently and for which provision for doubtful accounts was
established at March 31, 1999.
Interest income decreased to $505,000 in fiscal 1999 from $1.2 million in
fiscal 1998 due to the utilization of cash balances and investments in
short-term interest-bearing securities in support of the Company's operating
deficiencies.
18
<PAGE>
Interest expense increased to $261,000 in fiscal 1999 from $77,000 in
fiscal 1998 due to the cost of financing provided by DVI Financial Services Inc.
under the Company's Capital Lease and Bridge Loan arrangements. Bridge Loan
costs include lease termination expense related to the cancellation and return
of system sales financed by DVI.
Current income tax benefit for fiscal 1999 reflects the refund of taxes
paid by the Company in fiscal year 1998. The Company has not provided deferred
income benefit of future income tax carryforwards because there is no certainty
that such benefits will be utilized. The Company has charged $349,000 to
earnings representing deferred income taxes from fiscal 1998 which it may not
collect.
Fiscal Year Ended March 31, 1998 as Compared to Fiscal Year Ended March 31, 1997
Net revenues increased 138.8% to $38.5 million in fiscal 1998 from $16.1
million in fiscal 1997. This increase was attributable principally to an
increase in the number of CDR(R) products sold. Also contributing to the
increase was the introduction of the Company's accuDEXA(R) bone mineral density
assessment device in December 1997. The number of CDR(R) products sold was
positively affected by the Company's increased expenditures on sales and
marketing, personnel recruiting, selling events and other promotional activities
and the increased use of domestic distributors of dental and medical products.
Total cost of sales increased 120.0% to $17.7 million (45.9% of net
revenues) in fiscal 1998 from $8.0 million (49.8% of net revenues) in fiscal
1997. The increase in cost of sales is directly attributable to the increase in
sales of the Company's products. Cost of sales as a percentage of revenues
decreased during fiscal 1998 as compared with 1997 due to increased
manufacturing efficiencies, increased production yields, lower material costs,
improved fixed overhead utilization, product mix and decreased warranty costs.
The effect of these improvements was partially offset by a decline in
manufacturing labor productivity attributable to an interruption in the
semiconductor wafer supply flow from the supplier during the fourth quarter of
fiscal 1998 and the increased use of domestic distributors. The interruption in
supply resulted in manufacturing and product shipment delays and therefore lower
revenues than anticipated during the fourth quarter of 1998.
Selling and marketing expenses increased 114.6% to $10.6 million (27.7% of
net revenues) in fiscal 1998 from $5.0 million (30.8% of net revenues) in fiscal
1997. This increase was attributable principally to the hiring and training of
new salespeople as the Company continued to increase the size of its national
sales force. In addition, the Company significantly increased its promotional
activities to create greater market awareness, and developed market strategies
for new products.
General and administrative expenses increased 92.5% to $4.0 million (10.3%
of net revenues) in fiscal 1998 from $2.1 million (12.8% of net revenues) in
fiscal 1997. The decrease as a percentage of revenues in 1998 was attributable
principally to increases in sales of the Company's products and partially offset
by growth in administrative expenditures, primarily the hiring of additional
administrative personnel.
Expenses for research and development in fiscal 1998 increased 171.7% to
$3.9 million (10.0% of net revenues) from $1.4 million (8.8% of net revenues) in
fiscal 1997. This increase was attributable principally to increased research
and development expenses associated with the development of accuDEXA(R), a bone
mineral density assessment device and enhancements to the CDR(R) system, as well
as the CDRCam(R), and continued development of a mammography system. All
research and development costs are expensed as incurred.
In July 1997, the Company, in connection with the settlement of certain
pending patent litigation involving a United States patent directed to a display
for digital dental radiographs, was granted a worldwide, non-exclusive fully
paid license covering such patent in consideration of a payment by the Company
of $600,000, which constituted a fiscal 1998 operating expense.
Interest income increased to $1.2 million in fiscal 1998 from $196,000 in
fiscal 1997. This increase was due to higher cash balances and investments in
short-term interest-bearing securities which were purchased from the proceeds of
the Company's initial public offering.
19
<PAGE>
Interest expense decreased to $77,000 in fiscal 1998 from $161,000 in
fiscal 1997. Interest expense was principally attributable to a loan from Merck
& Co., Inc. (the "Merck Loan") which was repaid upon consummation of the
Company's initial public offering in July 1997.
Income tax expense for fiscal 1998 reflects a combined federal and state
effective tax rate of 12.2%. The low effective rate in fiscal 1998 was primarily
due to the utilization of net operating loss carryforwards, research and
development tax credits generated in prior years and the reversal of valuation
reserves provided for deferred tax assets in prior years.
MATTERS RELATING TO RESTATEMENT OF FINANCIAL RESULTS
In February 1999, the Company restated its financial results for the first
and second quarters of fiscal 1999. Such restatements were made to reflect
increased reserves and allowances for sales returns and bad debts. In addition,
at that time, the Company reanalyzed the timing of various sales transactions,
which resulted in certain revenues being shifted from the first quarter of
fiscal 1999 to the second quarter of fiscal 1999 and the elimination of certain
revenue recognized in the second quarter.
On September 3, 1999, the Company announced restated financial results for
the first, second and third quarters of fiscal 1999. These restatements
reflected the findings of an investigation initiated by the Audit Committee of
the Company's Board of Directors concerning the Company's revenue recognition
and sales practices. The investigation was conducted by independent outside
counsel with the assistance of Ernst and Young LLP. The restatements arose from
certain previously reported sales transactions which had been recognized
prematurely, or improperly recorded, during interim periods of fiscal 1999. In
addition to the required adjustments to revenues, reserves for sales returns
were restated to reflect actual return rates associated with certain promotional
programs which had not previously been considered in the Company's estimates of
sales returns. These restatements revised the restated financial results for the
first and second quarters announced by the Company in February 1999.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly financial
information for each of the eight quarters in the period ended March 31, 1999.
This information is presented on the same basis as the audited financial
statements appearing elsewhere in this Report and, in the opinion of the
Company, includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the unaudited quarterly results. The
quarterly results should be read in conjunction with the audited consolidated
financial statements of the Company and related notes thereto. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period. In addition, the Company's CDR(R) products are subject to
seasonal variations. Historically the Company has experienced higher sales
growth rates in its first and third fiscal quarters than in its second and
fourth fiscal quarters.
The Company's Financial Statements for the fiscal quarters ended June 30,
1998, September 30, 1998 and December 31, 1998 are being restated and set forth
in the following table, from amounts previously reported by the Company in its
Forms 10-Q for those respective quarters.
<TABLE>
<CAPTION>
(in thousands)
June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue, net $ 6,040 $ 8,224 $ 11,912 $ 12,275 $ 10,439 $ 12,309 $ 15,540 $ 7,317
Total cost of sales 2,831 3,867 5,529 5,431 5,636 8,004 14,772 11,665
Gross Profit 3,209 4,357 6,383 6,844 4,803 4,305 768 (4,348)
Gross Profit Margin 53.1% 53.0% 53.6% 55.8% 46.0% 35.0% 4.9% (59.4%)
Operating expenses 3,912 3,910 5,384 6,009 6,702 6,987 10,383 11,658
Income (loss) from Operations (703) 447 999 835 (1,899) (2,682) (9,615) (16,006)
Net income (loss) $ (697) $ 1,010 $ 1,225 $ 823 $ (1,691) $ (2,537) $ (9,004) $(16,374)
</TABLE>
20
<PAGE>
The Company may in the future experience significant quarter-to-quarter
fluctuations in its results, which may result in volatility in the price of the
Company's common stock. Quarterly results of operations may fluctuate as a
result of a variety of factors, including demand for the Company's products, the
introduction of new or enhanced products by the Company or its competitors,
market acceptance of new products, the timing of significant marketing programs,
the commencement of new product development programs, supply and manufacturing
delays, the extent and timing of the hiring of additional personnel, competitive
conditions in the industry and general economic conditions. See Exhibit 99 to
this Report.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had $1.4 million in cash and cash
equivalents, $360 thousand in short-term investments and $2.9 million in working
capital, compared to $6.2 million in cash and cash equivalents, $14.0 million in
short term investments and $33.7 million in working capital at March 31, 1998.
The decrease in working capital at March 31, 1999, is primarily
attributable to the loss from operations for the year then ended. Ongoing losses
in fiscal 2000 have further reduced working capital. As of December 31, 1999,
the Company's working capital deficiency was $3.7 million.
DVI Financial Services, Inc. ("DVI") has provided the Company with loans
and advances up to $6.222 million in the aggregate (the "Bridge Loan"), which is
secured by first priority liens on collateral (the "Collateral") consisting of
all of the Company's now-owned and hereafter-acquired tangible and intangible
personal property including, without limitation, cash, marketable securities,
accounts receivable, inventories, contract rights, patents, trademarks,
copyrights and other general intangibles, machinery, equipment and interests in
real estate of the Company, together with all products and proceeds thereof. In
connection with the Bridge Loan, and reflecting the Company's repayment
obligations thereunder as well as the security interest created thereby in the
Collateral, the Company executed a Secured Promissory Note and a Security
Agreement (the "Security Agreement") dated January 25, 1999, and executed an
Amended and Restated Secured Promissory Note dated July 30, 1999. The Security
Agreement provides, in part, that the Company may not permit the creation of any
lien or encumbrance on the Company's property or assets. The Company is not in
compliance with certain financial covenants and other terms and provisions
contained in the Bridge Loan. The Company and DVI have entered into a commitment
letter for the restructuring of its Bridge Loan.
In December 1999, the Company entered into a Loan Agreement (as amended,
the "Loan Agreement") with Greystone Funding Corporation ("Greystone") to
provide up to $7.5 million of subordinated debt in the form of a secured credit
facility. Pursuant to the Loan Agreement, and to induce Greystone to enter into
said Agreement, the Company issued to Greystone and its designees, warrants to
purchase 3,000,000 shares of Company's Common Stock at an exercise price of
$0.75 per share. The Company agreed to issue to Greystone or its designees
warrants to purchase an additional 2,000,000 shares at an exercise price of
$0.75 per share in connection with a cash payment of $1 million by Greystone to
the Company in consideration of a sale of Photobit stock by the Company to
Greystone. The sale of the Photobit stock was made subject to a right of first
refusal held by Photobit and its founders. By letter dated February 17, 2000,
counsel for Photobit informed the Company that Photobit considers the Company's
sale of its shares to Greystone to be void on the basis of the Company's
purported failure to properly comply with Photobit's right of first refusal.
On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended Loan
Agreement"), which amended and restated the Loan Agreement pursuant to which
Greystone agreed to provide up to $7.5 million of subordinated debt in the form
of a secured credit facility. The $1 million cash payment to the Company was
converted as of December 27, 1999 into an initial advance of $1,000,000 under
the Amended Loan Agreement. Pursuant to the Amended Loan Agreement and to induce
Greystone to enter into said Agreement, the Company issued warrants to Greystone
and its designees, consisting of those warrants previously issued under the Loan
Agreement, to purchase 5,000,000 shares, of the Company's Common Stock at an
exercise price of $0.75 per share, exercisable at any time after December 27,
1999. Under the Amended Loan Agreement, the Company also issued to Greystone or
its designees warrants (the "Additional Warrants") to purchase an additional
13,000,000 shares of common stock, which Additional Warrants will vest and be
exercisable at a rate of two shares of Common Stock for each dollar advanced
under the
21
<PAGE>
Amended Loan Agreement in excess of the initial draw of $1,000,000. Any
additional warrants which do not vest prior to expiration or surrender of the
line of credit will be forfeited and canceled. In connection with the Greystone
secured credit facility, effective as of February 15, 2000, DVI consented to the
Company's grant to Greystone of a second priority lien encumbering the Company's
assets, under and subject in priority and right of payment to all liens granted
by the Company to DVI.
The Company has also undertaken various cost-cutting measures including
reduction of facilities and personnel by over 40% from peak levels of fiscal
1999. The Company discontinued certain promotional programs which had resulted
in increased credit risk, and concomitantly limited credit to selected domestic
dealers. The Company continues efforts to improve its products and methods of
production and believes it has strengthened customer support services to its
customers.
In spite of the Company's cost reductions, refinancing and tightening of
credit, there can be no assurance that the Company will achieve profitability or
generate sufficient working capital to permit its continuation as a going
concern. See Note 2 to The Consolidated Financial Statements. The ability of the
Company to satisfy its cash requirements is dependent in part on the Company's
ability to attain adequate sales and profit levels and to control warranty
obligations by increasing warranty revenues and reducing warranty costs.
Management currently believes that existing capital resources and sources of
credit, including the Greystone credit facility, are adequate to meet its
current cash requirements. However, if the Company's cash needs are greater than
anticipated, the restructuring of the DVI Bridge Loan is not completed or the
Company does not satisfy drawdown conditions under the Amended Loan Agreement,
the Company will be required to seek additional or alternative financing
sources. There can be no assurance that such financing will be available or
available on terms acceptable to the Company.
Year 2000 Compliance
The Year 2000 problem is the result of computer programs having been
written using two digits rather than four to define the applicable year. A
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. Should systems fail to process
date information correctly because of the calendar year change to 2000,
significant problems could occur as a result. Through the filing date of this
Report, the Company has not experienced any material adverse effects resulting
from or relating to the Year 2000 computer problem.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The DVI Bridge Loan bears an annual interest rate based on the prime rate
plus 2.5%. Because the interest rate is variable, the Company's cash flow may be
adversely affected by increases in interest rates. Management does not, however,
believe that any risk inherent in the variable-rate nature of the loan is likely
to have a material effect on the Company's interest expense or available cash.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included as a separate section of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DATA
Information responsive to this item was previously reported in the
Company's Current Reports on Form 8-K, dated September 2, 1999 and September 24,
1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The Directors of the Company are as follows:
22
<PAGE>
Euval Barrekette, Ph.D. Age 69, has served as a Director of the Company
since April 1992. Dr. Barrekette's current term on
the Board, which was initially scheduled to expire
at the Company's Annual Meeting of Stockholders in
1999, shall expire once his successor is elected
and qualified. Dr. Barrekette is a licensed
Professional Engineer in New York State. Since
1986 Dr. Barrekette has been a consulting engineer
and physicist. From 1984 to 1986 Dr. Barrekette
was Group Director of Optical Technologies of the
IBM Large Systems Group. From 1960 to 1984 Dr.
Barrekette was employed at IBM's T.J. Watson
Research Center in various capacities, including
Assistant Director of Applied Research, Assistant
Director of Computer Science, Manager of
Input/Output Technologies and Manager of Optics
and Electrooptics. Dr. Barrekette holds an A.B.
degree from Columbia College, a B.S. degree from
Columbia University School of Engineering, an M.S.
degree from its Institute of Flight Structures and
a Ph.D. from the Columbia University Graduate
Faculties. Dr. Barrekette is a fellow of the
American Society of Civil Engineers, a Senior
Member of the Institute of Electronic & Electrical
Engineers, and a member of The National Society of
Professional Engineers, The New York State Society
of Professional Engineers, The Optical Society of
America and The New York Academy of Science. Dr.
Barrekette is the uncle of David B. Schick and the
brother-in-law of Dr. Allen Schick.
David B. Schick Age 38, is a founder of the Company and, since its
inception in April 1992, has served as the
Company's Chief Executive Officer and Chairman of
the Board of Directors. From the Company's
inception to December 1999, Mr. Schick also served
as the Company's President. Mr. Schick's current
term on the Board expires at the Company's Annual
Meeting of Stockholders in 2000. Mr. Schick is
also a member of the Board of Directors of
Photobit Corporation. From September 1991 to April
1992, Mr. Schick was employed by Philips N.V.
Laboratories, where he served as a consulting
engineer designing high-definition television
equipment. From February 1987 to August 1991, Mr.
Schick was employed as a senior engineer at Cox
and Company, an engineering firm in New York City.
From January 1985 to January 1987, Mr. Schick was
employed as an electrical engineer at Grumman
Aerospace Co. Mr. Schick holds a B.S. degree in
electrical engineering from the University of
Pennsylvania's Moore School of Engineering. Mr.
Schick is the son of Dr. Allen Schick and the
nephew of Dr. Barrekette.
Allen Schick, Ph.D. Age 65, has served as a Director of the Company
since April 1992. Dr. Schick's current term on the
Board expires at the Company's Annual Meeting of
Stockholders in 2000. Since 1981, Dr. Schick has
been a professor at the University of Maryland and
since 1988 has been a Visiting Fellow at the
Brookings Institution. Dr. Schick holds a Ph.D.
degree from Yale University. Dr. Schick is David
B. Schick's father and the brother-in-law of Dr.
Barrekette.
Jeffrey T. Slovin Age 35, has served as the Company's President and
as a Director since December 1999. Mr. Slovin's
current term on the Board expires at the Company's
Annual Meeting of Stockholders in 2001. Mr. Slovin
is currently a Managing Director of Greystone &
Co., Inc. From 1996 to 1999, Mr. Slovin served in
various executive capacities at Sommerset
Investment Capital LLC, including President, and
as Managing Director of Sommerset Realty
Investment Corp. During 1995, Mr. Slovin was a
Manager at Fidelity Investments Co. From 1991 to
1994, Mr. Slovin was Chief Financial Officer of
SportsLab USA Corp. and, from 1993 to 1994, was
also President of Sports and Entertainment Inc.
From 1987 to 1991, Mr. Slovin was an associate at
Bear Stearns & Co., Inc., specializing in mergers
and acquisitions and corporate finance. Mr. Slovin
holds an MBA degree from Harvard Business School.
23
<PAGE>
Robert Barolak Age 46, has served as a Director of the Company
since December 1999. Mr. Barolak's current term on
the Board expires at the Company's Annual Meeting
of Shareholders in 2001. Since 1989, Mr. Barolak
has been employed at Greystone & Co. in various
executive capacities and has been its Executive
Vice President since 1995. From 1979 to 1989, Mr.
Barolak was an attorney at the firm of Ballard
Spahr Andrews & Ingersoll, LLP in Philadelphia.
Mr. Barolak holds a J.D. degree from the
University of Pennsylvania School of Law.
(b) The following table shows the names and ages of all executive officers of
the Company, the positions and offices held by such persons and the period
during which each such person served as an officer. The term of office of
each person is generally not fixed since each person serves at the
discretion of the Board of Directors of the Company.
<TABLE>
<CAPTION>
Officer
Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
David B. Schick................... 38 Chairman of the Board and Chief Executive
Officer 1992
Jeffrey T. Slovin................. 35 President and Director 1999
John Pauley....................... 53 Chief Operating Officer 1999
Zvi N. Raskin, Esq................ 37 Secretary and General Counsel 1992
Stan Mandelkern................... 40 Vice President of Engineering 1999
William Rogers.................... 59 Vice President of Operations 1999
Michael Stone..................... 47 Vice President of Sales and Marketing 2000
</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, Esq., has served as Secretary of the Company since April
1992 and as General Counsel of the Company since September 1995. From April
1992 to May 1996, Mr. Raskin was a Director of the Company. Mr. Raskin is
admitted to practice law before the Bars of the State of New York, the
United States District Courts for the Southern and Eastern Districts of New
York and the United States Court of Appeals for the Second Circuit. From
1992 to 1995, Mr. Raskin was a senior associate at the New York law firm of
Townley & Updike. From 1990 to 1992, Mr. Raskin was an associate at the New
York law firm of Dornbush Mandelstam & Silverman. Mr. Raskin holds a J.D.
degree from Yale Law School.
STAN MANDELKERN has served as the Company's Vice President of Engineering
since November, 1999. From 1998 to 1999, Mr. Mandelkern was the Company's
Director of Electrical Engineering, and was a Senior Electrical Engineer at
the Company from 1997 to 1998. From 1996 to 1997 Mr. Mandelkern was at
Satellite Transmission Systems as Project Leader for the Digital Video
Products Group. From 1989 to 1996 Mr. Mandelkern held various design and
management positions at Loral Corp. Mr. Mandelkern holds a M.S. Degree in
electrical engineering from Syracuse University.
WILLIAM ROGERS has served as the Company's Vice President of Operations
since January, 2000. From 1998 to 2000, Mr. Rogers was the Company's
Director of Materials and Manufacturing Engineering. From
24
<PAGE>
1995 to 1998, Mr. Rogers was Director of Operations at Vecco Instruments
Co., and from 1993 to 1995 was Director of Manufacturing for Scully Signal
Company. Mr. Rogers holds a B.S. Degree in electrical engineering from
Northeastern University.
MICHAEL STONE has served as the Company's Vice President of Sales and
Marketing since January 2000. From 1993 to 2000, Mr. Stone was General
Manager of the Dental Division of Welch-Allyn Company, and from 1989 to
1993 was Director of Marketing for Welch-Allyn. Mr. Stone holds an MBA
degree from the University of Rochester.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who beneficially own more than 10%
of the Company's Common Stock to file initial reports of ownership and reports
of changes in ownership with the Commission. Such executive officers and
directors and greater than 10% beneficial owners are required by the regulations
of the Commission to furnish the Company with copies of all Section 16(a)
reports they file.
Based solely on a review of the copies of such reports furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers and directors and greater than 10% beneficial owners were
complied with.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
received for the fiscal years ended March 31, 1999, 1998 and 1997 by the
Company's chief executive officer and each of the current and former executive
officers of the Company whose total salary and other compensation exceeded
$100,000 (the "Named Executives") for services rendered in all capacities
(including service as a director of the Company) during the year ended March 31,
1999.
25
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Other
Annual Securities All Other
Name and Principal Fiscal Compensa- Underlying Compensa-
Position Year Salary($) Bonus($) tion Options(#)(2) tion($)(3)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
David B. Schick 1999 $217,500 $ -- --(1) 12,251 $ --
Chairman of the Board
and Chief Executive 1998 143,385 39,692 -- 3,267 4,569
Officer
1997 140,308 5,890 -- 5,715 2,000
- -------------------------------------------------------------------------------------------------------------------------
Fred Levine 1999 179,167 47,500(4) -- 12,055 --
Former Vice President of
Sales and Marketing and 1998 137,318 23,826(4) -- 1,000 4,031
Former Director
1997 105,846 42,353 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Jonathan Singer 1999 131,667 -- -- 12,695 --
Former Vice President of
Engineering and Former 1998 109,423 -- -- 2,027 1,812
Director
1997 90,569 5,993 -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Zvi N. Raskin, Esq 1999 132,500 -- -- 17,006 --
General Counsel and
Secretary 1998 99,539 25,000 -- 2,343 3,113
1997 84,000 5,365 -- -- 1,100
- -------------------------------------------------------------------------------------------------------------------------
George C. Rough, Jr 1999 13,846(5) 150,000(6) -- 100,000(7) --
Former Chief Financial
Officer 1998 -- -- -- -- --
1997 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
</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
1997, 1998 and 1999, pursuant to the Company's 1996 Employee Stock Option
Plan.
(3) Reflects amounts contributed by the Company in the form of matching
contributions to the Named Executive's Savings Plan account during fiscal
1997, 1998 and 1999.
(4) Represents a commission received by Mr. Levine in connection with certain
sales targets that were met or exceeded.
(5) Reflects payment of salary to Mr. Rough from March 1, 1999, upon
commencement of his employment with the Company, through March 31, 1999.
(6) At or about the time of his commencement of employment with the Company in
March 1999, Mr. Rough was
26
<PAGE>
paid a bonus of $150,000.
(7) Upon his employment with the Company on March 1, 1999, Mr. Rough was
granted stock options to purchase 100,000 shares, 25% of which stock
options were to vest on March 1, 2000, 25% on March 1, 2001, 25% on March
1, 2002, and the remaining 25% on March 1, 2003, pursuant to the 1996
Employee Stock Option Plan. Upon his termination from employment with the
Company in October 1999, all such options terminated and were returned to
the Company.
Employment Agreements and Termination of Employment Arrangement
In February 2000, the Company entered into a three-year employment
agreement with David Schick, pursuant to which Mr. Schick is employed as Chief
Executive Officer of the Company. The term of the agreement is renewable
thereafter on a year-to-year basis unless either party gives 60-day written
notice of termination before the end of the then-current term. Mr. Schick's
annual base annual salary is $200,000, subject to annual increases of at least
ten percent (10%). In addition to base salary, Mr. Schick is eligible to receive
annual merit or cost-of-living increases as may be determined by the Executive
Compensation Committee of the Board of Directors. Mr. Schick will also receive
incentive compensation in the form of a bonus which is calculated using a
formula based on the Company's EBITDA as a percentage of the Company's net
revenues. Additionally, all Company stock options held by, or to be issued to,
Mr. Schick will immediately vest in the event that the Company has a change in
control or is acquired by another company or entity.
In February 2000, the Company entered into a three-year employment
agreement with Zvi Raskin, effective January 1, 2000, pursuant to which Mr.
Raskin is employed as General Counsel of the Company. Mr. Raskin's annual base
annual salary is $200,000. In addition to base salary, Mr. Raskin will receive a
minimum bonus of $20,000 per calendar year and is eligible to receive additional
performance bonuses at the sole discretion of the Executive Compensation
Committee of the Board of Directors. Mr. Raskin was also awarded 75,000 shares
of the Company's Common Stock, subject to a risk of forfeiture which expires as
to 25,000 shares on each of December 31, 2000, 2001 and 2002. Upon the sale of
any such vested shares, Mr. Raskin is required to pay the Company the sum of
$1.32 per share sold within 30 days following such sale. In the event that Mr.
Raskin is terminated from employment with the Company without cause, he would
receive 12 months of severance pay.
In August 1999, the Company and Fred Levine entered into a Separation,
Severance and General Release Agreement. The Agreement provided that Mr.
Levine's employment at the Company and membership on the Board of Directors
would cease as of August 27, 1999, and that he would receive continued payment
of his then-current salary, in the gross annual amount of $170,000, as well as
continued medical and dental insurance coverage, for a period of one year
following such cessation of employment. The Agreement also provided that the
Company stock options granted to Mr. Levine in fiscal 1996 could be exercised
until their expiration on December 31, 2000. Mr. Levine also agreed to a
24-month non-competition covenant. Additionally, the parties mutually released
one another from any current or future claims arising out of Mr. Levine's
employment with the Company, his separation from such employment and/or his
compensation.
