UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004.
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 Number)
30-00 47th Avenue 11101
Long Island City, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (718) 937-5765
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of August 9, 2004, 15,048,167 shares of common stock, par value $.01 per
share, were outstanding.
SCHICK TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004
(unaudited) and March 31, 2004 ...................... Page 1
Consolidated Statements of Operations for the
three months ended June 30, 2004 and 2003
(unaudited) ......................................... Page 2
Consolidated Statements of Cash Flows for the
three months ended June 30, 2004 and 2003
(unaudited) ......................................... Page 3
Notes to Consolidated Financial Statements
(unaudited) ......................................... Page 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. Page 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ......................................... Page 11
Item 4. Controls and Procedures ............................. Page 11
PART II. OTHER INFORMATION ........................................... Page 12
Item 1. Legal Proceedings ................................... Page 12
Item 2. Changes in Securities and Use of Proceeds ........... Page 12
Item 3. Defaults Upon Senior Securities ..................... Page 12
Item 4. Submission of Matters to a Vote of Security
Holders ............................................. Page 13
Item 5. Other Information ................................... Page 13
Item 6. Exhibits and Reports on Form 8-K .................... Page 13
SIGNATURES ........................................................... Page 14
CERTIFICATIONS ....................................................... Page 15
PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, March 31,
---------- ---------
2004
------------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents ............................................. $ 24,518 $ 20,734
Accounts receivable, net of allowance for doubtful accounts of $138 ... 2,722 3,982
Inventories ........................................................... 3,165 3,057
Prepayments and other current assets .................................. 552 861
Deferred income taxes ................................................. 6,594 6,481
-------- --------
Total current assets ......................................... 37,551 35,115
-------- --------
Equipment, net ............................................................. 1,339 1,405
Goodwill, net .............................................................. 266 266
Deferred income taxes ...................................................... 4,393 5,679
Other assets ............................................................... 279 278
-------- --------
Total assets ................................................. $ 43,828 $ 42,743
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses ................................. $ 1,627 $ 1,456
Accrued salaries and commissions ...................................... 701 1,390
Income taxes payable .................................................. 166 142
Deposits from customers ............................................... 24 13
Warranty obligations .................................................. 270 210
Deferred revenue ...................................................... 3,843 4,504
-------- --------
Total current liabilities .................................... 6,631 7,715
-------- --------
Commitments and contingencies .............................................. -- --
Stockholders' equity
Preferred stock ($0.01 par value; 2,500,000 shares authorized; none
issued and outstanding) ........................................... -- --
Common stock ($0.01 par value; 50,000,000 shares authorized:
15,046,394 and 15,026,470 shares issued and outstanding,
respectively) ..................................................... 150 150
Additional paid-in capital ............................................ 44,996 44,626
Accumulated deficit ................................................... (7,949) (9,748)
-------- --------
Total stockholders' equity ................................... 37,197 35,028
-------- --------
Total liabilities and stockholders' equity ................... $ 43,828 $ 42,743
======== ========
----------
The accompanying footnotes are an integral part of these consolidated financial
statements
1
Schick Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (unaudited)
(In thousands, except share and per share amounts)
Three months ended
June 30,
2004 2003
----------- ------------
Revenue, net ........................................ $ 10,881 $ 8,676
Cost of sales ....................................... 3,209 2,629
----------- ------------
Gross profit ............................... 7,672 6,047
----------- ------------
Operating expenses:
Selling and marketing .......................... 1,456 1,435
General and administrative ..................... 1,985 1,580
Research and development ....................... 1,112 842
Bad debt expense ............................... -- 75
----------- ------------
Total operating costs ...................... 4,553 3,932
----------- ------------
Income from operations ..................... 3,119 2,115
----------- ------------
Other income (expense)
Other income ................................... -- 101
Interest income ................................ 93 20
Interest expense ............................... -- (169)
----------- ------------
Total other income (expense) ............... 93 (48)
----------- ------------
Income before income taxes ................. 3,212 2,067
Provision for income taxes ................. 1,413 88
----------- ------------
Net income ................................. $ 1,799 $ 1,979
=========== ============
Basic earnings per share ................... $ 0.12 $ 0.19
=========== ============
Diluted earnings per share ................. $ 0.10 $ 0.12
