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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, 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
incorporation or organization)
  (I.R.S. Employer
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 February 7, 2005, 15,957,052 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, 2004 (unaudited)
and March 31, 2004
Page 1
   
  Consolidated Statements of Operations for the three and nine
months ended December 31, 2004 and 2003 (unaudited)
Page 2
   
  Consolidated Statements of Stockholders’ Equity as of
December 31, 2004 and 2003 (unaudited)
Page 3
   
  Consolidated Statements of Cash Flows for the nine months ended
December 31, 2004 and 2003 (unaudited)
Page 4
   
  Notes to Consolidated Financial Statements (unaudited) Page 5
   
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 13
   
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 Page 15
   
SIGNATURES Page 15
   
CERTIFICATIONS Page 16



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,    


2004    

(unaudited)        
Assets    
Current assets    
        Cash and cash equivalents $ 16,560   $ 20,734  
        Short-term investments 14,984    
        Accounts receivable, net of allowance for doubtful accounts
                of $138 and $42, respectively
8,964   3,982  
        Inventories 3,687   3,057  
        Prepayments and other current assets 847   861  
        Deferred income taxes 6,967   6,481  
 
   
   
                        Total current assets 52,009   35,115  
Equipment, net 1,410   1,405  
Goodwill, net 266   266  
Deferred income taxes 93   5,679  
Other assets 257   278  
 
   
   
                        Total assets $ 54,035   $ 42,743  

   
   
             
Liabilities and Stockholders’ Equity    
Current liabilities    
        Accounts payable and accrued expenses $ 2,077   $ 1,456  
        Accrued salaries and commissions 1,801   1,390  
        Income taxes payable 134   142  
        Deposits from customers 82   13  
        Warranty obligations 393   210  
        Deferred revenue 4,438       4,504    
 
   
   
                        Total current liabilities 8,925   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:
                15,930,707 and 15,026,470 shares issued and outstanding, respectively)
159   150  
        Additional paid-in capital 46,016   44,626  
        Accumulated deficit (1,065 )   (9,748 )  
 
   
   
45,110   35,028  
 
   
   
                        Total liabilities and stockholders’ equity $ 54,035   $ 42,743  
 
   
   
             

           
             

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
December 31,
  Nine months ended
December 31,
 
2004   2003   2004   2003  

 
 
 
 
Revenue, net $ 16,813   $ 12,124   $ 38,564   $ 29,301  
Cost of sales   4,144     3,063     10,325     8,316  
 
 
 
 
 
                Gross profit 12,669   9,061   28,239   20,985  
       
Operating expenses:        
        Selling and marketing 2,235   1,655   5,222   4,505  
        General and administrative 1,723   1,725   4,992   4,921  
        Research and development   1,456     827     3,873     2,508  
 
 
 
 
 
                Total operating costs   5,414     4,207     14,087     11,934  
 
 
 
 
 
       
                Income from operations 7,255   4,854   14,152   9,051  
       
Other income (expense)        
        Interest income 111   39   288   88  
        Interest expense   (9 )   (180 )
        Other income      —     4          —     141  
 
 
 
 
 
Total other income   111     34     288     49  
 
 
 
 
 
       
                Income before income taxes 7,366   4,888   14,440   9,100  
       
                Provision for income taxes   2,968     34     5,757         —  
 
 
 
 
 
       
                Net income $ 4,398   $ 4,854   $ 8,683   $ 9,100  
 
 
 
 
 
               
                Basic earnings per share $ 0.28   $ 0.47   $ 0.57   $ 0.88  
 
 
 
 
 
                Diluted earnings per share $ 0.25   $ 0.29   $ 0.50   $ 0.54  
 
 
 
 
 
                Weighted average common shares (basic)   15,440,891     10,407,356     15,189,316     10,334,431  
 
 
 
 
 
                Weighted average common shares (diluted)   17,359,203     16,879,982     17,212,293     16,776,152  
 
 
 
 
 
 

 
The accompanying notes are an integral part of these financial statements.

