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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 September 30, 2004.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________.
Commission file number: 000-22673
SCHICK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3374812
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
30-00 47th Avenue
Long Island City, New York 11101
(Address of principal executive offices) (Zip Code)
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 November 5, 2004, 15,184,155 shares of common stock, par value $.01 per
share, were outstanding.
SCHICK TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30 (unaudited) and March 31, 2004............Page 1
Consolidated Statements of Operations for the three and six months ended September
30, 2004 and 2003 (unaudited)............................................................Page 2
Consolidated Statements of Cash Flows for the six months ended September 30, 2004
and 2003 (unaudited).....................................................................Page 3
Notes to Consolidated Financial Statements (unaudited)...................................Page 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...............................................................................Page 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................Page 11
Item 4. Controls and Procedures.................................................................Page 11
PART II. OTHER INFORMATION...............................................................................Page 12
Item 1. Legal Proceedings.......................................................................Page 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.............................Page 12
Item 3. Defaults Upon Senior Securities.........................................................Page 12
Item 4. Submission of Matters to a Vote of Security Holders.....................................Page 13
Item 5. Other Information.......................................................................Page 13
Item 6. Exhibits................................................................................Page 13
SIGNATURES...............................................................................................Page 14
CERTIFICATIONS...........................................................................................Page 15
PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
(In thousands, except share amounts)
September 30, March 31,
------------- ---------
2004
------------------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents ...................................................... $ 26,441 $ 20,734
Accounts receivable, net of allowance for doubtful accounts of $138 ............ 4,312 3,982
Inventories .................................................................... 3,159 3,057
Prepayments and other current assets ........................................... 871 861
Deferred income taxes .......................................................... 9,620 6,481
-------- --------
Total current assets .................................................. 44,403 35,115
-------- --------
Equipment, net ...................................................................... 1,456 1,405
Goodwill, net ....................................................................... 266 266
Deferred income taxes ............................................................... 244 5,679
Other assets ........................................................................ 293 278
-------- --------
Total assets .......................................................... $ 46,662 $ 42,743
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses .......................................... $ 1,551 $ 1,456
Accrued salaries and commissions ............................................... 822 1,390
Income taxes payable ........................................................... 159 142
Deposits from customers ........................................................ 25 13
Warranty obligations ........................................................... 300 210
Deferred revenue ............................................................... 3,708 4,504
-------- --------
Total current liabilities ............................................. 6,565 7,715
-------- --------
Commitments and contingencies ....................................................... -- --
Stockholders' equity
Preferred stock ($0.01 par value; 2,500,000 shares authorized; none
issued and outstanding) .................................................... -- --
Common stock ($0.01 par value; 50,000,000 shares authorized:
15,184,155 and 15,026,470 shares issued and outstanding,
respectively) .............................................................. 152 150
Additional paid-in capital ..................................................... 45,408 44,626
Accumulated deficit ............................................................ (5,463) (9,748)
-------- --------
Total stockholders' equity ............................................ 40,097 35,028
-------- --------
Total liabilities and stockholders' equity ............................ $ 46,662 $ 42,743
======== ========
- ----------
The accompanying footnotes are an integral part of these consolidated financial
statements
1
Schick Technologies, Inc. and Subsidiary
Consolidated Statements of Operations (unaudited)
(In thousands, except share and per share amounts)
Three months ended Six months ended
September 30, September 30,
2004 2003 2004 2003
----------- ------------ ----------- ------------
Revenue, net ........................................... $ 10,870 $ 8,501 $ 21,751 $ 17,177
Total cost of sales .................................... 2,972 2,624 6,181 5,253
----------- ------------ ----------- ------------
Gross profit .................................. 7,898 5,877 15,570 11,924
----------- ------------ ----------- ------------
Operating expenses:
