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 June 30, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____________ to
_______________.
Commission file number: 000-22673
SCHICK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3374812
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
30-00 47th Avenue 11101
Long Island City, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (718) 937-5765
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 2001, 10,138,992 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 June 30, 2001 (unaudited)
and March 31,2001...........................................Page 1
Consolidated Statements of Operations for the three months ended
June 30, 2001 and 2000 (unaudited)..........................Page 2
Consolidated Statements of Cash Flows for the three months ended
June 30, 2001 and 2000 (unaudited)..........................Page 3
Notes to Consolidated Financial Statements .................Page 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................Page 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..Page 12
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings...........................................Page 12
Item 2. Changes in Securities and Use of Proceeds...................Page 13
Item 3. Defaults Upon Senior Securities.............................Page 13
Item 4. Submission of Matters to a Vote of Security Holders.........Page 13
Item 5. Other Information...........................................Page 13
Item 6. Exhibits and Reports on Form 8-K............................Page 13
SIGNATURES ...........................................................Page 14
PART I. Financial Information
Item 1. Financial Statements --
Schick Technologies, Inc and Subsidiary
Consolidated Balance Sheet
(In thousands, except share amounts)
June 30, March 31,
-------- ---------
2001
----
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 1,583 $ 2,167
Short - term investments 8 8
Accounts receivable, net of allowance for
doubtful accounts of $1,866 and $1,818, respectively 1,842 977
Inventories 3,701 3,820
Income taxes receivable 15 21
Prepayments and other current assets 187 176
-------- --------
Total current assets 7,336 7,169
-------- --------
Equipment, net 3,606 3,489
Investments 815 815
Other assets 1,104 1,173
-------- --------
Total assets $ 12,861 $ 12,646
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current maturity of long term debt $ 2,339 $ 2,851
Accounts payable and accrued expenses 2,177 1,801
Accrued salaries and commissions 409 347
Deferred revenue 3,664 3,132
Deposits from customers 98 483
Warranty obligations 141 141
-------- --------
Total current liabilities 8,828 8,755
-------- --------
Long term debt 3,595 4,080
-------- --------
Total liabilities 12,423 12,835
-------- --------
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; 25,000,000 shares authorized:
10,137,193 shares issued and outstanding) 101 101
Additional paid-in capital 42,480 42,480
Accumulated deficit (42,143) (42,770)
-------- --------
Total stockholders' equity 438 (189)
-------- --------
Total liabilities and stockholders' equity $ 12,861 $ 12,646
======== ========
- -------------
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 amounts)
Three months ended
June 30
2001 2000
---- ----
Revenue, net $ 5,841 $ 6,243
Cost of sales 2,198 3,096
Excess and obsolete inventory 100 --
------------ ------------
Total cost of sales 2,298 3,096
------------ ------------
Gross profit 3,543 3,147
------------ ------------
Operating expenses:
Selling and marketing 1,302 1,614
General and administrative 980 1,161
Research and development 530 554
Bad debt recovery (43) --
------------ ------------
Total operating costs 2,769 3,329
------------ ------------
Income (loss) from operations 774 (182)
------------ ------------
Other income (expense):
Other income 43 --
Interest income 20 14
Interest expense (210) (359)
------------ ------------
Total other expense, net (147) (345)
------------ ------------
Income (loss) before income taxes 627 (527)
Provision for income taxes -- --
------------ ------------
Net income $ 627 $ (527)
============ ============
Basic earnings per share $ 0.06 $ (0.05)
============ ============
Diluted earnings per share $ 0.05 $ (0.05)
============ ============
Weighted average common shares (basic) 10,137,193 10,134,384
============ ============
Weighted average common shares (diluted) 11,470,010 10,134,384
============ ============
- -------------
The accompanying notes are an integral part of these financial statements.