2



Schick Technologies, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
(In thousands, except share amounts)

 
Additional
Paid - in
Capital
  Accumulated
Deficit
Total
Stockholders’
Equity
 
Common Stock      

Shares   Amount
 
 
 
 
   
 
Balance at March 31, 2003 10,206,425   $ 102   $ 42,618   $ (27,857 )   $ 14,863  
     Issuance of common stock 235,555     2     305       307  
     Tax benefit of stock options exercised       275       275  
     Non cash compensation       234       234  
     Other       100       100  
     Net income         9,100       9,100  
 
 
 
 
   
 
Balance at December 31, 2003 10,441,980   $ 104   $ 43,532   $ (18,757 )   $ 24,879  
 
 
 
 
   
 
                     
Balance at March 31, 2004 15,026,470   $ 150   $ 44,626   $ (9,748 )   $ 35,028  
     Issuance of common stock 904,237     9     378       387  
     Tax benefit of stock options exercised       229       229  
     Non cash compensation       783       783  
     Net income         8,683       8,683  
 
 
 
 
   
 
Balance at December 31, 2004 15,930,707   $ 159   $ 46,016   $ (1,065 )   $ 45,110  
 
 
 
 
   
 
 

 
The accompanying notes are an integral part of these financial statements. 

3



Consolidated Statements of Cash Flows (unaudited)
(In thousands)

 
Nine months ended
December 31,
   
2004     2003    

   
   
Cash flows from operating activities          
Net income   $ 8,683     $ 9,100    
        Adjustments to reconcile net income to net cash provided by          
                 operating activities                  
                        Non cash compensation     783       234    
                        Depreciation and amortization     544       825    
                        Amortization of deferred financing charges       150    
                        Deferred tax asset     5,100       (470 )  
                        Tax benefit of stock options exercised     229       275    
                        Gain from repayment of long-term debt       (50 )  
                        Provision for excess and obsolete inventory     89      
                        Changes in assets and liabilities:          
                                Accounts receivable     (4,982 )     (2,129 )  
                                Inventories     (719 )     (343 )  
                                Prepayments and other current assets     22       (107 )  
                                Other assets     3       (80 )  
                                Accounts payable and accrued expenses     1,032       785    
                                Income taxes payable     (8 )     102    
                                Deposits from customers     69       (23 )  
                                Warranty obligations     183       154    
                                Deferred revenue     (66 )     743    
   
   
   
                                                Net cash provided by operating activities     10,962       9,166    
   
   
   
Cash flows from investing activities          
        Proceeds of short-term investments       703    
        Purchase of short-term investments     (14,984 )    
        Capital expenditures     (531 )     (275 )  
   
   
   
                                                Net cash (used in) provided by investing activities     (15,515 )     428    
   
   
   
Cash flows from financing activities          
        Proceeds from issuance of common stock     379       300    
        Payment of long-term debt       (1,453 )  
   
   
   
                                                Net cash provided by  (used in ) investing activities     379       (1,153 )  
   
   
   
           
Net (decrease) increase in cash and cash equivalents     (4,174 )     8,441    
           
Cash and cash equivalents at beginning of period     20,734       7,100    
   
   
   
Cash and cash equivalents at end of period   $ 16,560     $ 15,541    
   
   
   
Interest paid     $ 32    
   
   
   
Income taxes paid   $ 353     $ 86    
   
   
   
 

 

The accompanying notes are an integral part of these financial statements.


4



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 nine months ended December 31, 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 December 31, 2004, include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances have been eliminated. Certain accounts in previously issue financial statements have been reclassified to conform to the current presentation.

Stock-Based Compensation

                At December 31, 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 or exceeding 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

 
2004   2003   2004   2003  

 
 
 
 
Net income, as reported $ 4, 398   $ 4,854   $ 8,683   $ 9,100  
Deduct:  Total stock-based employee compensation expense
         determined under fair value based method for all
         awards, net of related tax effects
  168     70     514     209  
 
 
 
 
 
Proforma net income $ 4,230   $ 4,784   $ 8,169   $ 8,891  
 
 
 
 
 
Earnings per share:                
         Basic - as reported $ 0.28   $ 0.47   $ 0.57   $ 0.88  
 
 
 
 
 
         Basic – proforma $ 0.27   $ 0.46   $ 0.54   $ 0.86  
 
 
 
 
 
         Diluted - as reported $ 0.25   $ 0.29   $ 0.50   $ 0.54  
 
 
 
 
 
         Diluted – proforma $ 0.25   $ 0.28   $ 0.48   $ 0.53  
 
 
 
 
 

5



Recently Issued Accounting Standards

 
        Stock-Based Compensation
 

                In December 2004 the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (revised 2004) (“FAS 123R”) “Share-Based Payment”. The statement supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” and establishes fair-value-based measurement in accounting for share-based payment transactions with employees for public companies in most instances. FASB 123R is effective for interim and annual periods beginning after June 15, 2005. The Company is evaluating the effect FAS 123R on its consolidated financial position, results of operations and cash flows.

