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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 December 31, 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 February 5, 2004, 10,443,753 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 December 31, 2003
(unaudited) and March 31, 2003 .......................... Page 1
Consolidated Statements of Operations for the three
and nine months ended December 31, 2003 and 2002
(unaudited) ............................................. Page 2
Consolidated Statements of Cash Flows for the nine
months ended December 31, 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 14
Item 4. Controls and Procedures ................................. Page 14
PART II. OTHER INFORMATION ............................................... Page 14
Item 1. Legal Proceedings ....................................... Page 14
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 15
Item 6. Exhibits and Reports on Form 8-K ........................ Page 16
SIGNATURES ............................................................... Page 16
CERTIFICATIONS ........................................................... Page 17
PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31, March 31,
------------ ---------
2003
--------------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents ............................................. $ 15,541 $ 7,100
Short-term investments ................................................ 9 712
Accounts receivable, net of allowance for doubtful accounts of $138
and $42, respectively ............................................. 5,161 3,032
Inventories ........................................................... 3,382 3,039
Income taxes receivable ............................................... 5 10
Prepayments and other current assets .................................. 533 421
Deferred income taxes ................................................. 2,861 2,590
-------- --------
Total current assets ......................................... 27,492 16,904
-------- --------
Equipment, net ............................................................. 1,621 2,151
Goodwill, net .............................................................. 266 266
Deferred income taxes ...................................................... 3,139 2,940
Other assets ............................................................... 259 349
-------- --------
Total assets ................................................. $ 32,777 $ 22,610
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current maturity of long term debt .................................... $ -- $ 1,503
Accounts payable and accrued expenses ................................. 1,832 1,468
Accrued salaries and commissions ...................................... 1,628 1,080
Income taxes payable .................................................. 106 4
Deposits from customers ............................................... 33 31
Warranty obligations .................................................. 185 56
Deferred revenue ...................................................... 4,348 3,605
-------- --------
Total current liabilities .................................... 8,132 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:
10,441,980 and 10,206,425 shares issued and outstanding,
respectively) ..................................................... 104 102
Additional paid-in capital ............................................ 43,298 42,618
Accumulated deficit ................................................... (18,757) (27,857)
-------- --------
Total stockholders' equity ................................... 24,645 14,863
-------- --------
Total liabilities and stockholders' equity ................... $ 32,777 $ 22,610
======== ========
- ----------
The accompanying notes are an integral part of these financial statements.
1
Schick Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (unaudited)
(In thousands, except share and per share amounts)
Three months ended Nine months ended
December 31, December 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue, net ......................................... $ 12,124 $ 8,816 $ 29,301 $ 22,470
Cost of sales ........................................ 3,063 2,503 8,316 7,160
Excess and obsolete inventory ........................ -- 150 -- 259
------------ ------------ ------------ ------------
Total cost of sales .................................. 3,063 2,653 8,316 7,419
------------ ------------ ------------ ------------
Gross profit ................................ 9,061 6,163 20,985 15,051
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing ........................... 1,655 1,482 4,505 4,257
General and administrative ...................... 1,725 1,179 4,921 3,549
Research and development ........................ 827 663 2,508 1,909
------------ ------------ ------------ ------------
Total operating costs ....................... 4,207 3,324 11,934 9,715
------------ ------------ ------------ ------------
Income from operations ...................... 4,854 2,839 9,051 5,336
------------ ------------ ------------ ------------
Other income (expense)
Interest income ................................. 39 12 88 39
Interest expense ................................ (9) (75) (180) (241)
Other income .................................... 4 84 141 100
------------ ------------ ------------ ------------
Total other income (expense) ......................... 34 21 49 (102)
------------ ------------ ------------ ------------
Income before income taxes .................. 4,888 2,860 9,100 5,234
Provision for income taxes .................. 34 55 -- 85
------------ ------------ ------------ ------------
Net income .................................. $ 4,854 $ 2,805 $ 9,100 $ 5,149
============ ============ ============ ============
Basic earnings per share .................... $ 0.47 $ 0.28 $ 0.88 $ 0.51
============ ============ ============ ============
Diluted earnings per share .................. $ 0.29 $ 0.19 $ 0.54 $ 0.35
============ ============ ============ ============
Weighted average common shares (basic) ...... 10,407,356 10,154,059 10,334,431 10,146,069
============ ============ ============ ============
Weighted average common shares (diluted) .... 16,879,982 14,957,659 16,776,152 14,885,888
============ ============ ============ ============
- ----------
The accompanying notes are an integral part of these financial statements.
