including in net income of the period of the change the cumulative effect of the change. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005. The Company is evaluating the effect of SFAS No. 154 but believes there will not be any material effect on the financial statements.
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. FAS 123R is effective for public companies for years beginning after December 31, 2005. The Company is currently evaluating the effect of FAS 123R on its consolidated financial position, results of operations and cash flows.
Basic earnings per share are calculated by dividing net income by the average number of common shares outstanding during the period. 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 quarter are exercised at the beginning of the period and the proceeds used by Schick Technologies, Inc. to purchase shares at the average market price for the period. The following is the reconciliation from basic to diluted shares for the three months ended June 30, 2005 and 2004:
The Company excluded 76,425 and 133,239 options from the computation of diluted earnings per share for the three months ended June 30, 2005 and 2004, respectively, because they are anti-dilutive.
The Company is subject to the risk of product liability and other liability claims in the event that the use of its products results in personal injury or other claims. Although the Company has not experienced any product liability claims to date, any such claims could have an adverse impact on the Company. The Company maintains
insurance coverage related to product liability claims, but there can be no assurance that product or other claims will not exceed its insurance coverage limits, or that such insurance will continue to be available on commercially acceptable terms, or at all.
SEC Investigation
In June 2005, the Securities and Exchange Commission (“SEC”) civil action, against the Company, its former chief executive officer, and its former vice president of sales and marketing, which has previously been reported by the Company, was settled against all defendants. On June 20, 2005, final judgment was entered by the court reflecting the terms of the parties’ settlement, and the SEC action was dismissed. Under the terms of the settlement, the Company neither admitted nor denied the allegations contained in the SEC Complaint and consented to the entry of an order permanently enjoining it from violating the books and records, periodic reporting and internal control provisions contained in Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. The settlement agreement did not require any monetary payment by the Company. The Company believes that it will not incur any further legal fees or indemnification costs in connection with this matter.
The following is a summary of the events leading up to the settlement of the SEC action:
In August 1999, the Company, through its outside counsel, contacted the Division of Enforcement of the SEC to advise it of certain matters related to the Company’s restatement of earnings for interim periods of fiscal 1999. The SEC subsequently conducted an investigation of the Company and certain individuals, including current and former officers and employees of the Company, pursuant to a Formal Order of Investigation. The Company cooperated with the SEC staff throughout the course of the investigation.
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 alleged fraud, and books and records and reporting violations under Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act and various rules promulgated thereunder in connection with the financial statements included in the Company’s reports on Form 10-Q for the quarters ended June 30, September 30 and December 31, 1998. The SEC complaint sought to enjoin the Company from future violations of those provisions of the Exchange Act and the rules thereunder, as well as disgorgement of any allegedly ill-gotten gains. With respect to the other defendants, the complaint sought injunctive relief, civil penalties, disgorgement and an officer/director bar. In June 2005, this action was settled, as described above.
Litigation
The Company is named as a party in other legal proceedings which are not described herein because they are not material. In addition, the Company could become a party to a variety of legal actions, 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. Recent court decisions and legislative activity may increase the Company’s exposure for any of these types of claims. In some cases, substantial punitive damages may be sought. The Company currently has insurance coverage for some of these potential liabilities. Other potential liabilities may not be covered by insurance, insurers may dispute coverage, or the amount of insurance may not be sufficient to cover the damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered by insurance and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future.
Other
Sales to a single customer approximated 66% and 55% of net revenue for the three months ended June 30, 2005 and 2004, respectively. Amounts due from that customer approximated 52% and 49% of net accounts receivable at June 30, 2005 and March 31, 2005, respectively, substantially all of which have been collected subsequent to those dates.
7
5. Income Taxes
Income tax expense for the three months ended June 30, 2005 and 2004 are summarized as follows:
| | | | | | | | |
| | | June 30, | |
| | | 2005 | | 2004 | |
| | |
| |
| |
| Current taxes | | $ | 1,754 | | $ | 212 | |
| Deferred taxes | | | 583 | | | 1,201 | |
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| Total tax expense | | $ | 2,337 | | $ | 1,413 | |
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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 risks and uncertainties relating to the Company’s dependence on its products, its exclusive North American distributor, its foreign distributors, its key personnel and key suppliers; the possibility of changing economic and competitive conditions; technological developments; competition; market uncertainties; fluctuation in results and seasonality; litigation; control of the Company by certain stockholders; and other risks and uncertainties, including those detailed in the Company’s 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® and CDR Wireless™), a digital panoramic radiography sensor (CDRPan®) and integrated device (CDRPanX™), an intra-oral camera system (USBCam®), and a DC dental x-ray generator (SDX™). The Company also manufactures and sells a bone mineral density assessment device (accuDEXA®) which it developed to assist in the diagnosis and treatment of osteoporosis.
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 allowance for uncollectible accounts. The Company primarily sells on open credit terms to its exclusive domestic distributor, Patterson Dental Company (“Patterson”) and to the U.S. Government, and upon signed purchase orders to hospitals and universities. The majority of the Company’s accounts receivable (63% and 58%, at June 30, 2005 and March 31, 2005, respectively) are due from Patterson. The Company’s international sales are generally prepaid, guaranteed by irrevocable letter of credit or underwritten by credit insurance. In a limited number of cases, international dealers are granted open credit terms. Warranty shipments are prepaid. Revenue from customers is subject to agreements allowing limited rights of return.