        Inventory Costs

                In November 2004 the Financial Accounting Standards Board issued FASB Statement No. 151 (“FASB 151”) “Inventory Costs”. The statement amends ARB No. 43, Chapter 4, “Inventory Pricing” and requires that unallocated overhead be recognized as an expense in the period in which it is incurred. FASB 151 is effective for fiscal years beginning after June 15, 2005. The Company believes that its current method of inventory pricing is in compliance with the requirements of the statement. Accordingly, the adoption of FASB 151 will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

        Income Taxes

                In December 2004 the Financial Accounting Standards Board issued FASB Staff Position on Statement 109 (“FSP FAS109-1”) (“FSP”) “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (the “Act”). The FSP states that the new tax rate reductions created in the Act should be treated as special deductions when accounting for income taxes. As a result deferred tax assets will not be adjusted to reflect the reduced tax rates. The Tax Act is effective for years beginning after December 31, 2004. The Company is evaluating the potential effect of the FSP since the Act replaces other income tax incentives, which will no longer be available to the Company. These incentives have been treated in a similar manner for financial accounting purposes.

2.             Inventories

                Inventories, net of reserves, are comprised of the following:

 
December 31,   March 31,  
2004
   
 
Raw materials   $ 2,069   $ 2,088  
Work-in-process     102     246  
Finished goods     1,516     723  


Total inventories   $ 3,687   $ 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 nine months ended December 31, 2004 and 2003:


6



Three months ended December 31,   Nine months ended December 31,  
2004   2003 2004   2003
 
 
 
 
 
Basic shares 15,440,891   10,407,356   15,189,316   10,334,331  
Dilutive:
Options 1,457,509   1,382,540   1,342,905   1,389,582  
Warrants 460,803   5,090,086   680,072   5,052,239  




Diluted shares 17,359,203   16,879,982   17,212,293   16,776,152  




 

                The Company excluded 87,061 and 93,288 options from the computation of diluted earnings per share for the three months ended December 31, 2004 and 2003, respectively, because they are anti-dilutive. The Company excluded 102,454 and 109,187 options from the computation of diluted earnings per share for the nine months ended December 31, 2004 and 2003, respectively, because they are anti-dilutive. In November 2004, the Company’s CEO exercised 750,000 warrants, pursuant to the cashless provisions of his warrant grant; as a result, he received 706,564 unregistered shares of common stock. The market price of the Company’s Common Stock was $12.95 at the date of exercise. The shares acquired by the CEO remain subject to registration rights agreements.

4.             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 property damage. 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 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.


7



                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. At that conference, another formal settlement conference was scheduled by the Court for January 21, 2005, but was subsequently postponed by the Court. A status conference was scheduled by the Court for February 25, 2005. The Company intends to continue settlement discussions with the SEC. There can be no assurance that settlement discussions will continue and/or will be successful. During the three months ended December 31, 2004, the insurance coverage available to the Company for legal fee reimbursements and indemnification costs was fully depleted. 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 74% and 63% of net revenue for the three months ended December 31, 2004 and 2003, respectively. Sales to a single customer approximated 64% and 58% of net revenue for the nine months ended December 31, 2004 and 2003, respectively. Amounts due from that customer approximated 81% and 58% of net accounts receivable at December 31, 2004 and March 31, 2004, respectively, all of which have been substantially collected subsequent to those dates.

