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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, 1999.
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)
31-00 47th Avenue 11101
Long Island City, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (718) 937-5765
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
As of March 14, 2000, 10,136,113 shares of common stock, par value $.01 per
share, were outstanding.
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SCHICK TECHNOLOGIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 1999 ........................................................... Page 1
Consolidated Statements of Operations for the three and nine
months ended December 31, 1999 and 1998 ................................... Page 2
Consolidated Statements of Cash Flows for the nine
months ended December 31, 1999 and 1998 .................................. Page 3
Notes to Consolidated Financial Statements ............................... 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 10
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings ......................................................... Page 10
Item 2. Changes in 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 12
Item 5. Other Information ......................................................... Page 12
Item 6. Exhibits and Reports on Form 8-K .......................................... Page 12
SIGNATURES ........................................................................... Page 14
EXHIBIT 27
EXHIBIT 10.25
PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31, March 31,
1999 1999
------------ --------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 1,692 $ 1,415
Short-term investments -- 360
Accounts receivable, net of allowance for
doubtful accounts of $2,318 and $4,512 1,858 4,205
Inventories 6,643 10,686
Income taxes receivable 127 2,720
Prepayments and other current assets 164 321
-------- --------
Total current assets 10,484 19,707
Equipment, net 5,718 7,221
Investments 815 1,250
Other assets 1,024 1,208
-------- --------
Total assets $ 18,041 $ 29,386
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 5,169 $ 8,946
Bridge note payable 6,222 5,000
Accrued salaries and commissions 626 1,296
Deferred revenue 1,031 564
Deposits from customers 576 513
Warranty obligations 352 402
Capital lease obligations, current 53 84
-------- --------
Total current liabilities 14,029 16,805
Loan payable 575 --
Capital lease obligations 4 45
-------- --------
Total liabilities 14,608 16,850
Commitments and contingencies
Stockholders' equity
Preferred stock ($.01 par value; 2,500,000
Shares authorized; none issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares authorized;
10,059,384 shares issued and outstanding) 101 101
Additional paid-in capital 41,751 41,236
Accumulated deficit (38,419) (28,801)
-------- --------
Total stockholders' equity 3,433 12,536
-------- --------
Total liabilities and stockholders' equity $ 18,041 $ 29,386
======== ========
The accompanying notes are an integral part
of these consolidated financial statements
1
Schick Technologies, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except per-share amounts)
Three months ended Nine months ended
December 31, December 31,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues, net $ 4,771 $ 15,540 $ 16,574 $ 38,288
-------- -------- -------- --------
Cost of sales 2,806 12,031 12,387 25,671
Excess and obsolete inventory 165 2,741 774 2,741
-------- -------- -------- --------
Total cost of sales 2,971 14,772 13,161 28,412
-------- -------- -------- --------
Gross profit 1800 768 3,413 9,876
Operating expenses
Selling and marketing 1,590 5,457 6,001 13,754
General and administrative 1,601 2,209 5,116 4,997
Research and development 595 907 2,164 2,773
Bad debt expense -- 1,810 9 2,548
-------- -------- -------- --------
Total operating expenses 3,786 10,383 13,290 24,072
-------- -------- -------- --------
Loss from operations (1,986) (9,615) (9,877) (14,196)
Other income (expense)
Gain from sale of investment -- -- 565 --
Interest income 32 48 71 477
Interest expense (90) (2) (377) (8)
-------- -------- -------- --------
Total other income (expense) (58) 46 259 469
-------- -------- -------- --------
Loss before income taxes (2,044) (9,569) (9,618) (13,727)
Benefit from income taxes -- (565) -- (495)
-------- -------- -------- --------
Net loss $ (2,044) $ (9,004) $ (9,618) $(13,232)
======== ======== ======== ========
Basic and diluted loss per share $ (0.20) $ (0.90) $ (0.96) $ (1.32)
======== ======== ======== ========
The accompanying notes are an integral
part of these consolidated financial statements
2
Schick Technologies, Inc.
Consolidated Statements of Cash Flow (unaudited)
(In thousands)
Nine months ended
December 31,
1999 1998
-------- --------
Cash flows from operating activities:
Net loss $ (9,618) $(13,232)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 1,577 1,359
Deferred income taxes -- 349
Provision for excess and obsolete inventory 774 2,741
Provision for doubtful accounts 9 2,548
Gain from sale of investment in Photobit Corporation (565) --
Changes in assets and liabilities:
Accounts receivable 2,338 (300)
Inventories 3,269 (5,997)
Income taxes receivable 2,593 (3,092)
Prepayments and other current assets 157 180
Other assets 182 (270)
Accounts payable and accrued expenses (4,290) 3,697
Income taxes payable -- (144)
Deferred revenue 467 121
Deposits from customers 63 (104)
Warranty obligations (50) 121
-------- --------
Net cash used in operating activities (3,094) (12,023)
Cash flows from investing activities:
Proceeds from maturities of held to maturity investments 360 21,224
Purchase of held to maturity investments -- (10,561)
Purchase of minority interest in Photobit Corporation -- (250)
Proceeds from sale of investment in Photobit Corporation stock 1,000 --
Capital expenditures (139) (3,263)
-------- --------
Net cash provided from investing activities 1,221 7,150
-------- --------
Cash flows from financing activities:
Proceeds from exercise of common stock options -- 32
Proceeds of loan payable 1,000 --
Proceeds of bridge note payable 1,222 --
Principal payments of capital lease obligations (72) --
-------- --------
Net cash provided from financing activities 2,150 32
-------- --------
Net increase (decrease) in cash and cash equivalents 277 (4,841)
Cash and cash equivalents at beginning of period 1,415 6,217
-------- --------
Cash and cash equivalents at end of period $ 1,692 $ 1,376
======== ========
The accompanying notes are an integral
part of these consolidated financial statements
3
Schick Technologies, Inc.
