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 September 30, 2002.
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 Identification
incorporation or organization) 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 |_|
As of October 31, 2002, 10,152,211 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 September 30, 2002
(unaudited) and March 31, 2002 ............................Page 1
Consolidated Statements of Operations for the three and
six months ended September 30, 2002 and 2001 (unaudited)...Page 2
Consolidated Statements of Cash Flows for the six months
ended September 30, 2002 and 2001 (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 12
Item 4. Controls and Procedures....................................Page 12
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings .........................................Page 12
Item 2. Changes in Securities and Use of Proceeds .................Page 13
Item 3. Defaults Upon Senior Securities............................Page 13
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 13
CEFTIFICATIONS...........................................................Page 14
PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc. and Subsidiary
Consolidated Balance Sheet
(In thousands, except share amounts)
September 30, March 31,
2002 2002
------- -------
(unaudited)
Assets
Current assets
Cash and cash equivalents $3,312 $1,622
Short term investments 460 472
Accounts receivable, net of allowance for doubtful
accounts of $691 and $1,742, respectively 2,352 2,812
Inventories 2,799 2,805
Income taxes receivable 13 13
Prepayments and other current assets 908 427
-------- --------
Total current assets 9,844 8,151
-------- --------
Equipment, net 2,491 2,939
Goodwill, net 266 266
Other assets 435 601
-------- --------
Total assets $13,036 $11,957
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long term debt $1,535 $1,815
Accounts payable and accrued expenses 842 957
Accrued salaries and commissions 679 565
Income taxes payable 30 --
Deposits from customers 74 30
Warranty obligations 68 72
Deferred revenue 3,478 3,579
-------- --------
Total current liabilities 6,706 7,018
-------- --------
Long term debt 1,073 2,039
-------- --------
Total liabilities 7,779 9,057
-------- --------
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 share authorized;
10,151,579 and 10,138,360 issued and outstanding 102 101
Additional paid-in capital 42,493 42,481
(Accumulated deficit) (37,338) (39,682)
-------- --------
Total stockholders' equity 5,257 2,900
-------- --------
Total liabilities and stockholders' equity $13,036 $11,957
======== ========
- ----------
The accompanying notes are integral part of these consolidated financial
statements.
1
Schick Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (unaudited)
(In thousands, except share amounts)
Three months ended Six months ended
September 30
2002 2001 2002 2001
------- ------- ------- -------
Revenue, net $6,750 $4,819 $13,654 $10,660
------------ ------------ ------------ ------------
Cost of sales 2,474 1,752 4,657 3,950
Excess and obsolete inventory -- -- 109 100
------------ ------------ ------------ ------------
Total cost of sales 2,474 1,752 4,766 4,050
------------ ------------ ------------ ------------
Gross profit 4,276 3,067 8,888 6,610
------------ ------------ ------------ ------------
Operating expenses
Selling and marketing 1,334 1,312 2,775 2,614
General and administrative 1,268 925 2,370 1,905
Research and development 580 532 1,246 1,062
Bad debt recovery -- -- -- (43)
------------ ------------ ------------ ------------
Total operating costs 3,182 2,769 6,391 5,538
------------ ------------ ------------ ------------
Income from operations 1,094 298 2,497 1,072
Other income (expense)
Gain from sale of investment -- 7 -- 7
Interest income 20 17 43 80
Interest expense (76) (572) (166) (782)
------------ ------------ ------------ ------------
Total other income (expense) (56) (548) (123) (695)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,038 (250) 2,374 377
Provision for income taxes 30 -- 30 --
------------ ------------ ------------ ------------
Net income (loss) $1,008 $(250) $2,344 $377
============ ============ ============ ============
Basic income (loss) per share $0.10 $(0.02) $0.23 $0.04
============ ============ ============ ============
Diluted income (loss) per share $0.07 $(0.02) $0.16 $0.03
============ ============ ============ ============
Weighted average common shares
outstanding (basic) 10,147,537 10,137,193 10,141,369 10,137,193
============ ============ ============ ============
Weighted average common shares
outstanding (diluted) 14,465,750 10,137,193 14,843,480 11,325,904
============ ============ ============ ============
- ----------
The accompanying notes are integral part of these consolidated financial
statements.
