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, 2003.
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 July 29, 2003, 10,346,158 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, 2003
(unaudited) and March 31, 2003 .............................Page 1
Consolidated Statements of Operations for the
three months ended June 30, 2003 and 2002
(unaudited) ................................................Page 2
Consolidated Statements of Cash Flows for the
three months ended June 30, 2003 and 2002
(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 9
Item 3. Quantitative and Qualitative Disclosures about Market
Risk ....................................................Page 15
Item 4. Controls and Procedures....................................Page 15
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings .........................................Page 15
Item 2. Changes in Securities and Use of Proceeds .................Page 15
Item 3. Defaults Upon Senior Securities............................Page 15
Item 4. Submission of Matters to a Vote of Security Holders........Page 15
Item 5. Other Information..........................................Page 16
Item 6. Exhibits and Reports on Form 8-K...........................Page 16
SIGNATURES ..............................................................Page 17
CERTIFICATIONS...........................................................Page 18
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,
-------- ---------
2003
----
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 8,886 $ 7,100
Short - term investments 666 712
Accounts receivable, net of allowance for
doubtful accounts of $117 and $42, respectively 2,551 3,032
Inventories 3,257 3,039
Income taxes receivable 10 10
Prepayments and other current assets 491 421
Deferred income taxes 2,590 2,590
-------- --------
Total current assets 18,451 16,904
-------- --------
Equipment, net 1,954 2,151
Goodwill, net 266 266
Deferred income taxes 2,991 2,940
Other assets 267 349
-------- --------
Total assets $ 23,929 $ 22,610
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current maturity of long term debt $ -- $ 1,503
Accounts payable and accrued expenses 1,472 1,468
Accrued salaries and commissions 1,063 1,080
Income taxes payable 56 4
Deposits from customers 23 31
Warranty obligations 98 56
Deferred revenue 4,144 3,605
-------- --------
Total current liabilities 6,856 7,747
-------- --------
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:
10,346,158 and 10,206,425 shares issued and outstanding,
respectively) 103 102
Additional paid-in capital 42,848 42,618
Accumulated deficit (25,878) (27,857)
-------- --------
Total stockholders' equity 17,073 14,863
-------- --------
Total liabilities and stockholders' equity $ 23,929 $ 22,610
======== ========
- ----------
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,
2003 2002
---- ----
Revenue, net $ 8,676 $ 6,904
Cost of sales 2,629 2,183
Excess and obsolete inventory -- 109
----------- -----------
Total cost of sales 2,629 2,292
----------- -----------
Gross profit 6,047 4,612
----------- -----------
Operating expenses:
Selling and marketing 1,435 1,441
General and administrative 1,655 1,102
Research and development 842 666
----------- -----------
Total operating costs 3,932 3,209
----------- -----------
Income from operations 2,115 1,403
----------- -----------
Other income (expense)
Other income 101 --
Interest income 20 23
Interest expense (169) (90)
----------- -----------
Total other income (expense) (48) (67)
----------- -----------
Income before income taxes 2,067 1,336
Provision for income taxes 88 --
----------- -----------
Net income $ 1,979 $ 1,336
=========== ===========
Basic earnings per share $ 0.19 $ 0.13
=========== ===========
Diluted earnings per share $ 0.12 $ 0.09
=========== ===========
Weighted average common shares (basic) 10,229,697 10,138,900
=========== ===========
Weighted average common shares (diluted) 16,536,892 15,212,574
=========== ===========
- ----------
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,
--------
2003 2002
---- ----
Cash flows from operating activities
Net income $ 1,979 $ 1,336
Adjustments to reconcile net income to
net cash provided by in operating activities
Deferred tax asset (51) --
Depreciation and amortization 292 310
Gain from repayment of long-term debt (50) --
Provision for doubtful accounts 75 --
Provision for excess and obsolete inventory -- 109
Amortization of deferred financing charges 150 30
Other 87 --
Changes in assets and liabilities:
Accounts receivable 406 464
Inventories (218) (310)
Prepayments and other current assets (70) (86)
Other assets (36) --
Accounts payable and accrued expenses (13) 203
Income taxes payable 52 --
Deposits from customers (33) 38
Warranty obligations 67 15
Deferred revenue 539 174
------- -------
Net cash provided by operating activities 3,176 2,283
------- -------
Cash flows from investing activities
Proceeds of short-term investments 46 9
Capital expenditures (88) (85)
------- -------
Net cash used in investing activities (42) (76)
------- -------
Cash flows from financing activities
Net proceeds from issuance of common stock 105 4
Payment of long-term debt (1,453) (718)
------- -------
Net cash used in financing activities (1,348) (714)
------- -------
Net increase in cash and cash equivalents 1,786 1,493
Cash and cash equivalents at beginning of period 7,100 1,622
------- -------
Cash and cash equivalents at end of period $ 8,886 $ 3,115
======= =======
Interest paid $ 22 $ 58
======= =======
Income taxes paid $ -- $ --
======= =======
- ----------
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, 2003
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,
2003 are not necessarily indicative of the results to be expected for the full
year ending March 31, 2004.