2
Schick Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
Nine months ended
December 31,
2003 2002
-------- -------
Cash flows from operating activities
Net income .............................................................. $ 9,100 $ 5,149
Adjustments to reconcile net income to net cash provided by
operating activities
Deferred tax asset ........................................ (470) --
Depreciation and amortization ............................. 825 962
Gain from repayment of long-term debt ..................... (50) --
Provision for doubtful accounts ........................... (7) --
Provision for excess and obsolete inventory ............... -- 259
Amortization of deferred financing charges ................ 150 84
Gain on sale of held to maturity investment ....... -- (45)
Other ..................................................... 282 150
Changes in assets and liabilities:
Accounts receivable ................................... (2,122) (1,570)
Inventories ........................................... (343) (18)
Income taxes receivable ............................... 5 3
Prepayments and other current assets .................. (112) (362)
Other assets .......................................... (80) (40)
Accounts payable and accrued expenses ................. 1,012 234
Income taxes payable .................................. 102 85
Deposits from customers ............................... (23) 26
Warranty obligations .................................. 154 (19)
Deferred revenue ...................................... 743 (536)
-------- -------
Net cash provided by operating activities .... 9,166 4,362
-------- -------
Cash flows from investing activities
Proceeds of short-term investments ................................. 703 416
Purchase of short-term investments ................................. -- (671)
Proceeds of liquidation of investment .............................. -- 169
Capital expenditures ............................................... (275) (368)
-------- -------
Net cash provided by (used in ) investing
activities ............................... 428 (454)
-------- -------
Cash flows from financing activities
Net proceeds from issuance of common stock ......................... 300 23
Payment of long-term debt .......................................... (1,453) (1,837)
-------- -------
Net cash used in financing activities ........ (1,153) (1,814)
-------- -------
Net increase in cash and cash equivalents ............................... 8,441 2,094
Cash and cash equivalents at beginning of period ........................ 7,100 1,622
-------- -------
Cash and cash equivalents at end of period .............................. $ 15,541 $ 3,716
======== =======
Interest paid ........................................................... $ 32 $ 153
======== =======
Income taxes paid ....................................................... $ 86 $ --
======== =======
- ----------
The accompanying footnotes are an integral part of these 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 and nine months ended
December 31, 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 December 31,
2003, include the accounts of the Company and its wholly owned subsidiary. All
significant intercompany balances have been eliminated.
Stock-based compensation
At December 31, 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 Nine months ended
December 31
---------------------------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income, as reported .................................. $ 4,854 $ 2,805 $ 9,100 $ 5,149
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects ... 70 58 209 173
--------- --------- --------- ---------
Proforma net income ...................................... $ 4,784 $ 2,747 $ 8,891 $ 4,976
========= ========= ========= =========
Earnings per share:
Basic - as reported ................................. $ 0.47 $ 0.28 $ 0.88 $ 0.51
========= ========= ========= =========
Basic - proforma .................................... $ 0.46 $ 0.27 $ 0.86 $ 0.49
========= ========= ========= =========
Diluted - as reported ............................... $ 0.29 $ 0.19 $ 0.54 $ 0.35
========= ========= ========= =========
Diluted - proforma .................................. $ 0.28 $ 0.18 $ 0.53 $ 0.33
========= ========= ========= =========
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
4
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. SFAS No. 145 did
not have a material effect on the Company's financial statements.
Accounting for Guarantees
In November 2002, FASB Interpretation 45 (FIN 45), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", 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.
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 from
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 period
beginning after December 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 values of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company believes EITF 00-21 does not have a
material effect 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". That consensus clarifies the types of
non-software deliverables included in arrangements that contain
more-than-incidental software that are included within the scope of SOP 97-2.
The Company believes that EITF 03-5 does not have a material effect on its
financial statements.
5
3. Inventories
Inventories, net of reserves, are comprised of the following:
December 31, March 31,
2003
-----------------------
Raw materials .................. $2,397 $2,103
Work-in-process ................ 310 241
Finished goods ................. 675 695
------ ------
Total inventories .............. $3,382 $3,039
====== ======
4. 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 to Greystone. The Company agreed to repay the
outstanding principal balance ($779) plus accrued interest in consideration of a
$50 principal reduction which is included in "other income." The loan was repaid
to Greystone on June 30, 2003.