2
Schick Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Six months ended
September 30,
2002 2001
------- -------
Cash flows from operating activities
Net income $2,344 $377
Adjustments to reconcile net income to net cash
Net cash provided by operating activities
Depreciation and amortization 623 790
Bad debt recovery -- (43)
Provision for excess and obsolete inventory 109 100
Amortization of deferred financing charge 60 121
Interest accretion -- 365
Gain on sale of held to maturity investment -- 7
Other 125
Changes in assets and liabilities:
Accounts receivable 460 (116)
Inventories (103) 85
Income taxes receivable -- 8
Prepayments and other current assets (481) (46)
Other assets (19) --
Accounts payable and accrued expenses (1) 730
Income taxes payable 30 (14)
Deposits from customers 44 (358)
Warranty obligations (4) (85)
Deferred revenue (101) 118
------- -------
Net cash provided by operating activities 3,086 2,039
------- -------
Cash flows from investing activities
Proceeds from maturities of held-to-maturity investments 12 11
Capital expenditures (175) (644)
------- -------
Net cash used in investing activities (163) (633)
------- -------
Cash flows from financing activities
Proceeds from issuance of common stock 13 --
Payment of long term debt (1,246) (2,364)
------- -------
Net cash used in financing activities (1,233) (2,364)
------- -------
Net increase (decrease) in cash and cash equivalents 1,690 (958)
Cash and cash equivalents at beginning of period 1,622 2,167
------- -------
Cash and cash equivalents at end of period $3,312 $1,209
======= =======
- ----------
The accompanying notes are 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, 2002
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 and six months ended
September 30, 2002, are not necessarily indicative of the results to be expected
for the full year ending March 31, 2003.
The consolidated financial statements of the Company, at September 30,
2002, include the accounts of the Company and its wholly owned subsidiary. All
significant intercompany balances have been eliminated.
2. Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," on April 30, 2002. Statement No. 145
rescinds Statement No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Upon adoption of Statement
No. 145, companies will be required to apply the criteria in APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" in determining the classification of gains and losses
resulting from the extinguishments of debt. Statement No. 145 is effective for
fiscal years beginning after May 15, 2002. The Company believes this
pronouncement has no material effect on its financial statements.
On July 30, 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company believes this pronouncement has
no material effect on its financial statements.
3. Inventories
Inventories are comprised of the following:
September 30, 2002 March 31, 2002
------------------ --------------
Raw materials $2,026 $2,141
Work-in-process 97 16
Finished goods 676 648
------ ------
Total inventories $2,799 $2,805
====== ======
4. Accounting for Business Combinations, Intangible Assets and Goodwill
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets". The new standards require
4
that all business combinations initiated after June 30, 2001 must be accounted
for under the purchase method. In addition, all intangible assets acquired that
are obtained through contractual or legal right, or are capable of being
separately sold, transferred, licensed, rented or exchanged shall be recognized
as an asset apart from goodwill. Goodwill and intangibles with indefinite lives
are no longer subject to amortization, but will be subject to at least an annual
assessment for impairment by applying a fair value based test.
The Company performed a transitional fair value based impairment test
during the three months ended September 30, 2002. The Company determined that
the fair value of goodwill is greater than the recorded value at April 1, 2002.
Accordingly, the Company did not record an impairment loss in the six months
ended September 30, 2002.
The adjustment of previously reported net (loss) income and earnings per
share represents the recorded amortization of goodwill. The impact on net (loss)
income and basic and diluted earnings per share for the three and six months
ended September 30, 2001 is set forth below:
Three months Six months
Ended September 30, 2001
------------------------
Reported net (loss) income $(250) $377
Add back of goodwill amortization 27 54
------- -------
Adjusted net (loss) income $(223) $431
======= =======
Basic and diluted earnings per share:
Before effect of change in accounting principle
Basic net (loss) income $(0.02) $0.04
======= =======
Diluted net (loss) income $(0.02) $0.03
======= =======
After effect of change in accounting principle
Basic net (loss) income $(0.02) $0.04
======= =======
Diluted net (loss) income $(0.02) $0.04
======= =======
5. Debt
Long-term debt is summarized as follows:
September 30, 2002 March 31, 2002
------------------ --------------
Term notes $2,608 $3,854
Less current maturities 1,535 1,815
------ ------
$1,073 $2,039
====== ======
Term Loan A
The principal balance of term loan A (amounting to $2,419) is payable in
49 monthly payments which commenced April 15, 2001, with interest payable
monthly at the prime rate plus 2.5% commencing April 15, 2000.