=========== ============
Weighted average common shares (basic) ..... 15,027,703 10,229,697
=========== ============
Weighted average common shares (diluted) ... 17,209,736 16,536,892
=========== ============
----------
The accompanying footnotes are an integral part of these consolidated financial
statements
2
Schick Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Three months ended
June 30,
2004 2003
-------- -------
Cash flows from operating activities
Net income ............................................................. $ 1,799 $ 1,979
Adjustments to reconcile net income to net cash provided by
operating activities
Deferred taxes ........................................... 1,173 (51)
Tax benefit of stock options exercised ................... 26 --
Depreciation and amortization ............................ 169 292
Gain from repayment of long-term debt .................... -- (50)
Provision for doubtful accounts .......................... -- 75
Amortization of deferred financing charges ............... -- 150
Non-cash compensation .................................... 307 87
Changes in assets and liabilities:
Accounts receivable .................................. 1,260 406
Inventories .......................................... (108) (218)
Prepayments and other current assets ................. 320 (70)
Other assets ......................................... (6) (36)
Accounts payable and accrued expenses ................ (518) (13)
Income taxes payable ................................. 24 52
Deposits from customers .............................. 11 (33)
Warranty obligations ................................. 60 67
Deferred revenue ..................................... (661) 539
-------- -------
Net cash provided by operating activities ... 3,856 3,176
-------- -------
Cash flows from investing activities
Proceeds from short-term investments .............................. -- 46
Capital expenditures .............................................. (98) (88)
-------- -------
Net cash used in investing activities ....... (98) (42)
-------- -------
Cash flows from financing activities
Net proceeds from issuance of common stock ........................ 26 105
Payment of long-term debt ......................................... -- (1,453)
-------- -------
Net cash provided by (used in) financing
activities .............................. 26 (1,348)
-------- -------
Net increase in cash and cash equivalents .............................. 3,784 1,786
Cash and cash equivalents at beginning of period ....................... 20,734 7,100
-------- -------
Cash and cash equivalents at end of period ............................. $ 24,518 $ 8,886
======== =======
Interest paid .......................................................... $ -- $ 22
======== =======
Income taxes paid ...................................................... $ 150 $ --
======== =======
---------------
The accompanying footnotes are an integral part of these consolidated financial
statements
3
Schick Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except share and per share amounts)
1. Basis of Presentation
The consolidated financial statements of Schick Technologies, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America ("US GAAP") for interim financial
information and the rules of the Securities and Exchange Commission (the "SEC")
for quarterly reports on Form 10-Q, and do not include all of the information
and footnote disclosures required by US GAAP for complete financial statements.
These statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended March 31, 2004
included in the Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results of operations for the
interim periods. The results of operations for the three months ended June 30,
2004 are not necessarily indicative of the results to be expected for the full
year ending March 31, 2005.
The consolidated financial statements of the Company, at June 30, 2004,
include the accounts of the Company and its wholly owned subsidiary. All
significant intercompany balances have been eliminated.
Stock-based compensation
At June 30, 2004, the Company has stock-based compensation plans. As
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company accounts for stock-based compensation arrangements with employees under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
Three months ended June 30,
2004 2003
--------- ---------
Net income, as reported ................................................ $ 1,799 $ 1,979
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects ............................................... 175 115
--------- ---------
Proforma net income .................................................... $ 1,624 $ 1,864
========= =========
Earnings per share:
Basic - as reported ............................................... $ 0.12 $ 0.19
========= =========
Basic - proforma .................................................. $ 0.11 $ 0.18
========= =========
Diluted - as reported ............................................. $ 0.10 $ 0.12
========= =========
Diluted - proforma ................................................ $ 0.09 $ 0.11
========= =========
Recently Issued Accounting Standards
Revenue Recognition
In November 2002, the Emerging Issues Task Force reached a consensus
opinion of EITF 00-21, "Revenue Arrangements with Multiple Deliverables". That
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration of the
4
arrangement should be allocated to the separate units of accounting based on
their relative fair values, with different provisions if the fair values of all
deliverables are not known or if the fair value is contingent on delivery of
specified items or performance conditions. Applicable revenue criteria should be
considered separately for each separate unit of accounting. EITF 00-21 was
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Entities may elect to report the change as a cumulative
effect adjustment in accordance with APB Opinion No. 20, "Accounting Changes."