In February 1999, the Company entered into a three-year employment
agreement with George C. Rough, Jr. to commence on March 1, 1999, pursuant to
which Mr. Rough was employed as Chief Financial Officer and Vice-President of
the Company. The term of the agreement was renewable thereafter on a
year-to-year basis unless either party were to give 60-day written notice of
termination before the end of the then-current term. Mr. Rough's base annual
salary was $240,000, subject to annual increases at the discretion of the
Company's Chief Executive Officer, contingent upon approval by the Executive
Compensation Committee of the Board of Directors. In addition to base salary,
Mr. Rough also received compensation in the form of a bonus, in the amount of
$150,000, paid to him in April 1999 and was also to receive a guaranteed annual
bonus of $40,000, payable at the end of each fiscal year during the term of his
employment. Mr. Rough was also awarded, upon commencement of his employment with
the Company, 100,000 Incentive Stock Options under the Company's 1996 Employee
Stock Option Plan, as amended. In October, 1999, Mr. Rough resigned from his
position at the Company, and, as a result, the 100,000 stock options awarded to
him have since terminated.
27
<PAGE>
Compensation of Directors
Directors who are also employees of the Company are not separately
compensated for any services they provide as directors. In fiscal 1999, each
non-employee director of the Company was eligible to receive $500 for each
meeting of the Board of Directors attended, $300 for each committee meeting
attended, and an annual retainer of $1,200. The Company may, but did not, pay
such fees in Common Stock. In addition, non-employee directors are entitled to
receive annual grants of stock options under the Company's Directors Stock
Option Plan.
Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee reviews and makes recommendations
regarding the compensation for top management and key employees of the Company,
including salaries and bonuses. The members of the Executive Compensation
Committee during the fiscal year ended March 31, 1999 were Howard Wasserman,
D.D.S. and Mark Bane, Esq. (who resigned as member of the Board of Director as
of February 18, 1999). None of such persons is an officer or employee, or former
officer or employee, of the Company or any of its subsidiaries. No interlocking
relationship existed during the fiscal year ended March 31, 1999, between the
members of the Company's Board of Directors or Compensation Committee and the
board of directors or compensation committee of any other company, nor had any
such interlocking relationship existed in the past. No person who served as a
member of the Executive Compensation Committee was a party to any material
transaction set forth under "Certain Transactions."
Stock Option Grants
The following table sets forth information regarding grants of options to
purchase Common Stock made by the Company during the year ended March 31, 1999
to each of the Named Executives.
Option Grants in Fiscal 1999
Individual Grants
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration Grant Date
Name Granted(#) Fiscal 1999(1) ($/Share) Date Value(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
David B. 2,251 .4% $27.72 4/01/2003 $ 39,000
Schick 10,000 1.9% 19.33 10/01/2003 119,000
Fred Levine 2,055 .39% 25.20 4/01/2008 36,000
10,000 1.9% 17.58 10/01/2008 122,000
Jonathan 2,695 .52% 25.20 4/01/2008 48,000
Singer 10,000 1.9% 17.58 10/01/2008 122,000
Zvi N. Raskin 2,006 .39% 25.20 4/01/2008 63,000
5,000 .96% 17.96 7/29/2008 63,000
10,000 1.9% 17.58 10/01/2008 122,000
George C. 100,000 19.2% 4.91 3/01/09 342,000
Rough, Jr.
</TABLE>
(1) The Company granted employees options to purchase a total of 520,523 shares
of Common Stock in fiscal 1999.
28
<PAGE>
(2) Grant date value was determined on the date of grant using the
Black-Scholes option pricing model based on the following assumptions:
volatility - 85%; expected life - 5 years; risk-free interest rate - 4.13%
to 5.46%; and no dividend yield.
Option Exercises and Year-End Value Table
The following table sets forth information regarding the exercise of stock
options during fiscal 1999 and the number and value of unexercised options held
at March 31, 1999 by each Named Executive.
Aggregated Option Exercises in Fiscal 1999
and Fiscal 1999 Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised "In-the-Money"
Options at Options at
Shares March 31, 1999 March 31, 1999
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized ($) Unexercisable Unexercisable(1)
---- ----------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
David B. Schick -- -- 10,412(2) / 10,821 0 / 0
- ------------------------------------------------------------------------------------------------------------
Fred Levine -- -- 56,250 / 12,805 130,760(3) / 0
- ------------------------------------------------------------------------------------------------------------
Jonathan Singer -- -- 6,880 / 14,215(4) 0 / 0
- ------------------------------------------------------------------------------------------------------------
Zvi N. Raskin -- -- 585 / 18,764 0 / 0
- ------------------------------------------------------------------------------------------------------------
George C. Rough, -- -- 0 / 100,000 0 / 0
Jr.
</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 $4.125 per share, the closing price per
share on March 31, 1999, and the exercise price of the option, multiplied
by the applicable number of options.
(2) The fiscal 1997 stock option grant of 5,715 stock options to Mr. Schick is
a time-vesting option. Twenty-five percent of such option vested on July
22, 1997, 25% vested on July 22, 1998, 25% vested on July 22, 1999, and the
remaining 25% vests on July 22, 2000. The stock option was exercisable upon
grant.
(3) Includes options to purchase 56,000 shares of Common Stock at an exercise
price of $1.79 a share granted to Mr. Levine in fiscal 1996 in connection
with Mr. Levine's commencement of employment with the Company, of which all
options are vested. Such options expire on December 31, 2000.
(4) The fiscal 1997 stock option grant of 6,373 stock options to Mr. Singer is
a time-vesting option. Twenty-five percent of such option vested on July
22, 1997, 25% vested on July 22, 1998, 25% vested on July 22, 1999 and the
remaining 25% vests on July 22, 2000. The stock option was exercisable upon
grant.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 7, 2000 by (i) each person
who is known by the Company to own beneficially more than 5% of the Common
Stock, (ii) each director, (iii) each Named Executive of the Company and (iv)
all directors and executive officers of the Company as a group. Unless otherwise
noted, the stockholders listed in the table have sole voting and investment
powers with respect to the shares of Common Stock owned by them.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name Beneficially Owned(1) Outstanding Shares
- ---- --------------------- ------------------
<S> <C> <C>
David B. Schick(2) ............................... 2,192,843(3) 21.6%
George C. Rough Jr.(4) ........................... --(5) --
Fred Levine(6) ................................... 97,792(7) *
Zvi N. Raskin(2) ................................. 115,722(8) 1.1%
Jonathan Singer(2) ............................... 329,639(9) 3.2%
Euval S. Barrekette(10) .......................... 116,490(11) 1.2%
Allen Schick(12) ................................. 534,374(13) 5.3%
Jeffrey T. Slovin(2) ............................. 750,000(14) 6.9%
Robert Barolak(15) ............................... -- --
Greystone Funding Corp.(16) ...................... 4,250,000(17) 29.5%
All current executive Officers and Directors as a
group ............................................ 7,959,429(18) 41.2%
</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 March 7, 2000 are deemed outstanding for computing the number and the
percentage of outstanding shares beneficially owned by the person holding
such options but are not deemed outstanding for computing the percentage
beneficially owned by any other person.
(2) Such person's business address is c/o Schick Technologies, Inc., 31-00 47th
Avenue, Long Island City, New York 11101.
(3) Consists of 2,183,300 shares held jointly by Mr. Schick and his wife; 4,285
shares issuable upon the exercise of stock options granted to Mr. Schick in
July 1996; 1,632 shares issuable upon the exercise of stock options granted
to Mr. Schick in July 1997; 1125 shares issuable upon the exercise of stock
options granted to Mr. Schick in April 1998; and 2,500 shares issuable upon
the exercise of stock options granted to Mr. Schick in October 1998,
pursuant to the 1996 Employee Stock Option Plan.
30
<PAGE>
(4) Such person's business address is c/o PricewaterhouseCoopers LLP, 1301
Avenue of the Americas, New York, New York 10036.
(5) Upon his employment with the Company on March 1, 1999, Mr. Rough was
granted stock options to purchase 100,000 shares, 25% of which stock
options were to vest on March 1, 2000, 25% on March 1, 2001, 25% on March
1, 2002, and the remaining 25% on March 1, 2003, pursuant to the 1996
Employee Stock Option Plan. Upon his termination from employment with the
Company in October 1999, all such options terminated and reverted to the
Company.
(6) Such person's address is 3 Cottonwood Lane, Wesley Hills, New York 10901.
(7) Consists of 41,792 shares held jointly by Mr. Levine and his wife, and
56,000 shares issuable upon the exercise of options granted to Mr. Levine
in fiscal 1996.
(8) Consists of 34,800 shares held jointly by Mr. Raskin and his wife; an
additional 75,000 shares (the "Shares") issued by the Company to Mr. Raskin
on February 6, 2000, which are subject to the following restrictions on
their sale or transfer: (i) none of the Shares may be sold or transferred
prior to December 31, 2000, (ii) one-third (i.e., 25,000) of the Shares may
be sold or transferred on or after December 31, 2000, (iii) an additional
one-third (i.e., an additional 25,000) of the Shares may be sold or
transferred on or after December 31, 2001, and (iv) the final one-third
(i.e., the final 25,000) of the Shares may be sold or transferred on or
after December 31, 2002; 1,170 shares issuable upon the exercise of stock
options granted to Mr. Raskin in July 1997; 1,002 shares issuable upon the
exercise of options granted to Mr. Raskin in April 1998; 1,250 shares
issuable upon the exercise of options granted to Mr. Raskin in July 1998;
and 2,500 shares issuable upon the exercise of options granted to Mr.
Raskin in October 1998, pursuant to the 1996 Employee Stock Option Plan.
(9) Consists of 320,000 shares held jointly by Mr. Singer and his wife; 4,779
shares issuable upon the exercise of stock options granted to Mr. Singer in
July 1996; 1,012 shares issuable upon the exercise of stock options granted
to Mr. Singer in July 1997; 1,347 shares issuable upon the exercise of
stock options granted to Mr. Singer in April 1998; and 2,500 shares
issuable upon the exercise of stock options granted to Mr. Singer in
October 1998, pursuant to the 1996 Employee Stock Option Plan.
(10) Dr. Barrekette's address is 90 Riverside Drive, New York, New York 10024.
(11) Consists of 115,240 shares held by Dr. Barrekette, and 1250 shares issuable
upon the exercise of stock options granted to Dr. Barrekette in July, 1998,
pursuant to the 1997 Directors Stock Option Plan.
(12) Dr. Schick's address is 1222 Woodside Parkway, Silver Spring, Maryland
20910.
(13) Consists of 488,324 shares held jointly by Dr. Schick and his wife; 44,800
shares held by Dr. Schick as custodian for the minor children of David
Schick; and 1,250 shares issuable upon the exercise of stock options
granted to Dr. Schick in July 1998, pursuant to the 1997 Directors Stock
Option Plan. Dr. Schick disclaims beneficial ownership of the 44,800 shares
held as custodian.
(14) Consists of 750,000 shares issuable upon the exercise of warrants held by
Mr. Slovin.
(15) Such person's business address is c/o Greystone & Co., 152 West 57th
Street, New York, New York 10019.
(16) Greystone's address is 152 West 57th Street, New York, New York 10019.
(17) Consists of 4,250,000 shares issuable upon the exercise of warrants held by
Greystone.
(18) Includes the shares underlying warrants described in Note 14 as well as the
shares subject to options held by officers and directors.
In connection with, and as a condition to, the Loan Agreement with Greystone on
December 27, 1999, the Company, David B. Schick, Allen Schick and Greystone
entered into a Stockholders Agreement (the "Stockholders Agreement") dated as of
December 27, 1999. (David B. Schick and Allen Schick are collectively referred
to herein as the "Stockholders") pursuant to which, among other things, (i) the
Stockholders agree to vote shares of Common Stock which they or family members
or certain affiliates own or which the Stockholders control (the "Stockholder
Shares") as necessary to cause the Company's Board of Directors (the "Board") to
consist of a minimum of six members or such other number as required by the Loan
Agreement; (ii) the Stockholders agree to vote the Stockholder Shares in favor
of the election or reelection of designees of Greystone for the number of seats
on the Board (initially two) as provided in the Loan Agreement; (iii) the
Stockholders agree to take action and vote to appoint a Greystone designee to
fill any vacancy on the Board by reason of the death, resignation or removal of
a Greystone designee; (iv) the Stockholders agree not to vote Stockholder Shares
to remove a Greystone designee from the Board; (v) each Stockholder who is a
director of the Registrant agrees, in his capacity as director (and subject to
his fiduciary duties), to cause Jeffrey Slovin to hold the office of President
of the Registrant and to vote as provided in clauses (i) through (iv) above, as
well as to vote to elect or reelect (and not vote to remove) individuals
appointed by Greystone to the audit committee and compensation committee of the
Board, as provided in the Loan Agreement. The Stockholders have also agreed to
vote all of their respective Stockholder Shares in favor of a proposal to
increase the number of stockholder options available for grant to employees by
750,000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
SCHICK TECHNOLOGIES, INC.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Index to Consolidated Financial Statements ..................................................... F-1
Report of Independent Accountants................................................................ F-2
Report of Independent Certified Public Accountants ........................................... F-3
Consolidated Balance Sheets as of March 31, 1999 and 1998 ...................................... F-4
Consolidated Statements of Operations for the years ended March 31, 1999, 1998 and 1997 ........ F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended March 31,
1999, 1998 and 1997 ....................................................................... F-7
Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997 ........ F-7
Notes to Consolidated Financial Statements ..................................................... F-8
</TABLE>
F-1
<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, Valuation and Qualifying Accounts, for the years ended March 31,
1998 and 1997 presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
June 9, 1998
F-2
<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 sheet of Schick
Technologies, Inc. (the "Company") as of March 31, 1999 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Schick
Technologies, Inc. as of March 31, 1999, and the consolidated results of their
operations and their consolidated cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
We have also audited Schedule II of Schick Technologies, Inc. for the year ended
March 31, 1999. In our opinion, this schedule presents fairly, in all material
respects, the information required to be set fourth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming that the Company will continue as a going
concern. As more fully described in Note 2, the Company has incurred significant
losses for the year ended March 31, 1999. In addition, as more fully described
in Note 13, the Company has been named as a defendant in several putative class
action lawsuits that have been consolidated into an amended complaint. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The consolidated financial statements and financial statement
schedule do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Grant Thornton LLP
New York, New York
March 8, 2000 (except for the last paragraph in Note 19 as to which the date is
March 17, 2000)
F-3
<PAGE>
Schick Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,415 $ 6,217
Short-term investments 360 14,022
Accounts receivable, net of allowance for
doubtful accounts of $4,512 and $200, respectively 4,205 10,173
Inventories 10,686 12,152
Income taxes receivable 2,720 --
Prepayments and other current assets 321 746
-------- --------
Total current assets 19,707 43,310
-------- --------
Equipment, net 7,221 5,801
Investments 1,250 1,000
Deferred tax asset -- 349
Other assets 1,208 1,214
-------- --------
Total assets $ 29,386 $ 51,674
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 8,946 $ 7,010
Bridge note payable 5,000 --
Accrued salaries and commissions 1,296 1,473
Deferred revenue 564 362
Deposits from customers 513 331
Warranty obligations 402 245
Income taxes payable -- 144
Capital lease obligations, current 84 --
-------- --------
Total current liabilities 16,805 9,565
-------- --------
Capital lease obligations, long term 45 --
-------- --------
Total liabilities 16,850 9,565
Commitments and contingencies
Stockholders' equity
Preferred stock ($0.01 par value; 2,500,000
shares authorized; none issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares authorized;
10,059,384 and 9,992,057 shares issued and outstanding) 101 100
Additional paid-in capital 41,236 41,204
(Accumulated deficit) retained earnings (28,801) 805
-------- --------
Total stockholders' equity 12,536 42,109
-------- --------
Total liabilities and stockholders' equity $ 29,386 $ 51,674
======== ========
</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,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues, net $ 45,605 $ 38,451 $ 16,101
-------- -------- --------
Cost of sales 34,611 17,658 7,907
Excess and obsolete inventory 5,466 -- 114
-------- -------- --------
Total cost of sales 40,077 17,658 8,021
-------- -------- --------
Gross profit 5,528 20,793 8,080
-------- -------- --------
Operating expenses
Selling and marketing 18,440 10,645 4,961
General and administrative 7,338 3,954 2,054
Research and development 4,354 3,852 1,418
Bad debt expense 5,598 164 34
Patent litigation settlement -- 600 --
-------- -------- --------
Total operating expenses 35,730 19,215 8,467
-------- -------- --------
(Loss) income from operations (30,202) 1,578 (387)
-------- -------- --------
Other income (expense)
Interest income 505 1,188 196
Interest expense (261) (77) (161)
-------- -------- --------
Total other income 244 1,111 35
-------- -------- --------
(Loss) income before income taxes (29,958) 2,689 (352)
-------- -------- --------
(Benefit) provision for income taxes (352) 328 --
-------- -------- --------
Net (loss) income $(29,606) $ 2,361 $ (352)
======== ======== ========
Basic (loss) earnings per share $ (2.96) $ 0.25 $ (0.05)
======== ======== ========
Diluted (loss) earnings per share $ (2.96) $ 0.24 $ (0.04)
======== ======== ========
</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, 1996 7,052,870 $ 71 $ 2,502 $ (1,204) $ 1,369
Issuance of common stock upon
conversion of notes payable 376,446 4 729 -- 733
Issuance and sale of common
stock and warrants 526,470 5 4,307 -- 4,312
Issuance of compensatory
stock options to employees -- -- 13 -- 13
Issuance of compensatory
common stock to an employee 1,445 -- 12 -- 12
Net loss -- -- -- (352) (352)
---------- ---------- ---------- ---------- ----------
Balance at March 31, 1997 7,957,231 80 7,563 (1,556) 6,087
Issuance and sale of common stock in initial
public offering 2,012,500 20 33,488 -- 33,508
Issuance of common stock upon
exercise of stock options 2,479 -- 18 -- 18
Issuance of common stock upon
exercise of warrants 19,847 -- 100 -- 100
Issuance of compensatory
stock options to employees -- -- 35 -- 35
Net income -- -- -- 2,361 2,361
---------- ---------- ---------- ---------- ----------
Balance at March 31, 1998 9,992,057 100 41,204 805 42,109
Issuance of common stock upon
exercise of stock options 3,848 -- 32 -- 32
Issuance of common stock upon
exercise of warrants 63,479 1 -- -- 1
Net loss -- -- -- (29,606) (29,606)
---------- ---------- ---------- ---------- ----------
Balance at March 31, 1999 10,059,384 $ 101 $ 41,236 $ (28,801) $ 12,536
========== ========== ========== ========== ==========
</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,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income $(29,606) $ 2,361 $ (352)
Adjustments to reconcile net (loss) income to
net cash used in operating activities
Depreciation and amortization 1,710 943 318
Provision for excess and obsolete inventory 5,466 -- 114
Provision for bad debts 5,598 164 34
Stock and option grant compensation -- 35 25
Accrued interest on investments -- (428) (53)
Non-cash interest expense -- -- 98
Changes in assets and liabilities, net of effects of business acquired
Accounts receivable 370 (8,409) (1,017)
Inventories (4,000) (9,474) (667)
Prepayments and other current assets (2,295) (419) (167)
Other assets (148) (61) (115)
Deferred income taxes 349 (349) --
Accounts payable and accrued expenses 1,916 5,757 1,212
Income taxes payable (144) 144 --
Deferred revenue 202 221 141
Deposits from customers 182 194 53
Accrued interest on notes payable -- (102) 102
-------- -------- --------
Net cash used in operating activities (20,400) (9,423) (274)
-------- -------- --------
Cash flows from investing activities
Capitalization of software development costs -- (165) --
Business acquisition -- (1,450) --
Purchase of minority interest in Photobit Corporation (250) (1,000) --
Purchase of held-to-maturity investments (10,588) (23,425) (6,619)
Purchase of available-for-sale investments -- -- (990)
Proceeds from maturities of held-to-maturity investments 24,250 12,144 4,359
Proceeds from redemption of available-for-sale investments -- 490 500
Capital expenditures (2,777) (4,668) (1,082)
-------- -------- --------
Net cash provided by (used in) investing activities 10,635 (18,074) (3,832)
-------- -------- --------
Cash flows from financing activities
Net proceeds from issuance and sale of common stock and warrants -- -- 4,312
Net proceeds from issuance and sale of common stock 33 33,626 --
Proceeds from issuance of long-term notes -- -- 1,000
Proceeds from issuance of short-term notes 5,000 -- --
Principal payments on capital lease obligations (70) (109) (21)
Repayment of notes payable -- (1,513) --
-------- -------- --------
Net cash provided by financing activities 4,963 32,004 5,291
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (4,802) 4,507 1,185
Cash and cash equivalents at
beginning of year 6,217 1,710 525
-------- -------- --------
Cash and cash equivalents at
end of year $ 1,415 $ 6,217 $ 1,710
======== ======== ========
</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
1999 1998 1997
---- ---- ----
CDR 71% 90% 100%
accuDEXA 29% 10% --
--- --- ---
100% 100% 100%
=== === ===
The consolidated financial statements of the Company at March 31, 1999,
include the accounts of the Company and its wholly- owned subsidiaries,
Schick New York and Schick X-Ray Corporation. In August 1999, Schick X-Ray
was dissolved and its operations absorbed by the Company.
2. Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company incurred significant
operating losses for the year ended March 31, 1999 and in each of the first
three quarters of fiscal 2000. At March 31, 1999, the Company had an
accumulated deficit of $28,801 and working capital of $2,902. Such losses
are principally attributable to significant product returns, bad debts and
excess and obsolete inventory resulting from (a) a change in the
semiconductor technology utilized in the Company's CDR(R) dental products
during fiscal 1999, (b) product reliability issues associated with the
Company's production of the accuDEXA(R) bone densitometer in fiscal 1999,
(c) a change in the Company's installation methodology for its CDR(R)
dental products and (d) insufficient credit and collections policies and
procedures. Further, the Company and certain of its directors and officers
have been named as defendants in several shareholder complaints purporting
to be Class Action lawsuits which have been consolidated into an amended
complaint (see Note 13). In March 1999, the Company secured a $5,000 bridge
loan (See Note 10), which was scheduled to mature on July 30, 1999. The
maturity of the bridge loan was extended and the principal amount of the
note was increased to $6,222 effective July 30, 1999. As further described
in Note 19, the Company is not in compliance with certain financial
covenants, and other terms and provisions contained in the extended bridge
loan and is currently in the process of restructuring the obligation.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company, which
in turn is dependent upon the Company's ability to meet its financing
requirements on a continuing basis, to maintain present financing, to
succeed in its future operations, and satisfactorily settle legal matters.
The financial statements do not include any adjustments relating to the
recoverability and
F-8
<PAGE>
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to
continue in existence.
In response to the losses incurred, management has implemented certain
corrective actions, which include, but are not limited to, (1) reducing
staff, space and other overhead expenditures, (2) curtailing certain sales
promotions, (3) tightening credit policies and payment terms, (4)
aggressively collecting past-due balances from customers, (5) consolidating
its sales force, (6) implementing programs to increase warranty revenue and
recover warranty parts from the Company's customers, (7) obtaining
additional financing from Greystone Funding Corporation ("Greystone"), (8)
renegotiating repayment terms with the secured lender, (9) employing new
senior management including Vice President of Sales and Marketing, and
Chief Operating Officer, (10) curtailing inventory acquisitions and
disposing of excess and obsolete inventory and, (11) modifying and
improving the Company's products to improve reliability and reduce warranty
expenditures.
3. Restatement of Interim Periods and Fourth Quarter Adjustments (unaudited
and not reviewed)
In February 1999, the Company restated its financial results for the first
and second fiscal quarters of 1999. Such restatements were made to reflect
increased reserves and allowances for sales returns and bad debts. In
addition, at that time, the Company reanalyzed the timing of various sales
transactions, which resulted in certain revenues being shifted from the
first quarter of fiscal 1999 to the second quarter of fiscal 1999 and the
elimination of certain revenue recognized in the second quarter.
In June 1999, the Company became aware that certain sales transactions of
both its CDR and accuDEXA systems had been recognized prematurely or
improperly recorded during interim periods of fiscal 1999. The Audit
Committee of the Company's Board of Directors subsequently initiated an
investigation of the Company's revenue recognition and sales practices. As
a result of the findings of the investigation and the year-end audit
process, the Company's financial statements for the first, second and third
quarters of fiscal 1999 have been restated from those previously announced
by the Company in February 1999. In addition to the required adjustments to
revenue, reserves for sales returns were restated to reflect actual return
rates associated with certain promotional programs. These promotional
programs had not been previously considered in the Company's estimates of
sales returns.
The following table sets forth the effect of the prior period adjustments
for the quarters ended June 30, 1998, September 30, 1998 and December 31,
1998:
Unaudited and not reviewed
Three Months Ended
--------------------------------------
June 30, September 30, December 31,
1998 1998 1998
-------- ------------- ------------
Revenues $(5,541) $(1,927) $(1,550)
Cost of sales 1,581 (1,069) 501
------- ------- -------
Gross profit (loss) (3,960) (2,996) (1,049)
Total operating expenses (162) 221 --
------- ------- -------
Gain (loss) from operations (4,122) (2,775) (1,049)
Income tax benefit 948 68 --
------- ------- -------
Net loss $(3,174) $(2,707) $(1,049)
======= ======= =======
The adjustments to revenues in the quarter ended June 30, 1998 result
primarily from premature revenue recognition related to "Bill & Hold"
transactions and promotional programs whereby the customer was provided a
trial period prior to the actual purchase of the Company's CDR and accuDEXA
systems. Revenues were initially recognized upon shipment of products
subject to the trial period versus at the expiration of the trial period or
upon confirmation from the customer of their acceptance of the purchase.
The adjustments resulted in $3,295 of revenues being shifted from the first
fiscal quarter to the second fiscal quarter. Revenues of $2,246 were
reduced in the first quarter of 1999 resulting from the accrual of returns
from the fourth quarter of 1999.
F-9
<PAGE>
Revenues in the second quarter of 1999 were increased by the $3,295 shifted
from the first quarter. Such increase was offset by the reversal of
revenues in the amount of $1,998 related to consignment sales to
distributors and shipments for which the customer did not accept delivery.
In addition, $700 of revenues related to product shipments subject to trial
periods was shifted from the second quarter to the third quarter of fiscal
1999. Revenues in the amount of $413 related to shipments of products
subject to trial periods where the customer never confirmed acceptance of
the product and subsequently returned the product were reversed. Revenues
of $2,111 were reduced in the second quarter of 1999 resulting from the
accrual of returns from the fourth quarter of 1999.
Adjustments to revenues in the third quarter of fiscal 1999 include an
increase of $700 related to the revenues shifted from the second quarter.