Term Loan B
The principal balance of term loan B (amounting to $189) is payable in 27
monthly payments which commenced January 15, 2001 with interest payable monthly
at the prime rate plus 2.5% commencing April 15, 2000.
The Company is also required to make additional principal payments equal
to fifty percent of the "positive actual cash flow", as defined. In May 2002 and
July 2002 the Company made prepayments aggregating $436 in satisfaction of this
provision through June 30, 2002. The term loans have been classified based upon
the terms of the amended note. The tangible and intangible assets of the
Company, as defined, collateralize the term loans.
In connection with the renewed note, the Company granted the lender, DVI
Financial Services, Inc. ("DVI"), 650,000 warrants at an exercise price of $2.19
expiring on November 15, 2004. The fair value of the warrants amounted to $596,
and is accounted for as deferred financing costs. The costs are included in
"Other Assets" in the accompanying balance sheet and are being amortized on a
straight-line basis over the life of the renewed note (17
5
months). In connection with the amended note, the warrants' exercise price was
reduced to $0.75, the expiration date extended to December 2006 and
anti-dilution protection, providing for exercise of the warrant to result in 5%
ownership, was added. Additional deferred financing costs of $130 were incurred
and are being amortized over the five-year life of the amended note. Interest
expense of approximately $24 and $48 relating to this warrants issuance was
recognized for the three and six months ending September 30, 2002 and September
30, 2001, respectively.
Effective August 28, 2000, DVI sold all its rights, title and interest in,
to and under the warrants, notes payable and security agreement as described
above, to the Company's other secured creditor (Greystone). By letter dated
October 11, 2000, DVI directed the Company to make all remaining payments due
for the notes payable directly to Greystone.
Principal maturities of long-term debt are as follows:
Year ending September 30
------------------------
2003 $1,535
2004 1,073
------
$2,608
======
Effective as of December 17, 1999 (as amended on March 17, 2000), the
Company entered into a Loan Agreement (the "Amended Loan Agreement") with
Greystone to provide up to $7.5 million of subordinated debt in the form of a
secured credit facility. No funds were advanced under the Amended Loan Agreement
in excess of an initial draw of $1 million. On July 5, 2001, the Company
remitted payment to Greystone in the amount of $1.05 million, repaying all
outstanding advances under the Greystone Amended Loan Agreement, together with
all unpaid accrued interest thereunder, and concurrently terminated the Amended
Loan Agreement. Approximately $423 representing the unamortized discount and
deferred financing costs relating to the Amended Loan Agreement was charged to
expense in July 2001.
6. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
average number of common shares outstanding during the year. Diluted earnings
per share is 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 which are in the money 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 and six months ended
September 2002 and 2001:
Three months ended September 30 Six months ended September 30
------------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic shares 10,147,537 10,137,193 10,141,369 10,137,193
Dilutive:
Options 715,314 -- 797,734 563,613
Warrants 3,602,899 -- 3,904,377 625,098
---------- ---------- ---------- ----------
Diluted shares 14,465,750 10,137,193 14,843,480 11,325,904
========== ========== ========== ==========
The Company excluded 512,206 options and 6,733,580 options and warrants
from the computation of diluted earnings per share for the three months ended
September 30, 2002 and 2001, respectively, because they are anti-dilutive.
The Company excluded 504,706 options and 3,831,359 options and warrants
from the computation of diluted earnings per share for the six months ended
September 30, 2002 and 2001, respectively, because they are anti-dilutive.
7. Contingencies
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
6
the Company has not experienced any product liability claims to date, any such
claims could have an adverse impact on the Company. The Company maintains
insurance coverage related to product liability claims, but there can be no
assurance that product or other claims will not exceed its insurance coverage
limits, or that such insurance will continue to be available on commercially
acceptable terms, or at all.