The adoption of EITF 00-21 did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
2. Inventories
Inventories, net of reserves, are comprised of the following:
June 30, March 31,
2004
-----------------------
Raw materials .......................... $2,308 $2,088
Work-in-process ........................ 176 246
Finished goods ......................... 681 723
------ ------
Total inventories ...................... $3,165 $3,057
====== ======
3. Earnings Per Share
Basic earnings per share are calculated by dividing net income by the
average number of common shares outstanding during the period. Diluted earnings
per share are calculated by dividing net income by the average number of common
shares outstanding assuming dilution, the calculation of which assumes that all
stock options and warrants whose exercise prices are less than the average
market price during the quarter are exercised at the beginning of the period and
the proceeds used by Schick Technologies, Inc. to purchase shares at the average
market price for the period. The following is the reconciliation from basic to
diluted shares for the three months ended June 30, 2004 and 2003:
Three months ended June 30,
2004 2003
---------- ----------
Basic shares ........... 15,027,703 10,229,697
Dilutive:
Options ................ 1,392,634 1,357,608
Warrants ............... 789,399 4,949,587
---------- ----------
Diluted shares ......... 17,209,736 16,536,892
========== ==========
The Company excluded 133,239 and 497,260 options from the computation of
diluted earnings per share for the three months ended June 30, 2004 and 2003,
respectively, because they are anti-dilutive.
4. Contingencies, Commitments and Other
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.
5
SEC Investigation and other
In August 1999, the Company, through its outside counsel, contacted the
Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings
for interim periods of fiscal 1999. Subsequent thereto, the SEC requested the
voluntary production of certain documents and the Company provided the SEC with
the requested materials. On August 17, 2000 and April 30, 2003, the SEC served
subpoenas upon the Company, pursuant to a formal order of investigation,
requiring the production of certain documents. The Company timely provided the
SEC with the subpoenaed materials. The Company has been informed that since
January 2002 the SEC and/or the United States Attorney's Office for the Southern
District of New York have served subpoenas upon and/or contacted certain
individuals, including current and former officers and employees of the Company,
and a current Director, in connection with this matter. On June 13, 2002, the
Company was advised by counsel to David Schick, the Company's former chief
executive officer, that the United States Attorney's Office for the Southern
District of New York had notified such counsel that Mr. Schick was a target of
the United States Attorney's investigation of this matter. The Company has
cooperated with the SEC staff and U.S. Attorney's Office.
On November 14, 2003, the SEC filed a civil action in the United States
District Court for the Eastern District of New York against the Company, its
former chief executive officer, and its former vice president of sales and
marketing. The SEC complaint alleges fraud, books and records violations, and
reporting violations under Sections 10(b), 13(a) and 13(b)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and various rules
promulgated thereunder in connection with the financial statements included in
the Company's reports on Form 10-Q for the quarters ended June 30, September 30
and December 31, 1998. The SEC complaint seeks to enjoin the Company from future
violations of those provisions of the Exchange Act and the rules thereunder, as
well as disgorgement of any ill-gotten gains, which the Company does not believe
to be material in amount. With respect to the other defendants, the complaint
seeks injunctive relief, civil penalties, disgorgement and an officer/director
bar.