In connection with the note, the Company had granted the lender warrants
to purchase 650,000 shares of the Company's common stock at an exercise price of
$0.75 per share, expiring in December 2006. The unamortized financing cost
($150) 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 issued to Greystone,
or its designees, warrants to purchase 5,000,000 shares of the Company's common
stock at an exercise price of $0.75 per share, expiring in December 2006. The
Termination Agreement affirms Greystone's continuing rights with respect to the
warrants.
5. 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
and nine months ended December 31, 2003 and 2002:
Three months ended Nine months ended
------------------ --------------------
December 31
-------------------------------------------
2003 2002 2003 2002
----- ----- ------- -------
Beginning balance ............. $ 98 $ 68 $ 56 $ 72
Warranties issued in period ... 654 476 1,695 1,382
Warranties paid in period ..... (567) (491) (1,566) (1,401)
----- ----- ------- -------
Balance end of period ......... $ 185 $ 53 $ 185 $ 53
===== ===== ======= =======
6
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 $2.3 million at December
31, 2003 and March 31, 2003.
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 December 31, 2003 and 2002:
Three months ended December 31, Nine months ended December 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic shares .... 10,407,356 10,154,059 10,334,331 10,146,059
Dilutive:
Options ......... 1,382,540 851,316 1,389,582 819,209
Warrants ........ 5,090,086 3,952,284 5,052,239 3,920,620
---------- ---------- ---------- ----------
Diluted shares .. 16,879,982 14,957,659 16,776,152 14,885,888
========== ========== ========== ==========
The Company excluded 93,288 and 486,014 options from the computation of
diluted earnings per share for the three months ended December 31, 2003 and
2002, respectively, because they are anti-dilutive. The Company excluded 109,187
and 516,809 options from the computation of diluted earnings per share for the
nine months ended December 31, 2003 and 2002, respectively, because they are
anti-dilutive.
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, that claims will not be denied, in whole
or in part, by insurance carriers, or that insurance will continue to be
available on commercially acceptable terms, or at all.
SEC Investigation
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
7
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 with the SEC staff and
U.S. Attorney's Office.
On November 14, 2003, the SEC filed a civil action in the United States
District Court for the Eastern District of New York against the Company, its
chief executive officer, and its former vice president of sales and marketing.
The SEC complaint alleges fraud, and books and records and reporting violations
under Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act and
various rules promulgated thereunder in connection with the financial statements
included in the Company's reports on Form 10-Q for the quarters ended June 30,
September 30 and December 31, 1998. The SEC complaint seeks to enjoin the
Company from future violations of those provisions of the Exchange Act and the
rules thereunder, as well as disgorgement of any ill-gotten gains, which the
Company does not believe to be material in amount. With respect to the other
defendants, the complaint seeks injunctive relief, civil penalties, disgorgement
and an officer/director bar. The Company promptly commenced, and has continued,
discussions with the SEC's northeast regional office in an effort to resolve the
complaint against the Company. There can be no assurance that those discussions
will be successful. The Company will continue to incur significant legal fees
and may incur indemnification costs. However, the Company believes that the
magnitude of such expenditures will not adversely affect its ongoing business
operations.
The Company cannot predict the potential outcome of these matters and
their impact on the Company and, therefore, has made no provision relating to
these matters in the accompanying consolidated financial statements.
Other 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 and intellectual property-related
litigation. Because of the nature of its business, the Company is subject to a
variety of legal actions relating to its business operations. Recent court
decisions and legislative activity may increase the Company's exposure for any
of these types of claims. In some cases, substantial punitive damages may be
sought. The Company currently has insurance coverage for some of these potential
liabilities. Other potential liabilities may not be covered by insurance,
insurers may dispute coverage, or the amount of insurance may not be sufficient
to cover the damages awarded. In addition, certain types of damages, such as
punitive damages, may not be covered by insurance and insurance coverage for all
or certain forms of liability may become unavailable or prohibitively expensive
in the future.
Other
Sales to a single customer approximated 63% and 60% of net revenue for the
three months ended December 31, 2003 and 2002, respectively. Sales to a single
customer approximated 58% and 50% of net revenue for the nine months ended
December 31, 2003 and 2002, respectively. Amounts due from that customer
approximated 74% and 62% of net accounts receivable at December 31, 2003 and
March 31, 2003, respectively, all of which have been substantially collected
subsequent to those dates.
The Company's $0.3 million letter of credit for the purchase of inventory
expired in January 2004.