SEC Investigation and Other
In August 1999, the Company, through its outside counsel, contacted the
Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings
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, the SEC served a subpoena upon the
Company, pursuant to a formal order of investigation, requiring the production
of certain documents. The Company provided the SEC with the subpoenaed
materials. In addition, investigators associated with the U.S. Attorney's Office
for the Southern District of New York have made inquiries of certain former and
current employees, apparently in connection with the same event.
The Company has been informed that since January 2002 the SEC and 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 Chief Executive Officer, that the United
States Attorney's Office for the Southern District of New York had recently
notified such counsel that Mr. Schick was a target of the United States
Attorney's investigation of this matter. The Company has cooperated fully with
the SEC staff and U.S. Attorney's Office, and intends to continue such
cooperation. The Company cannot predict the potential outcome of the inquiry.
Litigation
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 and/or attorneys'
fees incurred. 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.
8. Income Taxes
The Company recorded the Alternative Minimum Tax income tax provision for
the three and six months ended September 30, 2002. The income tax benefit of the
net operating loss utilized for the three months ended September 30, 2002
approximates $0.5 million. The income tax benefit utilized for the six months
ended September 30, 2002 and 2001 approximates $1.1 million and $0.2 million,
respectively.
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 Securities Exchange Act of 1934, as amended. 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 relating
to the Company's past history of substantial operating losses, dependence on
financing, dependence on products, competition, the changing economic and
competitive conditions in the medical and dental digital radiography markets,
dependence on key personnel, dependence on distributors, fluctuation in results
and
7
seasonality, governmental approvals and investigations, technological
developments, protection of technology utilized by the Company, patent
infringement claims and other litigation, potential need for additional
financing and other risks and uncertainties, including those detailed in the
Company's other filings with the Securities and Exchange Commission.
General
The Company designs, develops and manufactures digital imaging systems for
the dental and medical markets. In the field of dentistry, the Company
manufactures and markets its proprietary 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 has also commenced development of a digital
radiography device for intended use in various applications.
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.
Revenue recognition
The Company recognizes revenue when each of the following four criteria
are 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. The Company records sales revenue upon
shipment to international dealers and to end-users in the U.S. In the case of
sales made by the Company's exclusive domestic distributor, Patterson
("Patterson Dental Company"), revenue is recognized upon shipment from
Patterson's warehouses. Revenue arising from inventory in Patterson's possession
is recorded in deferred revenue. The Company records warranty renewal revenue
over the warranty renewal period (generally one-year). The unamortized portion
of warranty revenue is recorded in deferred revenue.
Accounts receivable
The Company primarily sells on open credit terms to Patterson and to the
U.S. Government, hospitals and universities based upon signed purchase orders.
The Company's international sales are generally prepaid, guaranteed by
irrevocable letter of credit or underwritten by credit insurance. There are a
limited number of cases in which the Company has granted international dealers
open credit terms. Warranty shipments are prepaid. The Company's estimate of
doubtful accounts relates primarily to shipments made before fiscal 2000, when
its credit policies were less restrictive. 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.
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories 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 ("FIFO") 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.
8
Goodwill and other long-lived assets
Effective April 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and other Intangible
Assets." This statement requires that the amortization of goodwill be
discontinued and that an annual impairment approach be applied instead. The
impairment tests will be performed upon adoption and annually thereafter (or
more often if adverse events occur) and will be based upon a fair value approach
rather than an evaluation of the undiscounted cash flows. If impaired, the
resulting charge reflects the excess of the asset's carrying value to the extent
it exceeds the recalculated goodwill.
Other long-lived assets such as patent and property and equipment are
amortized or depreciated over their estimated useful lives. These assets are
reviewed for impairment whenever events or circumstances provide evidence that
suggest that the carrying amount of the asset may not be recoverable with
impairment being based upon an evaluation of the identifiable undiscounted cash
flows. If impaired, the resulting charge reflects the excess of the asset's
carrying cost over its fair value.
If market conditions become less favorable, future cash flows, the key
variable in assessing the impairment of these assets, may decrease and as a
result the Company may be required to recognize impairment charges.