In September 2003, the Board of Directors appointed a Special Litigation
Committee, consisting of four non-employee Directors, which has oversight
responsibility and authority with respect to the SEC/U.S. Attorney matter. The
Company has had discussions with the SEC's northeast regional office in an
effort to resolve the complaint against the Company. There can be no assurance
that those discussions will continue and/or will be successful. The Company will
continue to incur significant legal fees and may incur indemnification costs.
However, the Company believes that the magnitude of such expenditures will not
adversely affect its ongoing business operations.
The Company cannot predict the potential outcome of these matters and
their impact on the Company and, therefore, has made no provision relating to
these matters in the accompanying consolidated financial statements.
Litigation
The Company may be a party to a variety of legal actions (in addition to
that referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims 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.
Employment Agreements and Termination of Employment Arrangements
In May 2004, the Company entered into a Consulting and Non-Competition
Agreement with David Schick, effective upon Mr. Schick's resignation in June
2004 as the Company's Chief Executive Officer and Chairman of the Board. The
Agreement provides for Mr. Schick to act as a consultant to the Company for a
period of three years.
6
It also provides that during the term of the Agreement, and for a period of two
years thereafter, Mr. Schick may not compete with the Company, solicit Company
employees, customers or vendors, or disclose any of the Company's proprietary
information. Pursuant to the Agreement, Mr. Schick is to be compensated, in full
payment for the consulting services to be rendered to the Company and for his
non-competition and other covenants contained in the Agreement, in the amount of
$28,333 per month for a period of 36 months. In addition, the Agreement provides
that 66,307 unvested employee stock options held by Mr. Schick continue to vest.
In June 2004, the Company entered into a three-year employment agreement
with Jeffrey T. Slovin. Pursuant to the Agreement, Mr. Slovin is employed as the
Company's Chief Executive Officer and President. Mr. Slovin's annual base salary
is $325,000, $337,000 and $350,000, respectively, during each year of the
initial 3-year term of the Agreement. In addition to base salary, Mr. Slovin is
eligible to receive a yearly bonus payment based on the Company's year-over-year
Earnings-Per-Share growth, as defined in the Agreement. Pursuant to the
Agreement, Mr. Slovin was also awarded 400,000 employee stock options which vest
in equal monthly increments over a period of 48 months. Additionally, under the
Agreement, all Company stock options held by Mr. Slovin will immediately vest in
the event that the Company has a change in control or is acquired by another
company or entity, or, under certain circumstances, if Mr. Slovin is terminated
from employment without cause. In addition, if Mr. Slovin is terminated without
cause, the Agreement provides that he shall receive severance payments equal to
12 months' salary and, if applicable, a pro-rated bonus.
In June 2004, the Company entered into a two-year employment agreement
with Michael Stone. Pursuant to the Agreement, Mr. Stone is employed as the
Company's Executive Vice President of Sales and Marketing. Mr. Stone's annual
base salary is $250,000 and $260,000, respectively, during each year of the
2-year term of the Agreement. In addition to base salary, Mr. Stone is eligible
to receive a yearly bonus payment based on the Company's year-over-year
Earnings-Per-Share growth, as defined in the Agreement. Pursuant to the
Agreement, Mr. Stone was also awarded 150,000 employee stock options which vest
in equal monthly increments over a period of 48 months. Additionally, under the
Agreement, all Company stock options held by Mr. Stone will immediately vest in
the event that the Company has a change in control or is acquired by another
company or entity, or, under certain circumstances, if Mr. Stone is terminated
from employment without cause. In addition, if Mr. Stone is terminated without
cause, the Agreement provides that he shall receive severance payments equal to
12 months' salary and, if applicable, a pro-rated bonus.
Other
Sales to a single customer approximated 55% and 57% of net revenue for the
three months ended June 30, 2004 and 2003, respectively. Amounts due from that
customer approximated 63% and 58% of net accounts receivable at June 30, 2004
and March 31, 2004, respectively, substantially all of which have been collected
subsequent to those dates.