Selling and marketing ............................. 1,531 1,415 2,987 2,850
General and administrative ........................ 1,284 1,511 3,269 3,091
Research and development .......................... 1,305 839 2,417 1,681
Bad debt expense .................................. -- 30 -- 105
----------- ------------ ----------- ------------
Total operating costs ......................... 4,120 3,795 8,673 7,727
----------- ------------ ----------- ------------
Income from operations ........................ 3,778 2,082 6,897 4,197
----------- ------------ ----------- ------------
Other income (expense)
Interest income ................................... 84 29 177 49
Other income ...................................... -- 36 -- 137
Interest expense .................................. -- (2) -- (171)
----------- ------------ ----------- ------------
Total other income (expense) .................. 84 63 177 15
----------- ------------ ----------- ------------
Income before income taxes .................... 3,862 2,145 7,074 4,212
Provision (benefit) for income taxes .......... 1,376 (122) 2,789 (34)
----------- ------------ ----------- ------------
Net income .................................... $ 2,486 $ 2,267 $ 4,285 $ 4,246
=========== ============ =========== ============
Basic earnings per share ...................... $ 0.16 $ 0.22 $ 0.28 $ 0.41
=========== ============ =========== ============
Diluted earnings per share .................... $ 0.14 $ 0.13 $ 0.25 $ 0.25
=========== ============ =========== ============
Weighted average common shares (basic) ........ 15,099,299 10,365,939 15,063,501 10,297,818
=========== ============ =========== ============
Weighted average common shares (diluted) ...... 17,230,852 16,911,580 17,219,421 16,724,236
=========== ============ =========== ============
- ----------
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)
Six months ended
September 30,
2004 2003
-------- --------
Cash flows from operating activities
Net income .......................................................................... $ 4,285 $ 4,246
Adjustments to reconcile net income to net cash provided by
operating activities
Non-cash compensation ................................................. 393 290
Depreciation and amortization ......................................... 345 567
Deferred income taxes ................................................. 2,296 (314)
Tax benefit of stock options exercised ................................ 123 205
Gain from repayment of long-term debt ................................. -- (50)
Provision for doubtful accounts ....................................... -- 105
Provision for excess and obsolete inventory ........................... 15 --
Amortization of deferred financing charges ............................ -- 150
Changes in assets and liabilities:
Accounts receivable ............................................... (330) (612)
Inventories ....................................................... (117) (58)
Prepayments and other current assets .............................. (9) (76)
Other assets ...................................................... (26) (52)
Accounts payable and accrued expenses ............................. (473) 359
Income taxes payable .............................................. 17 23
Deposits from customers ........................................... 12 (30)
Warranty obligations .............................................. 90 67
Deferred revenue .................................................. (796) 936
-------- --------
Net cash provided by operating activities ...................... 5,825 5,756
-------- --------
Cash flows from investing activities
Proceeds from short-term investments ........................................... -- 705
Capital expenditures ........................................................... (385) (231)
-------- --------
Net cash (used in) provided by investing activities ............ (385) 474
-------- --------
Cash flows from financing activities
Net proceeds from issuance of common stock ..................................... 267 233
Payment of long-term debt ...................................................... -- (1,453)
-------- --------
Net cash provided by (used in) financing activities ............ 267 (1,220)
-------- --------
Net increase in cash and cash equivalents ........................................... 5,707 5,010
Cash and cash equivalents at beginning of period .................................... 20,734 7,100
-------- --------
Cash and cash equivalents at end of period .......................................... $ 26,441 $ 12,110
======== ========
Interest paid ....................................................................... -- $ 22
======== ========
Income taxes paid ................................................................... $ 201 $ 52
======== ========
- ----------
The accompanying footnotes are an integral part of these consolidated financial
statements
3
Schick Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except share and per share amounts)
1. Basis of Presentation
The consolidated financial statements of Schick Technologies, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America ("US GAAP") for interim financial
information and the rules of the Securities and Exchange Commission (the "SEC")
for quarterly reports on Form 10-Q, and do not include all of the information
and footnote disclosures required by US GAAP for complete financial statements.
These statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended March 31, 2004
included in the Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results of operations for the
interim periods. The results of operations for the three and six months ended
September 30, 2004 are not necessarily indicative of the results to be expected
for the full year ending March 31, 2005.
The consolidated financial statements of the Company, at September 30,
2004, include the accounts of the Company and its wholly owned subsidiary. All
significant intercompany balances have been eliminated.