Revenues in the amount of $353 were recognized during the third quarter for
consignment sales to distributors. These revenues were recognized upon
payment by the respective distributor. These increases in revenues were
offset by $90 of revenues related to product shipments subject to trial
periods, which were shifted to the fourth quarter of 1999. Revenues in the
amount of $357 related to shipments of products subject to trial periods
where the customer never confirmed acceptance of the product and
subsequently returned the product were reversed. Revenues of $2,149 were
reduced in the third quarter of 1999 resulting from the accrual of returns
from the fourth quarter of 1999.
Beginning in the quarter ended September 30, 1998, the rate of product
returns increased significantly. The increase in product returns and bad
debt expense is attributable to (a) change in the semiconductor technology
utilized in the Company's CDR dental products during fiscal 1999, (b)
product reliability issues associated with the Company's production of the
accuDEXA(R) bone densitometer in fiscal 1999, (c) a change in the Company's
installation methodology for its CDR dental products and, (d) insufficient
credit and collections policies and procedures. Also contributing to the
increase in returns were certain promotional programs. These programs had
not been considered in the Company's previous estimates of sales returns.
The actual rate of returns and accounts receivable charge-offs
significantly exceeded the respective provisions and reserves for sales
returns and bad debts. The restated results of operations for the first,
second and third quarters of fiscal 1999 reflect the actual rate of returns
versus the Company's initial estimates.
The previously reported results of operations for the quarters ended June
30, 1998, September 30, 1998 and December 31, 1998, as reported on Form
10-Q with the Securities and Exchange Commission, will be amended for the
restated results. The effect of such prior period adjustments on the
Company's previously reported quarters are as follows:
<TABLE>
<CAPTION>
-----------------------------Unaudited and not reviewed---------------------
Three months ended Three months ended Three months ended
June 30, 1998 September 30, 1998 December 31, 1998
--------------------- --------------------- ----------------------
As As As
originally As originally As originally As
reported restated reported restated reported restated
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues, net $ 15,980 $ 10,439 $ 14,236 $ 12,309 $ 17,090 $ 15,540
Total cost of sales 7,217 5,636 6,935 8,004 15,273 14,772
-------- -------- -------- -------- -------- --------
Gross Profit 8,763 4,803 7,301 4,305 1,817 768
Total operating expenses 6,540 6,702 7,208 6,987 10,383 10,383
-------- -------- -------- -------- -------- --------
Income (loss) from operations 2,223 (1,899) 93 (2,682) (8,566) (9,615)
Total other Income 243 243 180 180 46 46
-------- -------- -------- -------- -------- --------
Income (loss) before taxes 2,466 (1,656) 273 (2,502) (8,520) (9,569)
Provision for (benefit from)
income taxes 983 35 103 35 (565) (565)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1,483 $ (1,691) $ 170 $ (2,537) $ (7,955) $ (9,004)
======== ======== ======== ======== ======== ========
Basic earnings (loss) per share $ 0.15 $ (0.17) $ 0.02 $ (0.25) $ (0.80) $ (0.90)
======== ======== ======== ======== ======== ========
Diluted earnings (loss) per
share $ 0.14 $ (0.17) $ 0.02 $ (0.25) $ (0.80) $ (0.90)
======== ======== ======== ======== ======== ========
</TABLE>
F-10
<PAGE>
The fourth quarter of 1999 includes certain charges as described below:
Provision for obsolete and slow moving inventory $2,725
Provision for bad debts 3,050
Reserve for returns and allowances 1,100
Write off of refundable income tax 143
------
$7,018
======
4. Restructuring and Recapitalization
In connection with the Company's initial public offering (the "IPO") under
the Securities Act of 1933, as amended, the Company engaged in the
following restructuring and recapitalization transactions. In April 1997,
the Company and its wholly- owned subsidiary, STI Acquisition Corporation
("STI") were formed under the General Corporation Law of the State of
Delaware for the purpose of forming a holding company and changing the
state of incorporation of Schick Technologies, Inc., a New York Corporation
("Schick New York" or the "Predecessor Corporation"). Effective June 4,
1997 (pursuant to a merger agreement among the Company, the Predecessor
Corporation and STI), the Company issued 7,957,231 shares of its common
stock for all the outstanding common stock of the Predecessor Corporation.
STI and the Predecessor Corporation merged and the Predecessor Corporation
was the survivor of the merger, and became a wholly-owned subsidiary of the
Company. In connection with the restructuring and merger, the holders of
the Predecessor Corporation's outstanding warrants and options converted
such warrants and options to similar warrants and options of the Company
(based on the same ratio of exchange, 2.8 shares for 1 share, applicable to
the common stock exchange).
The 1996 Stock Option Plan of the Predecessor Corporation was amended by
the Company and the shares available for issuance pursuant to the Plan were
adjusted to 470,400. The Company also implemented its 1997 Stock Option
Plan for Non-Employee Directors ("the Directors Plan") whereby nonqualified
options to purchase up to 35,000 shares of the Company's common stock may
be granted to non-employee directors. Each option granted under the
Directors Plan becomes exercisable on the second anniversary date of its
grant and must have an exercise price equal to the fair market value of the
Company's common stock on the date of grant.
All common shares, stock options, warrants and related per share data
reflected in the accompanying financial statements and notes thereto have
been presented as if the recapitalization had been effective for all
periods presented.
References herein to the operations and historical financial information of
the "Company" prior to the date of the restructuring refer to the
operations and historical financial information of the Predecessor
Corporation.
5. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
F-11
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash equivalents
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated
at cost.
Investments
Investments with original maturities greater than three months and less
than one year when purchased are classified as short-term investments.
Investments are categorized as held-to-maturity and are carried at
amortized cost, without recognition of gains or losses that are deemed to
be temporary, as the Company has both the intent and the ability to hold
these investments until they mature (see Note 9).
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. Cost is determined principally on the
standard cost method for manufactured goods and on the average cost method
for other inventories, each of which approximates actual cost on the
first-in, first-out method.
Equipment
Equipment is stated at cost. Depreciation and amortization are provided on
the straight-line method over the lesser of the estimated useful lives of
the related assets or, where appropriate, the lease term.
Revenue Recognition
Revenues from sales of the Company's hardware and software products are
recognized at the time of shipment to customers, and when no significant
obligations exist and collectibility is probable. The Company provides its
customers with a 30-day return policy but allows for an additional 15 days,
and, accordingly, recognizes allowances for estimated returns by customers
pursuant to such policy at the time of shipment. During 1999, due to
various operational issues, the Company accepted product returns for
products shipped during 1999 beyond the standard return policy. The Company
has recognized allowances at March 31, 1999 for estimated returns by
customers pursuant to the extended return period. Amounts received from
customers in advance of product shipment are classified as deposits from
customers. Revenues from the sale of extended warranties on the Company's
products are recognized on a straight-line basis over the life of the
extended warranty, which is generally for a one-year period. Deferred
revenues relate to extended warranty fees which have been paid by customers
prior to the performance of extended warranty services.
Advertising Costs
Advertising costs included in selling and marketing expenses are expensed
as incurred and were $1,494, $1,484 and $906 for the years ended March 31,
1999, 1998 and 1997, respectively.
Warranties
The Company provides its customers with a limited product warranty for a
period of one year subsequent to the sale of its products. The Company
recognizes estimated costs associated with the limited warranty at the time
of sale of its products.
F-12
<PAGE>
Research and Development
Research and development costs consist of expenditures covering basic
scientific research and the application of scientific advances to the
development of new and improved products and their uses. Research and
development costs are expensed as incurred.
Software development costs for external use software incurred after the
establishment of technological feasibility are capitalized and amortized to
cost of revenues on a straight-line basis over the expected useful life of
the software. Software development costs incurred prior to the attainment
of technological feasibility are considered research and development and
are expensed as incurred. Costs of software developed for internal use
incurred during the development of the application are capitalized and
amortized to operating expense on a straight-line basis over the expected
useful life of the software.
The Company did not capitalize any software development costs during 1999.
The Company capitalized $165 of software development costs during the year
ended March 31, 1998 and recorded amortization expense related to such
capitalized costs of $35 and $7 during 1999 and 1998, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between
financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities reflect the tax rates
expected to be in effect for the years in which the differences are
expected to reverse. A valuation allowance is provided if it is more likely
than not that some or all of the deferred tax asset will not be realized.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and bridge notes payable approximates
fair value due to the relatively short maturity of these instruments.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
fiscal 1999 presentation.
6. Earnings (Loss) Per Share
Basic earnings per share ("Basic EPS") is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share ("Diluted
EPS") gives effect to all dilutive potential common shares outstanding
during the period. The computation of Diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would have
an antidilutive effect on earnings.
The loss per share for the year ended March 31, 1997 has been restated for
the adoption of SFAS 128. The adoption of SFAS 128 did not have a
significant impact on the loss per share of the period.
The computations of basic (loss) earnings per share and diluted (loss)
earnings per share for the years ended March 31, 1999, 1998 and 1997 are as
follows:
F-13
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net (loss) income available to common stockholders $ (29,606) $ 2,361 $ (352)
Interest on convertible notes -- -- 23
------------ ------------ ------------
(Loss) income for diluted earnings per share $ (29,606) $ 2,361 $ (329)
============ ============ ============
Weighted-average shares outstanding for basic
(loss) earnings per share 10,013,061 9,474,590 7,643,307
Dilutive effect of stock options and warrants -- 339,464 --
------------ ------------ ------------
Weighted-average shares outstanding for diluted
(loss) earnings per share 10,013,061 9,814,054 7,643,307
============ ============ ============
Basic (loss) earnings per share $ (2.96) $ 0.25 $ (0.05)
============ ============ ============
Diluted (loss) earnings per share $ (2.96) $ 0.24 $ (0.04)
============ ============ ============
</TABLE>
At March 31, 1999, outstanding options to purchase 593,466 shares of common
stock, with exercise prices ranging from $1.79 to $27.72 per share, have
been excluded from the computation of diluted loss per share as they are
antidilutive. Outstanding warrants to purchase 297,150 shares of common
stock with exercise prices ranging from $7.86 to $8.93 per share were also
antidilutive and excluded from the computation of diluted loss per share at
March 31, 1999.
7. Inventories
Inventories at March 31, 1999 and 1998, net of provisions for excess and
obsolete inventories, are comprised of the following:
1999 1998
------- -------
Raw materials $ 2,203 $ 7,108
Work-in-process 3,763 3,466
Finished goods 4,720 1,578
------- -------
Total inventories $10,686 $12,152
======= =======
8. Equipment
Equipment at March 31, 1999 and 1998 is comprised of the following:
1999 1998
-------- --------
Production equipment $ 5,188 $ 3,300
Computer and communications equipment 2,055 1,096
Demonstration equipment 803 934
Leasehold improvements 1,921 1,169
Other equipment 116 608
-------- --------
Total equipment 10,083 7,107
Less - accumulated depreciation and amortization (2,862) (1,306)
-------- --------
Equipment, net $ 7,221 $ 5,801
======== ========
F-14
<PAGE>
At March 31, 1999, computer equipment included approximately $199 of
equipment acquired under capital leases. Accumulated depreciation related
to these assets approximated $17 at March 31, 1999.
9. Investments in Debt Securities
Held-to-maturity securities at March 31, 1999 and 1998 consist of
short-term U.S. Treasury and government agency debt securities of $360 and
$14,022, on an amortized cost basis, with maturity dates of less than one
year. The gross unrealized gains and losses at March 31, 1999 and 1998 on
held-to-maturity securities were insignificant.
10. Bridge Note Payable
In March 1999, the Company issued a secured short-term promissory note in
the principal amount of $5,000 to a third party. The note, which matured
July 30, 1999, bore interest at the rate of prime plus one-half percent per
annum. Interest on the note was payable monthly. The note was secured by
the Company's tangible and intangible assets. During 1999, the Company
recognized $14 of interest expense related to the note. Effective July 30,
1999, the maturity of the note was extended and the principal of the note
was increased to $6,222 (See Note 19).
11. Income Taxes
The components of the Company's (benefit) provision for income taxes is as
follows:
March 31,
-----------------------------------
1999 1998 1997
----- ----- -------
Current
Federal $(531) $ 415 $ --
State (170) 262 --
----- ----- -------
Total (701) 677 $ --
Deferred
Federal 282 (282) --
State 67 (67) --
----- ----- -------
349 (349) --
----- ----- -------
$(352) $ 328 $ --
===== ===== =======
The reconciliation between the U.S. federal statutory rate and the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<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 (0.2) 8.0 (9.0)
Non-deductible expenses 16.7 4.9 10.3
Research and development tax credit 0.8 (11.2) (20.6)
Valuation allowance on deferred tax assets 15.6 (23.5) 53.3
------ ------ ------
Effective tax rate (1.1)% 12.2% --
====== ====== ======
</TABLE>
F-15
<PAGE>
Significant components of the Company's deferred tax assets at March 31,
1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net operating loss carryforwards $ 5,701 $ -- $ 241
Reserves and allowance for inventory 2,702 -- 212
Accounts receivable and warranties 3,488 355 --
Depreciation and other (445) (211) --
Other accrued expenses not currently deductible -- 205 48
Other 409 -- 122
-------- -------- --------
11,855 349 623
Valuation allowance (11,855) -- (623)
-------- -------- --------
Net deferred tax asset
$ -- $ 349 $ --
======== ======== ========
</TABLE>
At March 31, 1999, the Company had a deferred tax asset of $11,855 (before
valuation allowance) consisting primarily of the future tax benefits from
net operating loss carryforwards, temporary differences and other tax
credits. Realization of the deferred tax asset depends on the Company's
ability to generate future U.S. taxable income.
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"), the Company is required to recognize all or
a portion of its net deferred tax asset if it believes that it is more
likely than not, given the weight of all available evidence, that all or a
portion of the benefits of the carryforward losses and tax credits will be
realized. Management believes that it is more likely than not that the
Company will not realize any benefits from its net deferred tax asset and
has recorded a 100% reserve against the asset at March 31, 1999. Management
will continue to assess the realizability of the deferred tax asset at the
interim and annual balance date based upon actual and forecasted operating
results.
At March 31, 1999, the Company has a U.S. federal income tax net operating
loss carryforward of $13,574 available to offset future taxable income. The
carryforward has various expiration dates beginning in 2018.
Under current tax law, the utilization of the Company's tax attributes will
be restricted if an ownership change, as defined, were to occur. Section
382 of the Internal Revenue Code provides, in general, that if an
"ownership change" occurs with respect to a corporation with net operating
and other loss carryforwards, such carryforwards will be available to
offset taxable income in each taxable year after the ownership change only
up to the "Section 382 Limitation" for each year (generally, the product of
the fair market value of the corporation's stock at the time of the
ownership change, with certain adjustments, and a specified long-term
tax-exempt bond rate at such time). The Company's ability to use its loss
carryforwards would probably be limited in the event of an ownership
change.
12. Concentration of Risks and Customer Information
Substantially all of the Company's sales are to domestic and foreign
dentists and doctors, distributors of dental and medical supplies and
equipment, and third-party financing companies. Financial instruments which
potentially subject the Company to concentrations of credit risk are
primarily accounts receivable, cash equivalents and short-term investments.
The Company generally does not require collateral and the majority of its
trade receivables are unsecured. The Company is directly affected by the
financial well-being of the dental and medical industries. During 1999, the
Company recorded significant charges for bad debt expense due to product
reliability issues, customer service issues and insufficient credit and
collection policies. The Company has undertaken steps to correct the
deficiencies that resulted in the bad debt charges. The Company places its
cash equivalents in short-term money market instruments. Short-term
investments consist of U.S. Treasury and government agency debt obligations
(see Note 9).
F-16
<PAGE>
The Company currently relies on two vendors to supply each of its primary
raw materials, the active-pixel sensor ("APS") and the charged coupled
device ("CCD") semiconductor wafers. During the fourth quarter of fiscal
1998, the Company experienced a delay in the supply flow from its CCD
vendor which resulted in manufacturing and product shipment delays.
Although there are a number of manufacturers capable of supplying these
materials, which the Company believes could provide for its semiconductor
requirements on comparable terms, such delays could occur again.
Approximately $5,961, $7,085 and $3,867 of the Company's sales in 1999,
1998 and 1997, respectively, were to foreign customers. The majority of
such foreign sales were to customers in Europe. During 1999, sales of
$7,187 were to a single distributor. In 1998 and 1997, no customer
accounted for 10% or more of sales.
13. Commitments and Contingencies
Operating and Capital Leases
The Company leases its facilities under operating lease agreements expiring
from February 2001 to August 2004. Rent expense for the years ended March
31, 1999, 1998 and 1997 was $718, $383 and $193, respectively.
Future minimum payments on a fiscal year basis under non-cancelable
operating and capital leases are as follows:
Operating Capital
--------- -------
2000 $ 971 $ 125
2001 981 48
2002 839 --
2003 873 --
2004 907 --
Thereafter 393 --
------ ------
Total minimum lease payments $4,964 $ 173
====== ------
Less: Amounts representing interest 44
------
Present value of future minimum lease payments 129
Less: Current maturities 84
------
Capital lease obligations - long term $ 45
======
Product Liability
The Company is subject to the risk of product liability and other liability
claims in the event that the use of its products results in personal injury
or other claims. Although the Company has not experienced any product
liability claims to date, any such claims could have an adverse impact on
the Company. The Company maintains insurance coverage related to product
liability claims, but there can be no assurance that product or other
claims will not exceed its insurance coverage limits, or that such
insurance will continue to be available on commercially acceptable terms,
or at all.
SEC Investigation and Other
In August 1999, the Company, through its outside counsel, contacted the
Division of Enforcement of the Securities and Exchange Commission ("SEC")
to advise it of certain matters related to the Company's
F-17
<PAGE>
restatement of earnings. The SEC has made a voluntary request for the
production of certain documents. The Company intends to cooperate fully
with the SEC staff and has provided responsive documents to it. In
addition, investigators associated with the U.S. Attorneys Office have made
inquires of certain former employees, apparently in connection with the
same event. The inquiries are in a preliminary stage and the Company cannot
predict their potential outcome.
Litigation
During fiscal 1999, several shareholder class action lawsuits were filed
against the Company. In May 1999 a consolidated and amended class action
complaint was filed naming the Company, certain of its officers and former
officers and various third parties as defendants. The complaint alleges
that certain defendants issued false and misleading statements concerning
the Company's publicly reported earnings in violation of the federal
securities laws. The complaint seeks certification of a class of persons
who purchased the Company's common stock between July 1, 1997 and February
19, 1999, inclusive, and does not specify the amount of damages sought. The
Company intends to defend itself vigorously against such allegations and
believes the claims to be without merit. As these actions are in their
preliminary stages, the Company is unable to predict the ultimate outcome
of these claims. The outcome, if unfavorable, could have a material adverse
effect on the financial position and results of operations of the Company.
During 1996, the Company was named as defendant in patent infringement
litigation commenced by a competitor in the United States and France. The
Company is vigorously defending itself against such allegations and
believes the claims to be without merit. The Company has filed a
countersuit against the competitor for infringement of a U.S. Patent which
has been exclusively licensed to the Company. The Company has obtained a
formal opinion of intellectual property counsel that its products do not
infringe on the competitor's U.S. patent. The Company has filed motions for
Summary Judgment seeking the dismissal of the action in the United States.
Such motions are currently pending. The Company is unable to predict the
ultimate outcome of this litigation. The outcome, if unfavorable, could
have a material adverse effect on the financial position and results of
operations of the Company. No provision has been made for any potential
losses at March 31, 1999 and 1998 as the range of potential loss, if any,
cannot be reasonably estimated.
During 1997, the Company was named as a defendant in patent litigation
involving a patent directed to a display system for digital dental
radiographs. In July 1997 the Company reached a settlement under which it
paid $600 for a world wide, non-exclusive license for the patent. The
license fee was expensed during 1998.
The Company may be a party to a variety of legal actions (in addition to
those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the
nature of its business, the Company is subject to a variety of legal
actions relating to its business operations. Recent court decisions and
legislative activity may increase the Company's exposure for any of these
types of claims. In some cases, substantial punitive damages may be sought.
The Company currently has insurance coverage for some of these potential
liabilities. Other potential liabilities may not be covered by insurance,
insurers may dispute coverage, or the amount of insurance may not be
sufficient to cover the damages awarded. In addition, certain types of
damages, such as punitive damages, may not be covered by insurance, and
insurance coverage for all or certain forms of liability may become
unavailable or prohibitively expensive in the future.
14. Stock Option Plan, Stock Grants and Defined Contribution Plan
Stock Option plan and Stock Grants
In April 1996, the Company implemented its 1996 Stock Option Plan (the
"Plan") whereby incentive and non-qualified options to purchase shares of
the Company's common stock may be granted to employees, directors and
consultants. In September 1998, the Plan was amended to increase the number
of shares of Common Stock issuable under the Plan from 470, 400 to
1,000,000. The exercise and vesting periods and the exercise price for
F-18
<PAGE>
options granted under the Plan are determined by the Board of Directors.
The Plan stipulates that the exercise price of non-qualified options
granted under the Plan must have an exercise price equal to or exceeding
85% of the fair market value of the Company's common stock as of the date
of grant of the option and no option may be exercisable after ten years
from the date of grant. Options granted under the plan generally vest over
a period of four years.
During fiscal 1996, prior to implementation of the Plan, an employee of the
Company was granted an option to purchase 56,000 shares of the Company's
common stock at $1.79 per share, determined by the Company's Board of
Directors to be the fair market value of the Company's common stock at the
date of the option grant. As of March 31, 1999, all shares are exercisable
under such option.
During 1998, the Company adopted the Directors Plan. A total of 35,000
shares of Common Stock have been authorized for issuance under the
Directors Plan. At March 31, 1999, 25,000 options to purchase Common Stock
pursuant to the Directors Plan were outstanding. There were no options
outstanding at March 31, 1998.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting
for its plans and other stock-based compensation issued to employees and
directors. During the year ended March 31, 1999, the Company did not
recognize compensation expense for options granted to employees. During
1998 and 1997, the Company has recognized compensation expense in the
amounts of $36 and $13, respectively, for options granted to employees. Had
compensation cost for option grants to employees been determined based upon
the fair value at the grant date for awards under the Plan consistent with
the methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
the Company's net loss in 1999 would have been increased by approximately
$759 ($.08 per basic share), net income in 1998 would have been decreased
by approximately $164 ($.02 per basic share) and the net loss in 1997 would
have been increased by approximately $45 ($.01 per basic share).
The fair value of options granted to employees during 1999, 1998 and 1997
has been determined on the date of the respective grant using the
Black-Scholes option-pricing model based on the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Dividend yield None None None
Risk-free interest rate on date of grant 4.13% - 5.48% 5.43% - 5.55% 6.27%
Forfeitures None None None
Expected life 5 years 5 years 5 years
Volatility 85% 75% --
</TABLE>
The following table summarizes information regarding stock options for
1999, 1998 and 1997:
F-19
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
----------------------- ----------------------- ----------------------
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, 56,000 $ 1.79 130,953 $ 4.85 223,411 $ 11.46
beginning of year
Options granted 79,338 7.14 97,902 20.87 420,523 10.76
Options exercised -- -- (2,479) 7.14 (3,848) 7.14
Options forfeited (4,385) 7.14 (2,965) 20.88 (46,620) 20.44
------- ------- ------- ---------
Options outstanding,
end of year 130,953 $ 4.85 223,411 $ 11.46 593,466 $ 10.87
======= ======= ======= =========
</TABLE>
Options outstanding Weighted-average remaining
Range of exercise price at March 31, 1999 contractual life (years)
- ----------------------- ----------------- ------------------------
At $ 1.79 56,000 6.8
$ 4.91 to $ 7.86 316,460 9.4
$15.81 to $22.97 155,502 8.9
$24.75 to $27.72 65,504 8.9
At March 31, 1999, there are 491,207 options available for grant pursuant
to the Company's option plans. Of the 593,466 options outstanding at March
31, 1999, 115,274 are exercisable at such date at a weighted-average
exercise price of $7.96.
The Company issued 1,445 shares of its common stock to an employee during
the year ended March 31, 1997 for services rendered by the employee to the
Company. The employee was immediately vested in the shares. The Board of
Directors of the Company has determined the fair market value of such
shares to be $8.16 per share. The Company recognized expense of $12 for the
year ended March 31, 1997 related to the grant.
Defined Contribution Plan
Effective October 1996, the Company implemented a defined contribution
savings plan, which qualifies under Section 401(k) of the Internal Revenue
Code, for employees meeting certain service requirements. Participants may
contribute up to 15% of their gross wages not to exceed, in any given year,
a limitation set by the Internal Revenue Service regulations. The plan
provides for mandatory matching contributions to be made by the Company to
a maximum amount of 2.5% of a plan participant's compensation. Company
contributions to the plan approximated $218, $111 and $38 in 1999, 1998 and
1997, respectively.
15. Supplemental Cash Flow Information
Cash payments for interest were $174, $144 and $56 in 1999, 1998 and 1997,
respectively. The Company paid $533 and $7 for income taxes in 1998 and
1997, respectively. There were no payments for income taxes in 1999.
During fiscal 1999 and 1997, the Company acquired $199 of computer
equipment and $95 of production equipment, respectively, under capital
leases.
16. Related Parties
In July 1997, the Company loaned its President, who is a principal
stockholder, $200. Such loan bore interest at a rate of 8% and was due and
payable on June 15, 1998. The loan, along with accrued interest in the
amount of $1, was repaid in August 1997.
17. Stockholders' Equity
In July 1997, the Company completed the IPO, selling 2,012,500 shares of
common stock at a price of $18.50 per share providing gross proceeds to the
Company of $37,231 and net proceeds, after underwriting discounts and
commissions and offering expenses payable by the Company, of $33,508.
F-20
<PAGE>
During 1997, the Company completed a private offering of 520,315 units, as
defined in such offering, at a price per unit ranging from $7.86 to $8.93
based on the quantity of units purchased. Each unit consisted of one share
of the Company's common stock, $.01 par value, and a warrant to purchase
one additional share of the Company's common stock at a price per share
equal to the purchase price of the unit, on or before May 3, 1999. The
offering provided net proceeds of $4,312. In conjunction with the offering
the Company issued 6,155 units, as a placement fee, to certain individuals
who assisted the Company in selling the units. The fair value of such
units, in the amount of $55, or $8.93 per unit has been reflected as a
reduction of paid in capital.