5. Income Taxes
For the three months ended June 30, 2004, the Company recorded a charge
for income taxes in the amount of $1.4 million, consisting of a non cash charge
for deferred income tax expense of $1.2 million, and alternative minimum tax and
current state taxes of $0.2 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act. The words or phrases "believes", "may",
"should", "will likely result", "estimates", "projects", "anticipates",
"expects" or similar expressions and variations thereof are intended to identify
such forward-looking statements. Actual results, events and circumstances could
differ materially from those set forth in such statements due to various
factors. Such factors include risks and uncertainties relating to the SEC action
and U.S. Attorney investigation regarding the Company and certain individuals;
the Company's dependence on its products, its exclusive North American
distributor, its foreign distributors, its key personnel and key suppliers; the
possibility of changing economic and competitive conditions; technological
developments; competition; market uncertainties; fluctuation in results and
seasonality;
7
litigation; control of the Company by certain stockholders; and other risks and
uncertainties, including those detailed in the Company's filings with the
Securities and Exchange Commission.
General
The Company designs, develops and manufactures digital imaging systems for
the worldwide dental and medical markets. In the field of dentistry, the Company
currently manufactures and markets a variety of digital imaging products
including intra-oral digital radiography systems (CDR(R) and CDR
Wireless(TM)), a digital panoramic radiography sensor (CDRPan(R)) an integrated
digital panoramic radiography device (CDRPanX(TM)) and an intra-oral camera
system (USBCam(TM)). The Company has also developed a bone mineral density
assessment device (accuDEXA(R)) to assist in the diagnosis and treatment of
osteoporosis, which was introduced in December 1997.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to make
estimates and assumptions that affect amounts reported in the accompanying
consolidated financial statements and related footnotes. These estimates and
assumptions are evaluated on an ongoing basis based on historical developments,
market conditions, industry trends and other information the Company believes to
be reasonable under the circumstances. There can be no assurance that actual
results will conform to the Company's estimates and assumptions, and that
reported results of operations will not be materially adversely affected by the
need to make accounting adjustments to reflect changes in these estimates and
assumptions from time to time. The following policies are those that the Company
believes to be the most sensitive to estimates and judgments.
Accounts Receivable
The Company reports accounts receivable net of reserves for uncollectible
accounts. The Company primarily sells on open credit terms to its exclusive
domestic distributor, Patterson Dental Company ("Patterson") and to the U.S.
Government, and upon signed purchase orders to hospitals and universities. The
majority of the Company's accounts receivable (63% and 58%, at June 30, 2004 and
March 31, 2004, respectively) are due from Patterson. The Company's
international sales are generally prepaid, guaranteed by irrevocable letter of
credit or underwritten by credit insurance. In a limited number of cases,
international dealers are granted open credit terms. Warranty shipments are
prepaid. Revenue from customers is subject to agreements allowing limited rights
of return. Accordingly, the Company reduces revenue recognized for estimated
future returns. The estimate of future returns is adjusted periodically based
upon historical rates of return. The Company provides an allowance for doubtful
accounts based upon its analysis of aged accounts receivable.
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. The Company establishes reserves for inventory estimated to be obsolete,
unmarketable or slow moving inventory equal to the difference between the cost
of inventory and estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those anticipated or if changes in technology affect the Company's
products, additional inventory reserves may be required.
Revenue Recognition
The Company recognizes revenue when each of the following four criteria is
met: 1) a contract or sales arrangement exists; 2) products have been shipped
and title has been transferred or services have been rendered; 3) the price of
the products or services is fixed or determinable; and 4) collectibility is
reasonably assured. 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 exclusive
8
domestic distributor with a 30-day return policy but allows for an additional 15
days, and accordingly recognizes allowances for estimated returns pursuant to
such policy at the time of shipment. Revenue from shipments to foreign customers
is recognized at the time of shipment in accordance with foreign sales orders.