8. Income Taxes
For the three and nine months ended December 31, 2003, the Company has
recorded a current Federal income tax provision of $0.2 million and $0.5
million, respectively, based on the Alternative Minimum Tax method. During the
three and nine months ended December 31, 2003, the net deferred tax asset
increased by approximately $0.2 million and $0.5 million, respectively. During
the three and nine months ended December 31, 2003, the Company reduced its
deferred tax valuation allowance by $2.3 million and $3.7 million, respectively,
since the Company believes that it is more likely than not that such tax benefit
will be realized. Management will continue to
8
assess the realizability of the deferred tax asset at the interim and annual
balance sheet dates based upon actual and forecasted operating results.
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
uncertainties as to the future sales volume of the Company's products and the
pending SEC action and U.S. Attorney investigation, the Company's dependence on
its exclusive North American distributor and on its foreign distributors, the
Company's dependence on products and technology, competition, changing economic
and competitive conditions in the medical and dental digital radiography
markets, dependence on key personnel, the Company's ability to manage growth,
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.
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 (74% and 62%, at
December 31, 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
9
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 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 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
a one-year period. Deferred revenues relate to extended warranty fees paid by
customers prior to the performance of extended warranty services, to certain
shipments to Patterson described above and to the 90-day exchange program for
CDR(R) wireless, described below. Patterson instituted a policy permitting,
under specific circumstances, the exchange of CDR(R) wireless products, sold
after October 23, 2003, for wired CDR(R) products. This exchange is allowed for
a period of 90 days from the date of installation in the event that external
radio-frequency sources cause interference that cannot be resolved. Accordingly,
the Company has deferred recognition of revenue related to Patterson's shipment
of the CDR(R) wireless product until the foregoing 90-day period has elapsed.
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 Company records revenues on extended warranties on a straight-line
basis over the term of the related warranty contracts (generally one year).
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.
At December 31, 2003 the net deferred tax asset aggregated $6.0 million (a
$0.5 million increase from March 31, 2003), which is net of a valuation
allowance of $7.7 million. A valuation allowance has been established for
deferred tax assets for which it is not more likely than not that the deferred
tax asset would be realized. In assessing the valuation allowance, the Company
has considered future taxable income and ongoing tax planning strategies. The
valuation allowance decreased by $3.7 million during the nine months ended
December 31, 2003 as a result of current year Company profitability.
Seasonality
In recent years, the third fiscal quarter (i.e., the three-month period
ended December 31) has been the period of highest revenues and net income for
the Company during each fiscal year. The Company believes that this is the
result, in part, of calendar-year-end Federal income tax incentives available to
system purchasers.
10
Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations and commercial
commitments at December 31, 2003:
=============================================================================
PAYMENTS DUE BY PERIOD
--------------------------------------------------
CONTRACTUAL Less Than 1-3 4-5 After 5
OBLIGATIONS Total 1 year years years years
-----------------------------------------------------------------------------
Operating leases $1,772 $ 482 $1,022 $268 --
-----------------------------------------------------------------------------
Employment agreements 536 536 -- -- --
-----------------------------------------------------------------------------
Purchase obligations 2,460 1,658 802 -- --
-----------------------------------------------------------------------------
Total Contractual
Cash Obligations $4,768 $2,676 $1,824 $268 --
=============================================================================
Results of Operations
Net revenues for the three months ended December 31, 2003 increased $3.3
million (38%) to $12.1 million as compared to $8.8 million in fiscal 2003. The
increase was due to increased sales of the CDR(R) radiography and intraoral
camera products and also reflects a reduction in revenues from our warranty
related upgrade program which has been phased out. CDR(R) product sales
increased $3.2 million (43%) to $10.7 million (88% of the Company's net
revenues) as compared to $7.5 million (85% of the Company's net revenues) in
fiscal 2003. The Company believes that the sales increases are a result of
increasing acceptance and adoption of its products by dental customers and an
increased commitment from its dealers, particularly Patterson. Warranty revenue
for the three months ended December 31, 2003 increased $0.2 million (14%) to
$1.3 million (12% of revenue) from $1.1 million (15% of revenue) in fiscal 2003.
Total domestic revenue for the three months ended December 31, 2003 increased
$2.3 million (32%) to $9.5 million (78% of revenue) as compared to $7.2 million
(82% of revenue) in fiscal 2003. Total international revenue for the three
months ended December 31, 2003 increased $1.0 million (63%) to $2.6 million (22%
of revenue) as compared to $1.6 million (18% of revenue) in fiscal 2003.