Stock-based compensation
At September 30, 2004, the Company has stock-based compensation plans. As
permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company accounts for stock-based compensation arrangements with employees under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees", and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee compensation.
Three months ended Six months ended
September 30,
------------------------------------------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income, as reported .................................. $ 2,486 $ 2,267 $ 4,285 $ 4,246
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects .......... 171 47 346 117
--------- --------- --------- ---------
Proforma net income ...................................... $ 2,315 $ 2,220 $ 3,939 $ 4,129
========= ========= ========= =========
Earnings per share:
Basic - as reported ................................. $ 0.16 $ 0.22 $ 0.28 $ 0.41
========= ========= ========= =========
Basic - proforma .................................... $ 0.15 $ 0.21 $ 0.26 $ 0.40
========= ========= ========= =========
Diluted - as reported ............................... $ 0.14 $ 0.13 $ 0.25 $ 0.25
========= ========= ========= =========
Diluted - proforma .................................. $ 0.14 $ 0.13 $ 0.24 $ 0.25
========= ========= ========= =========
2. Inventories
Inventories, net of reserves, are comprised of the following:
4
September 30, March 31,
2004
-------------------------------
Raw materials .................... $1,887 $2,088
Work-in-process .................. 234 246
Finished goods ................... 1,038 723
------ ------
Total inventories ................ $3,159 $3,057
====== ======
3. Earnings Per Share
Basic earnings per share are calculated by dividing net income by the
average number of common shares outstanding during the 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 prices are less than the average
market price during the period are exercised at the beginning of the period and
the proceeds used by Schick Technologies, Inc. to purchase shares at the average
market price for the period. The following is the reconciliation from basic to
diluted shares for the three and six months ended September 30, 2004 and 2003:
Three months ended September 30, Six months ended September 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Basic shares .................. 15,099,299 10,365,939 15,063,501 10,297,818
Dilutive:
Options ....................... 1,339,410 1,428,597 1,365,144 1,393,103
Warrants ...................... 792,143 5,117,044 790,776 5,033,315
---------- ---------- ---------- ----------
Diluted shares ................ 17,230,852 16,911,580 17,219,421 16,724,236
========== ========== ========== ==========
The Company excluded 87,061 and 98,035 options from the computation of diluted
earnings per share for the three months ended September 30, 2004 and 2003,
respectively, because they are anti-dilutive. The Company excluded 110,150 and
115,637 options from the computation of diluted earnings per share for the six
months ended September 30, 2004 and 2003, respectively, because they are
anti-dilutive.
4. Contingencies and Other
Product Liability and Litigation
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. In addition, the Company
may be a party to a variety of legal actions (in addition to that referred to
above), such as employment and employment discrimination-related suits, employee
benefit claims, breach of contract actions, tort claims and intellectual
property related litigation. In addition, because of the nature of its business,
the Company is subject to a variety of legal actions relating to its business
operations. 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.
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
5
certain documents and the Company provided the SEC with the requested materials.
On August 17, 2000 and April 30, 2003, the SEC served subpoenas upon the
Company, pursuant to a formal order of investigation, requiring the production
of certain documents. The Company timely provided the SEC with the subpoenaed
materials. The Company has been informed that since January 2002 the SEC and/or
the United States Attorney's Office for the Southern District of New York have
served subpoenas upon and/or contacted certain individuals, including current
and former officers and employees of the Company, and a current Director, in
connection with this matter. On June 13, 2002, the Company was advised by
counsel to David Schick, the Company's former chief executive officer, that the
United States Attorney's Office for the Southern District of New York had
notified such counsel that Mr. Schick was a target of the United States
Attorney's investigation of this matter. The Company has cooperated with the SEC
staff and U.S. Attorney's Office.