With respect to products shipped to its exclusive domestic distributor, the
Company defers revenue until Patterson ships such inventory from its
distribution centers. Amounts received from customers in advance of product
shipment are classified as deposits from customers. The Company records as
revenue shipping and handling charges invoiced to customers. The cost of
shipping and handling is recorded in cost of sales. 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 a one-year
period. Deferred revenues relate to extended warranty fees paid by customers
prior to the performance of extended warranty services, to certain shipments to
Patterson and to the 90-day exchange program for CDR(R) wireless.
Warranties
The Company records a liability for an estimate of costs that it expects
to incur under its basic limited warranty when product revenue is recognized.
Factors affecting the Company's warranty liability include the number of units
sold and historical and anticipated rates of claims and costs per claim. The
company periodically assesses the adequacy of its warranty liability based on
changes in these factors.
The following table reconciles warranty liability for the three months
ended June 30, 2004 and 2003:
2004 2003
----- -----
Beginning balance .............. $ 210 $ 56
Warranties charged in period ... 622 603
Warranties paid in period ...... (562) (561)
----- -----
Balance end of period .......... $ 270 $ 98
===== =====
The Company records revenues on extended warranties on a straight-line
basis over the term of the related warranty contracts (generally one year).
Deferred revenues related to extended warranty were $2.3 and $2.4 million at
June 30, 2004 and March 31, 2004, respectively. Services costs are expensed as
incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or the entire
deferred tax asset will not be realized.
Goodwill and Other Intangible Assets
Effective April 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets",
which established financial accounting and reporting for acquired goodwill and
other intangible assets and superseded Accounting Principles Board Opinion
("APB") No. 17, "Intangible Assets". Under SFAS No. 142 goodwill and
indefinite-lived purchased intangible assets are no longer amortized but are
reviewed at least annually for impairment. The Company has elected to perform
this review annually as of February 28.
Identifiable intangible assets that have finite lives continue to be
amortized over their estimated useful lives. Other intangible assets include
costs incurred to secure patents and deferred financing costs, and are included
in other assets. Finite-lived purchased intangible assets are amortized
principally by the straight-line method over their expected period of benefit.
Costs incurred to secure patents are amortized by the straight-line method over
periods of five years.
9
Long-lived assets and intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations and commercial
commitments at June 30, 2004:
==================================================================================================
PAYMENTS DUE BY PERIOD
--------------------------------------------------------
CONTRACTUAL Less Than 1-3 4-5 After 5
OBLIGATIONS Total 1 year years years years
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Operating leases $1,533 $ 491 $1,042 -- --
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Consulting and non-compete agreement 1,007 340 667
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Employment agreements 1,498 576 922 -- --
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Purchase obligations 1,868 1,773 95 -- --
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Total Contractual
Cash Obligations $5,906 $3,180 $2,726 $ -- $ --
==================================================================================================
Results of Operations
Net revenues for the three months ended June 30, 2004 increased $2.2
million (25%) to $10.9 million from $8.7 million in fiscal 2004. The increase
was due to increased sales of the CDR(R) radiography and intraoral camera
products. CDR(R) product sales increased $2.1 million (29%) to $9.4 million (87%
of the Company's net revenues) from $7.3 million (84% of the Company's net
revenues) in fiscal 2004. The Company believes that the increase in sales is a
result of growing acceptance of its products by dental customers and sales of
the Company's new panoramic product. CDR(R) warranty revenue for the three
months ended June 30, 2004 was unchanged at $1.2 million. Domestic product
revenue for the three months ended June 30, 2004 increased $0.9 million (17%) to
$6.4 million from $5.5 million in fiscal 2004. International revenue for the
three months ended June 30, 2004 increased $1.2 million (62%) to $3.2 million
from $2.0 million in fiscal 2004.
Cost of sales for the three months ended June 30, 2004 increased $0.6
million (22%) to $3.2 million (29.5% of net revenue) from $2.6 million (30.3% of
net revenue) in fiscal 2004. The decrease in the relative total cost of sales
(0.8%) was due to improved manufacturing efficiency.
Selling and marketing expenses for the three months ended June 30, 2004
increased $21 (2%) to $1.5 million (13% or net revenue) from $1.4 million (17%
of net revenue) in fiscal 2004. Increases were primarily related to trade show
and travel expenses.
