<ARTICLE> 5
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 6,217,000
<SECURITIES> 14,022,000
<RECEIVABLES> 10,373,000
<ALLOWANCES> 200,000
<INVENTORY> 12,152,000
<CURRENT-ASSETS> 43,310,000
<PP&E> 7,107,000
<DEPRECIATION> 1,306,000
<TOTAL-ASSETS> 51,674,000
<CURRENT-LIABILITIES> 9,565,000
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 100,000
<OTHER-SE> 41,204,000
<TOTAL-LIABILITY-AND-EQUITY> 51,674,000
<SALES> 0
<TOTAL-REVENUES> 38,451,000
<CGS> 17,658,000
<TOTAL-COSTS> 19,215,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,000
<INCOME-PRETAX> 2,689,000
<INCOME-TAX> 328,000
<INCOME-CONTINUING> 2,361,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,361,000
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>7
<DESCRIPTION>CAUTIONARY STATEMENT
<TEXT>
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 the 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" 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.
DEPENDENCE ON CDR(TM)
To date the Company's revenues are primarily generated from sales of its
CDR(TM) system and, to a lesser extent, the CDRCam(TM), accuDEXA(TM) and the CDR
Discovery 60/70 DC(TM). 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(TM) system,
CDRCam(TM) or accuDEXA(TM). 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(TM) system and CDRCam(TM), 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. 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 obtain pre-market clearance for the digital mammography sensors or
any other future products, or that in order to obtain 510(k) clearance, the
Company will not be required to submit additional data or meet additional FDA
requirements that may substantially delay the 510(k) process and result in
substantial additional expense. Moreover, such pre-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. In addition, while the Company intends to
distribute the digital mammography sensors through a direct sales force and
other established 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 governmental
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.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF PATENT INFRINGEMENT
The Company currently has an issued United States patent for an 'Intra-Oral
Sensor For Computer Aided Radiography,' which expires on October 16, 2012, and
an allowed United States patent application for a 'Large Area Image Detector'
which will expire on November 20,
2016. The Company also has five additional patent applications currently pending
before the United States Patent and Trademark Office (the 'PTO').
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 by 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.
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 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(TM) 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
The Company is a named defendant in two lawsuits instituted by Trophy
Radiologie, S.A. ('Trophy S.A.'). 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(TM) 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 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(TM) 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.
In addition, the Company has counter-sued Trophy S.A. and Trophy Inc. for
infringement of United States Patent No. 4,160,997, a recently 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-suits are meritorious, and is vigorously pursuing them.
On September 12, 1997, 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 the
"best mode" defense. Those 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-suits. If the Company is unsuccessful in its
defense of any of these actions, it could have a material adverse effect upon
the Company.
DEPENDENCE ON KEY SUPPLIERS; VOLATILITY OF SEMICONDUCTOR MARKET
Semiconductors are the most significant product components the Company
purchases. Since its inception, the Company has purchased virtually all of its
semiconductors principally
from one supplier. The Company has entered into a 'blanket' purchase order with
such supplier to purchase a minimum number of semiconductors over the course of
one year. The availability and price of these components may be subject to
change due to interruptions in production, changing market conditions and other
events. 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.
PRODUCT WARRANTIES
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.
Costs associated with product returns, including servicing and/or repair of
products, during the warranty period, as a percentage of total revenues during
fiscal 1998, were less than 5%. Should the Company experience an increase in
product returns, there could be 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
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.
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.
DEPENDENCE ON THIRD-PARTY DISTRIBUTORS
The Company markets and distributes a significant portion of its CDR(TM)
systems overseas 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 1996, one distributor, Dental Computer/Dental
Technologies, accounted for 18.0% 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. Additionally, the Company intends to
market its current and future products in the United States and its future
products overseas through independent third-party distributors. The loss of, or
a significant reduction in sales 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 1998, 1997 and 1996, international sales accounted for 18%, 24%
and 31% 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 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 or research personnel could have
a material adverse effect on the Company. In addition, the development of the
Company's business has been primarily dependent upon the efforts of David B.
Schick, the Company's President and 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. The Company does not have employment agreements
with any of its employees, including Mr. Schick, and there can be no assurance
that he 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.
RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH
There can be no assurance that the growth experienced by the Company will
continue or that the Company will be able to achieve the growth contemplated by
its business strategy. Furthermore, there are significant risks, expenses and
difficulties associated with managing the operation and sustaining the
development of an expanding business. The Company's growth has placed, and will
continue to place, significant demands on the Company's financial and other
resources. 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
Currently, the executive officers and directors of the Company collectively
beneficially own approximately 39.3% 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 26.8% of the outstanding shares
of Common Stock and, accordingly, may be able to exert significant influence
over the Company.
PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
The Company's Common Stock is currently listed on The Nasdaq National
Market. 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. In
addition, the stock market prices of many medical technology companies have
experienced substantial fluctuations. Such price fluctuations have often been
unrelated to the operating performance of the affected companies. 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(TM)
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. 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.
NEED FOR ADDITIONAL FINANCING
The Company may require additional outside financing to 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 have to curtail its expansion activities.