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 generally accepted accounting
principles 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 generally
accepted accounting principles 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, 1999 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 nine months ended December
31, 1999, are not necessarily indicative of the results to be expected for the
full year ending March 31, 2000.
The consolidated financial statements of the Company, at December 31, 1999,
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances have been eliminated.
During the quarter ending December 31, 1999, the Company continued to incur
operating losses and has a deficiency in working capital. In spite of the
Company's cost reductions, refinancing and tightening of credit, there can be no
assurance that the Company will achieve profitability or generate sufficient
working capital to permit its continuation as a going concern. The ability of
the Company to satisfy its cash requirements is dependent in part on the
Company's ability to attain adequate sales and profit levels and to control
warranty obligations by increasing warranty revenues and reducing warranty
costs, and to collect its accounts receivable on a timely basis. Management
currently believes that existing capital resources, which have been diminished
as a result of losses in fiscal 1999 and the first nine months of fiscal 2000,
and sources of credit, including the Greystone credit facility, are adequate to
meet its current cash requirements. However, if the Company's cash needs are
greater than anticipated, the restructuring of the bridge note payable is not
completed, or the Company does not satisfy drawdown conditions under the amended
loan agreement with Greystone Funding Corporation, the Company will be required
to seek additional or alternative financing sources. There can be no assurance
that such financing will be available or available on terms acceptable to the
Company.
2. Inventories
Inventories at December 31, 1999 and March 31, 1999 are comprised of the
following:
December 31, 1999 March 31, 1999
----------------- --------------
Raw materials .......................................... $ 2,587 $ 3,657
Work-in-process ........................................ 8,257 7,598
Finished goods ......................................... 2,007 4,897
Reserve for slow moving/obsolete ....................... (6,208) (5,466)
-------- --------
Total inventories .......................... $ 6,643 $ 10,686
======== ========
3. Loss Per Share
The computation of basic and diluted loss per share for the three and nine
months ended December 31, 1999 and 1998 are as follows:
Three months ended December 31, Nine months ended December 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net loss available to common stockholders .......... $ (2,044) $ (9,004) $ (9,618) $ (13,232)
Weighted average shares outstanding
for basic and diluted loss per share ......... 10,059,384 10,002,987 10,059,384 9,996,023
Basic and diluted loss per share ................... $ (0.20) $ (0.90) $ (0.96) $ (1.32)
============ ============ ============ ============
4
4. Commitments and Contingencies
Employment Agreements
On or subsequent to December 31, 1999, the Company entered into employment
agreements with four executive officers. These agreements provide for monthly
base salaries which, when annualized, aggregate $710 in executive compensation
and for benefits. In addition, certain of the Company's agreements provide for
the issuance of common stock and/or common stock options to the executives,
which generally vest ratably over the term of the agreements (2-3 years).
Additionally, certain executives may earn bonus compensation based upon the
specific terms of the respective agreements, as defined.
Product Liability
The Company is subject to the risk of product liability and other liability
claims in the event that the use of its products results in personal injury or
other claims. Although the Company has not experienced any product liability
claims to date, any such claims could have an adverse impact on the Company. The
Company maintains insurance coverage related to product liability claims, but
there can be no assurance that product liability or other claims will not exceed
its insurance coverage limits, or that such insurance will continue to be
available on commercially acceptable terms, or at all.
SEC Investigation and Other
In August 1999, the Company, through its outside counsel, contacted the Division
of Enforcement of the Securities and Exchange Commission ("SEC") to advise it of
certain matters related to the Company's restatement of earnings. The SEC has
made a voluntary request for the production of certain documents. The Company
intends to cooperate fully with the SEC staff and has provided responsive
documents to it. In addition, investigators associated with the U.S. Attorney's
Office have made inquires of certain former employees, apparently in connection
with the same event. The inquiries are in a preliminary stage and the Company
cannot predict their potential outcome.