General and administrative expenses for the three months ended June 30,
2004, increased $0.4 million (26%) to $2.0 million (18% of net revenue) from
$1.6 million (18% of net revenue) in fiscal 2004. The increase in general and
administrative expenses was primarily attributable to a non-cash charge to
payroll and increases in insurance costs, and legal and consulting fees.
Research and development expenses for the three months ended June 30, 2004
increased $0.3 million (32%) to $1.1 million (10% of net revenue) from $0.8
million (10% of net revenue) in fiscal 2004. The increase was attributable to
increases in payroll, consulting costs and research and development materials.
Income from operations for the three months ended June 30, 2004 increased
$1.0 million (48%) to $3.1 million from $2.1 million in the same period of
fiscal 2004.
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Income before income taxes for the three months ended June 30, 2004
increased $1.1 million (55%) to $3.2 million from $2.1 million in the same
period of fiscal 2004.
Interest expense for the three months ended June 30, 2004 decreased $0.2
million. In June 2003 the Company repaid the balance of notes payable and wrote
off the balance of deferred finance costs related to that note ($150).
For the three months ended June 30, 2004, the Company is not required to
pay income taxes (other than alternative minimum tax and certain state and local
taxes) due to the partial utilization of its net operating loss ("NOL")
carryforwards. For the first quarter of fiscal 2005, the Company utilized
approximately $2.5 million of these NOL carryforwards to offset current taxable
income. The Company recorded a charge for income tax for the quarter in the
amount of $1.4 million, consisting of a non-cash charge for deferred income tax
expense of $1.2 million, and alternative minimum tax and current state income
taxes of $0.2 million. Because the Company's deferred tax valuation allowance
was eliminated during fiscal 2004, the income tax benefit associated with the
NOL had been fully recorded as of March 31, 2004. In subsequent quarters, if the
Company continues to generate earnings, it will continue to utilize its
available NOL and record a charge for deferred income tax expense. As of June
30, 2004, the Company had NOL carryforwards of $14.8 million available to offset
future taxable income during the carryforward period (which expires between 2019
and 2021).
As a result of the above items, the Company's net income decreased $0.2
million (9%) to $1.8 million (17% of revenue) for the three months ended June
30, 2004 from $2.0 million (23% of revenue) in fiscal 2004.
Liquidity and Capital Resources
At June 30, 2004, the Company had $24.5 million in cash and cash
equivalents and working capital of $30.9 million, as compared to $20.7 million
in cash and cash equivalents and working capital of $27.4 million at March 31,
2004.
During the three months ended June 30, 2004 cash provided by operations
was $3.9 million as compared to $3.2 million during the same period in fiscal
2004. Increases in cash were primarily provided by improved operating
performance. Sales to a single customer approximated 55% and 57% of net revenue
for the three months ended June 30, 2004 and 2003, respectively. Amounts due
from that customer approximated 63% and 58% of net accounts receivable at June
30, 2004 and March 31, 2004, respectively, substantially all of which have been
collected subsequent to those dates. The decrease in net accounts receivable is
the result of cash collections during the three months ended June 30, 2004.
Capital expenditures remained unchanged at $0.1 million in the first quarter of
fiscal 2005 and 2004. The Company repaid its term notes in full during June
2003.
Future expenses relating to the legal proceedings described in Part II,
Item 1, "Legal Proceedings," to the extent not covered by insurance, could
affect the Company's cash position. Management believes that its existing
capital resources and potential sources of credit are adequate to meet its
current cash requirements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
Item 4. Controls and Procedures
a) Under the supervision and with the participation of the Company's
management, including its principal executive officer and principal
financial officer, the Company has evaluated the effectiveness of
the Company's disclosure controls and procedures as of June 30,
2004.
They have concluded that these disclosure controls provide
reasonable assurance that the Company can collect, process and
disclose, within the time periods specified in the SEC's rules and
forms, the information required to be disclosed in its periodic
Exchange Act reports.