5.             Income Taxes

                The following table summarizes income tax expense/(benefit) for the three and nine months ended December 31, 2004 and 2003:

 
Three months ended   Nine months ended
December 31
 
 
 
 
2004   2003   2004   2003  
 
 
 
 
 
Current – Federal and state $ 58   $ 131   $ 428   $ 206  
Deferred – Federal and state   2,910     1,838     5,329     3,444  




Tax provision before reserve reversal   2,968     1,969     5,757     3,650  
Deferred tax reserve reversal       (1,935 )       (3,650 )




Net income tax expense $ 2,968   $ 34   $ 5,757      




 

                The income tax benefit of the net operating loss utilized for the three months ended December 31, 2004 and 2003 approximates $3.3 million and $1.7 million, respectively. The income tax benefit of the net operating loss utilized for the nine months ended December 31, 2004 and 2003 approximates $5.4 million and $3.8 million, respectively.

                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 nine months ended December 31, 2003, respectively, was $1.9 million ($0.11 per diluted share) and $3.7 million ($0.22 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.


8



Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

                This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “believes”, “may”, “should”, “will likely result”, “estimates”, “projects”, “anticipates”, “expects” or similar expressions and variations thereof are intended to identify such forward-looking statements. Actual results, events and circumstances could differ materially from those set forth in such statements due to various factors. Such factors include uncertainties as to the future sales volume of the Company’s products and the pending SEC action and U.S. Attorney investigation, th e 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.

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. T he 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 (81% and 58%, at December 31, 2004 and March 31, 2004, respectively) are due from its exclusive domestic distributor, Patterson Dental Company (“Patterson”). Other accounts receivable are due from international distributors and agencies of the U.S. military. Credit is extended to distributors on varying terms between 30 and 90 days. Most international credit is underwritten by credit insurance. The Company provides an allowance for doubtful accounts based upon analysis of the accounts receivable aging. The Company writes off accounts receivable when they become uncollectible. Subsequently received payments are credited to operations.

                Inventories

                Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market value. Cost is determined principally on the standard cost method for manufactured goods and on the average cost method for other inventories, each of which approximates actual cost on the first-in, first-out method. The Company establishes reserves for inventory estimated to be obsolete, unmarketable or slow moving 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.


9



                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, Patterson, 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 Patterson, the Company defers revenue recognition 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® 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® 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 potential radio frequency issues. Subsequent returns and/or exchanges have been negligible and the Co mpany no longer defers the recognition of revenue relating to the wireless product beyond its standard revenue-recognition policy for products shipped to Patterson, as discussed above.

                Warranties

                The Company records a liability for an estimate of costs that it expects to incur under its basic limited warranty when product revenue is recognized. Factors affecting the Company’s warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim. The company periodically assesses the adequacy of its warranty liability based on changes in these factors.

                The following table reconciles aggregate warranty liability for the three and nine months ended December 31, 2004 and 2003:

         
Three months ended   Nine months ended  
 
 
 
December 31,  
 
 
2004   2003   2004   2003  
 
 
 
 
 
Beginning balance     $ 270   $ 98   $ 210   $ 56  
Warranties recorded in period       650     654     1,770     1,880  
Warranties paid in period       (527 )   (567 )   (1,587 )   (1,751 )
 
 
 
 
 
Balance end of period     $ 393   $ 185   $ 393   $ 185  
 
 
 
 
 
 

                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 $2.2 million and $2.3 million at December 31, 2004 and 2003, 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.


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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 income tax incentives available to system purchasers.

Contractual Obligations and Commercial Commitments

                The following table summarizes contractual obligations and commercial commitments at December 31, 2004:

 
PAYMENTS DUE BY PERIOD  
 
 
CONTRACTUAL
OBLIGATIONS
  Total   Less Than
1 year
  1-3
years
  4-5
years
  After 5
years
 

 
 
 
 
 
 
Operating leases   $ 1,290   $ 501   $ 789      
   
 
 
 
 
 
Employment agreements     1,210     587     623      
   
 
 
 
 
 
Purchase obligations     1,250     1,250          
   
 
 
 
 
 
Consulting agreement     836     340     496      
   
 
 
 
 
 
Total Contractual
Cash Obligations
  $ 4,586   $ 2,678   $ 1,908      
   
 
 
 
 
 
 