During 1999, warrants to purchase 204,680 shares of common stock were
exercised using cashless exercises pursuant to which 63,479 shares of the
Company's common stock were issued. During 1998, warrants to purchase
24,640 shares of the Company's common stock were exercised. Exercises of
11,200 of such warrants, for which 11,200 shares of common stock were
issued, provided the Company with net proceeds of approximately $100. The
remaining 13,440 warrant exercises were cashless exercises pursuant to
which 8,647 shares of the Company's common stock were issued. At March 31,
1999, the Company has reserved 297,150 shares of its common stock for
issuance upon the exercise of outstanding warrants.
18. Acquisition and Investment
Keystone Acquisition
On September 24, 1997, the Company's wholly-owned subsidiary, Schick X-Ray
Corporation ("Schick X-Ray"), a Delaware corporation, acquired certain
assets of Keystone Dental X-Ray Inc. ("Keystone"), a manufacturer of x-ray
equipment for the medical and dental radiology field, for $1,450. Schick
X-Ray was formed on September 24, 1997, for the sole purpose of acquiring
the assets of Keystone. Schick X-Ray acquired inventory, manufacturing
equipment, tooling and intellectual property. The acquisition has been
accounted for using the purchase method, and Schick X-Ray has recorded
goodwill in the amount of $750, which is included in other assets and is
being amortized on a straight-line basis over 7 years. The Company
recognized $107 and $55 for amortization of goodwill in 1999 and 1998,
respectively.
Investment in Photobit Corporation
In September 1997, the Company purchased a minority interest of 5%, for
$1,000 in Photobit Corporation, a developer of complementary metal-oxide
semiconductor ("CMOS"), APS imaging technology. In July 1998, the Company
invested an additional $250 in Photobit Corporation, bringing its total
investment in Photobit to $1,250. The Company is the exclusive licensee of
the APS technology for medical applications and utilizes the technology in
its bone-mineral density assessment device and certain components of its
computed dental x-ray imaging system. The Company carries the investment at
cost. At March 31, 1999, it is not practicable to estimate the fair value
of this investment because of the lack of quoted market prices and the
inability to estimate fair value without incurring excessive costs. No
dividends were paid on this investment. In September 1999, the Company sold
250,000 shares of Photobit stock for $1,000 and recorded an investment gain
of approximately $580.
19. Subsequent Events
Bridge Note Payable
Effective July 30, 1999, the Company secured an extension to the secured
promissory note it initially issued in March 1999. Pursuant to the amended
and restated note, the principal of the note was increased to $6,222. The
increase in the principal amount resulted from the conversion of certain
trade payables owed to the third party lender into the principal balance of
the note. The amended and restated note bears interest at the rate of prime
plus two and one-half percent per annum. Interest on the note is payable
monthly and the note is secured by the Company's tangible and intangible
assets. The principal is payable in quarterly installments of $1,000
commencing December 31, 1999. The Company is also required to make
additional principal payments equal to 25% of the net proceeds of any
equity or debt financing or asset sale (other than sales of inventory in
the
F-21
<PAGE>
ordinary course of business) to the extent that 25% of such proceeds
exceeds the $1,000 principal installment due at the end of the quarter in
which the financing or asset sale is completed. In connection with the
amended and restated note, the Company issued 650,000 warrants to the
note-holder. The warrants are exercisable for a period of 5 years and each
have an exercise price of $2.19. The Company is not in compliance with
certain financial covenants, and other terms and provisions contained in
the extended bridge loan and is currently in the process of refinancing the
obligation.
NASDAQ Delisting
On September 15, 1999, the Company received notice from the Nasdaq Listings
Qualifications Panel that its common stock would no longer be listed on the
Nasdaq National Market effective with the close of business on September
15, 1999. The panel's action was based on the Company's inability to timely
file its Annual Report on Form 10-K for the fiscal year ended March 31,
1999 and public interest concerns regarding the Company's revenue
recognition and sales practices.
Greystone Funding Corporation
In December 1999, the Company entered into a Loan Agreement, (the "Loan
Agreement") with Greystone Funding Corporation ("Greystone") to provide up
to $7.5 million of subordinated debt in the form of a secured credit
facility. Pursuant to the Loan Agreement, and to induce Greystone to enter
into said Agreement, the Company issued to Greystone and its designees
warrants to purchase 3,000,000 shares of the Company's Common Stock at an
exercise price of $0.75 per share. The Company agreed to issue to Greystone
and its designees warrants to purchase an additional 2,000,000 shares at an
exercise price of $0.75 per share in connection with a cash payment of $1
million by Greystone to the Company in consideration of a sale of Photobit
stock by the Company to Greystone. The sale of the Photobit stock was made
subject to a right of first refusal held by Photobit and its founders. By
letter dated February 17, 2000, counsel for Photobit informed the Company
that Photobit considers the Company's sale of its shares to Greystone to be
void on the basis of the Company's purported failure to properly comply
with Photobit's right of first refusal.
On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended
Loan Agreement") pursuant to which Greystone agreed to provide up to $7.5
million of subordinated debt in the form of a secured credit facility. The
$1 million cash payment to the Company was converted as of December 27,
1999 into an initial advance of $1,000,000 under the Amended Loan
Agreement. Pursuant to the Amended Loan Agreement, and to induce Greystone
to enter into said Agreement, the Company issued warrants to Greystone and
its designees, consisting of those warrants previously issued under the
Loan Agreement, to purchase 5,000,000 shares of the Company's Common Stock
at an exercise price of $0.75 per share, exercisable at any time after
December 27, 1999. Under the Amended Loan Agreement, the Company also
issued to Greystone and its designees warrants (the "Additional Warrants")
to purchase an additional 13,000,000 shares of common stock, which
Additional Warrants will vest and be exercisable at a rate of two shares of
Common Stock for each dollar advanced under the Amended Loan Agreement in
excess of the initial draw of $1,000,000. Any additional warrants which do
not vest prior to expiration or surrender of the line of credit will be
forfeited and canceled. In connection with the Greystone secured credit
facility, effective as of February 15, 2000, DVI consented to the Company's
grant to Greystone of a second priority lien encumbering the Company's
assets, under and subject in priority and right of payment to all liens
granted by the Company to DVI.
F-22
<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, 1997 $ 35,000 $ 33,933 $ -- $ 18,933(a) $ 50,000
For the year ended March 31, 1998 50,000 163,866 -- 13,866(a) 200,000
For the year ended March 31, 1999 200,000 5,598,000 -- 1,286,000(a) 4,512,000
RESERVE FOR OBSOLETE/SLOW MOVING INVENTORY
For the year ended March 31, 1997 $ -- $ 113,714 $ -- $ -- $ 113,714
For the year ended March 31, 1998 113,714 -- -- 113,714 --
For the year ended March 31, 1999 -- 5,466,000 -- --
5,466,000
VALUATION ALLOWANCE - DEFERRED TAX ASSET
For the year ended March 31, 1997 $ 490,000 $ -- $ 133,000(b) $ -- $ 623,000
For the year ended March 31, 1998 623,000 -- -- 623,000(c) --
For the year ended March 31, 1999 -- -- 11,855,000 11,855,000(c)
PROVISION FOR WARRANTY OBLIGATIONS
For the year ended March 31, 1997 $ 130,055 $ 199,371 $ -- $ -- $ 329,426
For the year ended March 31, 1998 329,426 -- 84,517(d) 244,909
For the year ended March 31, 1999 244,909 157,091 -- -- 402,000
</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
F-23
<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 Accounts F-2
Report of Independent Certified Public Accountants F-3
Consolidated Balance Sheet at March 31, 1999 and 1998 F-4
Consolidated Statement of Operations for the years ended
March 31, 1999, 1998 and 1997 F-5
Consolidated Statement of Stockholders' Equity for the year
ended March 31, 1999, 1998 and 1997 F-6
Consolidated Statement of Cash Flows for the year ended
March 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
(2) Financial statement schedules filed as part of this Report
Schedule II Valuation and Qualifying Accounts F-23
Schedules other than that mentioned above are omitted because the conditions
requiring their filing do not exist, or because the information is provided in
the financial statements filed herewith, including the notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
(c) The following Exhibits are included in this report:
Number Description
*3.1 Amended and Restated Certificate of Incorporation of the Company
**3.2 Bylaws of the Company, as amended
*4.1 Form of Common Stock certificate of the Company
*4.2 Form of Warrant of the Company
*4.3 Agreement and Plan of Merger dated as of May 15, 1997 among Schick
Technologies, Inc., a New York corporation, Schick Technologies Inc.,
a Delaware corporation and STI Acquisition Corp, a Delaware
corporation.
*10.1 Schick Technologies, Inc. 1996 Employee Stock Option Plan
32
<PAGE>
*10.2 Schick Technologies, Inc. 1997 Stock Option Plan for Non Employee
Directors
*10.3 Form of Non-Disclosure, Solicitation, Solicitation, Non-Competition
and Inventions Agreements between Schick Technologies, Inc. and Named
Executives of Schick Technologies, Inc.
*10.5 Service and License Agreement between Photobit, LLC and Schick
Technologies, Inc. dated as of June 24, 1996
10.9 Asset Purchase Agreement dated September 24, 1997 among Keystone
Dental X-Ray, Inc., DisCovery X-Ray Corporation and Imaging Sciences,
Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant's
Report on Form 8-K dated October 9, 1997.)
10.10 Secured Promissory Note between Schick Technologies, Inc. and DVI
Financial Services, Inc., dated as of January 25, 1999
10.10 Allonge to Secured Promissory Note by and between Schick Technologies,
Inc. and DVI Financial Services, Inc., dated as of March 4, 1999
10.12 Amended and Restated Promissory Note between Schick Technologies, Inc.
and DVI Financial Services, Inc., as of July 30, 1999.
10.13 Security Agreement between Schick Technologies, Inc. and DVI
Affiliated Capital, dated January 25, 1999
10.14 Employment Agreement between Schick Technologies, Inc. and George C.
Rough, Jr., dated February 25, 1999
10.15 Employment Agreement between Schick Technologies Inc. and David
Schick, dated February 29, 2000.
10.16 Employment Letter Agreement between Schick Technologies Inc. and Zvi
Raskin, dated February 6, 2000.
10.17 Employment Letter Agreement between Schick Technologies Inc. and
Michael Stone, dated January 12, 2000.
10.18 Employment Letter Agreement between Schick Technologies Inc. and
William F. Rogers, dated December 31, 1999.
10.19 Separation, Severance and General Release Agreement between Schick
Technologies Inc. and Fred Levine, dated August 27, 1999.
10.20 Separation, Severance and General Release Agreement between Schick
Technologies Inc. and Avi Itzhakov, dated August 20, 1999.
10.21 Loan Agreement, dated December 27, 1999, by and between Schick
Technologies, Inc., a Delaware corporation, Schick Technologies, Inc.,
a New York corporation, and Greystone Funding Corporation
("Greystone"), a Virginia corporation. (Filed as Exhibit 1 to the
Company's Current Report on Form 8-K dated December 27, 1999.)
33
<PAGE>
10.22 Stockholders' Agreement, dated December 27, 1999, by and between
Schick Technologies, Inc., a Delaware corporation, David B. Schick,
Allen Schick and Greystone. (Filed as Exhibit 2 to the Company's
Current Report on Form 8-K dated December 27, 1999.)
10.23 Stock Purchase Agreement, dated December 27, 1999, by and between
Schick Technologies, Inc., a Delaware corporation, and Greystone.
(Filed as Exhibit 3 to the Company's Current Report on Form 8-K dated
December 27, 1999.)
10.24 Form of Warrant Certificate Issued to Greystone to Purchase Shares of
Common Stock of Schick Technologies, Inc., a Delaware corporation.
(Filed as Exhibit 4 to the Company's Current Report on Form 8-K dated
December 27, 1999.)
21 List of subsidiaries of Schick Technologies, Inc.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Grant Thornton LLP
24 Powers of Attorney (included on signature page of this Report)
27.1 Financial Data Schedule [filed in electronic format only]
99 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995
* Filed as the same exhibit number as part of the registrant's Registration
Statement on Form S-1 (File No. 333-33731) declared effective by the
Securities and Exchange Commission on June 30, 1997 and incorporated by
reference herein.
** Filed as the same exhibit number as part of the registrant's Annual Report
on 10-K for the year ended March 31, 1998, filed with the Securities and
Exchange Commission on June 29, 1998.
34
<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 March 20, 2000.
SCHICK TECHNOLOGIES, INC
By: /a/ David B. Schick
--------------------------------
David B. Schick
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 20, 2000.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David B. Schick and Zvi N. Raskin (with full
power to act alone), as his true and lawful attorneys-in-fact and agents, with
full powers of substitution and resubstitution, for him in his name, place and
stead to sign an Annual Report on Form 10-K of Schick Technologies, Inc, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, lawfully do or cause to be done by virtue
hereof.
Signature Title
- --------- -----
/s/ David B. Schick
- -------------------------------- Chairman of the Board and Chief
David B. Schick Executive Officer
/s/ Jeffrey Slovin
- -------------------------------- Director and President
Jeffrey Slovin
/s/ Allen Schick
- -------------------------------- Director
Allen Schick
/s/ Euval Barrekette
- -------------------------------- Director
Euval Barrekette
/s/ Robert Barolak
- -------------------------------- Director
Robert Barolak
35
SECURED PROMISSORY NOTE
$5,000,000.00 Doylestown, Pennsylvania
January 25, 1999
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the undersigned
("Borrower") hereby promises to pay to the order of DVI FINANCIAL SERVICES INC.
("Lender"), the principa1 sum of FIVE MILLION ($5,000,000.00), together with
interest thereon upon the following terms:
1. Collateral. This Note is secured by a certain Security Agreement of even
date herewith given by Borrower to Lender (such security agreement, this Note
and all other documents, instruments and agreements collateral thereto are
collectively referred to herein as the "Loan Documents").
2. Interest Rate. Interest on the unpaid principal balance hereof will
accrue from the date of advance until final payment thereof at the rate equal to
one-half of one percent per annum over the Prime Rate (such interest rate to
change immediately upon any change in the Prime Rate). For purposes of this
Note, "Prime Rate" shall mean the prime rate as published in the Wall Street
Journal.
3. Default Interest. Interest will accrue on the outstanding principal
amount hereof following the occurrence of an Event of Default until paid at a
rate of eighteen percent (18%) per annum (the "Default Rate").
4. Post Judgment Interest. Any judgment obtained for sums due hereunder or
under the Loan Documents will accrue interest at the Default Rate until paid.
5. Computation. Interest will be computed on the basis of a year of three
hundred sixty (360) days comprised of twelve (12) 30-day months and paid for the
actual number of days elapsed.
6. Principal and Interest Payments. Principal and accrued interest thereon
is due and payable as follows:
(a) Interest Only. Borrower will pay accrued interest monthly
commencing on February 1, 1999 and continuing on the first day of each
month thereafter:
(b) Principal and Interest. All principal and accrued and unpaid
interest due hereon shall be due and payable in full on the earlier of (i)
April 30, 1999, or (ii) the date on which the pending financing transaction
with Chase Manhattan Bank, N.A. or any of its affiliates is closed.
7. Place of Payment. Principal and interest hereunder shall be payable as
provided in the Loan Agreement, or at such other place as Lender, from time to
time, may designate in writing.
1
<PAGE>
8. Financial Reporting Requirements. In addition to the requirements set
forth hereinabove, Borrower shall keep proper books of record and account in
which full and true entries will be made of all dealings or transactions of or
in relationship to the business and affairs of Borrower in accordance with
generally accepted accounting principles consistently applied. Borrower will
furnish Lender as soon as available and in any event within forty-five (45) days
after the end of each quarter, current balance sheets and statements of income
and retained earnings, and such other information reporting the condition or
operations, financial or otherwise, of the Borrower as Lender may reasonably
request.
9. Events of Default. The occurrence of any one or more of the following
events shall constitute an Event or Events of Default hereunder:
(a) The failure of Borrower to pay any amount of principal or interest
on this Note, or any fee or other sums payable hereunder, or under any of
the other Loan Documents or the date on which such payment is due, whether
on demand, at the stated maturity or due date thereof, or by reason of any
requirement for the prepayment thereof, by acceleration or otherwise and
such failure continues unremedied for a period of five (5) days after the
date such payment is first due;
(b) The failure of Borrower to duly perform or observe in any material
respect any obligation, covenant or agreement on its part contained herein
or in any other Loan Document not otherwise specifically constituting an
Event of Default under this Section 9 and such failure continues unremedied
for a period of ten (10) days after notice from Lender to Borrower of the
existence of such failure;
(c) The failure of Borrower to pay or perform in any material respect
any other material obligation to Lender under any other agreement or note
or otherwise arising, whether or not related to this Agreement, after the
expiration of any notice and/or grace periods permitted in such documents;
(d) The adjudication of Borrower as a bankrupt or insolvent, or the
entry of an order for relief against Borrower or the entry of an order
appointing a receiver or trustee for Borrower of any of its property or
approving a petition seeking reorganization or other similar relief under
the bankruptcy or other similar laws of the United States or any state or
any other competent jurisdiction;
(e) A proceeding under any bankruptcy, reorganization, arrangement of
debt, insolvency, readjustment of debt or receivership law is filed by or
(unless dismissed or stayed within 60 days) against Borrower, or Borrower
makes an assignment for the benefit of creditors, or Borrower takes any
action to authorize any of the foregoing;
(f) All or any material part of the Collateral or the assets of
Borrower are attached, seized, subjected to a writ or distress warrant, or
levied upon, or come within the possession or control of any receiver,
trustee, custodian or assignee for the benefit of creditors;
(g) The entry of a final judgment for the payment of money in excess
of Fifty Thousand Dollars ($50,000.00), individually or in the aggregate,
against Borrower which, within
2
<PAGE>
ten (10) days after such entry, shall not have been discharged or execution
thereof stayed pending appeal or shall not have been discharged within five
(5) days after the expiration of any such stay;
(h) Any representation or warranty of Borrower in any of the Loan
Documents is discovered to be untrue in any material respect or any
statement, certificate or data furnished by Borrower or any Guarantor
pursuant hereto is discovered to be untrue in any material respect as of
the date as of which the facts therein set forth are stated or certified;
(i) Borrower voluntarily or involuntarily dissolves or is dissolved,
liquidates or is liquidated;
(j) A material and adverse change occurs in any of Borrower's
operations, management or financial condition;
(k) The validity or enforceability of this Note, or any of the Loan
Documents, is contested by the Borrower; any stockholder of Borrower; or
Borrower denies that it has any or any further liability or obligation
hereunder or thereunder.
10. Default Remedies. Upon the occurrence of an Event of Default Lender, at
its option and without notice to Borrower, may declare immediately due and
payable the entire unpaid balance of principal and all other sums due by
Borrower hereunder and under the other Loan Documents, together with interest
accrued thereon at the applicable rate specified above to the date of the Event
of Default and thereafter at the Default Rate. Payment thereof may be enforced
and recovered in whole or in part at any time and from time to time by one or
more of the remedies provided to Lender in this Note or in the Loan Documents or
as otherwise provided at law or in equity, all of which remedies are cumulative
and concurrent.
11. Waivers. Borrower and all endorsers hereby, jointly and severally,
waive presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
the payment of this Note.
12. Miscellaneous. If any provisions of this Note shall be held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. This Note has been delivered in and shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the law of conflicts. This Note shall be binding upon Borrower
and upon Borrower's successors and assigns and shall benefit Lender and its
successors and assigns. The prompt and faithful performance of all of Borrowers
obligations hereunder, including without limitation, time of payment, is of the
essence of this Note.
13. Notices. All notices, requests and other communications made or given
in connection with this Note shall be in writing and, unless receipt is stated
herein to be required, shall be deemed to have been validly given if delivered
personally to the individual or division or department to whose attention
notices to a party are to be addressed, or by private carrier, or registered or
certified mail, return receipt requested, or by telecopy with the original
forwarded by first-class mail, in all cases, with charges prepaid, addressed as
follows, until some other address (or
3
<PAGE>
individual or division or department for attention) shall have been designated
by notice given by one party to the other:
To Borrower:
Schick Technologies, Inc.
31-00 47th Avenue
Long Island City, NY 11101
Attention: President
Telecopier No.: 718-937-5962
To Lender:
DVI Affiliated Capital
707 Skokie Boulevard
Northbrook, IL 60062
Attention: Chief Operating Officer
Telecopier No.: 847-564-2965
With a copy to:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Legal Department
Telecopier No.: 215-345-7759
14. Submission to Jurisdiction. Borrower hereby consents to the
jurisdiction of any state or federal court located within the Commonwealth of
Pennsylvania, and irrevocably agrees that subject to Lender's election, any
actions or proceedings relating to the Loan Documents or the transactions
contemplated hereunder may be litigated in such courts, and Borrower waives any
objection which it may have based on lack of personal jurisdiction, improper
venue or forum non conveniens to the conduct of any proceeding in any such court
and waives personal service of any and all process upon it, and consents that
all such service of process be made by mail or messenger directed to it at the
address set forth in Section 13. Nothing contained in this Section 14 shall
affect the right of Lender to serve legal process in any other manner permitted
by law or affect the right of Lender to bring any action or proceeding against
Borrower or its property in the courts of any other jurisdiction.
15. Fees, Costs and Expenses. Borrower shall pay upon demand all costs and
expenses incurred by Lender in connection with the enforcement of the Loan
Documents and the DVI Indebtedness, including without limitation all reasonable
legal fees and costs.
16. Limitation of Interest to Maximum Lawful Rate. In no event shall the
rate of interest payable hereunder exceed the maximum rate of interest permitted
to be charged by applicable law (including the choice of law rules) and any
interest paid in excess of the permitted
4
<PAGE>
rate shall be refunded to Borrower. Such refund shall be made by application of
the excessive amount of interest paid against any sums outstanding and shall be
applied in such order as Lender may determine, If the excessive amount of
interest paid exceeds the sums outstanding, the portion exceeding the said sums
outstanding shall be refunded in cash by Lender. Any such crediting or refund
shall not cure or waive any default by Borrower hereunder. Borrower agrees,
however, that in determining whether or not any interest payable under this Note
exceeds the highest rate permitted by law, any non-principal payment, including,
without limitation, late charges, loan fees and expenses are and shall be deemed
to the extent permitted by law to be late charges, loan fees or expenses, as
applicable, and not interest.
17. Law Governing. This Note has been made, executed and delivered in the
Commonwealth of Pennsylvania and will be construed in accordance with and
governed by the laws of such Commonwealth (without giving effect to any
principles of conflicts of law).
18. Assignment or Sale by Lender. Lender may sell, assign or participate
all or a portion of its interest in this Note and/or any of the Loan Documents
and in connection therewith may make available to any prospective purchaser,
assignee or participant any information relative to Borrower and/or any
Guarantor in its possession.
19. No Assignment by Borrower. Borrower may not assign any of its rights
hereunder without the prior written consent of Lender, and Lender shall not be
required to lend hereunder except to Borrower as it presently exists.
20. Binding Effect. This Note and all rights and powers granted hereby will
bind and inure to the benefit of the parties hereto and their respective
permitted successors and assigns.
21. Modifications. No modification of this Note or any of the Loan
Documents shall be binding or enforceable unless in writing and signed by or on
behalf of the party against whom enforcement is sought.
22. JURY TRIAL WAIVER. BORROWER AND LENDER WAIVE ANY RIGHT TO TRIAL BY JURY
ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER ANY OF THE
LOAN DOCUMENTS OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF BORROWER OR LENDER WITH RESPECT TO ANY OF THE LOAN DOCUMENTS OR THE
TRANSACTIONS BELATED HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE. BORROWER AND LENDER AGREE AND CONSENT THAT ANY
SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT A JURY, AND THAT ANY PARTY TO THE LOAN DOCUMENTS MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF BORROWER AND LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
BORROWER ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL
REGARDING THIS SECTION, THAT IT FULLY UNDERSTANDS ITS TERMS, CONTENT AND EFFECT,
AND THAT IT VOLUNTARILY AND KNOWINGLY AGREES TO THE TERMS OF
5
<PAGE>
THIS SECTION.
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has
caused this Note to be duly executed the day and year first above written.
SCHICK TECHNOLOGIES, INC.
By:________________________
Name:______________________
Title:_____________________
DVI FINANCIAL SERVICES INC.
By:________________________
Name:______________________
Title:_____________________
6
ALLONGE TO SECURED PROMISSORY NOTE
(Loan No. 000______-001)
THIS ALLONGE is made as of the ______ day of March, 1999, by and between
SCHICK TECHNOLOGIES, INC. ("Borrower") and DVI FINANCIAL SERVICES INC.
("Lender").
BACKGROUND
A. Borrower is duly and justly indebted to Lender under a certain Secured
Promissory Note dated January 25, 1999, given by Borrower to Lender in the
original principal amount of $5,000,000.00 (the "Note").
B. At Borrower's request, Lender has agreed to modify certain terms of the
Note in accordance with the terms of this Allonge.
NOW, THEREFORE, the parties hereto, intending to legally bound, agree as
follows:
1. Advances. All references in Section 6(b)(i) of the Note to the date
"April 30, 1999" shall be deleted and replaced with the date "July 30, 1999."
2. Effect of Allonge. All terms and conditions of this Allonge not
expressly modified hereby shall remain in full force and effect and are hereby
ratified and confirmed by the parties hereto. To the extent of any inconsistency
between the terms and conditions of this Allonge and the Note, the terms of this
Allonge shall prevail.
3. Governing Law. This Allonge is governed by the laws of the Commonwealth
of Pennsylvania (without giving effect to any principles of conflicts of law).
IN WITNESS WHEREOF, the parties hereto have executed this Allonge as of the
date first above written.
SCHICK TECHNOLOGIES, INC. DVI FINANCIAL SERVICES, INC.
By:___________________________ By:___________________________
Name:_________________________ Name:_________________________
Title:________________________ Title:________________________
1
AMENDED AND RESTATED
SECURED PROMISSORY NOTE
(DVI CONTRACT NO.______)
$6,222,415.93 Doylestown, Pennsylvania
July 30, 1999
FOR VALUE RECEIVED AND INTENDING TO BE LEGALLY BOUND, the undersigned
("Borrower") hereby promises to pay to the order of DVI FINANCIAL SERVICES INC.
(`Lender"), the principal sum of SIX MILLION TWO HUNDRED TWENTY-TWO THOUSAND
FOUR HUNDRED FIFTEEN DOLLARS AND NINETY-THREE CENTS ($6,222,415.93), together
with interest thereon upon the following terms:
1. Collateral. This Note is secured by (a) certain Security Agreement dated
January 25, 1999, given by Borrower to Lender, and (b) certain Collateral
Assignment of Patents, Trademarks, Copyrights, Licenses and Trade Secrets dated
July 30, 1999, between Borrower and Lender (the Security Agreement the
Collateral Assignment, this Note and all other documents, instruments and
agreements collateral thereto, as the same may be modified, amended,
supplemented and/or replaced from time to time, are collectively referred to
herein as the "Loan Documents").