2
Schick Technologies, Inc and Subsidiary
Consolidated Statements of Cash Flows - (unaudited)
(In thousands)
Three months ended
June 30,
2001 2000
---- ----
Cash flows from operating activities
Net income (loss) $ 627 $ (527)
Adjustments to reconcile net loss to
net cash provide by (used in) operating activities
Depreciation and amortization 391 477
Bad debt recovery (43) --
Provision for excess and obsolete inventory 100 --
Amortization of deferred financing charge 27 104
Interest accretion 12 12
Changes in assets and liabilities:
Accounts receivable (822) 138
Inventories 19 537
Income taxes receivable 6 --
Prepayments and other current assets (11) 57
Other assets 1 (6)
Accounts payable and accrued expenses 438 (1,292)
Deferred revenue 532 482
Deposits from customers (385) (317)
Warranty obligations -- (63)
------- -------
Net cash provided by (used in) operating
activities 892 (398)
------- -------
Cash flows from investing activities
Capital expenditures (467) (30)
------- -------
Net cash used in investing activities (467) (30)
------- -------
Cash flows from financing activities
Payment of long term debt (1,009) (14)
------- -------
Net cash used in financing activities (1,009) (14)
------- -------
Net decrease in cash and cash equivalents (584) (442)
Cash and cash equivalents at beginning of period 2,167 1,429
------- -------
Cash and cash equivalents at end of period $ 1,583 $ 987
======= =======
- -------------
The accompanying notes are an integral part of these financial statements.
3
Schick Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except share and per share amounts)
1. Basis of Presentation
The consolidated financial statements of Schick Technologies, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America ("US GAAP") for interim financial
information and the rules of the Securities and Exchange Commission (the "SEC")
for quarterly reports on Form 10-Q, and do not include all of the information
and footnote disclosures required by US GAAP for complete financial statements.
These statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended March 31, 2001
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 months ended June 30,
2001, are not necessarily indicative of the results to be expected for the full
year ending March 31, 2002.
The consolidated financial statements of the Company, at June 30, 2001,
include the accounts of the Company and its wholly owned subsidiary. All
significant intercompany balances have been eliminated.
2. Liquidity
The Company had net income of $627 and incurred net losses of $527 for the
three months ended June 30, 2001 and 2000, respectively. The Company incurred
net losses of $1,638, $12,331 and $29,606 in the years ended March 31, 2001,
2000 and 1999, respectively. The Company has an accumulated deficit of $42,143
and working capital deficiency of $1,492 at June 30, 2001.
In response to the losses incurred, management has implemented certain
corrective actions, which include, but are not limited to, (1) reducing staff,
space and other overhead expenditures, (2) curtailing certain sales promotions,
(3) tightening credit policies and payment terms, (4) aggressively collecting
past-due balances from customers, (5) consolidating and reducing its sales
force, by entering into new distribution agreements, (6) implementing programs
to increase warranty revenue and recover warranty costs from the Company's
customers, (7) employing new senior management including an Executive Vice
President who directly oversees the Company's sales and marketing efforts, (8)
improving inventory yields and disposing of excess and obsolete inventory, and
(9) modifying and improving the Company's products to improve reliability and
reduce warranty expenditures.
Additionally, the Company has taken the following steps to improve
operations and provide for adequate resources to fund the Company's capital
needs for the next twelve months:
o In April 2000, the Company entered into an exclusive distributorship
agreement with Patterson Dental Company, which grants Patterson the rights to
distribute the Company's dental products in the United States and Canada.
o In May 2000, the Company entered into an agreement, subject to court
approval, for the settlement of a class action lawsuit against the Company. The
Company's insurance carrier will pay the settlement amount in its entirety. (See
Note 12).
o In June 2000, the Company renegotiated a $ 6.2 million term note payable
increasing the principal balance to $ 6.6 million(refinancing certain trade
payables on a long term basis), eliminating principal payments through January
2001 and extending the maturity date from March 2001 to April 2005.
o In July 2001, a Director of the Company made a commitment ("the
Commitment") to make an equity investment in the Company in the minimum amount
of $1 million, subject to the approval and acceptance of the Company's Board of
Directors.
o In fiscal 2001, the Company entered into several foreign distributorship
agreements.
In view of the matters described in the preceding paragraphs, Management
believes the Company has the ability to meet its financing requirements on a
continuing basis. However, if the Company's fiscal 2002 planned cash flow
projections are not met, Management could consider the reduction of certain
discretionary expenses and sale of certain assets. In the event that these plans
are not sufficient and the Company's credit facilities are not available, the
Company's ability to operate could be adversely affected.