The consolidated financial statements of the Company, at June 30, 2003,
include the accounts of the Company and its wholly owned subsidiary. All
significant intercompany balances have been eliminated.
Stock-based compensation
At June 30, 2003, 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 FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation.
Three months ended June 30,
2003 2002
---- ----
Net income, as reported $ 1,979 $ 1,336
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 115 99
------- -------
Proforma net income $ 1,864 $ 1,237
======= =======
Earnings per share:
Basic - as reported $ 0.19 $ 0.13
======= =======
Basic - proforma $ 0.18 $ 0.12
======= =======
Diluted - as reported $ 0.12 $ 0.09
======= =======
Diluted - proforma $ 0.11 $ 0.08
======= =======
4
2. Recently Issued Accounting Standards
Accounting for Debt Extinguishments
In April 2002, the FASB issued Statement 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical
Corrections" (SFAS 145). Among other provisions, SFAS 145 rescinds FASB
Statement 4, "Reporting Gains and Losses from Extinguishment of Debt".
Accordingly, gains or losses from extinguishment of debt should not be reported
as extraordinary items unless the extinguishment qualifies as an extraordinary
item under the criteria of Accounting Principles Board Opinion 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" (APB 30). Gains or losses from extinguishment of debt, which do
not meet the criteria of APB 30, should be reclassified to income from
continuing operations in all prior periods presented. The provisions of SFAS 145
are effective for fiscal years beginning after May 15, 2002. The Company
anticipates that SFAS No. 145 will not have a material effect on its financial
statements.
Accounting for Guarantees
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), was issued. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees
the Company issues or modifies subsequent to December 31, 2002, but has certain
disclosure requirements effective for interim and annual periods ending after
December 15, 2002.
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 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 warranties were $2.5 million
and $2.3 million at June 30, 2003 and March 31, 2003, respectively. Services
costs are expensed as incurred. The Company anticipates that FIN 45 will not
have a material effect on its financial statements.
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support for
other parties or in which equity investors do not have the characteristics of
controlling financial interests ("variable interest entities"). Variable
interest entities within the scope of FIN 46 will be required to be consolidated
by their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the entity's
expected losses, receives a majority of its expected returns, or both. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim
5
period beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company does not have any investment or other interest in "variable interest
entities".
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 arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value 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 is 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 20, "Accounting
Changes." The Company is still evaluating the impact of the adoption of EITF
00-21 on its financial statements.
In July 2003, the Emerging Issues Task Force reached a consensus opinion
of EITF 03-5, "Applicability of AICPA Statement of Position 97-2, Software
Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software". The consensus clarifies the types of
non-software deliverables included in arrangements that contain
more-than-incidental software are included within the scope of SOP 97-2. The
Company is evaluating the impact of the adoption of EITF 03-5 on its financial
statements.
3. Inventories
Inventories, net of reserves, are comprised of the following:
June 30, March 31,
2003
----
Raw materials $2,311 $2,103
Work-in-process 143 241
Finished goods 803 695
------ ------
Total inventories $3,257 $3,039
====== ======
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 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.
In March 2003, the Company performed its annual fair value impairment
test. The test indicated that the fair value of goodwill is greater than the
recorded value. Accordingly, the Company did not record an impairment loss.
6
5. Debt
Secured Term Notes
In June 2003, the Company and Greystone Funding Corporation ("Greystone")
executed an agreement ("Secured Term Note Termination Agreement") terminating
the Company's obligation. The Company agreed to repay the outstanding principal
balance ($779) plus accrued interest in consideration of a $50 principal
reduction. The loan was repaid to Greystone on June 30, 2003. Greystone is
removing its lien against the Company's assets.