Income taxes
Income taxes are determined in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income liabilities and assets are
determined based on the difference between financial statements and tax bases of
liabilities and assets using enacted tax rates in effect for the year in which
the differences are expected to reverse. SFAS 109 also provides for the
recognition of deferred tax assets if it is more likely than not that the assets
will be realized in future years. A valuation allowance has been established for
deferred tax assets. At September 30, 2002 the deferred tax asset ($17.3
million) has been fully reserved. In assessing the valuation allowance, the
Company has considered future taxable income and ongoing tax planning
strategies. Changes in these circumstances, such as a decline in future taxable
income, may result in the continuation of a full valuation allowance being
required.
Warranty obligations
Products sold are generally covered by a warranty against defects in
materials and workmanship for a period of one year. The Company accrues a
warranty reserve for estimated costs to provide warranty services. The Company
estimates costs to service warranty obligations based on historical experience
and expectation of future conditions. To the extent the Company experiences
increased warranty claim activity or increased costs associated with servicing
those claims, warranty accrual will increase, resulting in decreased gross
profit.
Litigation and contingencies
The Company and its subsidiary are from time to time parties to lawsuits
and regulatory administrative proceedings arising out of their respective
operations. The Company records liabilities when a loss is probable and can be
reasonably estimated. These estimates are based on an analysis made by internal
and external legal counsel who consider information known at the time. The
Company believes it has estimated well in the past; however court decisions
could cause liabilities to be incurred in excess of estimates.
Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations and commercial
commitments at September 30, 2002:
========================================================================
PAYMENTS DUE BY PERIOD
-------------------------------------------------
Less
CONTRACTUAL Than 1 1-3 4-5 After 5
OBLIGATIONS Total year years years years
------------------------------------------------------------------------
Long-Term Debt $2,608 $1,535 $1,073 $ -- $ --
------------------------------------------------------------------------
Operating leases 2,347 459 973 915 --
------------------------------------------------------------------------
Employment agreements 1,488 778 710 -- --
------------------------------------------------------------------------
Total Contractual
Cash Obligations $6,443 $2,772 $2,756 $915 $ --
====== ====== ====== ==== ====
========================================================================
9
Results of Operations
Net revenues for the three months ended September 30, 2002 increased $2.0
million (40%) to $6.8 million from $4.8 million for the same period in fiscal
2002. The increase is due to increased sales of the CDR (R) radiography and
intraoral camera products. CDR product sales increased $2.0 million (59%) to
$5.3 million (79% of the Company's net revenues) as compared to $3.3 million
(70% of the Company's net revenues) for the comparable period in fiscal 2002.
The Company believes that sales increases are a result of increasing acceptance
of its products by dental customers. CDR (R) warranty revenue for the three
months ended September 30, 2002 decreased $0.1 million (7%) to $1.2 million from
$1.3 million in fiscal 2002. Total domestic revenue for the three months ended
September 30, 2002 increased $1.4 million (35%) to $5.3 from $3.9 for the same
period in fiscal 2002. Total international revenue for the three months ended
September 30, 2002 increased $0.6 million (67%) to $1.5 million from $0.9
million for the same period in fiscal 2002.
Net revenues for the six months ended September 30, 2002 increased $3.0
million (28%) to $13.7 million from $10.7 million for the same period in fiscal
2002 for the reasons described above.
Total cost of sales for the three months ended September 30, 2002
increased $0.7 million (41%) to $2.5 million (36.7% of net revenue) from $1.8
million (36.4% of net revenue) in fiscal 2002. The increase in the relative
total cost of sales (0.3%) is due to higher direct and indirect labor costs,
product mix, and material costs.
Total cost of sales for the six months ended September 30, 2002 increased
$0.7 million (18%) to $4.8 million (34.9% of net revenue) from $4.1 million
(38.0% of net revenue) in fiscal 2002. The decrease in the relative total cost
of sales (3.1%) is primarily attributable to the reduction in warranty costs as
product reliability continued to improve.
Selling and marketing expenses for the three months ended September 30,
2002 were unchanged at $1.3 million (20% and 27% of net revenue in fiscal 2003
and 2002, respectively). Selling and marketing expenses for the six months ended
September 30, 2002 increased $0.2 million (6%) to $2.8 million (20% of net
revenue) from $2.6 million (25% of net revenue) in fiscal 2002. The increase is
principally attributable to increases in payroll, travel and advertising
expense.