Litigation
During fiscal 1999, several shareholder class action lawsuits were filed against
the Company. In May 1999 a consolidated and amended class action complaint was
filed naming the Company, certain of its officers and former officers and
various third parties as defendants. The complaint alleges that certain
defendants issued false and misleading statements concerning the Company's
publicly reported earnings in violation of the federal securities laws. The
complaint seeks certification of a class of persons who purchased the Company's
common stock between July 1, 1997 and February 19, 1999, inclusive, and does not
specify the amount of damages sought. The Company intends to defend itself
vigorously against such allegations and believes the claims to be without merit.
As these actions are in their preliminary stages, the Company is unable to
predict the ultimate outcome of these claims. The outcome, if unfavorable, could
have a material adverse effect on the financial position and results of
operations of the Company.
During 1996, the Company was named as a defendant in patent infringement
litigation commenced by a competitor in the United States and France. The
Company is vigorously defending itself against such allegations and believes the
claims to be without merit. The Company has filed a countersuit against the
competitor for infringement of a U.S. Patent which has been exclusively licensed
to the Company. The Company has obtained a formal opinion of intellectual
property counsel that its products do not infringe the competitor's U.S. patent.
The Company has filed motions for summary judgment seeking the dismissal of the
action in the United States. Such motions are currently pending. The Company is
unable to predict the ultimate outcome of this litigation. The outcome, if
unfavorable, could have a material adverse effect on the financial position and
results of operations of the Company. No provision has been made for any,
potential losses at December 31, 1999 as the range of potential loss, if any,
cannot be reasonably estimated.
During 1997, the Company was named as a defendant in patent litigation involving
a patent directed to a display system for digital dental radiographs. In July
1997 the Company reached a settlement under which it paid $600 for a world wide,
non-exclusive license for the patent. The license fee was expensed during 1998.
5
The Company may be a party to a variety of legal actions (in addition to those
referred to above), such as employment and employment discrimination-related
suits, employee benefit claims, breach of contract actions, tort claims,
shareholder suits, including securities fraud, and intellectual property related
litigation. In addition, because of the nature of its business, the Company 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.
5. Investment in Photobit Corporation
In September 1997, the Company purchased a minority interest of 5%, for
$1,000 in Photobit Corporation, a developer of complementary metal-oxide
semiconductor ("CMOS"), APS imaging technology. In July 1998, the Company
invested an additional $250 in Photobit Corporation, bringing its total
investment in Photobit to $1,250. The Company is the exclusive licensee of the
APS technology for medical applications and utilizes the technology in its
bone-mineral density assessment device and certain components of its computed
dental x-ray imaging system. The Company carries the investment at cost. In
September 1999, the Company sold 250,000 shares of Photobit stock for $1,000 and
recorded an investment gain of approximately $565.
6. Bridge Note Payable
Effective July 30, 1999, the Company secured an extension to the secured
promissory note it initially issued in March 1999 for $5,000. Pursuant to the
amended and restated note, the principal of the note was increased to $6,222.
The increase in the principal amount resulted from the conversion of certain
trade payables owed to the third-party lender into the principal balance of the
note. The amended and restated note bears interest at the rate of prime plus two
and one-half percent per annum. Interest on the note is payable monthly and the
note is secured by the Company's tangible and intangible assets. The principal
is payable in quarterly installments of $1,000 commencing December 31, 1999. The
Company is also required to make additional principal payments equal to 25% of
the net proceeds of any equity or debt financing or asset sale (other than sales
of inventory in the ordinary course of business) to the extent that 25% of such
proceeds exceeds the $1,000 principal installment due at the end of the quarter
in which the financing or asset sale is completed. In connection with the
amended and restated note, the Company issued 650,000 warrants to the
note-holder. The warrants are exercisable for a period of 5 years and each has
an exercise price of $2.19. The Company is not in compliance with certain
financial covenants, and other terms and provisions contained in the extended
bridge loan and is currently in the process of restructuring the obligation.
7. NASDAQ Delisting
On September 15, 1999, the Company received notice from the Nasdaq Listings
Qualifications Panel that its common stock would no longer be listed on the
Nasdaq National Market effective with the close of business on September 15,
1999. The panel's action was based on the Company's inability to timely file its
Annual Report on Form 10-K for the fiscal year ended March 31, 1999 and public
interest concerns regarding the Company's revenue recognition and sales
practices.
8. Loan Payable
In December 1999, the Company entered into a Loan Agreement (the "Loan
Agreement") with Greystone Funding Corporation ("Greystone") to provide up to
$7.5 million of subordinated debt in the form of a secured credit facility.
Pursuant to the Loan Agreement, and to induce Greystone to enter into said
Agreement, the Company issued to Greystone and its designees, warrants to
purchase 3,000,000 shares of the Company's Common Stock at an exercise price of
$0.75 per share. The Company agreed to issue to Greystone or its designees
warrants to purchase an additional 2,000,000 shares at an exercise price of
$0.75 per share in connection with a cash payment of $1 million by Greystone to
the Company in consideration of a sale of Photobit stock by the Company to
Greystone. The sale of the Photobit stock was made subject to a right of first
refusal held by Photobit and its founders. By letter dated February 17, 2000,
counsel for Photobit informed the Company that Photobit considers the Company's
sale of its shares to Greystone to be void on the basis of the Company's
purported failure to properly comply with Photobit's right of first refusal.