Results of Operations

                Net revenues for the three months ended December 31, 2004 increased $4.7 million (39%) to $16.8 million as compared to $12.1 million in fiscal 2004. The increase was due to increased sales of the Company’s CDR® radiography and intraoral camera products. CDR® product sales increased $4.9 million (46%) to $15.5 million (93% of the Company’s net revenues) as compared to $10.7 million (88% of the Company’s net revenues) in the same period 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, particularly Patterson. Warranty revenue for the three months ended December 31, 2004 decreased $0.1 million (8%) to $1.2 million (7% of revenue) from $ 1.3 million (11% of revenue) for the same period 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. Total domestic product revenue for the three months ended December 31, 2004 increased $4.9 million (61%) to $13.1 million (78% of revenue) as compared to $8.2 million (67% of revenue) for the same period in fiscal 2004. Total international product revenue for the three months ended December 31, 2004 decreased $0.1 million (5%) to $2.5 million (15% of revenue) as compared to $2.6 million (22% of revenue) for the same period in fiscal 2004.

                Net revenues for the nine months ended December 31, 2004 increased $9.3 million (32%) to $38.6 million as compared to $29.3 million for the same period in fiscal 2004. The increase was due to increased sales of the Company’s CDR® radiography and intraoral camera products. CDR® product sales increased $9.5 million (38%) to $34.5 million (90% of the Company’s net revenues) as compared to $25.0 million (85% of the Company’s net revenues) in the same period in fiscal 2004. 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, 2004 decreased $0.1 million (3%) to $3.7 million (9% of total revenue) as compared to $3.8 million (13% of revenue) f or the same period in fiscal 2004. Total domestic product revenue for the nine months ended December 31, 2004 increased $7.2 million (38%) to $26.0 million (67% of revenue) as compared to $18.8 million (65% of revenue) for the same period in fiscal 2004. Total international product revenue for the nine months ended December 31, 2004 increased $2.2 million (34%) to $8.8 million (23% of revenues) as compared to $6.6 million (23% of revenue) for the same period in fiscal 2004.

                Total cost of sales for the three months ended December 31, 2004 increased $1.0 million (35%) to $4.1 million (24.6% of net revenue) as compared to $3.1 million (25.3% of net revenue) for the three months ended December 31, 2003. The decrease in the relative total cost of sales (0.7%) was due to improved product mix and manufacturing efficiency more than offsetting an excess and obsolete inventory provision of $0.1 million or 0.4% of revenue in fiscal 2005.


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                Total cost of sales for the nine months ended December 31, 2004 increased $2.0 million (24%) to $10.3 million (26.8% of net revenue) as compared to $8.3 million (28.4% of net revenue) for the nine months ended December 31, 2003. The decrease in the relative total cost of sales (1.6%) was due to improved product mix and manufacturing efficiency more than offsetting an excess and obsolete inventory provision of $0.1 million or 0.2% of revenue in fiscal 2005.

                Selling and marketing expenses for the three months ended December 31, 2004 increased $0.5 million (35%) to $2.2 million (13% of net revenue) as compared to $1.7 million (14% of net revenue) for the three months ended December 31, 2003. This primarily relates to an increase in commissions paid by the Company, driven by increased revenue. Other increases include payroll and related expenses as well as advertising and marketing expenses.

                Selling and marketing expenses for the nine months ended December 31, 2004 increased $0.7 million (16%) to $5.2 million (14% of net revenue) as compared to $4.5 million (15% of net revenue) for the nine months ended December 31, 2003. This primarily relates to an increase in commissions paid by the Company, driven by increased revenue. Other increases include payroll and related expenses and advertising and marketing expenses.

                General and administrative expenses for the three months ended December 31, 2004, were unchanged from fiscal 2004 at $1.7 million (10% and 14% of net revenue, respectively). Various components of the Company’s G&A expenses for the quarter increased by $0.5 million, primarily as a result of increases in non-cash payroll charges, legal expenses incurred in connection with the SEC action and costs incurred to comply with new Federal regulations for public companies. However, those increases were offset by a $0.5 million recovery received from the Company’s Directors and Officers liability insurer for legal expenses paid in prior periods in connection with the SEC action.

                General and administrative expenses for the nine months ended December 31, 2004, increased $0.1 million (1%) to $5.0 million (13% of net revenue) as compared to $4.9 million (17% of net revenue) for the nine months ended December 31, 2004. Various components of the Company’s G&A expenses for the nine months increased by $0.8 million, primarily as a result of increases in non-cash payroll charges, legal expenses incurred in connection with the SEC action, and costs incurred to comply with new Federal regulations for public companies. However, those increases were partially offset by a $0.7 million recovery received from the Company’s Directors and Officers liability insurer for legal expenses paid in prior periods in connection with the SEC action.