Additionally, Management is currently evaluating the Commitment and
exploring supplemental and alternative financing sources. However, there can be
no assurance that such financing will be available on terms acceptable to the
Company or that the Company's cash needs will not be greater than anticipated.
3. Inventories
Inventories are comprised of the following:
June 30, 2001 March 31, 2001
------------- --------------
Raw materials $ 2,828 $3,046
Work-in-process 112 119
Finished goods 761 655
------- -------
Total inventories $ 3,701 $ 3,820
======= =======
4. Accounting for Business Combinations, Intangible Assets and Goodwill
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets".
The new standards require that all business combinations initiated after June 30
2001 must be accounted for under the purchase method. In addition, all
intangible assets acquired that are obtained through contractual or legal right,
or are capable of being separately sold, transferred, licensed, rented or
exchanged shall be recognized as an asset apart from goodwill. Goodwill and
intangibles with indefinite lives will no longer be subject to amortization, but
will be subject to at least an annual assessment for impairment by applying a
fair value based test.
The Company will continue to amortize under its current method until April
1, 2002. Thereafter, annual goodwill and quarterly goodwill amortization of $107
and $27 respectively, will no longer be recognized. By September 30, 2002, the
Company will perform a transitional fair value based impairment test and if the
fair value is less than the recorded value at April 1, 2002, the Company will
record an impairment loss in the June 30, 2002 quarter, as a cumulative effect
of a change in accounting principle.
5. Debt
Long-term debt is summarized as follows:
June 30, 2001 March 31, 2001
------------- --------------
Term notes $ 5,287 $ 6,296
Secured credit facility 647 635
------- -------
5,934 6,931
Less current maturities 2,339 2,851
------- -------
$ 3,595 $ 4,080
======= =======
4
Term Notes
In June 2000, the Company amended its term note increasing its principal
balance to $6,596 ("the amended note"). The term note was originally issued in
March 1999 for $5,000 and renewed in July 1999 for $6,222 (the "renewed note").
The increase in the principal amounts resulted from the conversion of certain
trade payables owed to the lender into the principal balance of the notes. The
amended note is segregated into two term loans: Term Loan A amounting to $5,000
and Term Loan B amounting to $1,596.
Term Loan A
The principal balance of term loan A is payable in 49 monthly payments
which commenced April 15, 2001, with interest payable monthly at the prime rate
plus 2.5% commencing April 15, 2000.
Term Loan B
The principal balance of term loan B is payable in 27 monthly payments
which commenced January 15, 2001 with interest payable monthly at the prime rate
plus 2.5% commencing April 15, 2000.
The Company is also required to make additional principal payments equal to
fifty percent of the "positive actual cash flow", as defined. In May 2001 the
Company made a prepayment of $750 in satisfaction of this provision. The term
loans have been classified based upon the terms of the amended note. The
tangible and intangible assets of the Company, as defined, collateralize the
term loans.
In connection with the renewed note, the Company granted the lender, DVI
Financial Services, Inc. ("DVI"), 650,000 warrants at an exercise price of $2.19
expiring on November 15, 2004. The fair value of the warrants amounted to $596,
and is accounted for as deferred financing costs. The costs are, included in
"Other Assets" in the accompanying balance sheet and are being amortized on a
straight-line basis over the life of the renewed note (17 months). In connection
with the amended note, the warrants' exercise price was reduced to $.75, the
expiration date extended to December 2006 and anti-dilution protection providing
for exercise of the warrant to result in 5% ownership was added. Additional
deferred financing costs of $130 were incurred and are being amortized over the
five-year life of the amended note. Interest expense of approximately $24 and
$104 relating to this warrants issuance was recognized for the three months
ending June 30, 2001 and June 30, 2000, respectively.
Effective August 28, 2000, DVI sold all its rights, title and interest in,
to and under the warrants, notes payable and security agreement as described
above, to the Company's other secured creditor (Greystone). By letter dated
October 11, 2000, DVI directed the Company to make all remaining payments due
for the notes payable directly to Greystone.
Secured Credit Facility
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.