6
On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended Loan
Agreement") which amended and restated the Loan Agreement pursuant to which
Greystone agreed to provide up to $7.5 million of subordinated debt in the form
of a secured credit facility. The $1 million cash payment to the Company was
converted as of December 27, 1999 into an initial advance of $1 million under
the Amended Loan Agreement. Pursuant to the Amended Loan Agreement, and to
induce Greystone to enter into said Agreement, the Company issued warrants to
Greystone and its designees, consisting of those warrants previously issued
under the Loan Agreement, to purchase 5,000,000 shares of the Company's Common
Stock at an exercise price of $0.75 per share, exercisable at any time after
December 27, 1999. Under the Amended Loan Agreement, the Company also issued to
Greystone or its designees warrants (the "Additional Warrants") to purchase an
additional 13,000,000 shares of common stock, which Additional Warrants will
vest and be exercisable at a rate of two shares of Common Stock for each dollar
advanced under the Amended Loan Agreement in excess of the initial draw of $1
million. Any Additional Warrants which do not vest prior to expiration or
surrender of the line of credit will be forfeited and canceled. In connection
with the Greystone secured credit facility, effective as of February 15, 2000,
DVI Financial Services, Inc., the Company's senior lender, consented to the
Company's grant to Greystone of a second priority lien encumbering the Company's
assets, under and subject in priority and right of payment to all liens granted
by the Company to DVI.
The $1 million proceeds of the initial draw has been allocated to the loan
and 15 million warrants issued, based upon their relative fair values at
issuance. The carrying value of the note of $575 is being accreted to the face
value of $1 million using the interest method over the seven-year term of the
loan. However, in the event that the loan is paid sooner, the Company will
recognize a charge for the unamortized discount remaining in such period. The
fair value of 3 million warrants issued in connection with the agreement,
amounting to $90, is being accounted for as a deferred financing cost. This
cost, included in "Other Assets" in the accompanying balance sheet, is being
amortized on a straight-line basis over the seven year life of the loan.
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," "will likely result," "estimates," "projects,"
"anticipates," "expects" or similar expressions and variations thereof are
intended to identify such forward-looking statements. Actual results, events and
circumstances could differ materially from those set forth in such statements
due to various factors. Such factors include risks relating to recent
substantial operating losses, dependence on financing, dependence on products,
competition, the changing economic and competitive conditions in the medical and
dental digital radiography markets, dependence on key personnel, dependence on
distributors, ability to manage growth, fluctuation in results and seasonality,
regulatory approvals, technological developments, protection of technology
utilized by the Company, patent infringement claims and other litigation, need
for additional financing and further risks and uncertainties, including those
detailed and in the Company's other filings with the Securities and Exchange
Commission.
General
The Company designs, develops and manufactures digital imaging systems and
devices for the dental and medical markets. In the field of dentistry, the
Company has developed, and currently manufactures and markets, an intra-oral
digital radiography system. The Company has also developed a bone mineral
density assessment device, which was introduced in December of 1997, to assist
in the diagnosis of osteoporosis. The Company is also developing a digital
mammography device, and has commenced development of a general digital
radiography device for intended use in various applications.
Results of Operations
Net revenues for the three months ended December 31, 1999 decreased $10.7
million (69%) to $4.8 million from $15.5 million during the comparable period of
fiscal 1999. Net revenues for the nine months ended December 31, 1999, decreased
$21.7 million (57%) to $16.6 million from $38.3 million during the comparable
period of fiscal 1999. The revenue decline is due to lower sales of the
Company's CDR(R) dental product and accuDEXA(TM) bone density assessment device.
Fiscal 2000 revenues were negatively affected by reduced marketing activity for
the Company's products, by reducing credit granting to select dealers,
hospitals, universities and governmental agencies and, the Company believes, by
the negative perception that existed in the marketplace concerning the Company's
viability and long-term ability to upgrade and service its products. For the
quarter ended December 31, 1999, net revenues of the Company's accuDEXA and CDR
product decreased to approximately $0.7 million (14%) and $4.1 million (86%),
respectively compared to $2.5 million (16%) and $13.0 million (84%),
respectively in the comparable quarter of fiscal 1999. For the nine months ended
December 31, 1999, net revenues of the Company's accuDEXA and CDR products
decreased to approximately $2.8 million (17%) and $13.8 million (83%),
7
respectively of the Company's net revenues as compared to $12.7 million (33%)
and $25.6 million (67%), respectively in the comparable nine months of fiscal
1999.