General and administrative expenses for the three months ended September
30, 2002, increased $0.4 million (37%) to $1.3 million (19% of net revenue) from
$0.9 million (19% of net revenue) for the comparable period of fiscal 2002. The
increase in general and administrative expenses was primarily attributable to
increases in payroll, insurance, other facility costs and professional services.
General and administrative expense for the six months ended September 30, 2002
increased $0.5 million (24%) to $2.4 million (17% of net revenue) from $1.9
million (18% of net revenue) in fiscal 2002 for the reasons described above.
Research and development expenses for the three months ended September 30,
2002 increased $0.1 million (9%) to $0.6 million (9% of net revenue) from $0.5
million (11% of net revenue) in fiscal 2002. The increase is attributable to
increases in payroll and research and development materials expenses. Research
and development expenses for the six months ended September 30, 2002 increased
$0.1 million (17%) to $1.2 million (9% of net revenue) from $1.1 million (10% of
net revenue) in fiscal 2002 for the reasons described above.
Interest expense for the three months ended September 30, 2002 decreased
$0.5 million (87%) to $0.1 million from $0.6 million in fiscal 2002. The
decrease is attributable to the July 2001 (fiscal 2002) repayment of the $1
million secured credit facility which had been provided by Greystone Funding
Corporation ("Greystone") resulting in the write off of unamortized discounts
and deferred finance charges of $0.4 million. Additionally interest expense
decreased due to the decline in the prime interest rate and the principal
reductions of other long-term debt. Interest expense for the six months ended
September 30, 2002 decreased $0.6 million (79%) to $0.2 from $0.8 million in
fiscal 2002 for the reasons described above.
10
As a result of the above items, the Company's net income increased $1.3
million to $1.0 million for the three months ended September 30, 2002 from a net
loss of $0.3 million for the same period in fiscal 2002. As a result of the
above items, the Company's net income increased $1.9 million to $2.3 million for
the six months ended September 30, 2002 from $0.4 million in fiscal 2002.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets." The new standards require that all business combinations initiated
after June 30, 2002 must be accounted for under the purchase method. In
addition, all intangible assets acquired that are obtained through contractual
or legal right, or are capable of being separately sold, transferred, licensed,
rented or exchanged shall be recognized as an asset apart from goodwill.
Goodwill and intangibles with indefinite lives will no longer be subject to
amortization, but will be subject to at least an annual assessment for
impairment by applying a fair value based test.
The Company continued to amortize under its old method until April 1,
2002. Thereafter, annual goodwill and quarterly goodwill amortization of $107
and $27 respectively, were no longer recognized. In August 2002, the Company
performed a transitional fair value impairment test. The test indicated that the
fair value of goodwill exceeded the recorded value at April 1, 2002. Therefore
goodwill was not impaired at April 1, 2002.
Liquidity and Capital Resources
At September 30, 2002, the Company had $3.8 million in cash, cash
equivalents and short-term investments and working capital of $3.2 million,
compared to $2.1 million in cash, cash equivalents and short-term investments
and working capital of $1.1 million at March 31, 2002.
During the six months ended September 30, 2002 cash provided by operations
was $3.1 million compared to $2.0 million in the same period in fiscal 2002.
Increases in cash were primarily provided by improved operating performance.
During the six months ended September 30, 2002 capital expenditures decreased
$0.4 million (73%) to $0.2 million from $0.6 million in fiscal 2002. Fiscal 2002
capital expenditures (principally leasehold improvements) were incurred in
connection with the Company's consolidation and relocation of its facility into
a portion of its space. During the six months ended September 30, 2002, cash
used to repay long-term debt decreased $1.2 million (50%) to $1.2 million from
$2.4 million in fiscal 2002. As note above the Company repaid its secured credit
facility to Greystone ($1.0 million) during July 2001.
In January 1999, DVI Financial Services, Inc. ("DVI") provided the Company
with financing evidenced by notes payable for $6.6 million which are secured by
first priority liens on substantially all of the Company's assets. The Company
issued promissory notes (amended in June 2000)(the "DVI Notes") and security
agreements that provide, in part, that the Company may not permit the creation
of any additional lien or encumbrance on the Company's property or assets. The
DVI Notes are due in varying installments through fiscal 2006. Interest is paid
monthly at the prime rate (4 3/4% at March 31, 2002) plus 2.5%. In connection
with the DVI Notes, the Company granted DVI 650,000 warrants at an exercise
price of $2.19 per share. In connection with the amended DVI Notes, the
warrants' exercise price was reduced to $.75, the expiration date extended to
December 2006 and anti-dilution protection providing for exercise of the warrant
to result in 5% ownership was added.