Under the Loan Agreement, the Company appointed two of Greystone's executive
officers, one as President of the Company and both as Directors. Pursuant to the
Loan Agreement, and to induce Greystone to enter into said Agreement, the
Company issued to Greystone, or 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 President of the Company has been issued 750,000 warrants as a Greystone
designee. 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
5
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, and its designees, to enter into said
Agreement, the Company issued warrants to Greystone or 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 were to 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 did not vest prior to expiration or surrender of
the line of credit, were to 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 $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 the $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 deferred financing cost. This cost,
included in "Other Assets" in the accompanying balance sheet, is being amortized
on a straight-line basis over the five-year life of the loan. Interest under the
credit line is due monthly at an annual rate of 10% until December 2004 when the
outstanding loan is due to be repaid. The secured term notes and secured credit
facility are subject to various financial and restrictive covenants including,
among others, interest coverage, current ratio, and EBITDA.
On July 5, 2001, the Company repaid all outstanding advances under the
Greystone Amended Loan Agreement, together with all unpaid accrued interest
thereunder ($1.05 million), and concurrently terminated said Amended Loan
Agreement. Approximately $423 representing the unamortized discount and deferred
financing costs relating to the Amended Loan Agreement will be charged to
expense in July 2001.
On July 12, 2001, the Company and Greystone entered into a Termination
Agreement effective as of March 31, 2001, acknowledging the repayment and
surrender of the line of credit and agreeing that all the Company's obligations
thereunder have been fully satisfied. The Company and Greystone further agreed,
among other matters, that: (i) five million warrants held by Greystone and its
assigns to purchase Common Stock of the Company remain in full force and effect;
(ii) the Registration Rights Agreement between Greystone and the Company dated
as of December 27, 1999 remains in full force and effect; and (iii) for so long
as Jeffrey Slovin holds the office of President of the Company, the Company
shall reimburse Greystone in the amount of $17 monthly.
Principal maturities of long-term debt are as follows:
Year ending June 30,
--------------------
2002 $2,339
2003 1,521
2004 1,236
2005 838
------
$5,934
======
6
6. Contingencies
Product Liability
The Company is subject to the risk of product liability and other liability
claims in the event that the use of its products results in personal injury or
other claims. Although the Company has not experienced any product liability
claims to date, any such claims could have an adverse impact on the Company. The
Company maintains insurance coverage related to product liability claims, but
there can be no assurance that product or other claims will not exceed its
insurance coverage limits, 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
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, the SEC served a subpoena upon the
Company, pursuant to a formal order of investigation, requiring the production
of certain documents. The Company has provided the SEC with the subpoenaed
materials and has cooperated fully with the SEC staff. The inquiry is in a
preliminary stage and the Company cannot predict its potential outcome.
In addition, investigators associated with the U.S. Attorney's Office have
made inquires of certain former and current employees, apparently in connection
7
with the same event. The inquiries are in a preliminary stage and the Company
cannot predict their potential outcome.
Litigation
In May 2000, the Company entered into an agreement for the settlement of
the class action lawsuit naming the Company, certain of its officers and former
officers and various third parties as defendants. The complaint alleged that
certain defendants issued false and misleading statements concerning the
Company's publicly reported earnings in violation of the federal securities
laws. The complaint sought 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. Under the settlement
agreement, reflected in a memorandum of understanding and Stipulation of
Settlement, all claims against the Company and other defendants are to be
dismissed without presumption or admission of any liability or wrongdoing. The
principal terms of the settlement agreement call for payment to the plaintiffs,
for the benefit of the class, of the sum of $3.4 million. The settlement amount
will be paid in its entirety by the Company's insurance carrier and is not
expected to have any material impact on the financial results of the Company.
The terms of the settlement are subject to approval by the Court.
During 1996, the Company was named as defendant in patent infringement
litigation commenced by a competitor in the United States and France. The
Company 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 on the competitor's U.S. patent. In October 2000, the French patent
court dismissed the litigation venued in France. The court dismissed all of
Trophy's claims, finding no patent infringement. The court also ordered Trophy
to pay the sum of 65,000 French Francs to the Company as partial reimbursement
for legal fees. In September 2000, The Company filed motions for Summary
Judgment seeking the dismissal of the action in the United States. On June 6,
2001, the parties executed an agreement for the settlement and discontinuance of
these two lawsuits. Under the Settlement Agreement, the terms of which are
confidential, all claims and counterclaims by the parties are to be dismissed
with prejudice without any admission of wrongdoing by any party and each party
releases the other from all claims. On June 11, 2001 the United States District
Court for the Eastern District of New York discontinued the case without costs
to any party.