The rate of returns in fiscal 2000 for the Company's CDR and accuDEXA
products decreased significantly from that of fiscal 1999. The decreased return
rate for CDR is believed to be attributable to several factors, including the
following: First, during fiscal 1999, the Company resolved certain technical
problems in transitioning its CDR product line from CCD sensors to APS sensors.
Shipments of the Company's initial version of its new APS sensor for the CDR
product, which were primarily delivered from April 1998 through August 1998,
exhibited a high failure rate and other technical problems during fiscal 1999.
The Company has provided for replacements of systems shipped during this period
where practical and provided for anticipated returns for units which were not
upgraded during fiscal 1999. In September 1998, the Company began shipping a new
version of the APS sensor which has exhibited a lower failure rate than the
initial version. Second, the Company's single user CDR System requires minimal
installation. Commencing in September 1998, the Company initiated a program in
coordination with its computer supplier, in which the supplier installed all
single-user CDR Systems. As a result of logistical problems in implementing this
program, the supplier's installations experienced significant delays, which led
to a higher than normal rate of return for single user systems shipped in this
period. Starting in January 1999, the Company resumed its original method of CDR
installation and has since experienced a reduced rate of return.
The Company also experienced decreased rate of returns of accuDEXA units.
The Company believes the decrease in such returns is due to several factors,
including the following: First, early shipments of accuDEXA experienced a higher
than normal failure rate due to shipping damage, as well as humidity and
temperature sensitivity of several components in the initial design of the
product. The Company took steps to address these problems and believes that
failure rates relating to such damage and sensitivity have dropped
significantly. In this regard, the Company currently expects to implement a
number of additional improvements to accuDEXA, to further increase reliability,
in the first half of fiscal 2001. Second, the Company initiated a change in its
sales policy which affected accuDEXA sales made from May 1998 through November
1998. During this time, the Company waived its customary 10% deposit charged to
customers prior to shipment of goods. In December 1998, the Company changed its
credit policy requiring prepayment from non-dealer customers.
Total cost of sales for the three months ended December 31, 1999 decreased
$11.8 million (80%) to $3.0 million (62% of net revenues) from $14.8 million
(95% of net revenues) for the comparable period of fiscal 1999. Total cost of
sales decreased for the three and nine months ended December 31, 1999 due to
lower direct and indirect labor costs, warranty expenditures, material costs,
royalty costs, and overhead costs as a result of decreased revenues in the
respective periods; and a decrease in the provision for excess and obsolete
inventory. The decrease in the provision for excess and obsolete inventory from
fiscal 1999 to fiscal 2000 is primarily attributable to the obsolescence of
inventory in the third quarter of fiscal 1999 due to the introduction of the new
APS sensors. The cost savings in the three months resulted in increased gross
profit percentage of 37.7% in fiscal 2000, compared to 5.0% in fiscal 1999.
However, these decreases were not adequate to cause the Company's gross profit
percentage for the nine months ended December 31, 1999 to be greater than the
gross profit percentage for fiscal 1999. The gross profit percentage for the
nine months ended December 31, 1999 was 20.6% compared to 25.8% in fiscal 1999.
In January 1999, in an effort to streamline operations and reduce expenses, and
as a result of more efficient manufacturing processes and a higher rate of
outsourcing, the Company reduced its direct manufacturing labor force from 101
to 64 employees and relocated the operations of its wholly-owned subsidiary,
Schick X-Ray Corp., from its facility in Roebling, New Jersey to the Company's
headquarters in Long Island City, New York. In August 1999, Schick X-Ray was
dissolved and its operations absorbed by the Company.
Selling & marketing expenses for the three months ended December 31, 1999,
decreased $3.9 million (71%) to $1.6 million (33% of net revenues) from $5.5
million (35% of net revenues) for the comparable period of fiscal 1999. Selling
and marketing expenses for the nine months ended December 31, 1999, decreased
$7.8 million (56%) to $6.0 million (36% of net revenues) from $13.8 million (36%
of net revenues) during the comparable period of fiscal 1999. The decreases for
the three and nine months ended December 31, 1999 are due to decreases in direct
selling expenses in the CDR and accuDEXA product lines, trade show expenses and
other marketing expenses. Additionally, the Company reduced its direct sales
force and associated overhead expenses as a result of decreased revenues.
General and administrative expenses for the three months ended December 31,
1999, decreased $0.6 million
8
(28%) to $1.6 million (34% of net revenues) from $2.2 million (14% of net
revenues) for the comparable period of fiscal 1999. General and administrative
expenses for the nine months ended December 31, 1999, increased $0.1 million (2%
of net revenues) to $5.1 million (31% of net revenues) from $5.0 million (13% of
net revenues) during the comparable period of fiscal 1999. The increases for the
three and nine months ended December 31, 1999 were primarily attributable to
increases in professional services rendered in connection with the restatement
of the Company's interim financial statements for fiscal 1999 partially offset
by decreases in payroll and related costs.
Research and development expenses for the three months ended December 31,
1999, decreased $0.3 million (34%) to $0.6 million (12% of net revenues) from
$0.9 million (6% of net revenues) for the comparable period of fiscal 1999.