On November 14, 2003, the SEC filed a civil action in the United States
District Court for the Eastern District of New York against the Company, its
former chief executive officer, and its former vice president of sales and
marketing. The SEC complaint alleges fraud, books and records violations, and
reporting violations under Sections 10(b), 13(a) and 13(b)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and various rules
promulgated thereunder in connection with the financial statements included in
the Company's reports on Form 10-Q for the quarters ended June 30, September 30
and December 31, 1998. The SEC complaint seeks to enjoin the Company from future
violations of those provisions of the Exchange Act and the rules thereunder, as
well as disgorgement of ill-gotten gains, if any, which the Company does not
believe to be material in amount. With respect to the other defendants, the
complaint seeks injunctive relief, civil penalties, disgorgement and an
officer/director bar.
In September 2003, the Board of Directors appointed a Special Litigation
Committee, consisting of four non-employee Directors, which has oversight
responsibility and authority with respect to the SEC/U.S. Attorney matter. The
Company has had discussions with the SEC's northeast regional office in an
effort to resolve the complaint against the Company and, on October 21, 2004, a
closed-door settlement conference was conducted before the Court. The Company
intends to continue settlement discussions with the SEC. The next formal
settlement conference has been scheduled by the Court for January 21, 2005.
There can be no assurance that such settlement 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
Sales to a single customer approximated 56% and 51% of revenue for the
three months ended September 30, 2004 and 2003, respectively. Sales to a single
customer approximated 56% and 54% of revenue for the six months ended September
30, 2004 and 2003, respectively. Amounts due from that customer approximated 62%
and 58% of net accounts receivable at September 30, 2004 and March 31, 2004,
respectively, substantially all of which have been collected subsequent to those
dates.
5. Income Taxes
The following table summarizes income tax expense/(benefit) for the three
and six months ended September 30, 2004 and 2003:
Three months ended Six months ended
------------------ ----------------
September 30
------------
2004 2003 2004 2003
------ ----- ------ -------
Current - Federal and state .......................... $ 158 $ 23 $ 370 $ 75
Deferred - Federal and state ......................... 1,218 798 2,419 1,606
------ ----- ------ -------
Tax provision before reserve reversal ................ 1,376 821 2,789 1,681
Deferred tax reserve reversal ........................ -- (943) -- (1,715)
------ ----- ------ -------
Net income tax expense/(benefit) ..................... $1,376 ($122) $2,789 ($ 34)
====== ===== ====== =======
6
The income tax benefit of the net operating loss utilized for the three
months ended September 30, 2004 and 2003 approximates $1.1 million and $0.9
million, respectively. The income tax benefit of the net operating loss utilized
for the six months ended September 30, 2004 and 2003 approximates $2.1 million
in each period.
During fiscal 2004 the deferred tax asset valuation reserve and income tax
expense were each reduced by the amount of such reserve that the Company
believed was more likely than not to be realized. As a result, net income for
the three and six months ended September 30, 2003, respectively, was $0.9
million ($0.06 per diluted share) and $1.7 million ($0.10 per diluted share)
higher than would otherwise have been reported if such reductions had not been
recorded. At March 31, 2004, the balance of the deferred tax asset valuation
reserve was reversed in full.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act . The words or phrases "believes", "may",
"should", "will likely result", "estimates", "projects", "anticipates",
"expects" or similar expressions and variations thereof are intended to identify
such forward-looking statements. Actual results, events and circumstances could
differ materially from those set forth in such statements due to various
factors. Such factors include uncertainties as to the future sales volume of the
Company's products, 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, the pending
SEC action and U.S Attorney investigation, 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 and manufactures digital imaging systems for
the worldwide dental and medical markets. In the field of dentistry, the Company
currently manufactures and markets a variety of digital imaging products
including an intra-oral digital radiography system (CDR(R) and CDR
Wireless(TM)), a digital panoramic radiography sensor (CDRPan(R)) an integrated
digital panoramic radiography device (CDRPanX(TM)) and an intra-oral camera
system (USBCam(TM)). The Company has also developed a bone mineral density
assessment device (accuDEXA(R)) to assist in the diagnosis and treatment of
osteoporosis, which was introduced in December 1997.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to make
estimates and assumptions that affect amounts reported in the accompanying
consolidated financial statements and related footnotes. These estimates and
assumptions are evaluated on an ongoing basis based on historical developments,
market conditions, industry trends and other information the Company believes to
be reasonable under the circumstances. There can be no assurance that actual
results will conform to the Company's estimates and assumptions, and that
reported results of operations will not be materially adversely affected by the
need to make accounting adjustments to reflect changes in these estimates and
assumptions from time to time. The following policies are those that the Company
believes to be the most sensitive to estimates and judgments.