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Accordingly, the Company reduces revenue recognized for estimated future returns. The estimate of future returns is adjusted periodically based upon historical rates of return. The Company provides an allowance for doubtful accounts based upon its analysis of aged accounts receivable.
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
The Company recognizes revenue when each of the following four criteria is met: 1) a contract or sales arrangement exists; 2) products have been shipped and title has been transferred or services have been rendered; 3) the price of the products or services is fixed or determinable; and 4) collectibility is reasonably assured. 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. Revenue from shipments to foreign customers is recognized at the time of shipment in accordance with foreign sales orders. 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. The Company records as revenue shipping and handling charges invoiced to customers. The cost of shipping and handling is recorded in cost of sales. 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 shipments to Patterson described above.
Warranties
The Company records a liability for an estimate of costs that it expects to incur under its basic limited warranty when product revenue is recognized. Factors affecting the Company’s warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim. The Company periodically assesses the adequacy of its warranty liability based on changes in these factors.
The following table reconciles warranty liability for the three months ended June 30, 2005 and 2004:
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| | | 2005 | | 2004 | |
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| Beginning balance | | $ | 446 | | $ | 210 | |
| Warranties charged in period | | | 976 | | | 622 | |
| Warranties paid in period | | | (915 | ) | | (562 | ) |
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| Balance end of period | | $ | 507 | | $ | 270 | |
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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 $2.3 and $2.2 million at June 30, 2005 and March 31, 2005, respectively. Services costs are expensed as incurred.
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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.
Goodwill and Other Intangible Assets
Effective April 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, which established financial accounting and reporting for acquired goodwill and other intangible assets and superseded Accounting Principles Board Opinion (“APB”) No. 17, “Intangible Assets”. Under SFAS No. 142, goodwill and indefinite-lived purchased intangible assets are no longer amortized but are reviewed at least annually for impairment. The Company has elected to perform this review annually as of February 28.
Identifiable intangible assets that have finite lives continue to be amortized over their estimated useful lives. Other intangible assets include costs incurred to secure patents and deferred financing costs, and are included in other assets. Finite-lived purchased intangible assets are amortized principally by the straight-line method over their expected period of benefit. Costs incurred to secure patents are amortized by the straight-line method over periods of five years.
Long-lived assets and intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations and commercial commitments at June 30, 2005:
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| | | PAYMENTS DUE BY PERIOD | |
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| CONTRACTUAL
OBLIGATIONS | | Total | | Less Than
1 year | | 1-3
years | | 4-5
years | | After 5
years | |
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| Operating leases | | $ | 1,041 | | $ | 510 | | $ | 531 | | | — | | | — | |
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| Consulting and non-compete
agreement | | | 666 | | | 340 | | | 326 | | | | | | | |
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| Employment agreements | | | 922 | | | 587 | | | 335 | | | — | | | — | |
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| Total Contractual
Cash Obligations | | $ | 2,629 | | $ | 1,437 | | $ | 1,192 | | $ | — | | $ | — | |
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Results of Operations
Net revenues for the three months ended June 30, 2005 increased $4.8 million (44%) to $15.7 million from $10.9 million in fiscal 2005. The increase was due to increased sales of the CDR® radiography and intraoral camera products. CDR® product sales increased $5.0 million (53%) to $14.4 million (92% of the Company’s net revenues) from $9.4 million (87% of the Company’s net revenues) in fiscal 2005. The Company believes that the increase in sales is a result of growing acceptance of its products by dental customers and sales of the Company’s new panoramic product. CDR® warranty revenue for the three months ended June 30, 2005 declined 6% to $1.2 million (8% of the Company’s net revenues compared to 12% in fiscal 2005). Domestic product revenue for the three months ended June 30, 2005 increased $4.3 million (67%) to $10.7 million (68% of the Company’s net revenues) from $6.4 million in fiscal 2005 (59% of the Company’s net revenues). International revenue for the three
10
months ended June 30, 2005 increased $0.6 million (19%) to $3.8 million (24% of the Company’s net revenues) from $3.2 million in fiscal 2005 (29% of the Company’s net revenues).
Cost of sales for the three months ended June 30, 2005 increased $1.5 million (46%) to $4.7 million (30.0% of net revenue) from $3.2 million (29.5% of net revenue) in fiscal 2005. The increase in the relative total cost of sales (0.5%) was due primarily to the success of the Company’s newest product offerings which have relatively lower gross margins.
Selling and marketing expenses for the three months ended June 30, 2005 increased $0.9 million (60%) to $2.3 million (15% or net revenue) from $1.5 million (13% of net revenue) in fiscal 2005. Increases were primarily related to sales commissions, trade shows, and training events.