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b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect its
internal controls subsequent to the date of their most recent
evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or certain of its former officers are involved in the
matters described below:
In August 1999, the Company, through its outside counsel, contacted the
Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings
for interim periods of fiscal 1999. Subsequent thereto, the SEC requested the
voluntary production of certain documents and the Company provided the SEC with
the requested materials. On August 17, 2000 and April 30, 2003, the SEC served
subpoenas upon the Company, pursuant to a formal order of investigation,
requiring the production of certain documents. The Company timely provided the
SEC with the subpoenaed materials. The Company has been informed that since
January 2002 the SEC and/or the United States Attorney's Office for the Southern
District of New York have served subpoenas upon and/or contacted certain
individuals, including current and former officers and employees of the Company,
and a current Director, in connection with this matter. On June 13, 2002, the
Company was advised by counsel to David Schick, the Company's former chief
executive officer, that the United States Attorney's Office for the Southern
District of New York had notified such counsel that Mr. Schick was a target of
the United States Attorney's investigation of this matter. The Company has
cooperated with the SEC staff and U.S. Attorney's Office.
On November 14, 2003, the SEC filed a civil action in the United States
District Court for the Eastern District of New York against the Company, its
former chief executive officer, and its former vice president of sales &
marketing. The SEC complaint alleges fraud, and books and records and reporting
violations under Sections 10(b), 13(a) and 13(b)(2) of the Exchange Act and
various rules promulgated thereunder in connection with the financial statements
included in the Company's reports on Form 10-Q for the quarters ended June 30,
September 30 and December 31, 1998. The SEC complaint seeks to enjoin the
Company from future violations of those provisions of the Exchange Act and the
rules thereunder, as well as disgorgement of any ill-gotten gains, which the
Company does not believe to be material in amount. With respect to the other
defendants, the complaint seeks injunctive relief, civil penalties, disgorgement
and an officer/director bar.
In September 2003, the Board of Directors appointed a Special Litigation
Committee, consisting of four non-employee Directors, which has oversight
responsibility and authority with respect to the SEC/U.S. Attorney matter. The
Company promptly commenced discussions with the SEC's northeast regional office
in an effort to resolve the complaint against the Company. There can be no
assurance that those discussions will continue and/or will be successful. The
Company will continue to incur significant legal fees and may incur
indemnification costs. However, the Company believes that the magnitude of such
expenditures will not adversely affect its ongoing business operations.
The Company cannot predict the potential outcome of these matters and
their impact on the Company and, therefore, has made no provision relating to
these matters in the accompanying consolidated financial statements.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
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Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Principal Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C.ss. 1350.
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C.ss. 1350.
(b) Reports on Form 8-K
1. A Form 8-K was filed on June 9, 2004 and reported on the Company's
press release, which announced that Jeffrey T. Slovin was named to the position
of President and Chief Executive Officer of the Company, that David B. Schick
had resigned as the Company's CEO and from its Board of Directors, and that
William K. Hood was elected Chairman of the Board of Directors, in Item 5,
"Other Events," of said Form 8-K.
2. A Form 8-K was filed on June 9, 2004 and reported on the Company's
press release, which announced its fiscal 2004 year-end conference call to
report the Company's fiscal fourth quarter and year-end financial results, in
Item 5, "Other Events," of said Form 8-K.
3. A Form 8-K was filed on June 15, 2004 and reported on the Company's
press release, which announced its financial results for the fourth quarter and
fiscal year ended March 31, 2004, in Item 12, "Results of Operations and
Financial Condition," of said Form 8-K.
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SCHICK TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirements 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.
SCHICK TECHNOLOGIES, INC.
Date: August 13, 2004 By: /S/ Jeffrey T. Slovin
------------------------------------
Jeffrey T. Slovin
Chief Executive Officer
By: /S/ Ronald Rosner
------------------------------------
Ronald Rosner
Director of Finance and
Administration (Principal Financial
Officer)
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