Accounts Receivable
The Company reports accounts receivable net of reserves for uncollectible
accounts. The majority of the Company's accounts receivable (62% and 58%, at
September 30, 2004 and March 31, 2004, respectively) are due from its exclusive
domestic distributor, Patterson Dental Company ("Patterson"). Other accounts
receivable are due
7
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
exclusive domestic distributor with a 30-day return policy but allows for an
additional 15 days, and accordingly recognizes allowances for estimated returns
pursuant to such policy at the time of shipment. With respect to products
shipped to its exclusive domestic distributor, the Company defers revenue until
Patterson ships such inventory from its distribution centers. Amounts received
from customers in advance of product shipment are classified as deposits from
customers. 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, and to certain shipments to Patterson described above.
Patterson instituted a policy permitting, under specific circumstances, the
exchange of CDR(R) wireless products, sold after October 23, 2003, for wired CDR
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. Previously, the Company had deferred
recognition of revenue related to Patterson's shipment of the CDR(R) wireless
product until the foregoing 90-day period had elapsed. However, during the three
months ended June 30, 2004, the Company issued a new release of its wireless
product designed to resolve the radio frequency issue. Subsequent returns and/or
exchanges have been negligible and the Company no longer defers the recognition
of revenue relating to the wireless product.
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 six months ended September 30, 2004 and 2003:
Three months ended Six months ended
---------------------- --------------------------
September 30,
------------------------------------------------------------
2004 2003 2004 2003
----- ----- ------- -------
Beginning balance ....................... $ 270 $ 98 $ 210 $ 56
Warranties recorded in period ........... 587 653 1,269 1,256
Warranties paid in period ............... (557) (653) (1,179) (1,214)
----- ----- ------- -------
Balance end of period ................... $ 300 $ 98 $ 300 $ 98
===== ===== ======= =======
8
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 $2.1 million and $2.4
million at September 30, 2004 and March 31, 2004, respectively.
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.
Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations and commercial
commitments at September 30, 2004:
====================================================================================================
PAYMENTS DUE BY PERIOD
---------------------------------------------------
CONTRACTUAL Less Than 1-3 4-5 After 5
OBLIGATIONS Total 1 year years years years
----------------------------------------------------------------------------------------------------
Operating leases $1,411 $ 496 $ 915 -- --
----------------------------------------------------------------------------------------------------
Employment agreements 1,354 581 773 -- --
----------------------------------------------------------------------------------------------------
Purchase obligations 1,829 1,829 -- -- --
----------------------------------------------------------------------------------------------------
Consulting agreement 921 340 581 -- --
----------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $5,515 $3,246 $2,269 -- --
====================================================================================================
Results of Operations
Net revenues for the three months ended September 30, 2004 increased $2.4
million (28%) to $10.9 million as compared to $8.5 million in fiscal 2004. The
increase was due to increased sales of the CDR(R) radiography and intraoral
camera products. CDR(R) product sales increased $2.5 million (35%) to $9.5
million (87% of the Company's revenues) as compared to $7.0 million (83% of
revenue) in fiscal 2004. 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, including Patterson and
distributors in Europe and Asia. Warranty revenue for the three months ended
September 30, 2004 decreased $43 (3%) to $1.2 million (11% of revenue) from $1.3
million (15% of revenue) in fiscal 2004. The Company believes that the reduction
of warranty revenue will continue as increasing numbers of the Company's legacy
customers transition to Patterson for their service and warranty needs and
revenues from Patterson increase. Total domestic revenue for the three months
ended September 30, 2004 increased $1.3 million (19%) to $7.8 million (71% of
revenue) as compared to $6.5 million (77% of revenue) in fiscal 2004. A 39%
revenue increase from Patterson was partially offset by decreases in domestic
revenues from the government and others. Total international revenue for the
three months ended September 30, 2004 increased $1.1 million (56%) to $3.1
million (28% of revenue) as compared to $2.0 million (23% of revenue) in fiscal
2004.