Net revenues for the nine months ended December 31, 2003 increased $6.8
million (30%) to $29.3 million as compared to $22.5 million in fiscal 2003. The
increase was due to increased sales of the CDR(R) radiography and intraoral
camera products and also reflects a reduction in revenues from our warranty
related upgrade program which has been phased out. CDR(R) product sales
increased $6.7 million (37%) to $25.1 million (86% of the Company's net
revenues) as compared to $18.4 million (82% of the Company's net revenues) in
fiscal 2003. The Company believes that the sales increases are a result of
increasing acceptance and adoption of its products by dental customers. Warranty
revenue for the nine months ended December 31, 2003 increased $0.2 million (4%)
to $3.8 million (13% of total revenue) as compared to $3.6 million (16% of
revenue) in fiscal 2003. Total domestic revenue for the nine months ended
December 31, 2003 increased $4.7 million (26%) to $22.7 million (77% of revenue)
as compared to $18.0 million (80% of revenue) in fiscal 2003. Total
international revenue for the nine months ended December 31, 2003 increased $2.1
million (48%) to $6.6 million (23% of revenues) as compared to $4.5 million (20%
of revenue) in fiscal 2003.
Total cost of sales for the three months ended December 31, 2003 increased
$0.4 million (16%) to $3.1 million (25.3% of net revenue) as compared to $2.7
million (30.1% of net revenue) in fiscal 2003. The decrease in the relative
total cost of sales (4.8%) was due to improved product mix and manufacturing
efficiency.
Total cost of sales for the nine months ended December 31, 2003 increased
$0.9 million (12%) to $8.3 million (28.4% of net revenue) as compared to $7.4
million (33.0% of net revenue) in fiscal 2003. The decrease in the relative
total cost of sales (4.6%) was due to improved product mix and manufacturing
efficiency.
Selling and marketing expenses for the three months ended December 31,
2003 increased $0.2 million (12%) to $1.7 million (14% of net revenue) as
compared to $1.5 million (17% of net revenue) in fiscal 2003. Increases in
commissions and payroll expenses were offset by reductions in marketing and
trade show expenses.
11
Selling and marketing expenses for the nine months ended December 31, 2003
increased $0.2 million (6%) to $4.5 million (15% of net revenue) as compared to
$4.3 million (19% of net revenue) in fiscal 2003. Increases in commissions and
payroll expenses were offset by reductions in marketing and trade shows
expenses.
General and administrative expenses for the three months ended December
31, 2003, increased $0.5 million (46%) to $1.7 million (14% of net revenue) as
compared to $1.2 million (13% of net revenue) in fiscal 2003. The increase in
general and administrative expenses was primarily attributable to increases in
legal costs related primarily to the SEC investigation, insurance, professional
services and other facility costs.
General and administrative expenses for the nine months ended December 31,
2003, increased $1.4 million (39%) to $4.9 million (17% of net revenue) as
compared to $3.5 million (16% of net revenue) in fiscal 2003. The increase in
general and administrative expenses was primarily attributable to a non-cash
compensation and increases in legal costs related primarily to the SEC
investigation, insurance, provision for doubtful accounts, professional services
and other facility costs.
Research and development expenses for the three months ended December 31,
2003 increased $0.1 million (25%) to $0.8 million (7% of net revenue) as
compared to $0.7 million (8% of net revenue) in fiscal 2003. The increase was
attributable to increases in payroll and research and development materials.
Research and development expenses for the nine months ended December 31,
2003 increased $0.6 million (31%) to $2.5 million (9% of net revenue) as
compared to $1.9 million (9% 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 December 31, 2003 decreased
$66 to $9 from $75 in fiscal 2003. The decrease in interest expense was
attributable to the Company's June 2003 repayment of the balance of the notes
payable. Interest income for the three months ended December 31, 2003 increased
$27 to $39 from $12. The increase was attributable to an increase in cash held
by the Company in a money market account.
Interest expense for the nine months ended December 31, 2003 decreased $61
to $180 from $241 in fiscal 2003. The decrease in interest expense was partially
attributable to the Company's June 2003 repayment of the balance of the notes
payable offset by the write-off of deferred finance costs related to that note
($150). Interest income for the nine months ended December 31, 2003 increased
$49 to $88 from $39 in fiscal 2003. The increase was attributable to an increase
in cash held in a money market account.