2. Interest Rate. Interest on the unpaid principal balance hereof will
accrue from the date of advance until final payment thereof at the rate equal to
two and one-half percent (2 1/2%) per annum over the Prime Rate (such interest
rate to change immediately upon any change in the Prime Rate). For purposes of
this Note, "Prime Rate" shall mean the prime rate as published in the Wall
Street Journal.
3. Default Interest. Interest will accrue on the outstanding principal
amount hereof following the occurrence of an Event of Default until paid at a
rate of eighteen percent (18%) per annum (the "Default Rate").
4. Late Charge. In the event that Borrower fails to pay any principal,
interest or other fees or expenses payable hereunder for a period of at least
ten (10) days, in addition to paying such sums, Borrower will pay to Lender a
late charge equal to five percent (5%), of such past due payment as compensation
for the expenses incident to such past due payment.
5. Post Judgment Interest. Any judgment obtained for sums due hereunder or
under the Loan Documents will accrue interest at the Default Rate until paid.
6. Computation. Interest will be computed on the basis of a year of three
hundred sixty (360) days comprised of twelve (12) 30-day months and paid for the
actual number of days elapsed.
7. Principal and Interest Payments. The principal of this Note, and the
interest accrued thereon, are due and payable as follows:
1
<PAGE>
(a) Monthly Interest Payments. On the first day of each calendar month,
Borrower will pay to the Lender accrued interest, in arrears, commencing on
September 1, 1999.
(b) Quarterly Principal Payments. On the last day of each calendar quarter,
Borrower will pay the principal balance of this Note in an amount equal to One
Million Dollars ($1,000,000.00) per quarter, commencing on December 31, 1999. In
any event all amounts due hereunder, including, without limitation, all
principal, accrued interest, fees and costs shall be due in full on March 3l,
2001.
(c) Additional Principal Payments. In addition to the payments set forth in
Sections 7(a) and (b), Borrower will also pay to Lender within ten (10) days
after the end of any calendar quarter, commencing with the calendar quarter
ending December 31, 1999, an amount equal to (a) twenty-five percent (25%) of
the proceeds (after deduction for reasonable and customary costs and expenses
associated with the applicable transaction(s)) for any capital raised by
Borrower (including any equity or subordinated debt) or assets sold by Borrower
(other than the sale of inventory in the ordinary course of Borrowers business)
during the calendar quarter just ended, minus (b) the payment made by Borrower
to Lender for such calendar quarter pursuant to Section 7(b) hereof.
(d) Resolution of Disputed Returns. Any amounts received by Lender from a
customer of Borrower on account of a disputed return of Borrower's equipment
sold to such customer by Borrower and financed by Lender will be applied by
Lender against the principal payments due hereunder, in inverse order of
maturity, provided, that the amount of final disputed return is included in the
principal amount of this Note.
8. Place of Payment. Principal and interest hereunder shall be payable as
provided in the Loan Agreement, or at such other place as Lender, from time to
time, may designate in writing.
9. Financial Reporting Requirements. In addition to the requirements set
forth hereinabove, Borrower shall keep proper books of record and account in
which full and true entries will be made of all dealings or transactions of or
in relationship to the business and affairs of Borrower in accordance with
generally accepted accounting principles consistently applied. Borrower will
furnish Lender as soon as available and in any event within forty-five (45) days
after the end of each quarter, current balance sheets and statements of income
and retained earnings, and such other information reporting the condition or
operations, financial or otherwise, of the Borrower as Lender may reasonably
request.
10. Events of Default. The occurrence of any one or more of the following
events shall constitute an Event or Events of Default hereunder:
(a) The failure of Borrower to pay any amount of principal or interest on
this Note, or any fee or other sums payable hereunder, or under any of the other
Loan Documents or the date on which such payment is due, whether on demand, at
the stated maturity or due date thereof, or by reason of any requirement for the
prepayment thereof, by acceleration or otherwise and such failure continues
unremedied for a period of five (5) days from and including the date such
payment is first due;
2
<PAGE>
(b) The failure of Borrower to duly perform or observe in any material
respect any obligation, covenant or agreement on its part contained herein or in
any other Loan Document not otherwise specifically constituting an Event of
Default under this Section 10 and such failure continues unremedied for a period
of ten (10) days after notice from Lender to Borrower of the existence of such
failure;
(c) The failure of Borrower to perform in any material respect or pay any
other obligation to Lender or any affiliate of Lender under any other agreement
or note or otherwise arising, whether or not related to this Agreement, after
the expiration of any notice and/or grace periods permitted in such documents;
(d) The adjudication of Borrower as a bankrupt or insolvent, or the entry
of an order for relief against Borrower or the entry of an order appointing a
receiver or trustee for Borrower of any of its property or approving a petition
seeking reorganization or other similar relief under the bankruptcy or other
similar laws of the United States or any state or any other competent
jurisdiction;
(e) A proceeding under any bankruptcy, reorganization, arrangement of debt
insolvency, readjustment of debt or receivership law is filed by or (unless
dismissed or stayed within 60 days) against Borrower, or Borrower makes an
assignment for the benefit of creditors, or Borrower takes any action to
authorize any of the foregoing;
(f) All or any material part of the Collateral or the assets of Borrower
are attached, seized, subjected to a wilt or distress warrant, or levied upon,
or come within the possession or control of any receiver, trustee, custodian or
assignee for the benefit of creditors;
(g) The entry of a final judgment for the payment of money in excess of
Fifty Thousand Dollars ($50,000.00), individually or in the aggregate, against
Borrower which, within ten (10) days after such entry, shall not have been
discharged or execution thereof stayed pending appeal or shall not have been
discharged within five (5) days after the expiration of any such stay;
(h) Any representation or warranty of Borrower in any of the Loan Documents
is discovered to be untrue in any material respect or any statement, certificate
or data furnished by Borrower or any Guarantor pursuant hereto is discovered to
be untrue in any material respect as of the date as of which the facts therein
set forth are stated or certified;
(i) Borrower voluntary or involuntarily dissolves or is dissolved,
liquidates or is liquidated;
(j) A material and adverse change occurs in any of Borrowers operations,
management or financial condition; or
(k) The validity or enforceability of this Note, or any of the Loan
Documents, is contested by the Borrower; any stockholder of Borrower; or
Borrower denies that it has any or any further liability or obligation hereunder
or thereunder.
3
<PAGE>
11. Default; Remedies. Upon the occurrence of an Event of Default, Lender,
at its option and without notice to Borrower, may declare immediately due and
payable the entire unpaid balance of principal and all other sums due by
Borrower hereunder and under the other Loan Documents, together with interest
accrued thereon at the applicable rate specified above to the date of the Event
of Default and thereafter at the Default Rate. Payment thereof may be enforced
and recovered in whole or in part at any time and from time to time by one or
more of the remedies provided to Lender in this Note or in the Loan Documents or
as otherwise provided at law or in equity, all of which remedies are cumulative
and concurrent.
12. Waivers. Borrower and all endorsers hereby, jointly and severally,
waive presentment for payment, demand, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default or enforcement of
the payment of this Note.
13. Miscellaneous. If any provisions of this Note shall be held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. This Note has been delivered in and shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania
without regard to the law of conflicts. This Note shall be binding upon Borrower
and upon Borrower's successors and assigns and shall benefit Lender and its
successors and assigns. The prompt and faithful performance of all of Borrower's
obligations hereunder, including without limitation, time of payment, is of the
essence of this Note.
14. Notices. All notices, requests and other communications made or given
in connection with this Note shall be in writing and, unless receipt is stated
herein to be required, shall be deemed to have been validly given if delivered
personally to the individual or division or department to whose attention
notices to a party are to be addressed, or by private carrier, or registered or
certified mail, return receipt requested, or by telecopy with the original
forwarded by first-class mail, in all cases, with charges prepaid, addressed as
follows, until some other address (or individual or division or department for
attention) shall have been designated by notice given by one party to the other:
To Borrower:
Schick Technologies, Inc.
31-00 47th Avenue
Long Island City, NY 11101
Attention: President
Telecopier No.: 718-937-5962
To Lender:
DVI Strategic Partner Group
707 Skokie Boulevard
Northbrook, IL 60062
Attention: Chief Operating Officer
Telecopier No.: 847-564-2965
4
<PAGE>
With a copy to:
DVI Financial Services Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Legal Department
Telecopier No.: 215-345-7759
15. Submission to Jurisdiction. Borrower hereby consents to the
jurisdiction of any state or federal court located within the Commonwealth of
Pennsylvania, and irrevocably agrees that, subject to Lender's election, any
actions or proceedings relating to the Loan Documents or the transactions
contemplated hereunder may be litigated in such courts, and Borrower waives any
objection which it may have based on lack of personal jurisdiction, improper
venue or forum non conveniens to the conduct of any proceeding in any such court
and waives personal service of any and all process upon it, and consents that
all such service of process be made by mail or messenger directed to it at the
address set forth in Section 14. Nothing contained in this Section 15 shall
affect the right of Lender to serve legal process in any other manner permitted
by law or affect the right of Lender to bring any action or proceeding against
Borrower or its property in the courts of any other jurisdiction.
16. Fees, Costs and Expenses. Borrower shall pay upon demand all costs and
expenses incurred by Lender in connection with the enforcement of the Loan
Documents and the DVI Indebtedness, including without limitation all reasonable
legal fees and costs.
17. Limitation of Interest to Maximum Lawful Rate. In no event shall the
rate of interest payable hereunder exceed the maximum rate of interest permitted
to be charged by applicable law (including the choice of law rules) and any
interest paid in excess of the permitted rate shall be refunded to Borrower.
Such refund shall be made by application of the excessive amount of interest
paid against any sums outstanding and shall be applied in such order as Lender
may determine. If the excessive amount of interest paid exceeds the sums
outstanding, the portion exceeding the said sums outstanding shall be refunded
in cash by Lender. Any such crediting or refund shall not cure or waive any
default by Borrower hereunder. Borrower agrees, however, that in determining
whether or not any interest payable under this Note exceeds the highest rate
permitted by law, any non-principal payment, including, without limitation, late
charges, loan fees and expenses are and shall be deemed to the extent permitted
by law to be late charges, loan fees or expenses, as applicable, and not
interest.
18. Law Governing. This Note has been made, executed and delivered in the
Commonwealth of Pennsylvania and will be construed in accordance with and
governed by the laws of such Commonwealth (without giving effect to any
principles of conflicts of law).
19. Assignment or Sale by Lender. Lender may sell, assign or participate
all or a portion of its interest in this Note and/or any of the Loan Documents
and in connection therewith may make available to any prospective purchaser,
assignee or participant any information relative to Borrower and/or any
Guarantor in its possession.
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20. No Assignment by Borrower. Borrower may not assign any of its rights
hereunder without the prior written consent of Lender, and Lender shall not be
required to lend hereunder except to Borrower as it presently exists.
21. Binding Effect. This Note and all rights and powers granted hereby will
bind and inure to the benefit of the parties hereto and their respective
permitted successors and assigns.
22. Modifications. No modification of this Note or any of the Loan
Documents shall be binding or enforceable unless in writing and signed by or on
behalf of the party against whom enforcement is sought.
23. JURY TRIAL WAIVER. BORROWER AND LENDER WAIVE ANY RIGHT TO TRIAL BY JURY
ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a) ARISING UNDER ANY OF THE
LOAN DOCUMENTS OR (b) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF BORROWER OR LENDER WITH RESPECT TO ANY OF THE LOAN DOCUMENTS OR THE
TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE. BORROWER AND LENDER AGREE AND CONSENT THAT ANY
SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL
WITHOUT A JURY, AND THAT ANY PARTY TO THE LOAN DOCUMENTS MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF BORROWER AND LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
BORROWER ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL
REGARDING THIS SECTION, THAT IT FULLY UNDERSTANDS ITS TERMS, CONTENT AND EFFECT,
AND THAT IT VOLUNTARILY AND KNOWINGLY AGREES TO THE TERMS OF THIS SECTION.
24. Effect of Amendment. This Note amends and restates, but does not repay
or satisfy, Borrower's obligations under that certain Secured Promissory Note
(DVI Contract No. 1969-001), as amended an Allonge dated March __, 1999.
25. CONFESSION OF JUDGMENT. BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY
ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN THE COMMONWEALTH OF
PENNSYLVANIA, OR IN ANY OTHER JURISDICTION WHICH PERMITS THE ENTRY OF JUDGMENT
BY CONFESSION, TO APPEAR FOR BORROWER AT ANY TIME AFTER THE OCCURRENCE OF AN
EVENT OF DEFAULT UNDER THE LOAN AGREEMENT IN ANY ACTION BROUGHT AGAINST BORROWER
ON THIS NOTE OR THE LOAN DOCUMENTS AT THE SUIT OF LENDER, WITH OR WITHOUT
COMPLAINT OR DECLARATION FILED, WITHOUT STAY OF EXECUTION, AS OF ANY TERM OR
TIME, AND THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST BORROWER FOR THE ENTIRE
UNPAID OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AND ALL OTHER SUMS TO BE PAID
BY BORROWER TO OR ON BEHALF OF LENDER PURSUANT TO THE TERMS HEREOF OR OF THE
LOAN DOCUMENTS AND ALL ARREARAGES OF INTEREST THEREON, TOGETHER WITH ALL COSTS
AND
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OTHER EXPENSES AND AN ATTORNEY'S COLLECTION COMMISSION OF FIVE PERCENT (5%) OF
THE AGGREGATE AMOUNT OF THE FOREGOING SUMS, BUT IN NO EVENT LESS THAN $5,000.00;
AND FOR SO DOING THIS NOTE OR A COPY HEREOF VERIFIED BY AFFIDAVIT SHALL BE A
SUFFICIENT WARRANT. THE AUTHOR1TY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT
BE EXHAUSTED BY ANY EXERCISE THEREOF HUT SHALL CONTINUE FROM TIME TO TIME AND AT
ALL TIMES UNTIL PAYMENT IN FULL OF ALL THE AMOUNTS DUE HEREUNDER. BORROWER
ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION WITH THE
EXECUTION AND DELIVERY OF THIS NOTE AND THAT IT KNOWINGLY WAIVES ITS RIGHT TO BE
HEARD PRIOR TO THE ENTRY OF SUCH JUDGMENT AND UNDERSTANDS THAT, UPON SUCH ENTRY,
SUCH JUDGMENT SHALL BECOME A LIEN ON ALL REAL PROPERTY OF BORROWER IN THE COUNTY
WHERE SUCH JUDGMENT IS ENTERED AND THAT EXECUTION MAY IMMEDIATELY BE ISSUED ON
THE JUDGMENT TO GARNISH, LEVY ON OR ATTACH ANY PERSONAL PROPERTY OF BORROWER.
IN WITNESS WHEREOF, Borrower, intending to be legally bound hereby, this
Note to be duly executed the day and year first above written.
SCHICK TECHNOLOGIES, INC.
By:/s/ David Schick
------------------------
Name: David Schick
----------------------
Title: President and C.E.O.
---------------------
DVI FINANCIAL SERVICES,INC.
By: /s/ Richard E. Miller
------------------------
Name: Richard E. Miller
----------------------
Title: President
---------------------
7
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement") is executed this 25th day of January,
1999, by SCHICK TECHNOLOGIES, INC., a New York corporation (the "Obligor"), in
favor of DVI AFFILIATED CAPITAL, a division of DVI Financial Services Inc. (the
"Lender"). Obligor intending to be legally bound, hereby agrees as follows:
1. DEFINITIONS. For purposes of this Agreement,
1.1 "account", "account debtor", "chattel paper", "documents",
"equipment", "general intangibles", "goods", "instrument", "inventory" and
"proceeds" shall have the meanings given such terms in the Code.
1.2 "Approved Application" shall mean the aggregate pending lease
applications of Obligor credit approved by Lender that comply with all of
the following conditions: (a) all required documents for such lease have
been prepared in form and content acceptable to Lender, signed by all
parties and returned to Lender, and (b) Lender's purchase order has been
issued. Lender, in its sole and absolute discretion, at any time and from
time to time, by written notice to Obliger, may suspend the restrictions
imposed by this Section.
1.3 "Chief Executive Office" shall mean the place from which the main
part of the business operations of Obligor are managed. Obliger's current
Chief Executive Office is 31-00 47th Avenue, Long Island City, NY 11101.
1.4 "Code" shall mean the Uniform Commercial Code as adopted by the
Commonwealth of Pennsylvania, as the same may be amended from time to time.
1.5 "Collateral" shall mean the following: (a) all existing and after
acquired accounts, chattel paper, documents, general intangibles, and
contract rights of Obligor and all proceeds thereof, including without
limitation, and all general ledger sheets, tiles, records, customer lists,
books of account, invoices, bills, certificates or documents of ownership,
bills of sale, business papers, correspondence, credit files, tapes, cards,
computer runs and all other data and data storage systems whether in the
possession of the Obligor or any service bureau; and (b) all Obligor's
present and future inventory and equipment subject to Approved Applications
(including but not limited to goods held for sale or lease or furnished or
to be furnished under contracts for service, raw materials,
work-in-process, finished goods and goods used or consumed in Obligor's
business) whether owned, consigned or held on consignment, together with
all merchandise, component materials, supplies, packing, packaging and
shipping materials, and all returned, rejected or repossessed goods sold,
consigned, leased or otherwise furnished by Obliger and all products and
proceeds of any of the foregoing.
l.6 "DVI Indebtedness" shall mean all obligations and indebtedness of
Obliger to Lender, whether now or hereafter owing or existing, under the
Loan Documents.
1.7 "Event of Default" shall include any and all events described in
Section 7.
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1.8 "Loan Documents" shall mean that certain Note of even date
herewith given by Obligor to Lender in the original principal amount of
Five Million Dollars ($5,000,000.00) (the "Note") and all agreements,
documents and instruments, all agreements, documents and instruments
collateral thereto, together with all amendments, replacements, increases,
renewals and modifications thereof or thereto, including, without
limitation, this Agreement.
1.9 "Person" means an individual, a corporation or a government or any
agency or subdivision thereof or any other entity.
2. SECURITY INTEREST. Obligor grants to Lender a security interest in and
lien on the Collateral.
3. EFFECT OF GRANT. The security interests in and liens on the Collateral
granted to Lender by Obligor hereunder shall not be rendered void by the fact
that no DVI Indebtedness exists as of a particular date, but shall continue in
full force and effect until all DVI Indebtedness has been paid in full, Lender
has no agreement or commitment outstanding pursuant to which Lender may extend
credit to or on behalf of Obligor and Lender has executed and delivered
termination statements and/or releases of Lender with respect to the Collateral.
4. OBLIGATIONS SECURED. The Collateral and the continuing security
interests granted therein shall secure the DVI Indebtedness. IT IS THE EXPRESS
INTENTION OF OBLIGOR THAT THE COLLATERAL SHALL SECURE ALL EXISTING AND FUTURE
DVI INDEBTEDNESS.
5. REPRESENTATIONS. Obligor hereby represents and warrants as follows,
which representations and warranties shall be true and correct as of the date
hereof, at the time of the creation of any DVI Indebtedness and until all DVI
Indebtedness has been paid in full:
5.1 Title to Collateral. The Collateral is and will be owned by
Obligor free and clear of all liens and other encumbrances of any kind
(including liens or other encumbrances upon properties acquired or to be
acquired under conditional sales agreements or other title retention
devices), excepting only liens in favor of the Lender. Obligor will defend
the Collateral against any claims of all persons or entities other than the
Lender.
5.2 Governmental Consents. No consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the
part of Obligor is required in connection with the execution, delivery or
performance by Obligor of this Agreement or the consummation of the
transactions contemplated hereby.
5.3 Addresses. The portions of the Collateral which are tangible
(corporeal) property and Obligor's books and records pertaining thereto
will at all times be located at the addresses set forth on Schedule 5.3
attached hereto; or such other location determined by Obligor after prior
notice to Lender and delivery to Lender of any items requested by Lender to
maintain perfection and priority of Lender's security interests and liens
and access to Obligor's books and records.
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5.4 Taxes. Obligor has filed all tax returns which it is required to
file and has paid, or made provision for the payment of, all taxes which
have or may have become due pursuant to such returns or pursuant to any
assessment received by it, except such taxes (other than real estate taxes
which must be paid regardless of challenge), if any, as are being contested
in good faith and as to which adequate reserves have been provided. Such
tax returns are complete and accurate in all respects. Obligor does not
know of any proposed additional assessment or basis for any assessment of
additional taxes.
5.5 Intellectual Property. Obligor owns or possesses the irrevocable
right to use all of the patents, trademarks, service marks, trade names,
copyrights, licenses, franchises and permits and rights with respect to the
foregoing necessary to own and operate the Obligor's properties (including
the Collateral) and to carry on its business as presently conducted and
presently planned to be conducted without conflict with the rights of
others.
5.6 Accuracy of Representations and Warranties. No representation or
warranty by Obligor contained herein or in any certificate or other
document furnished by Obligor pursuant hereto or in connection herewith
fails to contain any statement of material fact necessary to make such
representation or warranty not misleading in light of the circumstances
under which it was made. There is no fact which Obligor knows or should
know and has not disclosed to Lender, which does or may materially and
adversely affect Obligor, or any of its operations.
6. COVENANTS. Obligor covenants and agrees that until the DVI Indebtedness
have been paid in full, Obligor shall:
6.1 Disposition of Assets. Not sell, lease, transfer or otherwise
dispose of all, substantially all, or any material portion of the
Collateral, except for sales of inventory in the ordinary course for fair
consideration.
6.2 Liens. Not create, incur or permit to exist any mortgage, pledge,
encumbrance, lien, security interest or charge of any kind (including liens
or charges upon properties acquired or to be acquired under conditional
sales agreements or other title retention devices) on its property or
assets, whether now owned or hereafter acquired, or upon any income or
profits therefrom, except as permitted hereunder or under the Loan
Documents.
6.3 Maintenance of Properties. Maintain, preserve, protect and keep or
cause to be maintained, preserved, protected and kept its real and personal
property used or useful in the conduct of its business in good working
order and condition, reasonable wear and tear excepted, and will pay and
discharge when due the cost of repairs to and maintenance of the same.
6.4 Insurance. Carry adequate insurance issued by responsible and
financially sound insurers acceptable to Lender, in amounts acceptable to
Lender (at least adequate to comply with any co-insurance provisions) and
against all such liability and hazards as are usually carried by entities
engaged in the same or a similar business similarly situated or as may be
required by Lender, Obligor will carry business interruption insurance in
such amounts as may be required by Lender. In the case of insurance on any
of the Collateral Obligor shall carry insurance in the full
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insurable value thereof and cause Lender to be named as insured mortgagee
with respect to all real property, loss payee (with a lender's loss payable
endorsement) with respect to all personal property, and additional insured
with respect to all liability insurance, as its interests nay appear with
thirty (30) days' notice to be given Lender by the insurance carrier prior
to cancellation or material modification of such insurance coverage.
Obligor shall cause to be delivered to Lender the insurance policies
therefor or in the alternative, evidence of insurance and at least thirty (30)
business days prior to the expiration of any such insurance, additional policies
or duplicates thereof or in the alternative, evidence of insurance evidencing
the renewal of such insurance and payment of the premiums therefor. Obligor
shall direct all insurers that in the event of any loss thereunder or the
cancellation of any insurance policy, the insurers shall make payments for such
loss and pay all returned or unearned premiums directly to Lender and not to
Obligor and Lender jointly.
In the event of any loss, Obligor will give Lender immediate notice thereof
and Lender may make proof of loss whether the same is done by Obligor. Lender is
granted a power of attorney by Obligor with full power of substitution to file
any proof of loss in Obligor's or Lender's name, to endorse Obligor's name on
any check, draft or other instrument evidencing insurance proceeds, and to take
any action or sign any document to pursue any insurance loss claim. Such power
being coupled with an interest is irrevocable.
In the event of any loss, Lender, at its option, may (i) retain and apply
all or any part of the insurance proceeds to reduce, in such order and amounts
as Lender may elect the DVI Indebtedness, or (ii) disburse all or any part of
such insurance proceeds to or for the benefit of Obligor for the purpose of
repairing or replacing Collateral after receiving proof satisfactory to Lender
of such repair or replacement, in either case without waiving or impairing the
DVI Indebtedness or any provision of this Agreement. Any deficiency thereon
shall be paid by Obligor to Lender upon demand. Obligor shall not take out any
insurance without having Lender named as loss payee or additional insured
thereon. Obligor shall bear the full risk of loss from any loss of any nature
whatsoever with respect to the Collateral.
6.5 Additional Documents and Future Actions. At its sole cost, take
such actions and provide Lender from time to time with such agreements,
financing statements and additional instruments, documents or information
as the Lender may in its discretion deem necessary or advisable to perfect,
protect and maintain the security interests in the Collateral, to permit
Lender to protect its interest in the Collateral, or to carry out the terms
of the Loan Documents. Obligor hereby authorizes and appoints Leader as its
attorney-in-fact with full power of substitution, to take such actions as
Lender may deem advisable to protect the Collateral and its interests
thereon and its rights hereunder, to execute on Obligor's behalf and file
at Obligor's expense financing statements, and amendments thereto, in those
public offices deemed necessary or appropriate by Lender to establish,
maintain and protect a continuously perfected security interest in the
Collateral, and to execute on Obligor's behalf such other documents and
notices as Lender may deem advisable to protect the Collateral and its
interests therein and its rights hereunder. Such power being coupled with
an interest is irrevocable. Obligor irrevocably authorizes the filing of a
carbon, photographic or other copy of this Agreement, or of a financing
statement, as a financing statement and agrees that such filing is
sufficient as a financing statement.
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6.6 Name or Address Change. Not change its name or address except upon
thirty (30) days prior written notice to Lender and delivery to Lender of
any items requested by Lender to maintain perfection and priority of
Lender's security interests and access to Obligor's books and records.
6.7 Inspections. Permit officers of Lender, or such persons as any of
them may designate, to visit and inspect any of the properties of Obligor,
examine (either by Lender's employees or by independent accountants) any of
the Collateral or other assets of Obligor, including the books of account
of Obligor, and discuss the affairs, finances and accounts of Obligor with
its officers and with its independent accountants, at such times as Lender
may desire.