In connection with the DVI loan, the Company prepaid $0.4 million and $0.8
million of outstanding loan balance during the first six months of fiscal 2003
and 2002, respectively. The Company estimates that it will make an additional
$0.1 million payment during October 2002 in satisfaction of prepayment covenants
for the three months ended September 30, 2002.
Effective August 28, 2000, DVI sold all its right, title and interest in,
to and under the warrants and DVI Notes, as described above, to Greystone. By
letter dated October 11, 2000, DVI directed the Company to make all remaining
payments due under the DVI Notes directly to Greystone.
Effective as of December 17, 1999 (as amended on March 17, 2000), the
Company entered into a Loan Agreement (the "Amended Loan Agreement") with
Greystone to provide up to $7.5 million of subordinated debt in the form of a
secured credit facility. No funds were advanced under the Amended Loan Agreement
in excess of an initial draw of $1 million. On July 5, 2001, the Company
remitted payment to Greystone in the amount of $1.05 million, repaying all
11
outstanding advances under the Greystone Amended Loan Agreement, together with
all unpaid accrued interest thereunder, and concurrently terminated the Amended
Loan Agreement. Approximately $423 representing the unamortized discount and
deferred financing costs relating to the Amended Loan Agreement was charged to
expense in July 2001.
On July 12, 2001, the Company and Greystone entered into a Termination
Agreement effective as of March 31, 2001, acknowledging the repayment and
termination of the Amended Loan Agreement and agreeing that all of the Company's
obligations thereunder had been fully satisfied. The Company and Greystone
further agreed, among other matters, that: (i) five million warrants held by
Greystone and its assigns to purchase Common Stock of the Company for 0.75 per
share remain in full force and effect and (ii) the Registration Rights Agreement
between Greystone and the Company dated as of December 27, 1999 remains in full
force and effect.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The DVI term notes bear an annual interest rate based on the prime rate
plus 2.5%, provided however, that if any payments to DVI are past due for more
than 60 days, interest will thereafter accrue at the prime rate plus 5.5%.
Because the interest rate is variable, the Company's future 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 4. Controls and Procedures
a) Under the supervision and with the participation of the Company's
management, including its chief executive officer and the principal
accounting officer, the Company has evaluated the effectiveness of
the Company's disclosure controls and procedures as of a date within
90 days prior to the filing of this report (the "Evaluation Date").
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 Commission's
rules and forms, the information required to be disclosed in its
periodic Exchange Act reports.
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
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, the SEC served a subpoena upon the
Company, pursuant to a formal order of investigation, requiring the production
of certain documents. The Company provided the SEC with the subpoenaed
materials. In addition, investigators associated with the U.S. Attorney's Office
for the Southern District of New York have made inquires of certain former and
current employees, apparently in connection with the same event.
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 Chief Executive Officer, that the United
States Attorney's Office for the Southern District of New York had recently
notified such counsel that Mr. Schick was a target of the United States
Attorney's investigation of this matter. The Company has cooperated fully with
the SEC staff and U.S. Attorney's Office, and intends to continue such
cooperation. The Company cannot predict the potential outcome of the inquiry.
12
The Company could become 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 may be 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 could 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
and/or attorneys' fees incurred. 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 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
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
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350.
99.2 Certification of Principal Accounting Officer Pursuant to 18
U.S.C.ss.1350.
(b) Reports on Form 8-K
None
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: October 31, 2002 By: /S/ David Schick
David B. Schick
Chief Executive Officer
By: /S/ Ronald Rosner
Ronald Rosner
Director of Finance and Administration
(Principal Accounting Officer)
13
CERTIFICATION
I, David B. Schick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Schick Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statement made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: October 31, 2002
/S/ David B. Schick
------------------------------
[Signature]
Chief Executive Officer
14
CERTIFICATION
I, Ronald Rosner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Schick Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statement made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: October 31, 2002
/S/ Ronald Rosner
--------------------------------------
[Signature]
Director of Finance and Administration
(Principal accounting officer)
15