As a result of the above items, the Company's net income for the three
months ended December 31, 2003 increased $2.1 million (73%) to $4.9 million as
compared to $2.8 million in fiscal 2003.
As a result of the above items, the Company's net income for the nine
months ended December 31, 2003 increased $4.0 million (77%) to $9.1 million as
compared to $5.1 million in fiscal 2003.
Liquidity and Capital Resources
At December 31, 2003, the Company had $15.6 million in cash, cash
equivalents and short-term investments and $19.4 million in working capital, as
compared to $7.8 million in cash, cash equivalents and short-term investments
and $9.2 million in working capital at March 31, 2003.
During the nine months ended December 31, 2003 cash provided by operations
was $9.2 million as compared to $4.4 million in fiscal 2003. Increases in cash
were primarily provided by improved operating performance. Sales to a single
customer approximated 58% and 50% of net revenue for the nine months ended
December 31, 2003 and 2002, respectively. Amounts due from that customer
approximated 74% and 62% of net accounts receivable at December 31, 2003 and
March 31, 2003, respectively, all of which have been substantially collected
subsequent to those dates. The increase in net accounts receivable is the result
of increased product shipments during the nine months ended December 31, 2003.
Capital expenditures decreased from $0.4 million to $0.3 million for the nine
months ended December 31, 2003. During the nine months ended December 31, 2003,
12
cash used to repay long-term debt decreased $0.3 million to $1.5 million as
compared to $1.8 million in fiscal 2003. As noted above, the Company repaid its
term notes to Greystone in full during June 2003.
With regard to the SEC investigation, the Company will continue to incur
significant legal fees and may incur indemnification costs. However, the Company
does not believe that the magnitude of such expenditures will adversely affect
its ongoing business operations.
Management believes that its existing capital resources and other
potential sources of credit are adequate to meet its current cash requirements.
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. SFAS No. 145 did
not have a material effect on the Company's 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.
13
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 period
beginning after December 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. The Company believes EITF 00-21 does not have a
material effect 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 believes EITF 03-5 does not have a material effect on its financial
statements.
Item 2. Quantitative and Qualitative Disclosures About Market Risk
None
Item 3. 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 December 31,
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.
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
14
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 with the SEC staff and U.S. Attorney's Office.
On November 14, 2003, the SEC filed a civil action in the United States
District Court for the Eastern District of New York against the Company, its
chief executive officer, and its former vice president of sales and marketing.
The SEC complaint alleges fraud, and books and records and reporting violations
under Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act and
various rules promulgated thereunder in connection with the financial statements
included in the Company's reports on Form 10-Q for the quarters ended June 30,
September 30 and December 31, 1998. The SEC complaint seeks to enjoin the
Company from future violations of those provisions of the Exchange Act and the
rules thereunder, as well as disgorgement of any ill-gotten gains, which the
Company does not believe to be material in amount. With respect to the other
defendants, the complaint seeks injunctive relief, civil penalties, disgorgement
and an officer/director bar. The Company promptly commenced, and has continued,
discussions with the SEC's northeast regional office in an effort to resolve the
complaint against the Company. There can be no assurance that those discussions
will be successful. The Company will continue to incur significant legal fees
and may incur indemnification costs. However, the Company does not believe that
the magnitude of such expenditures will adversely affect its ongoing business
operations.
The Company cannot predict the potential outcome of these matters and
their impact on the Company and, therefore, has made no provision relating to
these matters in the accompanying consolidated financial statements.
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, and intellectual property-related
litigation. 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.
Item 5. Other Information
Not Applicable.
15
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 October 30, 2003 and reported on the Company's
press release, which announced its second quarter conference call to report the
Company's financial results for the second quarter of fiscal year 2004, in Item
5, "Other Events," of said Form 8-K.
2. A Form 8-K was filed on November 5, 2003 and reported on the Company's
press release, which announced its financial results for the second quarter of
fiscal year 2004, in Item 12, "Results Of Operations and Financial Condition,"
of said Form 8-K.
3. A Form 8-K was filed on November 18, 2003 and reported on the Company's
press release, which announced that the Securities and Exchange Commission had
filed a civil action against the Company, its chairman and chief executive
officer, and its former director and vice president of sales and marketing, in
Item 5, "Other Events," of said Form 8-K.
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: February 12, 2004 By: /S/ David Schick
---------------------------------------
David B. Schick
Chief Executive Officer
By: /S/ Ronald Rosner
---------------------------------------
Ronald Rosner
Director of Finance and Administration
(Principal Financial Officer)
16