In connection with the note, the Company had granted the lender 650,000
warrants at an exercise price of $0.75 expiring in December 2006. The
unamortized financing cost was written off to interest expense upon repayment of
the obligation. The Secured Term Note Termination Agreement affirms Greystone's
continuing rights with respect to the warrants.
Former Secured Credit Facility
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. In July 2001, the Company and
Greystone executed an agreement ("Termination Agreement") terminating the
secured credit facility. On July 5, 2001 the Company remitted $1.05 million,
repaying all outstanding advances under this agreement, plus accrued interest.
In connection with the credit facility the Company had issued to
Greystone, or its designees, warrants to purchase 5,000,000 warrants at an
exercise price of $0.75 expiring in December 2006. The Termination Agreement
affirms Greystone's continuing rights with respect to the warrants.
6. Earnings Per Share
Basic earnings per share are calculated by dividing net income by the
average number of common shares outstanding during the year. 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 price is 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, 2003 and 2002:
Three months ended June 30,
2003 2002
---- ----
Basic shares 10,229,697 10,138,900
Dilutive:
Options 1,357,608 897,586
Warrants 4,949,587 4,176,087
---------- ----------
Diluted shares 16,536,892 15,212,573
========== ==========
The Company excluded 133,239 and 497,260 options from the computation of
diluted earnings per share for the three months ended June 30, 2003 and 2002,
respectively, because they are anti-dilutive.
7
7. Contingencies 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.
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 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 fully
with the SEC staff and U.S. Attorney's Office.
On June 11, 2003, the Company and its chief executive officer, David
Schick, received notifications from the staff of the SEC of their intention to
recommend that the SEC authorize civil enforcement actions against them. The
contemplated actions would allege violations of federal securities law relating
to the Company's publicly filed financial statements, including those for the
first three quarters of the Company's fiscal year ended March 31, 1999,
restatements of which were filed in March 2000. In connection with the
contemplated actions, the staff would ask for authority to seek injunctive
relief, civil penalties and a bar against Mr. Schick from serving as an officer
or director of a public company. 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. Regardless of the outcome of these matters, the Company
could be forced to expend significant amounts of money in legal fees.
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, 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
8
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.
Other
Sales to a single customer approximated 57% and 45% of net revenue for the
three months ended June 30, 2003 and 2002, respectively. Amounts due from that
customer approximated 53% and 50% of net accounts receivable at June 30, 2003
and March 31, 2003, respectively, all of which have been substantially collected
subsequent to those dates.
8. Income Taxes
For the three months ended June 30, 2003 the Company has recorded a
current Federal income tax provision of $52 based on the Alternative Minimum Tax
method. The income tax benefit of the net operating loss utilized for the three
months ended June 30, 2003 and 2002 approximates $1.0 million and $0.4 million,
respectively.
During the three months ended June 30, 2003, the Company reduced its
deferred tax valuation allowance by $51 since the Company believes that it is
more likely than not that such tax benefit will be realized. During the fourth
quarter of fiscal 2003 the Company reduced its deferred tax valuation allowance
by $5.8 million. Management has established a valuation allowance for the
remainder of the deferred tax asset. Management will continue to assess the
realizability of the deferred tax asset at the interim and annual balance sheet
dates based upon actual and forecasted operating results.
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 "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
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 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.
9
General
The Company designs, develops, manufactures and markets its proprietary
intra-oral digital radiography system and other digital imaging systems for the
dental market. The Company also manufactures and markets a bone mineral density
assessment device to assist in the diagnosis and treatment of osteoporosis,
which was introduced to the medical market 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.
Accounts Receivable
The Company reports accounts receivable net of reserves for uncollectible
accounts. The majority of the Company's accounts receivable (53% and 50%, at
June 30, 2003 and March 31, 2003, respectively) are due from its exclusive
domestic distributor, Patterson Dental Company ("Patterson"). Other accounts
receivable are due from international distributors and agencies of the U.S.
military. Credit is extended to distributors on varying terms between 30 and 90
days. Most international credit is underwritten by credit insurance. The Company
provides an allowance for doubtful accounts based upon analysis of the accounts
receivable aging. The Company writes off accounts receivable when they become
uncollectible. Subsequently received payments are credited to operations.
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
Revenues from sales of the Company's hardware and software products are
recognized at the time of shipment to customers, and when no significant
obligations exist and collectibility is probable. The Company provides its
customers with a 30-day return policy but allows for an additional 15 days, and
accordingly recognizes allowances for estimated returns by customers pursuant to
such policy at the time of shipment. The Company defers revenue from products
shipped to its exclusive domestic
10
distributor, until Patterson ships such inventory from its distribution centers.