Net revenues for the six months ended September 30, 2004 increased $4.6
million (27%) to $21.8 million as compared to $17.2 million in fiscal 2004. The
increase was due to increased sales of the CDR(R) radiography and intraoral
camera products. CDR(R) product sales increased $4.6 million (32%) to $18.9
million (87% of revenue) as compared to $14.3 million (84% of revenue) in fiscal
2004. Warranty revenue for the six months ended September 30, 2004 decreased $8
but remains at $2.5 million (11% and 14% of revenue in fiscal 2005 and 2004,
respectively). Total domestic revenue for the six months ended September 30,
2004 increased $2.2 million (17%) to $15.4 million (71% of revenue) as compared
to $13.2 million (77% of revenue) in fiscal 2004. A 30% revenue increase from
Patterson was partially offset by decreases in domestic revenues from the
government and others. Total international revenue for the six months ended
September 30, 2004 increased $2.3 million (60%) to $6.3 million (29% of revenue)
as compared to $4.0 million (23% of revenue) in fiscal 2004.
9
Total cost of sales for the three months ended September 30, 2004
increased $0.4 million (13%) to $3.0 million (27% of revenue) as compared to
$2.6 million (31% of revenue) in fiscal 2004. The decrease in the relative total
cost of sales (3.6%) was due to improved product mix and manufacturing
efficiency.
Total cost of sales for the six months ended September 30, 2004 increased
$0.9 million (18%) to $6.2 million (28% of revenue) as compared to $5.3 million
(31% of revenue) in fiscal 2004. The decrease in the relative total cost of
sales (2.2%) was due to improved product mix and manufacturing efficiency.
Selling and marketing expenses for the three months ended September 30,
2004 increased $0.1 million (8%) to $1.5 million (14% of revenue) as compared to
$1.4 million (17% of revenue) in fiscal 2004. Increases are primarily
attributable to commissions, payroll, promotions, marketing and trade show
expense.
Selling and marketing expenses for the six months ended September 30, 2004
increased $0.1 million (5%) to $3.0 million (14% of revenue) as compared to $2.9
million (17% of revenue) in fiscal 2004. Increases are attributable to the
factors described above.
General and administrative expenses for the three months ended September
30, 2004, decreased $0.2 million (15%) to $1.3 million (12% of revenue) as
compared to $1.5 million (18% of revenue) in fiscal 2004. The decrease in
general and administrative expenses was primarily attributable to a $ 275
reduction in non-cash payroll costs and an insurance recovery of $149 related to
claims paid in connection with the SEC/US attorney matter. These decreases
offset increases in professional services, corporate governance costs and
insurance.
General and administrative expenses for the six months ended September 30,
2004, increased $0.2 million (6%) to $3.3 million (15% of revenue) as compared
to $3.1 million (18% of revenue) in fiscal 2004. The net increase in general and
administrative expenses was attributable to the items discussed above.
Research and development expenses for the three months ended September 30,
2004 increased $0.5 million (56%) to $1.3 million (12% of revenue) as compared
to $0.8 million (10% of revenue) in fiscal 2004. The increase was attributable
to the Company's technical consulting agreement with its former chief executive
officer, dated May 7, 2004, which resulted in non-cash and cash charges of $267
and $85, respectively, and to increases in payroll expenses and costs of product
development materials.
Research and development expenses for the six months ended September 30,
2004 increased $0.7 million (44%) to $2.4 million (11% of revenue) as compared
to $1.7 million (10% of revenue) in fiscal 2004. The increase was attributable
to the items discussed above.
Interest income increased for the three months and six months ended
September 30, 2004 due to an increase in the cash balance held in a money market
account.
Interest expense decreased for the six months ended September 30, 2004 as
a result of the June 2003 repayment of the balance of notes payable and the
write-off of deferred finance costs related to that note ($150).