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.
7. Income Taxes
No provision for income taxes is recorded in these financial statements
since available tax carryovers exceed taxable income.
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," "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 the Company's
history of 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, governmental approvals and investigations, 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 in the Company's other
filings with the Securities and Exchange Commission.
General
The Company designs, develops and manufactures digital imaging systems for
the dental and medical markets. In the field of dentistry, the Company
manufactures and markets its' proprietary intra-oral digital radiography system.
The Company has also developed a bone mineral density assessment device to
assist in the diagnosis and treatment of osteoporosis, which was introduced in
December 1997. The Company has also commenced development of a general digital
radiography device for intended use in various applications.
Results of Operations
Net revenues for the three months ended June 30, 2001 decreased $0.4
million (6%) to $5.8 million from $6.2 million for the comparable period in
fiscal 2001. The decline is due to lower sales of the CDR (R) radiography
product, offset in part, by higher sales of CDR (R) warranties. In the first
quarter of fiscal 2002, accuDEXA sales were $0.2 million, unchanged for the
comparable period in fiscal 2001. CDR product sales declined $0.9 million (17%)
to $4.3 million (74% of the Company's net revenues) as compared to $5.2 million
(84% of the Company's net revenues) for the comparable period in fiscal 2001.
The Company believes that this decline was due to the Company's consolidation of
its sales channels in North America in May 2000. At that time, the Company
ceased selling the CDR (R) product line through a combination of its direct
sales force and non-exclusive-dealer network and entered into an exclusive
distribution agreement with Patterson Dental Company ("Patterson"). This
agreement grants Patterson exclusive rights to distribute the Company's dental
products in the United States and Canada, with the Company retaining direct
relationships for hospitals, universities and governmental agencies. The Company
believes that the establishment and phasing-in of this new distribution channel
resulted in lower CDR (R) sales, as the Patterson sales force became familiar
with the CDR (R) product line. CDR (R) warranty revenue increased $0.5 million
(63%) to $1.3 million from $0.8 million in fiscal 2001. The Company believes
that this increase was due primarily to improvements made in the implementation
of its product warranty programs, including policy enforcement and timely
notification of warranty-coverage expirations.
Total cost of sales for the three months ended June 30, 2001 decreased $0.8
million (26%) to $2.3 million (39% of net revenue) from $3.1 million (50% of net
revenue) for the comparable period in fiscal 2001. The decrease in the relative
total cost of sales is due to several factors including lower direct and
indirect labor costs, warranty expenditures, material costs and overhead costs
as a result of increased manufacturing efficiency.
Selling and marketing expenses for the three months ended June 30, 2001,
decreased $0.3 million (19%) to $1.3 million (22% of net revenue) from $1.6
million (26% of net revenue) for the comparable period of fiscal 2001. This
decrease is principally attributable to a reduction in the Company's direct
sales force, and a reduction in promotional and trade show expenses principally
as a result of the Patterson distribution agreement.
9
General and administrative expenses for the three months ended June 30,
2001, decreased $0.2 million (16%) to $1.0 million (17% of net revenue) from
$1.2 million (19% of net revenue) for the comparable period of fiscal 2001. The
decrease in general and administrative expenses was primarily attributable to a
decrease in payroll and related costs.
Research and development expenses for the three months ended June 30, 2001,
decreased $0.1 million (4%) to $0.5 million (9% of net revenue) from $0.6
million (9% of net revenue) for the comparable period of fiscal 2001. The
decrease is primarily attributable to a decrease in operating expenses.
Interest expense for the three-month period ended June 30, 2001 decreased
$0.2 million (42%) to $0.2 million from $0.4 million for the comparable period
of fiscal 2001. The decrease is attributable to interest rate declines, reduced
debt resulting from principal repayments and decreasing amortization of deferred
finance charges.
As a result of the above items, the Company's operating results improved to
a net profit of $0.6 million for the three months ended June 30, 2001 as
compared to a net loss of $0.5 million for the comparable period of fiscal 2001.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets".