Amounts received from customers in advance of product shipment are classified as
deposits from customers. Revenues from the sale of extended warranties on the
Company's products are recognized on a straight-line basis over the life of the
extended warranty, which is generally for a one-year period. Deferred revenues
relate to extended warranty fees paid by customers prior to the performance of
extended warranty services, and to certain shipments to Patterson described
above.
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 aggregate warranty liability for the three
months ended June 30, 2003 and 2002:
2003 2002
---- ----
Beginning balance $ 56 $ 72
Warranties issued in period 603 568
Warranties paid in period (561) (553)
----- -----
Balance end of period $ 98 $ 87
===== =====
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 $2.5 million and $2.3
million at June 30,2003 and March 31, 2003, 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.
A valuation allowance has been established for deferred tax assets for
which it is not more likely than not that the deferred tax asset will be
realized. At June 30, 2003 the deferred tax asset ($16.0 million) has a partial
reserve of $10.1 million, reflecting a reduction in the valuation allowance of
$0.1 million during the three months ended June 30, 2003. In assessing the
valuation allowance, the Company has considered future taxable income and
ongoing tax planning strategies and has determined that it is more likely than
not that $5.6 million of the deferred tax asset will be realized.
Goodwill and Other Intangible Assets
Goodwill represents the cost of acquired companies in excess of the fair
value of the net assets acquired. At the date of acquisition, goodwill is
allocated to reporting units based on net assets assigned to that unit.
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
11
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 and deferred financing costs are amortized by
the straight-line method over periods of five years and over the term of the
loan, respectively.
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.
Stock-based compensation
At June 30, 2003, 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 FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
Three months ended June 30,
2003 2002
---- ----
Net income, as reported $1,979 $1,336
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 115 99
------ ------
Proforma net income $1,864 $1,237
====== ======
Earnings per share:
Basic - as reported $ 0.19 $ 0.13
====== ======
Basic - proforma $ 0.18 $ 0.12
====== ======
Diluted - as reported $ 0.12 $ 0.09
====== ======
Diluted - proforma $ 0.11 $ 0.08
====== ======
Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations and commercial
commitments at June 30, 2003:
12
======================================================================
PAYMENTS DUE BY PERIOD
----------------------------------------------
Less
CONTRACTUAL Than 1 1-3 4-5 After 5
OBLIGATIONS Total year years years years
----------------------------------------------------------------------
Operating leases 2,005 472 1,002 531 --
----------------------------------------------------------------------
Employment agreements 911 653 258 -- --
----------------------------------------------------------------------
Total Contractual
Cash Obligations $2,916 $1,125 $1,260 $ 531 $ --
====== ====== ====== ====== =====
======================================================================
Results of Operations
Net revenues for the three months ended June 30, 2003 increased $1.8
million (26%) to $8.7 million as compared to $6.9 million in fiscal 2003. The
increase was due to increased sales of the CDR(R) radiography and intraoral
camera products. CDR(R) product sales increased $1.8 million (33%) to $7.3
million (84% of the Company's net revenues) as compared to $5.5 million (79% of
the Company's net revenues) in fiscal 2003. The Company believes that the sales
increases are a result of increasing acceptance of its products by dental
customers and sales of the new wireless product which the Company began shipping
in March 2003. CDR(R) warranty revenue for the three months ended June 30, 2003
was unchanged at $1.2 million. Total domestic revenue for the three months ended
June 30, 2003 increased $1.2 million (22%) to $6.7 million as compared to $5.5
million in fiscal 2003. Total international revenue for the three months ended
June 30, 2003 increased $0.6 million (42%) to $2.0 million as compared to $1.4
million in fiscal 2003.
Total cost of sales for the three months ended June 30, 2003 increased
$0.3 million (15%) to $2.6 million (30.3% of net revenue) as compared to $2.3
million (33.2% of net revenue) in fiscal 2003. The decrease in the relative
total cost of sales (2.9%) was due to improved product mix and manufacturing
efficiency.
Selling and marketing expenses for the three months ended June 30, 2003
was unchanged at $1.4 million (17% and 21% of net revenue for the period in
fiscal 2004 and 2003, respectively). Increases in commissions and payroll
expenses were offset by reductions in advertising and trade shows expense.