Research and development expenses for the nine months ended December 31, 1999,
decreased $ 0.6 million (22%) to $2.2 million (13% of net revenues) from $2.8
million (7% of net revenues) for the comparable period of fiscal 1999. The
decreases for the three and nine months ended December 31, 1999 are primarly
attributable to a decrease in payroll and related costs due to a reduction in
personnel, partially offset by increase in test services and supply expenses.
Interest income decreased to $32 thousand in the three months ended
December 31, 1999 from $48 thousand in the comparable period of fiscal 1999.
Interest income for the nine months ended December 31, 1999 decreased to $71
thousand from $477 thousand for the comparable period of fiscal 1999. The
decrease is attributable to lower cash balances and investments in short-term
interest-bearing securities that were purchased with the proceeds of the
Company's July 1997 Initial Public Offering. Interest expense of $90 thousand
and $377 thousand for the three and nine month periods ended December 31,1999,
respectively, was principally attributable to the bridge note payable.
Liquidity and Capital Resources
At December 31, 1999, the Company had $1.7 million in cash and cash
equivalents and a working capital deficiency of $3.5 million compared to $1.4
million in cash and cash equivalents, $0.4 million in short-term investments and
$2.9 million in working capital at March 31, 1999. The decrease in working
capital is primarily attributable to the loss from operations for the nine
months ended December 31, 1999. Ongoing losses in fiscal 2000 have further
reduced working capital.
During the nine months ended December 31, 1999, cash used in operations was
$3.1 million compared to $12.0 million used in operations during the comparable
period of fiscal 1999. Increases to cash were primarily provided by the sale of
a portion of the Company's investment in Photobit stock and loan proceeds from
the Company's bridge note payable and loan payable. This cash was used to fund
the Company's operating losses and account payable reduction, which more than
exceeded reductions in accounts receivable, inventory and collection of
refundable income taxes. Accounts receivable decreased from $4.2 million at
March 31, 1999 to $1.9 million at December 31, 1999 due to reduced sales and
restricted credit granting to select dealers, hospitals, universities and
governmental agencies. Inventory decreased from $10.7 million at March 31, 1999
to $6.6 million at December 31, 1999 primarily due to the Company's planned
reduction of inventory levels. The Company received estimated tax payment and
net operating loss refunds of approximately $2.6 million during the nine months
ended December 1999.
The Company's capital expenditures during the three months ended December
31, 1999 amounted to $0.1 million. Such expenditures included leasehold
improvements, computers, and production equipment.
DVI Financial Services, Inc. ("DVI") has provided the Company with loans
and advances up to $6.2 million in the aggregate (the "Bridge Loan"), which is
secured by first priority liens on collateral (the "Collateral") consisting of
all of the Company's now-owned and hereafter-acquired tangible and intangible
personal property including, without limitation, cash, marketable securities,
accounts receivable, inventories, contract rights, patents, trademarks,
copyrights and other general intangibles, machinery, equipment and interests in
real estate of the Company, together with all products and proceeds thereof. In
connection with the Bridge Loan, and reflecting the Company's repayment
obligations thereunder as well as the security interest created thereby in the
Collateral, the Company executed a Secured Promissory Note and a Security
Agreement (the "Security Agreement") dated January 25, 1999, and executed an
Amended and Restated Secured Promissory Note dated July 30, 1999. The Security
Agreement provides, in part, that the Company may not permit the creation of any
lien or encumbrance on the Company's property or assets. The Company is not in
compliance with certain financial covenants and other terms and provisions
contained in the Bridge Loan. The Company and DVI have entered into a commitment
letter for the restructuring of its Bridge Loan.
In December 1999, the Company entered into a Loan Agreement (the "Loan
Agreement") with Greystone Funding Corporation ("Greystone") to provide up to
$7.5 million of subordinated debt in the form of a
9
secured credit facility. Pursuant to the Loan Agreement, and to induce Greystone
to enter into said Agreement, the Company issued to Greystone and its designees,
warrants to purchase 3,000,000 shares of Company's Common Stock at an exercise
price of $0.75 per share. The Company agreed to issue to Greystone or its
designees warrants to purchase an additional 2,000,000 shares at an exercise
price of $0.75 per share in connection with a cash payment of $1 million by
Greystone to the Company in consideration of a sale of Photobit stock by the
Company to Greystone. The sale of the Photobit stock was made subject to a right
of first refusal held by Photobit and its founders. By letter dated February 17,
2000, counsel for Photobit informed the Company that Photobit considers the
Company's sale of its shares to Greystone to be void on the basis of the
Company's purported failure to properly comply with Photobit's right of first
refusal.