6.8 Taxes: Claims for Labor and Materials. Pay or cause to be paid
when due all taxes, assessments, governmental charges or levies imposed
upon it or its income, profits, payroll or any property belonging to it,
including without limitation all withholding taxes, and all claims for
labor, materials and supplies which, if unpaid, might become a lien or
charge upon any of its properties or assets; provided that it shall not be
required to pay any such tax, assessment, charge, levy or claim so long as
the validity thereof shall be contested in good faith by appropriate
proceedings promptly initiated and diligently conducted by it, and neither
execution nor foreclosure sale or similar proceedings shall have been
commenced in respect thereof (or such proceedings shall have been stayed
pending the disposition of such contest of validity), and it shall have set
aside on its books, or at the request of Lender deposited with Lender,
adequate reserves with respect thereto.
6.9 Requested Information. With reasonable promptness, deliver to
Lender all financial information in respect of the condition, operation and
affairs of Obligor and the Collateral as Lender may reasonably request from
time to time.
7. EVENTS OF DEFAULT. The occurrence of any one or more of the following
events shall constitute an event of default hereunder:
7.1 The occurrence of any event of default or default under any of the
Loan Documents after expiration of any applicable notice and/or grace
period permitted in such documents;
7.2 The failure of Obligor to duly perform or observe any obligation,
covenant or agreement on its part contained herein;
7.3 All or any part of the Collateral are attached, seized, subjected
to a writ or distress warrant, or levied upon, or come within the
possession or control of any receiver, trustee, custodian or assignee for
the benefit of creditors;
7.4 Any representation or warranty of Obligor contained herein is
discovered to be untrue in any material respect or any statement,
certificate or data furnished by Obligor pursuant hereto is discovered to
be untrue in any material respect as of the date as of which the facts
therein set forth are stated or certified;
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7.5 A material and adverse change occurs in the value of the
Collateral;
7.6 Any material uninsured damage to, or loss, theft, or destruction
of any of the Collateral occurs;
7.7 The adjudication of Obligor as a bankrupt or insolvent, or the
entry of an Order for Relief against Obligor or the entry of an order
appointing a receiver or trustee for Obligor of any of its property or
approving a petition seeking reorganization or other similar relief under
the bankruptcy or other similar laws of the United States or any state or
any other competent jurisdiction;
7.8 A proceeding under any bankruptcy, reorganization, arrangement of
debt, insolvency, readjustment of debt or receivership law is filed by or
(unless dismissed within 60 days) against Obligor or Obligor makes an
assignment for the benefit of Creditors, or Obligor takes any action to
authorize any of the foregoing; and/or
7.9 The Collateral or the prospects of the payment of the Bank
Indebtedness is jeopardized or impaired as determined by Lender in good
faith.
8. REMEDIES OF LENDER.
8.1 Remedies. At the option of the Lender, upon the occurrence of an
Event of Default, or at any time thereafter:
(a) The entire unpaid principal of the DVI Indebtedness, or any
part thereof all interest accrued thereon, all fees due hereunder and
all other obligations of Obligor to Lender hereunder or under any
other agreement, note or otherwise arising will become immediately due
and payable without any further demand or notice;
(b) Lender may enter the premises occupied by Obligor and take
possession of the Collateral and any records relating thereto; and/or
(c) Lender may exercise each and every right and remedy granted
to it under the Loan Documents, under the Code and under any other
applicable law or at equity.
8.2 Sale or Other Disposition of Collateral. The sale, lease or other
disposition of the Collateral, or any part thereof, by Lender after an
Event of Default may be for cash, credit or any combination thereof and
Lender may purchase all or any part of the Collateral at public or, if
permitted by law, private sale, and in lieu of actual payment of such
purchase price, may set-off the amount of such purchase price against the
DVI Indebtedness then owing. Any sales of the Collateral may be adjourned
from time to time with or without notice. The Lender may cause the
Collateral to remain on Obligor's premises or otherwise or to be removed
and stored at premises owned by other persons, at Obligor's expense,
pending sale or other disposition of the Collateral. Obligor, at Lender's
request, shall assemble the Collateral consisting of inventory and tangible
assets and make such assets available to Lender at a place to be designated
by Lender.
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Lender shall have the right to conduct such sales on Obligor's premises, at
Obligor's expense, or elsewhere, on such occasion or occasions as Lender
may see fit. Any notice required to be given by Lender of a sale, lease or
other disposition or other intended action by Lender with respect to any of
the Collateral which is deposited in the United States mail, postage
prepaid and duly addressed to Obligor at the address specified in Section
11 below, at least five (5) business days prior to such proposed action,
shall constitute fair and reasonable notice to Obligor of any such action.
The net proceeds realized by Lender upon any such sale or other
disposition, after deduction for the expenses of retaking, holding,
storing, transporting, preparing for sale, selling or otherwise disposing
of the Collateral incurred by Lender in connection therewith and all other
costs and expenses related thereto including attorney fees, shall be
applied in such order as Lender, in its sole discretion, elects, toward
satisfaction of the DVI Indebtedness. Lender shall account to Obligor for
any surplus realized upon such sale or other disposition, and Obligor shall
remain liable for any deficiency. The commencement of any action, legal or
equitable, or the rendering of any judgment or decree for any deficiency
shall not affect Lender's security interest in the Collateral. Obligor
agrees that Lender has no obligation to preserve rights to the Collateral
against any other parties. Lender is hereby granted a license or other
right to use, after an Event of Default, without charge, Obligor's labels,
general intangibles, intellectual property, equipment, real estate,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing production
of advertising for sale and selling any inventory or other Collateral and
Obligor's rights under all contracts, licenses, leases and franchise
agreements shall inure to Lender's benefit. Lender shall be under no
obligation to marshall any assets in favor of Obligor or any other party or
against or in payment of any or all of the DVI Indebtedness.
8.3 Delay or Omission Not Waiver. Neither the failure nor any delay on
the part of Lender to exercise any right, remedy, power or privilege under
the Loan Documents upon the occurrence of any Event of Default or otherwise
shall operate as a waiver thereof or impair any such right, remedy, power
or privilege. No waiver of any Event of Default shall affect any later
Event of Default or shall impair any rights of Lender. No single, partial
or full exercise of any rights, remedies, powers and privileges by the
Lender shall preclude further or other exercise thereof. No course of
dealing between Lender and Obligor shall operate as or be deemed to
constitute a waiver of Lender's rights under the Loan Documents or affect
the duties or obligations of Obligor.
8.4 Remedies Cumulative; Consents. The rights, remedies, powers and
privileges provided for herein shall not be deemed exclusive, but shall be
cumulative and shall be in addition to all other rights, remedies, powers
and privileges in Lender's favor at law or in equity. Whenever the Lender's
consent or approval is required or permitted, such consent or approval
shall be at the sole and absolute discretion of Lender.
9. CERTAIN FEES, COSTS EXPENSES AND EXPENDITURES. Obligor agrees to pay on
demand all costs and expenses of Lender, including without limitation:
9.1 All costs and expenses in connection with any amendments,
extensions and increases to the Loan Documents (including, without
limitation, attorney's fees and expenses, and the cost of appraisals and
reappraisals of Collateral), and the cost of periodic lien searches and tax
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clearance certificates, as Lender deems advisable;
9.2 All Lender's, costs and expenses in connection with the
enforcement, protection and preservation of the Lender's rights or remedies
under the Loan Documents, or any other agreement relating to any
Obligations, or in connection with legal advice relating to the rights or
responsibilities of Lender (including without limitation court costs,
reasonable attorney's fees and expenses of accountants and appraisers); and
9.3 Any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of the Loan
Documents, and all liabilities to which Lender may become subject as the
result of delay in paying or omission to pay such taxes.
In the event Obligor shall fail to pay taxes, insurance, assessments, costs
or expenses which it is required to pay hereunder, or fails to keep the
Collateral free from security interests or lien (except as expressly permitted
herein), or fails to maintain or repair the Collateral as required hereby, or
otherwise breaches any obligations under the Loan Documents, Lender in its
discretion, may make expenditures for such purposes and the amount so expended
(including reasonable attorneys fees and expenses, filing fees and other
charges) shall be payable by Obligor on demand and shall constitute part of the
DVI Indebtedness.
In the event any action at law or in equity in connection with the Loan
Documents, the DVI Indebtedness or matters collateral thereto is terminated
adverse to Obligor, Obligor will pay all reasonable attorneys' fees and legal
costs incurred by Lender in connection with such actions.
With respect to any amount required to be paid by Obligor under this
Section, in the event Obligor fails to pay such amount on demand, Obligor shall
also pay to Lender interest thereon at the Default Rate (as defined in the Loan
Documents). Obligor's obligations under this Section shall survive termination
of this Agreement.
10. TIME IS OF THE ESSENCE. Time is of the essence in Obligor's performance
of its obligations under the Loan Documents.
11. COMMUNICATIONS AND NOTICES. All notices, requests and other
communications made or given in connection with this Agreement shall be in
writing and, unless receipt is stated herein to be required, shall be deemed to
have been validly given if delivered personally to the individual or division or
department to whose attention notices to a party are to be addressed, or by
private carrier, telecopy (with original forwarded by first class mail), or
registered or certified mail, return receipt requested, in all cases with
postage prepaid, addressed as follows, until some other address (or individual
or division or department for attention) shall have been designated by notice
given by one party to the other:
To Obligor:
Schick Technologies, Inc.
31-00 47th Avenue
Long lsland City, NY 11101
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Attention: President
Telecopy No.: 718-937-5962
To Lender:
DVI Affiliated Capital
707 Skokie Boulevard
Northbrook, IL 60062
Attention: Chief Operating Officer
Telecopy No.: 847-564-2965
With a copy to:
DVI, Inc.
500 Hyde Park
Doylestown, PA 18901
Attention: Legal Department
Telecopy No.: 215-345-7759
12. LIMITATION ON LIABILITY. Obligor shall be responsible for and Lender is
hereby released from any claim or liability in connection with:
12.1 Safekeeping any Collateral;
12.2 Any loss or damage to any Collateral;
12.3 Any diminution in value of the Collateral; or
12.4 Any act or default of another person or entity.
Lender shall only be liable for any act or omission on its pert
constituting willful misconduct. In the event that Lender breaches its required
standard of conduct, Obligor agrees that its liability shall be only for direct
damages suffered and shall not extend to consequential or incidental damages. In
the event Obligor brings suit against Lender in connection with the transactions
contemplated hereunder and Lender is found not to be liable, Obligor will
indemnify and hold Lender harmless from all costs and expenses, including
attorney's fees, incurred by Lender in connection with such suit.
13. WAIVERS. In connection with any proceedings hereunder or in connection
with any of the DVI Indebtedness, including without limitation any action by
Lender in replevin, foreclosure or other court process or in connection with any
other action related to the DVI Indebtedness or the transactions contemplated
hereunder, Obligor waives:
13.1 all procedural errors, defects and imperfections in such
proceedings;
13.2 all benefits under any present or future laws exempting any
property,
9
<PAGE>
real or personal, or any part of any proceeds thereof from attachment, levy
or sale under execution, or providing for any stay of execution to be
issued on any judgment recovered in connection with the DVI Indebtedness or
in any replevin or foreclosure proceeding, or otherwise providing for any
valuation, appraisal or exemption;
13.3 all rights to inquisition on any real estate, which real estate
may be levied upon pursuant to a judgment obtained in connection with any
of the DVI Indebtedness and sold upon any writ of execution issued thereon
in whole or in part, in any order desired by Lender;
13.4 presentment for payment demand, notice of demand, notice of
nonpayment, protest and notice of protest of any of the DVI Indebtedness;
13.5 any requirement for bonds, security or sureties required by
statute, court rule or otherwise; and
13.6 any demand for possession of Collateral prior to commencement of
any suit.
14. JURISDICTION. Obligor hereby consents to the jurisdiction of any state
or federal court located within the Commonwealth of Pennsylvania, and
irrevocably agrees that, subject to the Lender's election, all actions or
proceedings relating to the Loan Documents or the transactions contemplated
hereunder may be litigated in such courts, and Obligor waives any objection
which it may have based on improper venue or forum non conveniens to the conduct
of any proceeding in any such court and waives personal service of any and all
process upon it, and consents that all such service of process be made by mail
or messenger directed to it at the address set forth in Section 11. Nothing
contained in this Section 14 shall affect the right of Lender to serve legal
process in any other manner permitted by law or affect the right of Lender to
bring any action or proceeding against Obligor or its property in the courts of
any other jurisdiction.
15. MISCELLANEOUS PROVISIONS.
15.1 Severability. The provisions of this Agreement and all other Loan
Documents are deemed to be severable, and the invalidity or
unenforceability of any provision shall not affect or impair the remaining
provisions which shall continue in full force and effect.
15.2 Headings. The headings of the Articles, Sections, paragraphs and
clauses of this Agreement are inserted for convenience only and shall not
be deemed to constitute a part of this Agreement.
15.3 Binding Effect. This Agreement and all rights and powers granted
hereby will bind and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.
15.4 Amendment. No modification of this Agreement or any of the Loan
Documents shall be binding or enforceable unless in writing and signed by
or on behalf of the party
10
<PAGE>
against whom enforcement is sought.
15.5 Governing Law. This Agreement has been made, executed and
delivered in the Commonwealth of Pennsylvania and will be construed in
accordance with and governed by the laws of such Commonwealth (without
giving effect to any principles of conflicts of law).
15.6 No Third Party Beneficiaries. The rights and benefits of this
Agreement and the Loan Documents shall not inure to the benefit of any
third party.
15.7 Exhibits and Schedules. All exhibits and schedules attached
hereto are hereby made a part of this Agreement.
15.8 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by
signing any such counterpart.
15.9 No Joint Venture. Nothing contained herein is intended to permit
or authorize Obligor to make any contract on behalf of Lender, nor shall
this Agreement be construed as creating a partnership, joint venture or
making Lender an investor in Obligor.
15.10 Filing of Financing Statements. Copies or reproductions of this
document or of any financing statement may be filed as a financing
statement.
15.11 Waiver of Right to Trial by Jury. OBLIGOR AND LENDER WAIVE ANY
RIGHT TO TRIAL BY JURY ON ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (a)
ARISING UNDER THIS AGREEMENT OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED
TO HEREIN OR DELIVERED IN CONNECTION HEREWITH, OR (b) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF OBLIGOR WITH RESPECT TO
THIS AGREEMENT OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO HEREIN OR
DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR
THERETO, IN EACH CASE WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
OBLIGOR AND LENDER AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT
ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF
THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF OBLIGOR
AND LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
11
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Security Agreement on
the date first above written.
SCHICK TECHNOLOGIES, INC.
By:/s/ David Schick
------------------------
Name: David Schick
----------------------
Title: President and C.E.O.
---------------------
Lender hereby joins in this Agreement for the sole purpose of ratifying and
confirming its consent to the provisions contained in Section l5.11 above.
DVI FINANCIAL SERVICES INC.
By:________________________
Name:______________________
Tide:______________________
12
[LOGO]
SCHICK TECHNOLOGIES, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this 25th day of
February, 1999, by and between Schick Technologies, Inc. (hereinafter referred
to as "Schick Technologies," "Schick" or "Company"), a Delaware Corporation with
a business address of 31-00 47th Avenue, Long Island City, NY 11101, and George
C. Rough, Jr. (hereinafter referred to as "Employee"), residing at 133 MacGregor
Drive, Stamford, Connecticut 06902.
WITNESSETH:
WHEREAS, Schick Technologies wishes to employ Employee as Chief Financial
Officer and Vice President of the Company; and
WHEREAS, Employee wishes to be so employed.
NOW THEREFORE, in consideration of the premises, of the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
I Employment
Schick Technologies hereby employs Employee and Employee hereby agrees to
be employed, commencing March 1, 1999, as Chief Financial Officer and
Vice-President of the Company upon the terms and conditions herein set forth.
Employee shall report to the Company's Chief Executive Officer and shall be
responsible for oversight and administration of the Company's finances and
financial affairs, and any other responsibilities and duties that may be
assigned to him customarily appertaining to the role of Chief Financial Officer
and Vice President, from time to time by the Company's Chief Executive Officer
or Board of Directors of the Company. Employee agrees to devote his reasonable
best diligence and his full time to the performance of his duties hereunder.
Employee's principal place of
Page 1 of 5
February 18, 1999
<PAGE>
employment shall be at the Company's headquarters in Long Island City, New York;
Employee shall travel as reasonably required in the performance of his duties
hereunder.
II Term
Employee's term of employment shall be for an initial term of three (3)
years commencing on March 1, 1999 (the "Initial Term"). This Agreement and
Employee's employment thereunder shall be renewable thereafter on a year-to-year
basis (each a "Renewal Term"), unless either party gives 60 days written notice
of termination before the end of the then-current term.
III Compensation & Benefits
Schick Technologies shall pay Employee, as full consideration for the
services to be rendered hereunder, compensation consisting of the following:
(1) Annual Base Salary of $240,000, payable bi-monthly or in accordance
with any other payment schedule as may be adopted generally for the
payment of the Company's payroll. Employee shall be eligible for
annual merit, or cost-of-living increases as may be determined by the
Company's Chief Executive Officer, subject to approval by the
Executive Compensation Committee of the Board of Directors;
(2) "Sign-On" Bonus of $150,000, payable with Employee's initial Company
paycheck;
(3) Guaranteed Annual Bonus of $40,000, payable at or about the end of
each fiscal year of employment hereunder, commencing April 1, 1999;
Employee shall also be eligible for annual merit bonuses in amounts
greater than $40,000, as may be determined by the Company's Chief
Executive Officer, subject to approval by the Executive Compensation
Committee of the Board of Directors;
(4) 100,000 Incentive Stock Options to be granted upon commencement of
employment under the Schick Technologies 1996 Employee Stock Option
Plan, as amended ("ESOP"). The exercise price of said options shall be
the fair market value of the Company's stock, as determined by the
Company's Board of Directors, on the date Employee commences
employment hereunder. Said options shall become exercisable in 25%
increments on, respectively, March 1, 2000, March 1, 2001, March 1,
2002, and March 1, 2003;
(5) Immediate vesting of said Stock Options in the event that, and at such
time as, Schick Technologies has a change in control or is acquired by
another entity or company. (For purposes of this Agreement, "control"
is defined as any event or circumstance that would require disclosure
pursuant to Item 1 of Form 8-K, or any comparable requirement of the
Securities and Exchange Commission.);
(6) Employment benefits generally provided to Schick employees, including
medical and dental insurance, on terms and in amounts no less
favorable than provided for other Schick employees similarly employed;
and
Page 2 of 5
February 18, 1999
<PAGE>
(7) Fifteen (15) business days per year for vacation time, and five
business days per year for sick or personal leave, during which times
Employee will be compensated the normal pro-rated portion of his base
salary.
IV Termination For Cause
This Agreement may be terminated immediately by the Company in the event
that a majority of the Company's Board of Directors (i) determines that any one
of the following events has occurred, and (ii) votes in favor of said
termination:
(1) that Employee is guilty of fraud, dishonesty, or other acts of
misconduct in his rendering of services for or on behalf of the
Company;
(2) that Employee materially fails or refuses to faithfully or diligently
perform his duties or responsibilities hereunder.
V Severance
(1) In the event that Employee is terminated from employment hereunder
without cause within twelve (12) months of any change in control of
the Company, Employee shall receive, in a lump-sum payment upon
termination, all amounts (including base salary and bonus) to be paid
to him hereunder during the remainder of the Initial Term or any
Renewal Term, but in no event shall he receive less than the amounts
paid to him hereunder during the twelve (12) months prior to said
termination;
(2) In the event that Employee is otherwise terminated by the Company from
employment hereunder without cause, Employee shall receive, in a
lump-sum payment upon termination, all amounts (including base salary
and bonus) to be paid to him hereunder during the remainder of the
Initial Term or any Renewal Term.
VI Non-Disclosure
(1) Employee recognizes that the Company possesses and will continue to
possess non-public information that has been created, discovered,
developed, or otherwise become known to it, and/or in which property
rights have been assigned or otherwise conveyed to it, which
information has commercial value in the business in which it is
engaged or may become engaged. All of the aforementioned information
is hereinafter called "Proprietary Information."
(2) By way of illustration, but not limitation, Proprietary Information
includes trade secrets, processes, structures, formulas, data,
know-how, improvements, inventions, product concepts, techniques,
marketing plans, strategies, forecasts, customer lists and information
about the Company's employees and/or consultants.
(3) At all times, both during Employee's employment by the Company and
after its termination, Employee shall keep in confidence and trust all
Proprietary Information, and Employee shall not use or disclose any
Proprietary Information or anything directly relating to it without
the written consent of the Chief Executive Officer of the Company,
except as may be necessary in the
Page 3 of 5
February 18, 1999
<PAGE>
ordinary course of Employee's performing his duties as an employee of
the Company and only for the benefit of the Company.
VII Non-Solicitation
During the period of the Employee's employment by the Company, and for a
period of twelve months following the termination of the Employee's Employment
with the Company for cause (as defined in Paragraph IV of this Agreement),
Employee shall not, directly or indirectly, without the prior written consent of
the Company (a) solicit or induce any employee of the Company to leave his or
her employment; or (b) hire for any purpose any employee of the Company or any
employee who has left such employment within the previous six months; or (c)
solicit or accept the business for any competing products of any party who was a
client or customer of the Company at any time during the term of Employee's
employment hereunder.
VIII Non Competition
During the period of Employee's employment by the Company and for a period
of twelve months following the termination of the Employee's Employment with the
Company for cause (as defined in Paragraph IV of this Agreement), Employee shall
not, directly or indirectly, engage or become interested in any way (whether as
an owner, stockholder, partner, lender, investor, director, officer, employee,
consultant or otherwise) in any activity, business or enterprise, located within
the geographical area of the United States or Canada, that is competitive with
any significant part of the business conducted by the Company or as contemplated
to be conducted by it [which, for purposes of this Paragraph VI, shall be deemed
to be competitive if it involves predominantly similar types of products or
services and is directed at predominantly similar types of customers as any
business of the Company (except that ownership of not more than 5% of the
outstanding securities of any class of any corporation that are listed on a
national securities exchange or traded in the over-the-counter market shall not
be considered a breach of this Paragraph VIII)].
IX Miscellaneous Provisions
(1) Acknowledgments and Affirmations: Employee recognizes, understands,
agrees and acknowledges that the Company has a legitimate and
necessary interest in protecting its goodwill and Proprietary
Information. Employee further affirms, represents, and acknowledges
that in the event of Employee's termination of employment with the
Company, Employee's experience and capabilities are such that the
enforcement of this Agreement will not prevent him from obtaining
employment in another line of business different from that carried on
by the Company and permitted under this Agreement. Employee further
affirms, represents and acknowledges that Employee has received good
and valuable consideration for entering into this Agreement.
(2) Remedies for Breach. Employee agrees that any breach of this Agreement
by Employee would cause irreparable damage to the Company and that, in
the event of such breach, the Company shall have, in addition to any
and all remedies at law, the right to an injunction, specific
performance or other equitable relief to prevent or redress the
violation of Employee's obligations hereunder.
Page 4 of 5
February 18, 1999
<PAGE>
(3) Separability. If any provision hereof shall be declared unenforceable
for any reason, such unenforceability shall not affect the
enforceability of the remaining provisions of this Agreement. Further,
such provision shall be reformed and construed to the extent permitted
by law so that it would be valid, legal and enforceable to the maximum
extent possible.
(4) Applicable Law. Any dispute arising under or related in any manner to
this Agreement or to Employee's employment by the Company or to the
termination of said employment shall in all respects be governed by,
adjudicated, construed and enforced in accordance with the laws of the
State of New York.
(5) Jurisdiction and Venue. Employee irrevocably and unconditionally
submits to the exclusive jurisdiction of any United States federal or
state court sitting in New York in any action or proceeding relating
in any manner to this Agreement or to Employee's employment by the
Company or to the termination of said employment. Further, Employee
irrevocably and unconditionally agrees that all claims relating in any
manner to this Agreement or to Employee's employment by the Company or
to the termination of said employment may be heard and determined in
any such court and waives any objection Employee may now or hereafter
have as to venue of any such action or proceeding brought in such
court or the fact that such court is an inconvenient forum.
SCHICK TECHNOLOGIES, INC. GEORGE C. ROUGH, JR.
31-00 47TH Avenue
Long Island City, NY 11101
By: /s/ David Schick /s/ George C. Rough, Jr.
------------------------------------ -----------------------------------
(signature)
Title: President and CEO
------------------------------------
Date: 2/25/99 Date: 2/25/99
------------------------------------ -----------------------------------
Page 5 of 5
February 18, 1999
[LOGO] SCHICK
TECHNOLOGIES, INC.
SCHICK TECHNOLOGIES, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this 29th day of
February, 2000 (the "Effective Date"), by and between Schick Technologies, Inc.
(hereinafter referred to as "Schick Technologies," "Schick" or "Company"), a
Delaware Corporation with a business address of 31-00 47th Avenue, Long Island
City, NY 11101, and David Schick (hereinafter referred to as "Employee"),
residing at 137-40 75th Road, Flushing, New York 10977.
WITNESSETH:
WHEREAS, Schick Technologies currently employs Employee as President
and Chief Executive Officer of the Company, and the services of the Employee,
his experience, expertise and knowledge of the affairs of the Company are of
great value to the Company; and
WHEREAS, Schick Technologies deems it essential that it continue to employ
Employee as Chief Executive Officer of the Company; and
WHEREAS, Employee consents to be so employed.
NOW THEREFORE, in consideration of the premises, of the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
I Employment
Schick Technologies hereby employs Employee, and Employee hereby agrees to
be employed, as Chief Executive Officer of the Company upon the terms and
conditions herein set forth. Employee shall be responsible for strategic
oversight and administration of the Company and any other responsibilities and
duties that may be assigned to him customarily appertaining to the role of Chief
Executive Officer, from time to time by the Board of Directors of the Company.
Employee agrees to devote his reasonable best diligence and his full time to the
performance of his duties hereunder. Employee's principal place of employment
shall be at the Company's headquarters in Long Island City, New York; Employee
shall travel as reasonably required in the performance of his duties hereunder.
March 9, 2000
Page 1 of 5
<PAGE>
II Term
The term of Employee's initial employment as Chief Executive Officer shall
be three (3) years, ending on December ___, 2002. This Agreement and Employee's
employment thereunder shall be renewable thereafter on a year-to-year basis,
unless either party gives 60 days written notice of termination before the end
of the then-current term.