Income before income tax for the three months ended September 30, 2004
increased $1.8 million (80%) to $3.9 million, as compared to $2.1 million in
fiscal 2004.
Income before income tax for the six months ended September 30, 2004
increased $2.9 million (68%) to $7.1 million, as compared to $4.2 million in
fiscal 2004.
Income tax expense for the three months ended September 30, 2004 increased
$1.5 million to $1.4 million as compared to a net income tax credit of $0.1
million in fiscal 2004. This change is primarily the result of an increase in
non-cash deferred income tax expense of $0.4 million and the prior year partial
reversal of the Company's tax asset valuation reserve of $0.9 million. The
valuation reserve was fully reversed at March 31, 2004.
Income tax expense for the six months ended September 30, 2004 increased
$2.8 million primarily resulting from an increase in non-cash deferred income
tax expense of $0.8 million and the prior year partial reversal of tax asset
reserves of $1.7 million. The reserve was fully reversed at March 31, 2004.
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The income tax benefit of the net operating loss utilized for the three
months ended September 30, 2004 and 2003 approximates $1.1 million and $0.9
million, respectively. The income tax benefit of the net operating loss utilized
for the six months ended September 30, 2004 and 2003 approximates $2.1 million
in each period.
During fiscal 2004 the deferred tax asset valuation reserve and income tax
expense were each reduced by the amount of such reserve that the Company
believed was more likely than not to be realized. As a result, net income for
the three and six months ended September 30, 2003, respectively, was $0.9
million ($0.06 per diluted share) and $1.7 million ($0.10 per diluted share)
higher than would otherwise have been reported if such reductions had not been
recorded. At March 31, 2004, the balance of the deferred tax asset valuation
reserve was reversed in full.
As a result of the above items, the Company's net income for the three
months ended September 30, 2004 increased $0.2 million (10%) to $2.5 million as
compared to $2.3 million in fiscal 2004.
As a result of the above items, the Company's net income for the six
months ended September 30, 2004 increased $39 (1%) to $4.3 million as compared
to $4.2 million in fiscal 2004.
Liquidity and Capital Resources
At September 30, 2004, the Company had $26.4 million in cash, cash
equivalents and short-term investments and $37.8 million in working capital, as
compared to $20.7 million in cash, cash equivalents and short-term investments
and $27.4 million in working capital at March 31, 2004.
During the six months ended September 30, 2004 and 2003 cash provided by
operations was $5.8 million. Increases in cash were primarily provided by the
Company's continuing and increasingly profitable operations. Net operating cash
receipts increased $2.3 million to $7.5 million compared to $5.2 million in
fiscal 2004. This increase in cash receipts was primarily used to reduce current
liabilities. Sales to a single customer approximated 56% and 54% of revenue for
the six months ended September 30, 2004 and 2003, respectively. Amounts due from
that customer approximated 62% and 58% of net accounts receivable at September
30, 2004 and March 31, 2004, respectively, substantially all of which have been
collected subsequent to those dates. The increase in net accounts receivable is
the result of increased product shipments during the six months ended September
30, 2004. For the six months ended September 30, 2004 Capital expenditures
increased $0.2 million to $0.4 million from $0.2 million in fiscal 2004. During
the six months ended September 30, 2003, the Company repaid its term notes to
Greystone in full. The Company remains debt free at September 30, 2004.
Future expenses relating to the legal proceedings described in Part II,
Item 1, "Legal Proceedings," to the extent not covered by insurance, could
affect the Company's cash position. The Company estimates that the coverage
available under the applicable insurance policy will be depleted during the
quarter ending December 31, 2004. Management believes that its existing capital
resources and other potential sources of credit are adequate to meet its current
cash requirements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 4. Controls and Procedures
a) Under the supervision and with the participation of the Company's
management, including its chief executive officer and principal
financial officer, the Company has evaluated the effectiveness of
the Company's disclosure controls and procedures as of September 30,
2004. They have concluded that these disclosure controls provide
reasonable assurance that the Company can collect, process and
disclose, within the time periods specified in the SEC's rules and
forms, the information required to be disclosed in its periodic
Exchange Act reports.