The new standards require that all business combinations initiated after June 30
2001 must be accounted for under the purchase method. In addition, all
intangible assets acquired that are obtained through contractual or legal right,
or are capable of being separately sold, transferred, licensed, rented or
exchanged shall be recognized as an asset apart from goodwill. Goodwill and
intangibles with indefinite lives will no longer be subject to amortization, but
will be subject to at least an annual assessment for impairment by applying a
fair value based test.
The Company will continue to amortize under its current method until April
1, 2002. Thereafter, annual goodwill and quarterly goodwill amortization of $107
and $27 respectively, will no longer be recognized. By September 30, 2002, the
Company will perform a transitional fair value based impairment test and if the
fair value is less than the recorded value at April 1, 2002, the Company will
record an impairment loss in the June 30, 2002 quarter, as a cumulative effect
of a change in accounting principle.
Liquidity and Capital Resources
At June 30, 2001, the Company had $1.6 million in cash and cash equivalents
and a working capital deficiency of $1.5 million, compared to $2.2 million in
cash and cash equivalents and a $1.6 million working capital deficiency at March
31, 2001.
During the three months ended June 30, 2001 cash provided by operations was
$0.9 million compared to $0.4 million used in operations in fiscal 2001.
Increases in cash were primarily provided by improved operating performance. The
Company's capital expenditures increased $0.5 million in fiscal 2002 from $30 in
fiscal 2001. Fiscal 2001 capital expenditures (principally leasehold
improvements) were incurred in connection with Company's consolidation and
relocation into a portion of its space after fiscal 2001.
DVI Financial Services, Inc. ("DVI") has provided the Company with
financing evidenced by notes payable for $6.6 million which are secured by first
priority liens on substantially all of the Company's assets. The Company issued
promissory notes (amended in June 2000)(the "DVI Notes") and security agreements
that provide, in part, that the Company may not permit the creation of any
additional lien or encumbrance on the Company's property or assets. The DVI
Notes are due in varying installments through fiscal 2006. Interest is paid
monthly at the prime rate (8% at March 31, 2001) plus 2.5%. In connection with
the DVI Notes, the Company granted DVI 650,000 warrants at an exercise price of
$2.19 per share. In connection with the amended DVI Notes, the warrants'
exercise price was reduced to $.75, the expiration date extended to December
2006 and anti-dilution protection providing for exercise of the warrant to
result in 5% ownership was added. In connection with the DVI loan, the Company
prepaid $750 of outstanding principal during the first quarter of fiscal 2002.
Effective August 28, 2000, DVI sold all its right, title and interest in, to and
under the warrants and DVI Notes, as described above, to Greystone Funding
Corporation ("Greystone"). By letter dated October 11, 2000, DVI directed the
Company to make all remaining payments due under the DVI Notes directly to
Greystone.
In December 1999, the Company entered into a Loan Agreement with 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 $.75 per share. The Company agreed to issue Greystone
additional warrants to purchase 2,000,000 shares at an exercise price of $.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 it 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 17, 1999 (the "Amended loan
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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 and Photobit stock sale arrangement, to purchase 5,000,0000 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 were to 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 did not vest
prior to expiration or surrender of the line of credit were to be forfeited and
canceled. In connection with the Greystone secured credit facility, effective
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.
No additional funds were advanced under the Amended Loan Agreement in
excess of the initial draw of $1 million. On July 5, 2001, the Company remitted
payment to Greystone in the amount of $1.05 million, repaying all outstanding
advances under the Greystone Amended Loan Agreement, together with all unpaid
accrued interest thereunder, and concurrently terminated said Amended Loan
Agreement. Approximately $423 representing the unamortized discount and deferred
financing costs relating to the Amended Loan Agreement will be charged to
expense in July 2001.
On July 12, 2001, the Company and Greystone entered into a Termination
Agreement effective as of March 31, 2001, acknowledging the repayment and
termination of the Amended Loan Agreement and agreeing that all of the Company's
obligations thereunder have been fully satisfied. The Company and Greystone
further agreed, among other matters, that: (i) five million warrants held by
Greystone and its assigns to purchase Common Stock of the Company remain in full
force and effect; (ii) the Registration Rights Agreement between Greystone and
the Company dated as of December 27, 1999 remains in full force and effect; and
(iii) for so long as Jeffrey Slovin holds the office of President of the
Company, the Company shall reimburse Greystone in the amount of $17 thousand
monthly.