                Research and development expenses for the three months ended December 31, 2004 increased $0.7 million (76%) to $1.5 million (9% of net revenue) as compared to $0.8 million (7% of net revenue) for the same period in fiscal 2004. The increase was attributable to increases in payroll expenditures and product development costs, including expenses for advanced development projects, as well as 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 $122 and $85, respectively.

                Research and development expenses for the nine months ended December 31, 2004 increased $1.4 million (54%) to $3.9 million (10% of net revenue) as compared to $2.5 million (9% of net revenue) for the same period in fiscal 2004. The increase was attributable to increases in payroll expenditures and product development costs, including expenses for advanced development projects, as well as 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 $455 and $170, respectively.

                Interest income for the three months and nine months ended December 31, 2004 by $0.1 million and $0.2 million, respectively, due to an increase in the cash balance held in a money market account.

                Interest expense decreased for the nine months ended December 31, 2003 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).


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                Income before income tax for the three months ended December 31, 2004 increased $2.5 million (51%) to $7.4 million, as compared to $4.9 million for the same period in fiscal 2004.

                Income before income tax for the nine months ended December 31, 2004 increased $5.3million (59%) to $14.4 million, as compared to $9.1 million for the same period in fiscal 2004.

                Income tax expense for the three months ended December 31, 2004 increased $3.0 million to $3.0 million as compared to $34 for the three months ended December 31, 2003. This change is primarily the result of an increase in non-cash deferred income tax expense of $1.0 million and the prior year partial reversal of the Company’s tax asset valuation reserve of $1.9 million. The valuation reserve was fully reversed at March 31, 2004.

                Income tax expense for the nine months ended December 31, 2004 increased $5.8 million to $5.8 million primarily resulting from an increase in the current tax expense of $0.2 million, and increase in non-cash deferred income tax expense of $1.8 million and the prior year partial reversal of tax asset reserves of $3.7 million. The reserve was fully reversed at March 31, 2004.

                As a result of the above items, the Company’s net income for the three months ended December 31, 2004 decreased $0.5 million (9%) to $4.4 million as compared to $4.9 million in the same period in fiscal 2004.

                As a result of the above items, the Company’s net income for the nine months ended December 31, 2004 decreased $0.4 million (5%) to $8.7 million as compared to $9.1 million in the same period in fiscal 2004.

Liquidity and Capital Resources

                At December 31, 2004, the Company had $31.5 million in cash, cash equivalents and short-term investments and $43.1 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 nine months ended December 31, 2004 and 2003 cash provided by operations was $11.0 million and $9.2 million, respectively. Increases in cash were primarily provided by the Company’s continuing and increasingly profitable operations. Sales to a single customer approximated 64% and 58% of revenue for the nine months ended December 31, 2004 and 2003, respectively. Amounts due from that customer approximated 81% and 58% of net accounts receivable at December 31, 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 nine months ended December 31, 2004. For the nine months ended December 31, 2004 capital expenditures increased $0.2 millio n to $0.5 million from $0.3 million in the same period of fiscal 2004. During the nine months ended December 31, 2003, the Company repaid its term notes to Greystone Funding Corporation in full. The Company remains debt free at December 31, 2004.

                With regard to the legal proceedings described in Part II, Item 1, “Legal Proceedings,” the coverage available under the applicable insurance policy was fully depleted during the quarter ended December 31, 2004. 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.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

                None.


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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 December 31, 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.
 
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. At that conference, another formal settlement conference was scheduled by the Court for January 21, 2005, but was subsequently postponed by the Court. A status conference was scheduled by the Court for February 25, 2005. The Company intends to continue settlement discussions with the SEC. There can be no assurance that settlement discussions will continue and/or will be successful. During the three months ended December 31, 2004, the insurance coverage available to the Company for legal fee reimbursements and indemnification costs was fully depleted. 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.


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  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.
   
Item 4. Submission of Matters to a Vote of Security Holders
   
  Not Applicable.
   
Item 5. Other Information
   
  Not Applicable.
   
Item 6. 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. § 1350.
 
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. § 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:  February 10, 2005  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)

15