On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended Loan
Agreement"), which amended and restated the Loan Agreement, pursuant to which
Greystone agreed to provide up to $7.5 million of subordinated debt in the form
of a secured credit facility. The $1 million cash payment to the Company was
converted as of December 27, 1999 into an initial advance of $1 million under
the Amended Loan Agreement. Pursuant to the Amended Loan Agreement and to induce
Greystone to enter into said Agreement, the Company issued warrants to Greystone
and its designees, consisting of those warrants previously issued under the Loan
Agreement, to purchase 5,000,000 shares, of the Company's Common Stock at an
exercise price of $0.75 per share, exercisable at any time after December 27,
1999. Under the Amended Loan Agreement, the Company also issued to Greystone or
its designees warrants (the "Additional Warrants") to purchase an additional
13,000,000 shares of common stock, which Additional Warrants will vest and be
exercisable at a rate of two shares of Common Stock for each dollar advanced
under the Amended Loan Agreement in excess of the initial draw of $1 million.
Any additional warrants which do not vest prior to expiration or surrender of
the line of credit will be forfeited and canceled. In connection with the
Greystone secured credit facility, effective as of February 15, 2000, DVI
consented to the Company's grant to Greystone of a second priority lien
encumbering the Company's assets, under and subject in priority and right of
payment to all liens granted by the Company to DVI.
The Company has also undertaken various cost-cutting measures including
reduction of facilities and personnel by over 40% from peak levels of fiscal
1999. The Company discontinued certain promotional programs which had resulted
in increased credit risk, and concomitantly limited credit to selected domestic
dealers. The Company continues efforts to improve its products and methods of
production and believes it has strengthened customer support services to its
customers.
In spite of the Company's cost reductions, refinancing and tightening of
credit, there can be no assurance that the Company will achieve profitability or
generate sufficient working capital to permit its continuation as a going
concern. The ability of the Company to satisfy its cash requirements is
dependent in part on the Company's ability to attain adequate sales and profit
levels and to control warranty obligations by increasing warranty revenues and
reducing warranty costs and to collect its account receivable on a timely basis.
Management currently believes that existing capital resources and sources of
credit, including the Greystone credit facility, are adequate to meet its
current cash requirements. However, if the Company's cash needs are greater than
anticipated, the restructuring of the DVI Bridge Loan is not completed or the
Company does not satisfy drawdown conditions under the Amended Loan Agreement,
the Company will be required to seek additional or alternative financing
sources. There can be no assurance that such financing will be available or
available on terms acceptable to the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The DVI Bridge Loan bears an annual interest rate based on the prime rate
plus 2.5%. Because the interest rate is variable, the Company's cash flow may be
adversely affected by increases in interest rates. Management does not, however,
believe that any risk inherent in the variable-rate nature of the loan is likely
to have a material effect on the Company's interest expense or available cash.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or certain of its officers and former officers, are
involved in the proceedings described below:
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I. The Company is a named defendant in two lawsuits instituted by Trophy
Radiologie, S.A. (`Trophy S.A.'), a subsidiary of Trex Medical Corporation. One
lawsuit was instituted in France and the other in the United States.
The French lawsuit was filed in November 1995, in the tribunal de Grande
Instance de Bobigny, the French patent court, and originally alleged that the
Company's CDR(R)system infringes French Patent No. 2,547,495, European Patent
No. 129,451 and French Certificate of Addition No. 2,578,737. These patents, all
of which are related, are directed to a CCD-based intra-oral sensor. Since
filing its lawsuit, Trophy S.A. has withdrawn its allegation of infringement
with respect to the Certificate of Addition. Trophy S.A. is seeking a permanent
injunction and unspecified damages, including damages for its purported lost
profits. The Company believes that the lawsuit is without merit and is
vigorously defending it.
The lawsuit in the United States was filed in March 1996 by Trophy S.A.,
Trophy Radiology, Inc., a United States subsidiary of Trophy S.A. (`Trophy
Inc.') and the named inventor on the patent in suit, Francis Mouyen, a French
citizen. The suit was brought in the United States District Court for the
Eastern District of New York, and alleges that the Company's CDR(R) system
infringes United States Patent No. 4,593,400 (the `400 patent'), which is
related to the patents in the French lawsuit. Trophy S.A., Trophy Inc. and
Mouyen are seeking a permanent injunction and unspecified damages, including
damages for purported lost profits, enhanced damages for the Company's purported
willful infringement and an award of attorney fees. The Company believes that
the lawsuit is without merit and is vigorously defending it. The Company's
counsel in the United States suit has issued a formal opinion that the CDR
system does not infringe the 400 patent.
In addition, the Company has counter-sued Trophy S.A. and Trophy Inc. for
infringement of United States Patent No. 4,160,997, an expired patent which was
exclusively licensed to the Company by its inventor, Dr. Robert Schwartz, and
for false advertising and unfair competition. The Company believes that its
counter-suit is meritorious, and is vigorously pursuing it.
On September 12, 1997, after having been given permission to do so by the
Court, the Company served two motions for summary judgment seeking dismissal of
the action pending in the United States District Court for the Eastern District
of New York, on the grounds of non-infringement and patent invalidity. On
February 22, 2000, oral argument on these motions was heard by the Court. The
motions are currently pending.