III Compensation & Benefits
Schick Technologies shall pay Employee, as full consideration for the
services to be rendered hereunder, compensation consisting of the following:
(1) An initial Annual Base Salary of $200,000, payable bi-monthly or in
accordance with any other payment schedule as may be adopted generally for
the payment of the Company's payroll. Said Annual Base Salary shall be
increased annually, on each anniversary of the Effective Date of this
Agreement, by a minimum of ten percent (10%). Additionally, Employee shall
be eligible for annual merit, or cost-of-living increases as may be
determined by the Executive Compensation Committee of the Board of
Directors;
(2) Incentive Compensation based upon the EBITDA earned by the Company during
each fiscal year, as a percentage of the Company's net revenues, as
represented by the following formula: [$5,000 x (EBITDA/Net Revenues) x
100], payable at or about the end of each fiscal year of employment
hereunder, commencing April 1, 2000. To illustrate, if the Company's EBITDA
for the fiscal year is $1 Million and its net revenues are $10 Million,
Employee shall receive incentive compensation under this paragraph in the
amount of $50,000. Additionally, Employee shall be eligible for annual
merit bonuses as may be determined by the Executive Compensation Committee
of the Board of Directors;
(3) Participation in any incentive compensation plan, pension or profit-sharing
plan, stock purchase or stock option plan, (including, without limitation,
the Company's 1996 Employee Stock Option Plan), annuity or group insurance
plan previously adopted by the Company or which may be adopted by the
Company at some future date, on terms and in amounts no less favorable than
provided for other Schick employees similarly employed.
(4) Immediate vesting of all Company stock options held by or issued to
Employee in the event that, and at such time as, Schick Technologies has a
change in control or is acquired by another entity or company. (For
purposes of this Agreement, "control" is defined as any event or
circumstance that would require disclosure pursuant to Item 1 of Form 8-K
or any comparable requirement of the Securities and Exchange Commission.);
(5) Employment benefits generally provided to Schick employees, including
medical and dental insurance, on terms and in amounts no less favorable
than provided for other Schick employees similarly employed;
(6) Fifteen (15) business days per year for vacation time, and five business
days per year for sick or personal leave, during which times Employee will
be compensated the normal pro-rated portion of his base salary;
March 9, 2000
Page 2 of 5
<PAGE>
(7) A discretionary spending allowance in the amount of $10,000 per year, which
allowance may be utilized at Employee's sole discretion for the payment of
costs and expenses relating to or arising out of the Company's business,
potential business or the Employee's employment hereunder. The Company
shall promptly establish a bank checking account in Employee's name into
which the Company shall deposit the sum of $10,000 on or about January 2nd
of each calendar year. Said checking account shall be linked to a debit
credit card issued in Employee's name;
(8) Reimbursement for all expenses incurred by Employee in the ordinary course
of his performance of duties hereunder and submitted by him with supporting
documentation to the Company's accounting department, in terms no less
favorable than provided for other Schick employees similarly employed;
(9) Monthly payments of up to $500 to pay for the cost of a leased automobile
to be used by Employee. Additionally, the Company shall make full payment
of automobile insurance premiums and operating expenses relating to said
automobile; and
(10) Reimbursement for any salary payments by the Company to Employee which were
previously declined or deferred by Employee. Said reimbursement shall be
made by April 15, 2000.
IV Termination For Cause
The Company shall have ""cause" to terminate this Agreement upon (i) the
commission by Employee of an act of (a) criminal misconduct, or (b) fraud
against the Company; or (ii) the commission by the Employee of an act of
malfeasance, recklessness or gross negligence against the Company that is
injurious to the Company or its customers; or (iii) a material breach by
Employee of the terms of this Agreement; in any of which cases the Company may
at any time thereafter by written notice to Employee immediately terminate this
Agreement.
V Severance
If the Company effects any change in Employee's title, or diminishes, in
any significant manner, Employee's duties or responsibilities of employment,
then Employee shall have the immediate right, at his sole option, to a position
as consultant for the company for a period of one year, during which time
Employee shall receive the compensation and benefits as set forth in section III
of this Agreement.
VI Non-Disclosure
(1) Employee recognizes that the Company possesses and will continue to possess
non-public information that has been created, discovered, developed, or
otherwise become known to it, and/or in which property rights have been
assigned or otherwise conveyed to it, which information has commercial
value in the business in which it is engaged or may become engaged. All of
the aforementioned information is hereinafter called "Proprietary
Information."
(2) By way of illustration, but not limitation, Proprietary Information
includes trade secrets, processes, structures, formulas, data, know-how,
improvements, inventions, product concepts, techniques, marketing plans,
strategies, forecasts, customer lists and information about the Company's
employees and/or consultants.
March 9, 2000
Page 3 of 5
<PAGE>
(3) At all times, both during Employee's employment by the Company and after
its termination, Employee shall keep in confidence and trust all
Proprietary Information, and Employee shall not use or disclose any
Proprietary Information or anything directly relating to it without the
written consent of the Chief Executive Officer of the Company, except as
may be necessary in the ordinary course of Employee's performing his duties
as an employee of the Company and only for the benefit of the Company.
VII Non-Solicitation
During the period of the Employee's employment by the Company, and for a
period of twelve months following the termination of the Employee's Employment
with the Company for cause (as defined in Paragraph IV of this Agreement),
Employee shall not, directly or indirectly, without the prior written consent of
the Company (a) solicit or induce any employee of the Company to leave his or
her employment; or (b) hire for any purpose any employee of the Company or any
employee who has left such employment within the previous six months; or (c)
solicit or accept the business for any competing products of any party who was a
client or customer of the Company at any time during the term of Employee's
employment hereunder.
VIII Non Competition
During the period of Employee's employment by the Company and for a period
of twelve months following the termination of the Employee's Employment with the
Company for cause (as defined in Paragraph IV of this Agreement), Employee shall
not, directly or indirectly, engage or become interested in any way (whether as
an owner, stockholder, partner, lender, investor, director, officer, employee,
consultant or otherwise) in any activity, business or enterprise, located within
the geographical area of the United States or Canada, that is competitive with
any significant part of the business conducted by the Company or as contemplated
to be conducted by it [which, for purposes of this Paragraph VI, shall be deemed
to be competitive if it involves predominantly similar types of products or
services and is directed at predominantly similar types of customers as any
business of the Company (except that ownership of not more than 5% of the
outstanding securities of any class of any corporation that are listed on a
national securities exchange or traded in the over-the-counter market shall not
be considered a breach of this Paragraph VIII)].
IX Miscellaneous Provisions
(1) Acknowledgments and Affirmations: Employee recognizes, understands, agrees
and acknowledges that the Company has a legitimate and necessary interest
in protecting its goodwill and Proprietary Information. Employee further
affirms, represents, and acknowledges that in the event of Employee's
termination of employment with the Company, Employee's experience and
capabilities are such that the enforcement of this Agreement will not
prevent him from obtaining employment in another line of business different
from that carried on by the Company and permitted under this Agreement.
Employee further affirms, represents and acknowledges that Employee has
received good and valuable consideration for entering into this Agreement.
(2) Remedies for Breach. Employee agrees that any breach of this Agreement by
Employee would cause irreparable damage to the Company and that, in the
event of such breach, the Company
March 9, 2000
Page 4 of 5
<PAGE>
shall have, in addition to any and all remedies at law, the right to an
injunction, specific performance or other equitable relief to prevent or
redress the violation of Employee's obligations hereunder.
(3) Separability. If any provision hereof shall be declared unenforceable for
any reason, such unenforceability shall not affect the enforceability of
the remaining provisions of this Agreement. Further, such provision shall
be reformed and construed to the extent permitted by law so that it would
be valid, legal and enforceable to the maximum extent possible.
(4) Applicable Law. Any dispute arising under or related in any manner to this
Agreement or to Employee's employment by the Company or to the termination
of said employment shall in all respects be governed by, adjudicated,
construed and enforced in accordance with the laws of the State of New
York.
(5) Jurisdiction and Venue. Employee irrevocably and unconditionally submits to
the exclusive jurisdiction of any United States federal or state court
sitting in New York in any action or proceeding relating in any manner to
this Agreement or to Employee's employment by the Company or to the
termination of said employment. Further, Employee irrevocably and
unconditionally agrees that all claims relating in any manner to this
Agreement or to Employee's employment by the Company or to the termination
of said employment may be heard and determined in any such court and waives
any objection Employee may now or hereafter have as to venue of any such
action or proceeding brought in such court or the fact that such court is
an inconvenient forum.
SCHICK TECHNOLOGIES, INC. DAVID SCHICK
31-00 47TH Avenue
Long Island City, NY 11101
By: /s/ Jeffrey T. Slovin
--------------------------
/s/ David Schick
------------------------
Title: President (signature)
Date: 2/29/00
Date: 2/29/00
March 9, 2000
Page 5 of 5
S C H I C K
[LOGO] Technologies, Inc.
February 6, 2000
Zvi N. Raskin
10 Keri Lane
Spring Valley, New York 10977
Re : Employment Agreement
Dear Zvi :
This is to confirm that, effective January 1, 2000, the terms of your
employment at Schick Technologies (the "Company") are as follows :
1. Term of Employment : 3 years
2. Base Salary : $ 200,000 annually
3. Bonus : Minimum bonus of $20,000 per calendar year, payable in half-year
increments of at least $10,000 each. (The first increment shall be paid
upon the completion of the DVI loan restructuring.) You are also eligible
(but are in no way entitled) to receive additional performance bonuses,
from time to time, at the sole discretion of Compensation Committee.
4. Stock Grant : You shall be granted 75,000 shares of the Company's Common
Stock (the "Shares"), with the following restriction on the sale or
transfer of the Shares: None of the Shares may be sold or transferred prior
to December 31, 2000; 25,000 Shares may be sold or transferred on or after
December 31, 2000; an additional 25,000 Shares may be sold or transferred
on or after December 31, 2001; and the final 25,000 Shares may be sold or
transferred on or after December 31, 2002. You will be required to pay the
Company the sum of $1.32 per Share which you sell or transfer, and such
payment shall be made within 6 months of such sale or transfer. In the
event of your termination of employment hereunder for cause or your
resignation from employment hereunder, all Shares which may not yet be sold
or transferred at the time of such termination or resignation shall revert
back to the Company, and you agree to execute all documents reasonably
necessary to effect such reversion. In the event that you are terminated
without cause during the term of this Agreement, all restrictions imposed
hereunder on the sale or transfer of the Shares shall be null and void and
without further force or effect.
5. Termination / Severance : Termination of your employment shall be permitted
for cause only. In order to terminate you for cause, a majority of the
members of the Company's Board of Directors must vote for such termination
and must affirmatively find that you are guilty of fraud, dishonesty, or
other acts of misconduct in your rendering of services for or on behalf of
the Company. In the event that you are terminated without cause during the
term of this Agreement, you shall receive twelve (12) months severance.
Kindly sign below to indicate your agreement with all of the terms
contained in this letter agreement.
Sincerely,
/s/ Jeffrey T. Slovin
Jeffrey T. Slovin
President
The Foregoing is Acknowledged
And Agreed to in its Entirety
/s/ Zvi N. Raskin
-----------------------------
Zvi N. Raskin
January 12, 2000
Michael Stone
3350 County Line Road
Skaneateles, NY 13152
Dear Michael:
We are pleased to offer you the position of Vice President of Sales and
Marketing at Schick Technologies, Inc., reporting to Jeff Slovin, President. In
that position, you will have total responsibility for sales and marketing of all
Schick Technologies products, domestically and internationally. Your starting
salary will be $3365.38 per week (which annualized amounts to $175,000)
commencing on your first day of employment. In addition, you will be given:
o An annual performance bonus tied to 0.5% of earnings before income taxes,
depreciation and amortization (EBITDA).
o A guaranteed salary (minimum) for twenty-four (24) months.
o Six months severance and pro-rated bonus for dismissal for any reason other
than cause.
o 50,000 options; 25,000 on your employment start date and the balance,
25,000 six months later. The vesting schedule for each group will be over
four (4) years; 25% vesting at the first anniversary, 50% at the second,
75% at the third, and 100% at the fourth anniversary.
o An additional 25,000 options granted on the third anniversary date based
upon: Achievement of a minimum of $30 million in annual revenues.
Achievement of a minimum of $5 million in annual EBITDA.
o Immediate vesting of 50% of unvested options upon termination for other
than cause.
o Immediate vesting of 100% of unvested options upon change of management
control.
o A $25,000 relocation allowance in the first year; up to $25,000
reimbursement for expenses (over the first $25,000) incurred prior to end
of second year.
Our benefits offering includes a life, medical and dental insurance package
commencing after 3 months of employment, and which is 25% contributory; and a
401(k) plan, for which you will be eligible after six months. You will also be
entitled to 15 vacation and 5 sick/personal days annually.
In anticipation of your acceptance, welcome to Schick Technologies, Inc. You are
joining the company at a very exciting time as we look forward to continued
growth and a more enhanced position in the marketplace.
If you should have any questions or require additional information, please do
not hesitate to contact me.
Sincerely,
Please retain the original letter and
/s/ Arthur S. King indicate your acceptance by signing
and returning the copy:
Arthur S. King
Human Resources Manager
/s/ Michael Stone
-------------------------------------
Michael Stone
December 31, 1999
William F. Rogers
251 Windward Court
Port Jefferson, New York 11777
Dear Will :
I am pleased to confirm the following terms of your employment as Vice
President of Operations at Schick Technologies (the "Company"), commencing this
Monday, January 3, 2000 :
1. Compensation. You will receive an annual salary of one hundred
thirty-five thousand dollars ($135,000);
2. Employee Stock Options/Immediate Vesting.
(i) You will be awarded ten thousand (10,000) stock options as of
January 3, 2000, at an exercise price of $1.00 per share,
which will fully vest six months thereafter, on July 3, 2000;
(ii) You will also be awarded an additional fifteen thousand
(15,000) stock options as of July 3, 2000, at an exercise
price of $1.00 per share, which will vest at a rate of 5,000
options every six months (i.e., 5,000 options will vest on
January 3, 2001; an additional 5,000 on July 3, 2001, and the
final 5,000 on January 3, 2002).
(iii) All of the stock options listed in "i" and "ii" above shall
immediately vest in the event that, and at such time as,
Schick Technologies has any change in control or is acquired
by, merged into or consolidated with any other entity,
company, group or person.
3. Moving Expenses. You will be provided with $5000 as reimbursement
for expenses which you actually incur in connection with relocating
to the New York area;
4. Vacation and Personal Days. You shall be entitled to fifteen (15)
business days per year for vacation time, five business days per
year for sick or personal leave, and four additional days for
holidays or personal time. During all such vacation, holiday or
personal time, you shall be compensated the normal pro-rated portion
of your salary;
5. Term. Your employment hereunder , and the terms of that employment,
shall commence on January 3, 2000 and shall remain in effect for a
period of two (2) years, and shall be renewable thereafter on a
year-to-year basis, upon mutual agreement of the parties;
6. Successor In Interest. This Agreement and the rights and obligations
granted to or imposed upon the Company hereunder shall also bind and
inure to the benefit of any successor of the Company by merger or
consolidation or any purchaser or assignee of all or substantially
all of the Company's assets. Notwithstanding the foregoing, however,
in the event that such successor, purchaser or assignee fails to
abide by its obligations to you hereunder, the Company shall remain
liable to you to fulfill those obligations;
7. Indemnification. In the event that R F Power Co. brings legal action
or asserts any claim against you in connection with or arising out
of your employment at the Company, the Company shall provide you
with legal representation, at no cost to you, and shall indemnify
you for any judgment or settlement which you may be required to pay
to R F Power.
1
<PAGE>
Will, kindly sign this 2-page letter below to indicate your agreement with
the terms contained in this letter. I expect to have a more detailed employment
contract prepared next week and will forward it to you at that time. Most
importantly, congratulations on your appointment, and a happy and healthy New
Year to you and your family.
Very truly yours,
/s/ Zvi N. Raskin
Zvi N. Raskin
General Counsel and Secretary
The Foregoing is Acknowledged
and Agreed To
/s/ William F. Rogers
- -----------------------------
William F. Rogers
2
SEPARATION, SEVERANCE
AND GENERAL RELEASE AGREEMENT
THIS AGREEMENT is entered into by and between FRED LEVINE, the undersigned
employee ("Employee") and SCHICK TECHNOLOGIES, INC. ("Employer" or the
"Company"), as of the 27th day of August, 1999. (The Employee and Employer are
sometimes collectively referred to herein as the "parties.")
The parties hereby knowingly and voluntarily agree to enter into this
Separation, Severance and General Release Agreement (the "Agreement") in order
to resolve any and all outstanding issues and to set forth all obligations
between the parties. Employee and Employer acknowledge and agree that this
Agreement constitutes the sole obligations of each to the other, supersedes all
previous agreements and/or promises and that no other promises, commitments or
representations have been made with or by either of the parties to the other.
Employee's employment with Employer, and Employee's membership on
Employer's Board of Directors will cease as of 5:00 p.m. on August 27, 1999 (the
"Termination Date"). In consideration for executing this Agreement, Employee
will receive the following :
(a) continued payment of his current salary, in the gross annual amount of
$170,000, minus applicable payroll deductions, for a period of one year
following the Termination Date. Said payments shall be made by Employer to
Employee in equal bi-weekly increments, on the dates on which the
Employer's company payroll is regularly paid.
(b) Continued receipt of the following benefits on the same terms by which
Employee currently receives those benefits from Employer : medical
insurance and dental insurance for a period of one year following the
Termination Date. In the event that the terms or availability of any of the
foregoing benefits are changed, modified or terminated generally for all
company employees or for a majority of said employees, then the terms of
those benefits may be changed, modified or terminated accordingly by
Employer, at its sole option, with respect to the benefits conferred upon
Employee hereunder. Furthermore, in the event that Employee obtains any of
the foregoing benefits from a third party (such as a new employer), then
Employer, at its sole option, may immediately cease to provide those
benefits to Employee;
Furthermore, Employee shall be entitled to indemnification by Employer in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he was an officer
and/or employee of Employer,
p. 1 of 4
Levine Separation, Severance and General Release Agreement
<PAGE>
pursuant to the provisions of Article V of Employer's By-laws, as amended, a
copy of which Article is annexed hereto and made a part hereof.
Employee acknowledges that he has been advised that his medical insurance
coverage will end no later than August 27, 2000 and that he can elect to
continue coverage under Employer's Medical Insurance Plan thereafter at his own
cost in accordance with applicable law.
Employer acknowledges that Employee was granted options in fiscal 1996 to
purchase 56,000 shares of Employer's common stock at an exercise price of $1.79
per share, all of which such options are currently vested. Said options will
survive the termination of Employee's employment with Employer and may be
exercised until they expire on December 31, 2000.
Employee acknowledges that he is receiving a substantially increased
benefit as consideration for executing this Agreement. Employee acknowledges
that he is not entitled to any other benefits or monies.
Employee and Employer agree not to disparage or impugn each other or their
respective partners, officers, directors or employees, in any way. Employer
shall publicly disclose the termination of Employee's employment by the issuance
of a press release in the form annexed hereto. Unless required by law, rule or
regulation, Employer shall not make any further public disclosure or issue any
additional press releases which specifically mention Employee by name.
Notwithstanding anything herein to the contrary, however, Employer may, at its
sole discretion, make any public disclosures it deems appropriate provided that
Employee is not specifically mentioned therein by name.
Employee agrees that for a period of twenty-four (24) months following the
termination of his employment with Employer, he will not, directly or
indirectly, engage or become interested as an owner, partner, lender, director,
officer, employee, consultant or in a similar capacity in any way (whether as an
owner, partner, lender, investor, director, officer, employee, consultant or
otherwise,) in any activity, business or enterprise, located within the
geographical area of the United States, that sells any product which competes
with any Company products is competitive with any significant part of the
Company's business, without the prior written consent of the President of the
Company.
By signing this Agreement, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Employee hereby
releases and discharges Employer, its employees, directors, officers,
shareholders and agents from, and waives for himself and for his heirs,
executors, administrators, successors, and assigns, any claim, suit, debt,
contract, agreement, damages, charge, arbitration, grievance, complaint, or
action (whether asserted or unasserted, known or unknown) which he now has or
hereafter can, shall or may have against Employer, its parent corporation,
affiliates, subsidiaries, all of its past and former subsidiaries and
affiliates,
p. 2 of 4
Levine Separation, Severance and General Release Agreement
<PAGE>
present and former stockholders, partners, officers, directors, employees,
agents, representatives, attorneys, successors and assigns, for, upon or by
reason of any matter, cause or thing whatsoever from the beginning of the world
to the date of this Agreement, arising out of Employee's employment and/or
professional engagement with Employer and/or his separation from employment
and/or relating to the issuance to Employee of stock, options, warrants, equity
or any other benefits, compensation, gifts or incentives by Employer or by any
of Employer's officers, directors, employees or agents, including but not
limited to any claim under federal, state, local or common law for breach of
contract, for wrongful or abusive discharge or for discrimination based on race,
color, ethnicity, sex age, national origin, sexual orientation, religion or
disability, under Title VII of the Civil Rights Act of 1964 as amended; the
Civil Rights Act of 1991; the Age Discrimination in Employment Act; the
Americans with Disabilities Act; Employee Retirement Income Security Act; Family
and Medical Leave Act and similar state and local laws, or any other unlawful
criteria or circumstances.
By signing this Agreement, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Employer hereby
releases and discharges Employee from, and waives for itself and its successors
and assigns, any claim, suit, debt, contract, agreement, damages, charge,
arbitration, grievance, complaint, or action (whether asserted or unasserted,
known or unknown) which it now has or hereafter can, shall or may have against
Employee for, upon or by reason of any matter, cause or thing whatsoever from
the beginning of the world to the date of this Agreement, arising out of
Employee's employment and/or professional engagement with Employer and/or his
separation from employment, and/or relating to the issuance to Employee of
stock, options, warrants, equity or any other benefits, compensation, gifts or
incentives by Employer or by any of Employer's officers, directors, employees or
agents.
Employee agrees that he has been advised to consult with an attorney prior
to signing this Agreement, that he has read and understands this Agreement, and
that he is fully competent to enter into this Agreement and has signed this
Agreement knowingly and voluntarily. Employee has had the opportunity to ask
questions and fully understands this Agreement. Employee acknowledges : (i) that
the Company has expressly informed him that he has at least twenty-one (21) days
in which to decide whether to sign this Agreement, but that he has decided, of
his own free will and volition, to sign this Agreement before the expiration of
said 21-day period and, (ii) that he has the opportunity to revoke such
Agreement within seven (7) days of signing it.
Employee represents that he does not have and has returned all business
records of Employer, its parent and its affiliates, in any form and all copies
thereof.
This Agreement and the payment of any consideration hereunder shall not be
construed as an admission of any kind whatsoever on the part of the Employer or
the Employee.
p. 3 of 4
Levine Separation, Severance and General Release Agreement
<PAGE>
Nothing contained herein shall constitute, or be deemed to constitute, a
waiver of either party's right to enforce the terms of this Agreement.
This Agreement can be amended only by a writing signed by both parties.
This Agreement shall be construed under New York law.
PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A
WAIVER AND RELEASE OF ALL CLAIMS.
FRED LEVINE SCHICK TECHNOLOGIES, INC.
_________________________ By: ____________________
Fred Levine David Schick
President & CEO
p. 4 of 4
Levine Separation, Severance and General Release Agreement
SEPARATION, SEVERANCE
AND GENERAL RELEASE AGREEMENT
THIS AGREEMENT is entered into by and between AVI ITZHAKOV, the undersigned
employee ("Employee") and SCHICK TECHNOLOGIES, INC. ("Employer" or "Company"),
as of the 20th day of August, 1999. (The Employee and Employer are sometimes
collectively referred to herein as the "parties.")
WHEREAS, the Board of Directors of the Company has determined that it is in
the Company's best interest to enter into this Agreement and that the terms
hereof constitute a full and complete resolution of all issues and matters
outstanding between the parties;
NOW THEREFORE, in consideration of the premises, of the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows :
The parties hereby knowingly and voluntarily agree to enter into this
Separation, Severance and General Release Agreement (the "Agreement") in order
to resolve any and all outstanding issues and to set forth all obligations
between the parties. Employee and Employer acknowledge and agree that this
Agreement constitutes the sole obligations of each to the other, supersedes all
previous agreements and/or promises and that no other promises, commitments or
representations have been made with or by either of the parties to the other.
Employee's employment with Employer will cease as of 5:00 p.m. on August
20, 1999 (the "Termination Date"). In consideration for executing this
Agreement, Employee will receive the following :
(a) Continued payment of his current salary, in the gross annual amount of
$130,000, minus applicable payroll deductions, for a period of one year
following the Termination Date. Said payments shall be made by Employer to
Employee in equal bi-weekly increments, on the dates on which the
Employer's company payroll is regularly paid;
(b) Continued receipt of the following benefits on the same terms by which
Employee currently receives those benefits from Employer : (i) medical
insurance and dental insurance, for a period of one year following the
termination Date; and (ii) automobile lease (including the continued
payment by Employer of auto insurance in connection with said lease) for
the remaining term of said lease. In the event that the terms or
availability of any of the foregoing benefits (with the sole exception of
the automobile lease -- including the payment by Employer of auto insurance
in connection with said lease) are changed, modified or terminated
generally for all Company employees or
p. 1
Itzhakov Separation, Severance and General Release Agreement
<PAGE>
for a majority of said employees, then the terms of those benefits may be
changed, modified or terminated accordingly by Employer, at its sole
option, with respect to the benefits conferred upon Employee hereunder.
Furthermore, in the event that Employee obtains any of the foregoing
benefits from a third party (such as a new employer), then Employer, at its
sole option, may immediately cease to provide those benefits to Employee;
and
(c) Fifteen Thousand (15,000) stock options, previously granted to Employee by
the Company, which shall be governed by the terms of the annexed
Non-Statutory Stock Option Agreement.
Furthermore, Employee shall be entitled to indemnification by Employer in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he was an officer
and/or employee of Employer, pursuant to the provisions of Article V of
Employer's By-laws, as amended, a copy of which Article is annexed hereto and
made a part hereof.
Employee acknowledges that he has been advised that his medical insurance
coverage will end no later than August 20, 2000 and that he can elect to
continue coverage under Employer's Medical Insurance Plan thereafter at his own
cost in accordance with applicable law.
Employee acknowledges that he is receiving a substantially increased
benefit as consideration for executing this Agreement. Employee acknowledges
that he is not entitled to any other benefits or monies.