General and administrative expenses for the three months ended June 30, 2005, decreased $0.2 million (9%) to $1.8 million (12% of net revenue) from $2.0 million (18% of net revenue) in fiscal 2005. The decrease in general and administrative expenses was primarily attributable to reduced non-cash charges to payroll and insurance cost reductions.
Research and development expenses for the three months ended June 30, 2005 were unchanged at $1.1 million (7% and 10% of net revenue in fiscal 2006 and 2005, respectively).
Income from operations for the three months ended June 30, 2005 increased $2.6 million (83%) to $5.7 million from $3.1 million in fiscal 2005.
Interest income for the three months ended June 30, 2005 increased $0.2 million to $0.3 million from $0.1 million in fiscal 2005 as a result of an increase in the Company’s cash available for investment.
Income before income taxes for the three months ended June 30, 2005 increased $2.8 million (86%) to $6.0 million from $3.2 million in fiscal 2005.
Income tax expense for the three months ended June 30, 2005 increased $0.9 million (65%) to $2.3 million from $1.4 million in fiscal 2005. The increase in income tax is the result of the increase in taxable income.
As a result of the above items, the Company’s net income increased $1.8 million (102%) to $3.6 million (23% of revenue) for the three months ended June 30, 2005 from $1.8 million (17% of revenue) in fiscal 2005.
Liquidity and Capital Resources
At June 30, 2005, the Company had $45.2 million in cash and cash equivalents and working capital of $51.0 million, as compared to $39.7 million in cash and cash equivalents and working capital of $47.1 million at March 31, 2005.
During the three months ended June 30, 2005 cash provided by operations increased $1.8 million (46%) to $5.6 million from $3.9 million during the same period in fiscal 2005. Increases in cash were primarily provided by improved operating performance. Sales to a single customer approximated 66% and 55% of net revenue for the three months ended June 30, 2005 and 2004, respectively. Amounts due from that customer approximated 61 % and 49% of net accounts receivable at June 30, 2005 and March 31, 2005, respectively, substantially all of which have been collected subsequent to those dates. The increase in net accounts receivable is the result of increased sales activity during the three months ended June 30, 2005. Capital expenditures for the three months ended June 30, 2005 increased $0.1 million to $0.2 million from $0.1 million in fiscal 2005.
Management believes that its existing capital resources and potential sources of credit are adequate to meet its current cash requirements.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
None
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Item 4. | Controls and Procedures |
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| a) | Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2005. |
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| | 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. |
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| 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. |
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PART II. | OTHER INFORMATION |
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Item 1. | Legal Proceedings |
In June 2005, the Securities and Exchange Commission (“SEC”) civil action, against the Company, its former chief executive officer, and its former vice president of sales and marketing, which has previously been reported by the Company, was settled against all defendants. On June 20, 2005, final judgment was entered by the court reflecting the terms of the parties’ settlement, and the SEC action was dismissed. Under the terms of the settlement, the Company neither admitted nor denied the allegations contained in the SEC Complaint and consented to the entry of an order permanently enjoining it from violating the books and records, periodic reporting and internal control provisions contained in Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. The settlement agreement did not require any monetary payment by the Company. The Company believes that it will not incur any further legal fees or indemnification costs in connection with this matter.
The following is a summary of the events leading up to the settlement of the SEC action:
In August 1999, the Company, through its outside counsel, contacted the Division of Enforcement of the SEC to advise it of certain matters related to the Company’s restatement of earnings for interim periods of fiscal 1999. The SEC subsequently conducted an investigation of the Company and certain individuals, including current and former officers and employees of the Company, pursuant to a Formal Order of Investigation. The Company cooperated with the SEC staff throughout the course of the investigation.
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 alleged fraud, and books and records and reporting violations under Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act and various rules promulgated thereunder in connection with the financial statements included in the Company’s reports on Form 10-Q for the quarters ended June 30, September 30 and December 31, 1998. The SEC complaint sought to enjoin the Company from future violations of those provisions of the Exchange Act and the rules thereunder, as well as disgorgement of any allegedly ill-gotten gains. With respect to the other defendants, the complaint sought injunctive relief, civil penalties, disgorgement and an officer/director bar. In June 2005, this action was settled, as described above.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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| Not Applicable. |
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Item 3. | Defaults Upon Senior Securities |
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| Not Applicable. |
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Item 4. | Submission of Matters to a Vote of Security Holders |
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| Not Applicable. |
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Item 5. | Other Information |
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| Not Applicable. |
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Item 6. | Exhibits |
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| 10.1 | Amendment to Distributorship Agreement by and between Schick Technologies, Inc. and Patterson Companies, Inc., made and entered into as of July 1, 2005. (This copy omits information for which confidential treatment has been requested.) |
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| 31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| 32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. § 1350. |
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| 32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. § 1350. |
13
SCHICK TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| | SCHICK TECHNOLOGIES, INC. |
| | |
Date: August 9, 2005 | | By: | /S/ Jeffrey T. Slovin |
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| | | Jeffrey T. Slovin |
| | | Chief Executive Officer |
| | | |
| | By: | /S/ Ronald Rosner |
| | |
| |
| | | Ronald Rosner |
| | | Director of Finance and Administration |
| | | (Principal Financial Officer) |
14