11
b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect its
internal controls subsequent to the date of their most recent
evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or certain of its former officers are involved in the
matters described below:
In August 1999, the Company, through its outside counsel, contacted the
Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings
for interim periods of fiscal 1999. Subsequent thereto, the SEC requested the
voluntary production of certain documents and the Company provided the SEC with
the requested materials. On August 17, 2000 and April 30, 2003, the SEC served
subpoenas upon the Company, pursuant to a formal order of investigation,
requiring the production of certain documents. The Company timely provided the
SEC with the subpoenaed materials. The Company has been informed that since
January 2002 the SEC and/or the United States Attorney's Office for the Southern
District of New York have served subpoenas upon and/or contacted certain
individuals, including current and former officers and employees of the Company,
and a current Director, in connection with this matter. On June 13, 2002, the
Company was advised by counsel to David Schick, the Company's former chief
executive officer, that the United States Attorney's Office for the Southern
District of New York had notified such counsel that Mr. Schick was a target of
the United States Attorney's investigation of this matter. The Company has
cooperated with the SEC staff and U.S. Attorney's Office.
On November 14, 2003, the SEC filed a civil action in the United States
District Court for the Eastern District of New York against the Company, its
former chief executive officer, and its former vice president of sales &
marketing. The SEC complaint alleges fraud, and books and records and reporting
violations under Sections 10(b), 13(a) and 13(b)(2) of the Exchange Act and
various rules promulgated thereunder in connection with the financial statements
included in the Company's reports on Form 10-Q for the quarters ended June 30,
September 30 and December 31, 1998. The SEC complaint seeks to enjoin the
Company from future violations of those provisions of the Exchange Act and the
rules thereunder, as well as disgorgement of ill-gotten gains, if any, which the
Company does not believe to be material in amount. With respect to the other
defendants, the complaint seeks injunctive relief, civil penalties, disgorgement
and an officer/director bar.
In September 2003, the Board of Directors appointed a Special Litigation
Committee, consisting of four non-employee Directors, which has oversight
responsibility and authority with respect to the SEC/U.S. Attorney matter. The
Company has had discussions with the SEC's northeast regional office in an
effort to resolve the complaint against the Company and, on October 21, 2004, a
closed-door settlement conference was conducted before the Court. The Company
intends to continue settlement discussions with the SEC. The next formal
settlement conference has been scheduled by the Court for January 21, 2005.
There can be no assurance that such settlement 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
12
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 2004 Annual Meeting of Stockholders (the
"Annual Meeting") on September 22, 2004.
(b) The following matter concerning the election of Directors was voted
upon at the Annual Meeting with the accompanying results:
Election of Directors:
Number of Votes For Number of Votes
------------------- Withheld
--------
William K. Hood 14,313,558 8,390
(New term expires in 2007)
Curtis M. Rocca III
(New term expires in 2007) 14,315,858 6,090
Jeffrey T. Slovin
(New term expires in 2007) 14,312,358 9,590
The terms of the other Directors of the Company continued after the
meeting, as follows: Euval Barrekette and Jonathan Blank serve in
the class whose term expires in 2005 and Allen Schick and Uri
Landesman serve in the class whose term expires in 2006. On October
13, 2004, Arthur D. Kowaloff was appointed to the Board for a term
that expires in 2005. Upon the expiration of the term of a class of
Directors, the members of such class will be elected for three-year
terms at the annual meeting of stockholders held in the year in
which such term expires.
(c) The following additional matter was voted upon at the Annual Meeting
held on September 22, 2004 with the following results:
Ratification of the selection of Grant Thornton LLP as the Company's
independent accountants for the fiscal year ending March 31, 2005:
Number of votes for: 14,228,330
Number of votes against: 90,190
Number of abstentions: 3,428
(d) Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits
Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
13
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.
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: November 11, 2004 By: /S/ Jeffrey T. Slovin
--------------------------------------
Jeffrey T. Slovin
Chief Executive Officer
By: /S/ Ronald Rosner
--------------------------------------
Ronald Rosner
Director of Finance and Administration
(Principal Financial Officer)
14