Employee and Employer agree not to disparage or impugn each other or their
respective partners, officers, directors or employees, in any way. Employer
shall publicly disclose the termination of Employee's employment by the issuance
of a press release in the form annexed hereto. Unless required by law, rule or
regulation, Employer shall not make any further public disclosure or issue any
additional press releases which specifically mention Employee by name.
Notwithstanding anything herein to the contrary, however, Employer may, at its
sole discretion, make any public disclosures it deems appropriate provided that
Employee is not specifically mentioned therein by name.
Employee agrees that for a period of twelve (12) months following the
termination of his employment with Employer, he will not, directly or
indirectly, engage or become interested in any way (whether as an owner,
stockholder, partner, lender, investor, director, officer, employee, consultant
or otherwise) in any activity, business or enterprise, located within the
geographical area of the United States, that is competitive with any significant
part of the Company's business, without the prior written consent of the
President of the Company.
By signing this Agreement, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Employee hereby
releases and
p. 2
Itzhakov Separation, Severance and General Release Agreement
<PAGE>
discharges Employer, its employees, directors, officers, shareholders and agents
from, and waives for himself and for his heirs, executors, administrators,
successors, and assigns, any claim, suit, debt, contract, agreement, damages,
charge, arbitration, grievance, complaint, or action (whether asserted or
unasserted, known or unknown) which he now has or hereafter can, shall or may
have against Employer, its parent corporation, affiliates, subsidiaries, all of
its past and former subsidiaries and affiliates, present and former
stockholders, partners, officers, directors, employees, agents, representatives,
attorneys, successors and assigns, for, upon or by reason of any matter, cause
or thing whatsoever from the beginning of the world to the date of this
Agreement, arising out of Employee's employment and/or professional engagement
with Employer and/or his separation from employment and/or relating to the
issuance to Employee of stock, options, warrants, equity or any other benefits,
compensation, gifts or incentives by Employer or by any of Employer's officers,
directors, employees or agents, including but not limited to any claim under
federal, state, local or common law for breach of contract, for wrongful or
abusive discharge or for discrimination based on race, color, ethnicity, sex
age, national origin, sexual orientation, religion or disability, under Title
VII of the Civil Rights Act of 1964 as amended; the Civil Rights Act of 1991;
the Age Discrimination in Employment Act; the Americans with Disabilities Act;
Employee Retirement Income Security Act; Family and Medical Leave Act and
similar state and local laws, or any other unlawful criteria or circumstances.
By signing this Agreement, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Employer hereby
releases and discharges Employee from, and waives for itself and its successors
and assigns, any claim, suit, debt, contract, agreement, damages, charge,
arbitration, grievance, complaint, or action (whether asserted or unasserted,
known or unknown) which it now has or hereafter can, shall or may have against
Employee for, upon or by reason of any matter, cause or thing whatsoever from
the beginning of the world to the date of this Agreement, arising out of
Employee's employment and/or professional engagement with Employer and/or his
separation from employment, and/or relating to the issuance to Employee of
stock, options, warrants, equity or any other benefits, compensation, gifts or
incentives by Employer or by any of Employer's officers, directors, employees or
agents.
Employee agrees that he has been advised to consult with an attorney prior
to signing this Agreement, that he has read and understands this Agreement, and
that he is fully competent to enter into this Agreement and has signed this
Agreement knowingly and voluntarily. Employee has had the opportunity to ask
questions and fully understands this Agreement. Employee acknowledges:(i) that
the Company has expressly informed him that he has at least twenty-one (21) days
in which to decide whether to sign this Agreement, but that he has decided, of
his own free will and volition, to sign this Agreement before the expiration of
said 21-day period and, (ii) that he has the opportunity to revoke such
Agreement within seven (7) days of signing it.
Employee represents that he does not have and has returned all business
records of Employer, its parent and its affiliates, in any form and all copies
thereof.
p. 3
Itzhakov Separation, Severance and General Release Agreement
<PAGE>
This Agreement and the payment of any consideration hereunder shall not be
construed as an admission of any kind whatsoever on the part of the Employer or
the Employee.
Nothing contained herein shall constitute, or be deemed to constitute, a
waiver of either party's right to enforce the terms of this Agreement.
This Agreement can be amended only by a writing signed by both parties.
This Agreement shall be construed under New York law.
PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A
WAIVER AND RELEASE OF ALL CLAIMS.
AVI ITZHAKOV SCHICK TECHNOLOGIES, INC.
_____________________ By: _____________________
Avi Itzhakov David Schick
President & CEO
p. 4
Itzhakov Separation, Severance and General Release Agreement
Exhibit 21
List of Subsidiaries
- --------------------
Schick Technologies, Inc., a New York Corporation
(Ex. 23.1)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-46825) of Schick Technologies, Inc. of our report
dated June 9, 1998 relating to the financial statements, which appear in this
Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 20, 2000
Exhibit 23.2
We have issued our report dated March 8, 2000, accompanying the consolidated
financial statements and schedule included in the Annual Report of Schick
Technologies, Inc. on Form 10-K for the year ended March 31, 1999. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of Schick Technologies, Inc. on Form S-8 (File No. 333-46825),
effective February 24, 1998.
GRANT THORNTON LLP (manually)
New York, New York
March 8, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,415
<SECURITIES> 360
<RECEIVABLES> 8,717
<ALLOWANCES> 4,512
<INVENTORY> 10,686
<CURRENT-ASSETS> 19,707
<PP&E> 10,083
<DEPRECIATION> 2,862
<TOTAL-ASSETS> 29,386
<CURRENT-LIABILITIES> 16,805
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 12,435
<TOTAL-LIABILITY-AND-EQUITY> 29,386
<SALES> 0
<TOTAL-REVENUES> 45,605
<CGS> 40,077
<TOTAL-COSTS> 35,730
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 261
<INCOME-PRETAX> (29,958)
<INCOME-TAX> (352)
<INCOME-CONTINUING> (29,606)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,606)
<EPS-BASIC> (2.96)
<EPS-DILUTED> (2.96)
</TABLE>
EXHIBIT 99
CAUTIONARY STATEMENT
The statements contained in this Form 10-K include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 ("PSLRA"). When used in this Form 10-K and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
presentations to securities analysts or investors, or in oral statements made by
or with the approval of an executive officer of the Company, the words or
phrases "believes," "may," "will likely result," "estimates," "projects,"
"anticipates," "expects" or similar expressions and variations thereof are
intended to identify such forward-looking statements. Any forward-looking
statement involves risks and uncertainties that may have a material adverse
effect on the business, results of operation, financial condition or prospects,
financial or other, of the Company and may cause the Company's actual results to
differ materially from historical results or the results discussed in the
forward-looking statements.
The following discussions contain cautionary statements regarding the
Company's business that investors and others should consider. This discussion is
intended to take advantage of the "safe harbor" provisions of the PSLRA. In
making these cautionary statements, the Company is not undertaking to address or
update each factor in future filings or communications regarding the Company's
business or results.
RECENT OPERATING LOSSES; GOING CONCERN QUALIFICATION; NEED FOR ADDITIONAL
FINANCING
The Company incurred operating losses of $29,606,000 in fiscal 1999 and
approximately $9,218,000 in the first nine months of fiscal 2000. Such operating
losses and other factors have caused the Company's independent accountants to
include a going concern qualification in their report on the Company's fiscal
1999 financial statements. The Company may require additional outside financing
to continue as a going concern, expand its core technology and develop new
products, for working capital and for capital expenditures. There can be no
assurance that such financing will be available on acceptable terms or at all.
The inability of the Company to obtain such financing could have a material
adverse effect on the Company. In addition, the Company may issue additional
shares of Common Stock or other securities, whether through public or private
offerings. Such offerings would have a dilutive effect on the percentage of
ownership in the Company of any holder of shares of Common Stock. In the event
the Company is unable to raise necessary additional financing in the future, it
may experience cash flow difficulties and/or be forced to curtail its expansion
activities.
DEPENDENCE ON PRODUCTS
The Company's revenues are primarily generated from sales of its CDR(R)
system and, to a lesser extent, other products, including the CDRCam(R),
CDRPan(TM) and accuDEXA(R). There can be no assurance that any of these devices
will not be rendered obsolete or inferior as a result of technological change,
changing customer needs or new product introductions, each of which would have a
material adverse effect on the Company. There can be no assurance that the
Company's competitors will not succeed in developing or marketing technologies
and products that are more commercially attractive than the CDR system, CDRCam
or accuDEXA. The Company's success will depend in part on its ability to improve
and enhance its products in a timely manner. While the Company is actively
engaged in research and development to improve and enhance the CDR system and
CDRCam, there can be no assurance that the Company will be successful. The
failure to enhance any of the Company's products in a timely manner could have a
material adverse effect on the Company.
DEPENDENCE ON DEVELOPING AND MARKETING NEW PRODUCTS AND ENHANCEMENTS TO EXISTING
PRODUCTS
The Company is currently developing new products for the dental and medical
markets. There can be no assurance that the Company will succeed in its efforts
to develop such products. 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. There can be no assurance
that the Company will file applications for or obtain regulatory approval from
the FDA, either in the form of a pre-market clearance or a 510(k) clearance, for
the digital mammography sensors or any other future products, or that in order
to obtain FDA clearance, the Company will not be required to submit additional
data or meet additional FDA requirements that may substantially delay the
application process and result in substantial additional expense. Moreover, such
pre-marketing 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. Furthermore, the
digital mammography market is unproven and there can be no assurance that it
will develop according to the Company's expectations. In addition, while the
Company intends to distribute the digital mammography sensors through a direct
sales force and/or other established
<PAGE>
independent distributors and manufacturers of medical and radiological
equipment, there can be no assurance that the Company will be able to
successfully develop any such distribution channel. While the Company is
actively engaged in research and development to develop digital mammography
sensors and other new products, there can be no assurance that the Company will
be successful in such endeavors. There can be no assurance that the digital
mammography sensors or any other products to be developed by the Company will be
approved by or receive marketing clearance from applicable domestic and/or
international governmental or regulatory authorities. If the Company is unable
to develop, obtain regulatory approval for and market new products and
enhancements to existing products, it will have a material adverse effect on the
Company.
RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapid and
significant technological change, evolving industry standards and new product
introductions. The Company's products require significant planning, design,
development and testing which require significant capital commitments and
investment by the Company. There can be no assurance that the Company's products
or proprietary technologies will not become uncompetitive or obsolete as a
result of technological change, evolving industry standards or new product
introductions or that the Company will be able to generate any economic return
on its investment in product development. If the Company's products or
technologies become uncompetitive or obsolete, it will have a material adverse
effect on the Company.
DEPENDENCE ON KEY SUPPLIERS; VOLATILITY OF SEMICONDUCTOR MARKET
The Company relies on several key suppliers as sole sources for a number of
critical components. Of these, semiconductors are the most significant product
components the Company purchases. The availability and price of these components
may be subject to change due to interruptions in production, changing market
conditions and other events. Furthermore, availability may be adversely impacted
if the Company fails to make timely payments to its key suppliers. There can be
no assurance that, if the Company were to enter into purchase arrangements with
other suppliers, such suppliers would be able to deliver such semiconductors at
an acceptable price or in a timely manner. If the Company were unable to develop
reasonably-priced alternative sources in a timely manner, or if the Company
encountered delays or other difficulties in the supply of such products and
other materials from third parties, there could be a material adverse effect on
the Company. In past years, semiconductors have been subject to significant
price fluctuations. There can be no assurance that the Company can mitigate the
effect of future price increases on its results of operations and financial
condition.
INTENSE COMPETITION
Competition relating to the Company's current products is intense and
includes various companies, both within and outside of the United States. The
Company anticipates that competition for its future products will also be
intense and include various companies, both within and outside of the United
States. Many of the Company's competitors are large companies with substantially
greater financial, sales and marketing, and technical resources, larger and more
experienced research and development staffs, more extensive physical facilities
and substantially greater experience in obtaining regulatory approvals and in
marketing products than 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 being
developed by the Company or that would otherwise render the Company's existing
and new technology and products obsolete or uncompetitive. No assurance can be
given that the Company will be able to compete successfully. The inability of
the Company to compete successfully or the development by the Company's
competitors of technology and products that are more effective than those being
developed by the Company would have a material adverse effect on the Company.
<PAGE>
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF PATENT INFRINGEMENT
The Company currently has issued patents and patent applications as
described in Item 1 - "Business," of this Form 10-K. There can be no assurance
that any of the Company's patents, any of the patents of which the Company is a
licensee or any patents which may issue to the Company or which the Company may
license in the future, will provide the Company with a competitive advantage or
afford the Company protection against infringement by others, or that the
patents will not be successfully challenged or circumvented by competitors of
the Company.
The Company is the licensee in certain fields of biomedical radiology of
certain patents, patent applications and other know-how related to APS
technology (collectively, the "APS Technology"), which was developed at the
California Institute of Technology. The Company has been advised by the licensor
of the APS Technology that the Company's rights to such technology are subject
to government rights to use, noncommercial educational rights to use by
California Tech 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 biomedical radiology, 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.
In addition, the license to the APS technology is subject to certain
requirements relating to product introduction, improvement, marketing and
distribution. There can be no assurance that the Company will be able to meet
the requirements necessary to maintain its license, and any loss of or
restriction in its license may have a material adverse effect on the Company.
The Company is also the owner of certain trade secrets, which it protects
by, among other things, entering into non-disclosure, confidentiality,
non-solicitation and non-competition agreements. However, there can be no
assurance that the duties imposed by these agreements, such as the duty to
maintain confidentiality and the duty not to compete, will not be breached, or
that such breaches will not have a material adverse effect on the Company.
There also can be no assurance that the technology practiced by the Company
will not infringe upon the patents of others. The Company's CDR(R) system is
currently the subject of litigation regarding the patent rights of others. In
the event that any such infringement claim is successful, there can be no
assurance that the Company would be able to negotiate with the patent holder for
a license, in which case the Company could be prevented from practicing the
subject matter claimed by such patent. In addition, there can be no assurance
that the Company would be able to redesign its products to avoid infringement.
The inability of the Company to practice the subject matter of patents claimed
by others or to redesign its products to avoid infringement could have a
material adverse effect on the Company.
LITIGATION AND INSURANCE
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.
<PAGE>
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 motions for summary judgment seeking dismissal of
the action pending in the United States District Court for the Eastern District
of New York, on the grounds of non-infringement and patent invalidity. On
February 22, 2000, oral argument on these motions was heard by the Court. The
motions are currently pending.
While the Company believes such suits against it are without merit, there
can be no assurance that the Company will be successful in its defense of any of
these actions, or in its counter-suit. If the Company is unsuccessful in its
defense of any of these actions, it could have a material adverse effect upon
the Company. Moreover, regardless of their outcome, the Company may be forced to
expend significant amounts of money in legal fees in connection with these
lawsuits.
II. In late 1998 through early 1999, nine shareholder complaints purporting
to be class action lawsuits were filed in the United States District Court for
the Eastern District of New York. Plaintiffs filed a Consolidated and Amended
Complaint on or about May 27, 1999 and, on or about November 24, 1999, filed a
Second Amended and Consolidated Complaint (the "Complaint"). The Complaint names
as defendants the Company, David B. Schick, Thomas E. Rutenberg, and David
Spector (collectively, the "Individual Defendants"), as well as
PricewaterhouseCoopers LLP.
The Complaint alleges, inter alia, that certain defendants issued false and
misleading statements concerning the Company's publicly reported earnings in
violation of the federal securities laws. The Complaint seeks certification of a
class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and does not specify the amount of damages
sought.
The Company has retained counsel, believes that these lawsuits are without
merit, and intends to vigorously defend them. On or about February 11, 2000, the
Company and the Individual Defendants filed a Motion to Dismiss the Complaint.
As these actions are in their preliminary stages, the Company is unable to
predict their ultimate outcome. The outcome, if unfavorable, could have a
material adverse effect on the Company.
III. In August 1999, the Company, through its outside counsel, contacted
the Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings.
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
<PAGE>
documents to it. The inquiry is in a preliminary stage and the Company cannot
predict its potential outcome.
The Company may be a party to a variety of legal actions (in addition to
those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, governmental
investigations, breach of contract actions, tort claims, shareholder suits,
including securities fraud, and intellectual property related litigation. In
addition, because of the nature of its business, the Company is subject to a
variety of legal actions relating to its business operations. Recent court
decisions and legislative activity may increase the Company's exposure for any
of these types of claims. In some cases, substantial punitive damages may be
sought. The Company currently has insurance coverage for some of these potential
liabilities. Other potential liabilities may not be covered by insurance,
insurers may dispute coverage, or the amount of insurance may not be sufficient
to cover the damages awarded. In addition, certain types of damages, such as
punitive damages, may not be covered by insurance and insurance coverage for all
or certain forms of liability may become unavailable or prohibitively expensive
in the future.
DILUTIVE EFFECT OF GREYSTONE TRANSACTION
The Company has entered into an agreement with Greystone Funding
Corporation whereby Greystone and its designees may exercise Warrants to
purchase up to 18 million shares of the Company's Common Stock. If Greystone
exercises such Warrants or a portion thereof, it can be expected to have a
significant dilutive effect on the percentage of shares held by the Company's
current shareholders.
RESTRICTIVE COVENANTS IN LOAN AGREEMENTS
The Loan Agreement between the Company and Greystone Funding Corporation as
well as the Bridge Loan Agreement between the Company and DVI Financial
Services, Inc. contain covenants that may inhibit the Company's ability to
manage its business and/or implement its strategic decisions. These
restrictions, among other things, will limit the Company's ability to incur
additional indebtedness; issue capital stock; create, incur or assume liens; and
merge, consolidate or sell assets.
PRODUCT WARRANTIES; WARRANTS
The Company generally warrants each of its products against defects in
materials and workmanship for a period of one year from the date of shipment
(plus any extended warranty period purchased by the customer). Costs associated
with product returns, including servicing and/or repair of products, during the
warranty period increased substantially in fiscal 1999. Product returns could
have a material adverse effect on the Company by, among other things, requiring
additional expenditures for parts and personnel as well as damaging the
Company's reputation and goodwill.
REGULATORY AND LEGISLATIVE RISKS
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 Company's CDR(TM) system is currently regulated by such
authorities and certain of the Company's new products will require approval by
or marketing clearance from various governmental authorities, including the FDA.
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
<PAGE>
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. There can be no assurance that the Company's advertising
and marketing materials regarding its products are and will be in compliance
with such regulations. The Company is also subject to other federal, state and
local laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices. 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. International sales of the Company's
products are subject to the regulatory agency product registration requirements
of each country in which the Company's products are sold. The regulatory review
process varies from country to country and may in some cases require the
submission of clinical data. The Company typically relies on its distributors in
foreign countries to obtain the required regulatory approvals. There can be no
assurance, however, that such approvals will be obtained on a timely basis, if
at all, or that the failure to obtain such approval by a distributor will not
have a material adverse effect on the Company. The Company's customers operate
in the health care industry, which is highly regulated. Both existing and future
governmental regulations could adversely impact the Company. Additionally,
cost-containment efforts by health maintenance organizations may adversely
affect the potential market for the Company's devices.
POTENTIAL FOR PRODUCT RECALL AND PRODUCT LIABILITY CLAIMS
Products such as those sold by the Company may be subject to recall for
unforeseen reasons. In addition, certain applications, including projected
applications, of the Company's products entail the risk of product liability
claims. Such risks will exist even with respect to those products that have
received, or in the future may receive, regulatory approval for commercial sale.
These claims may be made by consumers, distributors, wholesalers or others.
Although the Company has maintained insurance coverage related to product
liability claims, no assurance can be given that product liability insurance
coverage will continue to be available or, if available, that it can be obtained
in sufficient amounts or at reasonable cost or that it will be sufficient to
cover any claims that may arise. The Company does not maintain any insurance
relating to potential recalls of its products. Costs associated with potential
product recalls or product liability claims could have a material adverse effect
on the Company.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT
Third-party payors, including government health administration authorities,
private health care insurers and other organizations regulate the reimbursement
of fees related to certain diagnostic procedures or medical treatments.
Third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. While the Company cannot predict what effect
the policies of government entities and other third-party payors will have on
future sales of the Company's products, there can be no assurance that such
policies would not have a material adverse effect on the Company.
DEPENDENCE ON THIRD-PARTY DISTRIBUTORS
The Company markets and distributes a significant portion of its CDR(R)
systems through third-party independent distributors. From time to time, a
limited number of distributors account for a significant portion of the
Company's revenues. In fiscal 1999, one distributor, Henry Schein, Inc.,
accounted for 15.8% of the Company's sales. In general, these distributors could
discontinue marketing the Company's products with little or no notice. Certain
of the Company's distributors also could market products which compete with the
Company's products. The loss of, or a significant reduction in sales
<PAGE>
volume through, one or more of the Company's distributors could have a material
adverse effect on the Company.
UNCERTAINTIES ASSOCIATED WITH INTERNATIONAL MARKETS
In fiscal 1999, 1998 and 1997, international sales accounted for 13%, 18%
and 24% and respectively, of the Company's revenues, and the Company anticipates
that international sales will continue to account for a significant percentage
of the Company's revenues. International revenues are subject to a number of
uncertainties, including the following: agreements may be difficult to enforce
and receivables difficult to collect; foreign customers and distributors may
have longer payment cycles, foreign countries may impose additional withholding
taxes or otherwise tax the Company's foreign income, impose tariffs or adopt
other restrictions on foreign trade; fluctuations in exchange rates may affect
product demand in relation to foreign competitors that may achieve advantageous
pricing based on the comparative strength of the United States dollar; United
States export licenses may be difficult to obtain; and intellectual property
rights in foreign countries may be difficult to enforce. Moreover, many foreign
countries have their own regulatory approval requirements for the sale of the
Company's products. As a result, the Company's introduction of new products into
international markets could be costly and time-consuming, and there can be no
assurance that the Company will be able to obtain the required regulatory
approvals on a timely basis, if at all. There can be no assurance that any of
these factors will not have a material adverse effect on the Company.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is dependent, in part, upon its ability to hire
and retain management, sales, technical and research personnel who are in high
demand and are often subject to competing employment opportunities. The
inability of the Company to hire or retain key management, sales, technical or
research personnel could have a material adverse effect on the Company. In
addition, the development of the Company's business has largely been dependent
upon the efforts of David B. Schick, the Company's Chief Executive Officer.
Although the Company has expanded the depth of the expertise of its personnel,
the loss of Mr. Schick or turnover in other management positions could have a
material adverse affect on the Company. There can be no assurance that Mr.
Schick or any other key employee will continue to be active with the Company.
The Company maintains and is the named insured party under a $1,000,000 life
insurance policy on Mr. Schick. There is no assurance that such insurance can be
maintained or will be adequate to meet the Company's future needs.
HISTORY OF RAPID GROWTH; ABILITY TO MANAGE GROWTH
There are significant risks, expenses and difficulties associated with
managing the operation and sustaining the development of an expanding business.
The Company's previous growth placed significant demands on the Company's
financial and other resources. In the past, the Company has experienced certain
inadequacies in its operating and financial systems, infrastructure and controls
and was not able to improve internal controls and upgrade personnel as needed to
accommodate the Company's growth. The Company will be required to continually
improve operating, financial, and other systems, as well as to train, motivate,
and manage its employees. If the Company's management is unable to manage growth
effectively or new employees are unable to achieve appropriate levels of
performance, it could have a material adverse effect on the Company.
CONTROL OF THE COMPANY BY CERTAIN STOCKHOLDERS; CONFLICTS OF INTEREST
Currently, the executive officers and directors of the Company collectively
beneficially own approximately 31% of the outstanding shares of Common Stock.
Accordingly, they may effectively have the ability to elect all of the directors
of the Company and determine the outcome of all other matters submitted for the
approval of the stockholders. In particular, David B. Schick and members of his
immediate family beneficially own approximately 22% of the outstanding shares of
Common Stock and, accordingly, may be able to exert significant influence over
the Company. In addition, the Company has entered into an agreement with
Greystone Funding Corporation, which is a lender to the Company whereby
Greystone may ultimately control
<PAGE>
a majority of the Common Stock and up to one half of the seats on the Company's
Board of Directors and, accordingly, may be able to exert significant influence
over the Company. An employee of Greystone's parent company (which pays such
employee's salary) is serving as President of the Company, and a designee of
Greystone is serving as COO of the Company. Two of the Company's current
directors are designees of Greystone. Accordingly, the relationship with
Greystone involves potential conflicts of interest.
NASDAQ DELISTING
The Company's Common Stock has been delisted from The Nasdaq National
Market, effective at the close of business on September 15, 1999, and currently
trades over the counter. The delisting could have a material adverse effect upon
the Company in a number of ways, including its ability to raise additional
capital. In addition, the absence of a trading system may adversely affect the
ability of broker-dealers to sell the Company's Common Stock, and consequently
may limit the public market for such Stock and have a negative effect upon its
trading price. There can be no assurance that the Company's Common Stock will be
relisted on the Nasdaq National Market at any future date or that such stock
will be listed or traded on any market or trading system.
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market historically has experienced volatility which has affected
the market price of securities of many companies and which has historically been
unrelated to the operating performance of such companies. The market prices for
securities of medical technology companies have historically been highly
volatile. Future technological innovations or new commercial products, results
of clinical testing, changes in regulation, litigation and public concerns as to
product safety as well as period-to-period fluctuations in financial performance
and fluctuations in securities markets generally could cause the market price of
the Common Stock to fluctuate substantially. These broad market fluctuations may
adversely affect the market price of the Common Stock.
POTENTIALLY SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
Several factors may significantly affect the Company's revenues, expenses
and results of operations from quarter to quarter, including the timing of new
product introductions by the Company or its competitors, developments regarding
new treatments for osteoporosis, developments in government reimbursement
policies, product mix, the ability to supply products to meet customer demand
and fluctuations in manufacturing costs. In addition, the Company's CDR(R)
products are subject to seasonal variations. Consequently, quarterly results of
operations can be expected to fluctuate. Such fluctuations in quarterly results
of operation could adversely affect the market price of the Common Stock.
AUTHORIZATION OF PREFERRED STOCK
The Company's certificate of Incorporation authorizes the issuance of a
series or designation of Preferred Stock with such rights, preferences,
privileges and restrictions as may be determined from time to time by the
Company's Board of Directors. Accordingly, the Board of Directors is empowered,
without the need for shareholder approval, to issue Preferred Stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the company's
<PAGE>
Common Stock. Other than the Series A Preferred Stock offered hereby, there are
currently no other shares of Preferred Stock designated or issued.