General and administrative expenses for the three months ended June 30,
2003, increased $0.6 million (50%) to $1.7 million (19% of net revenue) as
compared to $1.1 million (16% of net revenue) in fiscal 2003. The increase in
general and administrative expenses was primarily attributable to a non-cash
charge to payroll and increases in insurance, provision for doubtful accounts,
other facility costs and legal and professional services.
Research and development expenses for the three months ended June 30, 2003
increased $0.1 million (26%) to $0.8 million (10% of net revenue) as compared to
$0.7 million (10% of net revenue) in fiscal 2003. The increase was attributable
to increases in payroll and research and development materials.
Interest expense for the three months ended June 30, 2003 increased $0.1
million to $0.2 million from $0.1 million in fiscal 2003. The increase in
interest expense was attributable to the June 2003 repayment of the balance of
notes payable and the write-off of deferred finance costs related to that note
($150).
13
As a result of the above items, the Company's net income increased $0.6
million (48%) to $2.0 million for the three months ended June 30, 2003 as
compared to $1.4 million in fiscal 2003.
Liquidity and Capital Resources
At June 30, 2003, the Company had $9.6 million in cash, cash equivalents
and short-term investments and working capital of $11.6 million, as compared to
$7.8 million in cash, cash equivalents and short-term investments and working
capital of $9.2 million at March 31, 2003.
During the three months ended June 30, 2003 cash provided by operations
was $3.2 million as compared to $2.3 million in fiscal 2003. Increases in cash
were primarily provided by improved operating performance. Sales to a single
customer approximated 57% and 45% of net revenue for the three months ended June
30, 2003 and 2002, respectively. Amounts due from that customer approximated 53%
and 50% of net accounts receivable at June 30, 2003 and March 31, 2003,
respectively, all of which have been substantially collected subsequent to those
dates. The decrease in net accounts receivable is the result of cash collections
during the three months ended June 30, 2003 and an increase to the reserve for
doubtful accounts. Capital expenditures remained unchanged at $0.1 million in
the first quarter of fiscal 2004 and 2003. During the three months ended June
30, 2003, cash used to repay long-term debt increased $0.8 million to $1.5
million as compared to $0.7 million in fiscal 2003. As noted above the Company
repaid its term notes to Greystone in full during June 2003.
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 other potential sources of credit are adequate to meet its current cash
requirements. However, if the Company's cash needs are greater than anticipated,
the Company may be required to seek additional or alternative financing sources
and could consider the reduction of certain discretionary expenses. There can be
no assurance that such financing will be available or available on terms
acceptable to the Company.
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 chief executive officer and principal
financial officer, the Company has evaluated the effectiveness of
the Company's disclosure controls and procedures as of June 30,
2003. 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.
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.
14
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 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 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 fully
with the SEC staff and U.S. Attorney's Office.
On June 11, 2003, the Company and its chief executive officer, David
Schick, received notifications from the staff of the SEC of their intention to
recommend that the SEC authorize civil enforcement actions against them. The
contemplated actions would allege violations of federal securities law relating
to the Company's publicly filed financial statements, including those for the
first three quarters of the Company's fiscal year ended March 31, 1999,
restatements of which were filed in March 2000. In connection with the
contemplated actions, the staff would ask for authority to seek injunctive
relief, civil penalties and a bar against Mr. Schick from serving as an officer
or director of a public company. The Company cannot predict the potential
outcome of these matters.
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. The legal
proceedings described above and other potential liabilities may not be covered
by insurance, insurers may dispute or deny coverage at any time, 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.
15
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief 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 Chief 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 5, 2003 and a Form 8-K/A was filed on June
10, 2003 and reported on the Company's press release, which announced its fiscal
2003 year-end conference call to report the Company's year-end financial
results, in Item 5, "Other Events," of said Forms 8-K and 8-K/A.
2. A Form 8-K was filed on June 10, 2003 and reported on the Company's
press release, which announced its financial results for the fourth quarter and
fiscal year ended March 31, 2003, in Item 9, "Regulation FD Disclosure," of said
Form 8-K.
3. A Form 8-K was filed on June 13, 2003 and reported on the Company's
press release, which announced that the Company and its chief executive officer
had received notifications from the staff of the Securities and Exchange
Commission of its intention to recommend that the SEC authorize civil
enforcement actions against them, in Item 9, "Regulation FD Disclosure," of said
Form 8-K.
16
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, 2003 By: /S/ David Schick
David B. Schick
Chief Executive Officer
By: /S/ Ronald Rosner
Ronald Rosner
Director of Finance and Administration
(Principal Financial Officer)
17