While the Company believes such suits against it are without merit, there
can be no assurance that the Company will be successful in its defense of any of
these actions, or in its counter-suit. If the Company is unsuccessful in its
defense of any of these actions, it could have a material adverse effect upon
the Company. Moreover, regardless of their outcome, the Company may be forced to
expend significant amounts of money in legal fees in connection with these
lawsuits.
II. In late 1998 through early 1999, nine shareholder complaints purporting
to be class action lawsuits were filed in the United States District Court for
the Eastern District of New York. Plaintiffs filed a Consolidated and Amended
Complaint on or about May 27, 1999 and, on or about November 24, 1999, filed a
Second Amended and Consolidated Complaint (the "Complaint"). The Complaint names
as defendants the Company, David B. Schick, Thomas E. Rutenberg, and David
Spector (collectively, the "Individual Defendants"), as well as
PricewaterhouseCoopers LLP.
The Complaint alleges, inter alia, that certain defendants issued false and
misleading statements concerning the Company's publicly reported earnings in
violation of the federal securities laws. The Complaint seeks certification of a
class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and does not specify the amount of damages
sought.
The Company has retained counsel, believes that these lawsuits are without
merit, and intends to vigorously defend them. On or about February 11, 2000, the
Company and the Individual Defendants filed a Motion to Dismiss the Complaint.
As these actions are in their preliminary stages, the Company is unable to
predict their ultimate outcome. The outcome, if unfavorable, could have a
material adverse effect on the Company.
III. 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.
The SEC has made a voluntary request for the production of certain documents.
The Company intends to cooperate fully with the SEC staff and has provided
responsive documents to it. The inquiry is in a preliminary
11
stage and the Company cannot predict its potential outcome.
The Company may be a party to a variety of legal actions (in addition to
those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the nature of
its business, the Company 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.
Item 2. Changes in Securities and Use of Proceeds
(d) On July 7, 1997, the Company's initial public offering (the "Offering")
of 1,750,000 shares of its common stock, $.01 par value per share (the "Common
Stock") closed. The Company's registration statement on Form S-1 (Registration
No. 333-33731) was declared effective by the Securities and Exchange Commission
on June 30, 1997. As part of the Offering, the Company granted to the
Underwriters over-allotment options to purchase up to 262,500 shares of Common
Stock ("the "Underwriters' Option"). On July 10, 1997, the underwriters
exercised the Underwriters' Option purchasing 262,500 shares of Common Stock
from the Company. The aggregate offering price of 2,012,500 shares of Common
Stock registered for the account of the Company pursuant to the Offering
(inclusive of the Underwriters' Option) was $37.2 million.
The aggregate net proceeds received by the Company from the Offering and as
a result of the exercise of the Underwriters' Option, after deducting
underwriting and commissions and expenses were $33,508,731. During the period of
July 1, 1997 through December 31, 1999, such net proceeds have been applied as
follows: (i) $1,606,000 for leasehold improvements; (ii) $5,248,000 for plant
and equipment; (iii) $1,450,000 to purchase certain assets of Keystone Dental
X-Ray Corp.; (iv) $1,250,000 to purchase a 5% interest in Photobit, Inc.; (v)
$1,512,833 to pay the notes payable and interest in the amount of $144,296 to
Merck & Co., Inc.; and (vii) the remaining $22,442,000 was used in its entirety
for working capital purposes and to fund the Company's substantial operation
losses in fiscal 1999 and 2000. None of the net proceeds were paid, directly or
indirectly, to directors, officers, controlling stockholders, or affiliates of
the Company.
Item 3. Defaults Upon Senior Securities
DVI Financial Services, Inc. ("DVI") has provided the Company with loans
and advances up to $6,222,000 in the aggregate (the "Bridge Loan"), which is
secured by first priority liens on collateral consisting of all of the Company's
now-owned and hereafter-acquired tangible and intangible personal property
including, without limitation, cash, marketable securities, accounts receivable,
inventories, contract rights, patents, trademarks, copyrights and other general
intangibles, machinery, equipment and interests in real estate of the Company,
together with all products and proceeds thereof. The Company is not in
compliance with certain financial covenants and other terms and provisions
contained in the Bridge Loan. The Company and DVI have entered into a commitment
letter for the restructuring of its Bridge Loan.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.25 Amended and Restated Loan Agreement, dated March 17, 2000, and made
effective as of December 27, 1999, by and between Schick Technologies,
Inc., a Delaware corporation, Schick
12
Technologies, Inc., a New York corporation, and Greystone Funding
Corporation, a Virginia corporation
27 Financial Data Schedule (Filed in electronic format only)
(b) Reports on Form 8-K
None
13
SCHICK TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirement 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: March 24, 2000 By: /S/ David B. Schick
David B. Schick
Chief Executive Officer
By: /S/ Ronald Rosner
Ronald Rosner
Controller
(Principal Financial Officer)
14