In July 2001, a Director of the Company made a commitment (the
"Commitment") to make an equity investment in the Company in the minimum amount
of $1 million, subject to the approval and acceptance of the Company's Board of
Directors.
Effective May 1, 2000 the Company entered into an exclusive distribution
agreement with Patterson Dental Company ("Patterson"). Under the terms of this
agreement the Company discontinued all direct domestic sales of its dental
products, with the exception of those to governmental agencies and universities.
As a result of the agreement, the Company further reduced its sales force.
Remaining domestic sales representatives have become manufacturer
representatives charged with support of the Patterson sales effort. The Company
terminated all existing dealer agreements including its agreement with Henry
Schein, Inc. In fiscal 2001, the Company entered into several foreign
distributorship agreements.
The Company believes that its cost reductions, refinancing and new sales
arrangement should permit the Company to generate sufficient working capital to
meet its obligations as they mature. The ability of the Company to meet its cash
requirements is dependent, in part, on the Company's ability to attain adequate
sales and profit levels and to satisfy its existing warranty obligations without
incurring expenses substantially in excess of related warranty revenue and to
collect its accounts receivable on a timely basis. Management believes that
existing capital resources are adequate to meet its current cash requirements.
Additionally, Management is currently evaluating the Commitment and exploring
supplemental and alternative financing sources. However, there can be no
assurance that such financing will be available on terms acceptable to the
Company or that the Company's cash needs will not be greater than anticipated.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The DVI term notes bear an annual interest rate based on the prime rate
plus 2.5%, provided however, that if any payments to DVI are past due for more
than 60 days, interest will thereafter accrue at the prime rate plus 5.5%.
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:
I. The Company was 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. On or about
June 6, 2001, the parties executed an agreement for the settlement and
discontinuance of these two lawsuits.
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. Subsequent
to filing its lawsuit, Trophy S.A. withdrew its allegation of infringement with
respect to the Certificate of Addition. Trophy S.A. was seeking a permanent
injunction and unspecified damages, including damages for its purported lost
profits. In October 2000, the French patent court dismissed this lawsuit. The
court dismissed all of Trophy's claims, finding no infringement of either
patent. The court also ordered Trophy to pay the sum of 65,000 French Francs to
the Company as partial reimbursement for legal fees.
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 alleged 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 were 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. In this action, the Company
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.
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. To
date, the Court has not ruled on these motions.
On June 6, 2001, the parties executed an agreement for the settlement and
discontinuance of these two lawsuits. Under the Settlement Agreement, all claims
and counterclaims by the parties are to be dismissed with prejudice without any
admission of wrongdoing by any party and each party releases the other from all
claims. The terms of such Agreement are confidential. On June 11, 2001 the
United States District Court for the Eastern District of New York discontinued
the case without costs to any party.
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
12
PricewaterhouseCoopers LLP.
The Complaint alleged, 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 sought certification of
a class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and did not specify the amount of damages
sought.
On May 23, 2000, the Company entered into an agreement in principle with
the plaintiffs for the settlement of the class action lawsuit, as reflected in a
Memorandum of Understanding. On June 5, 2001, a Stipulation of Settlement was
executed, under which all claims against the Company and the Individual
Defendants are to be dismissed without presumption or admission of any liability
or wrongdoing. The principal terms of the settlement agreement call for payment
to the Plaintiffs, for the benefit of the class, of the sum of $3.4 million. The
settlement amount will be paid in its entirety by the Company's insurance
carrier and is not expected to have any material impact on the financial results
of the Company. The settlement is subject to approval by the Court.
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
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, the SEC served a subpoena upon the
Company, pursuant to a formal order of investigation, requiring the production
of certain documents. The Company has provided the SEC with the subpoenaed
materials and has cooperated fully with the SEC staff. The inquiry is in a
preliminary stage and the Company cannot predict its potential outcome.
The Company could become a party to a variety of legal actions (in addition
to those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, 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 could 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
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 and Reports on Form 8-K
(a) Exhibits
None
(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: August 9, 2001 By: /S/ David Schick
David B. Schick
Chief Executive Officer
By: /S/ Ronald Rosner
Ronald Rosner
Director of Finance and
Administration
(Principal Financial Officer)
14