SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
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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, 1998.
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 [X] No [ ]
As of February 19, 1999, 10,061,113 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 Sheet as of December 31, 1998 and
March 31, 1998 ............................................ Page 1
Consolidated Statement of Operations for the three and nine
months ended December 31, 1998 and 1997 ................... Page 2
Consolidated Statement of Cash Flows for the nine
months ended December 31, 1998 and 1997 ................... 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
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings ......................................... Page 12
Item 2. Changes in Securities and Use of Proceeds ................ Page 12
Item 6. Exhibits and Reports on Form 8-K .......................... Page 13
SIGNATURE ................................................................... Page 14
EXHIBIT 27 .................................................................. Page 15
EXHIBIT 99 .................................................................. Page 16
PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc.
Consolidated Balance Sheet
(In thousands, except share amounts)
December 31, 1998 March 31, 1998
----------------- --------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 1,376 $ 6,217
Short-term investments 3,359 14,022
Accounts receivable, net of allowance for doubtful
accounts of $2,368 and $200 respectively 12,815 10,173
Inventories 13,829 12,152
Prepayments and other current assets 3,658 746
-------- --------
Total current assets 35,037 43,310
Equipment, net 7,980 5,801
Investments 1,250 1,000
Other assets 1,384 1,214
Deferred tax asset -- 349
-------- --------
Total assets $ 45,651 $ 51,674
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 11,206 $ 7,010
Accrued salaries and commissions 974 1,473
Provision for warranty obligations 366 245
Income taxes payable -- 144
Deferred revenue 483 362
Deposits from customers 227 331
-------- --------
Total current liabilities 13,256 9,565
Other long term liabilities 175 --
Commitments -- --
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; 10,052,488 and 9,992,057 shares issued
and outstanding) 100 100
Additional paid-in capital 41,236 41,204
Retained earnings (9,116) 805
-------- --------
Total stockholders' equity 32,220 42,109
Total liabilities and stockholders' equity $ 45,651 $ 51,674
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
1
Schick Technologies, Inc.
Consolidated Statement of Operations
(unaudited)
Three months ended December 31, Nine months ended December 31,
------------------------------- ------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenue, net $ 17,090 $ 11,912 $ 43,179 $ 26,176
Cost of sales 15,273 5,529 29,530 12,227
-------- -------- -------- --------
Gross profit 1,817 6,383 13,649 13,949
Operating expenses:
Selling and marketing 5,457 2,903 14,216 6,787
General and administrative 4,019 1,192 7,545 2,923
Research and development 907 1,289 2,773 2,896
Patent litigation settlement -- -- -- 600
-------- -------- -------- --------
Total operating expenses 10,383 5,384 24,534 13,206
-------- -------- -------- --------
Income (loss) from operations (8,566) 999 (10,885) 743
-------- -------- -------- --------
Other income (expense)
Interest income 46 360 469 858
Interest expense -- (26) -- (77)
-------- -------- -------- --------
Total other income (expense) 46 334 469 781
-------- -------- -------- --------
Income (loss) before income tax (8,520) 1,333 (10,416) 1,524
-------- -------- -------- --------
Provision (benefit) for income taxes (565) 108 (495) (14)
-------- -------- -------- --------
Net income (loss) ($ 7,955) $ 1,225 ($ 9,921) $ 1,538
======== ======== ======== ========
Earnings (loss) per share ($ 0.80) $ 0.12 ($ 0.99) $ 0.17
======== ======== ======== ========
Earnings (loss) per share -
assuming dilution ($ 0.77) $ 0.12 ($ 0.96) $ 0.16
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
2
Schick Technologies, Inc.
Consolidated Statement of Cash Flows
(In thousands)
(unaudited)
Nine months ended December 31,
------------------------------
1998 1997
-------- --------
Net cash flows from operating activities:
Net income (loss) (9,921) $ 1,538
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities
Depreciation and amortization 1,284 570
Stock and option grant compensation -- 15
Accrued interest on investments (210) (436)
Non-cash interest expense --
Changes in assets and liabilities:
Accounts receivable (2,642) (4,993)
Inventories (1,677) (6,128)
Prepayments and other current assets (2,912) (41)
Other assets (273) (73)
Deferred income taxes 349 (434)
Accounts payable and accrued expenses 3,818 3,994
Income taxes payable (144) 420
Deferred revenue 121 189
Deposits from customers (103) 44
Other liabilities 174 --
Accrued interest on notes payable -- (102)
-------- --------
Net cash (used in) provided by operating activities (12,136) (5,437)
-------- --------
Cash flows from investing activities:
Investment in capitalized software (200) (70)
Purchases of available-for-sale investments -- --
Purchases of held-to-maturity investments (10,561) (15,518)
Proceeds from maturities of held-to-maturity investments 21,435 1,444
Business acquisition -- (1,450)
Purchase of minority interest in Photobit Corporation (250) (1,000)
Capital expenditures (3,161) (2,816)
-------- --------
Net cash used in investing activities 7,263 (19,410)
Cash flows from financing activities:
Net proceeds from issuance and sale of common stock -- 33,608
Net proceeds from issuance and sale of common stock and
warrants 32 --
Proceeds from issuance of long-term notes -- --
Repayment of notes payable -- (1,513)
Principal payments on capital lease obligations -- (109)
-------- --------
Net cash provided by financing activities 32 31,986
Net increase in cash and cash equivalents (4,841) 7,139
Cash and cash equivalents at beginning of period 6,217 1,710
-------- --------
Cash and cash equivalents at end of period $ 1,376 $ 8,849
======== ========
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)
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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, 1998 included in the Company's Annual
Report on Form 10-K and Amendment No. 1 thereto.
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, 1998, are not necessarily indicative of the
results to be expected for the full year ending March 31, 1999.
The consolidated financial statements of the Company, at December 31, 1998,
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances have been eliminated.
2. Inventories
Inventories at December 31, 1998 and March 31, 1998 are comprised of the
following:
December 31, 1998 March 31, 1998
----------------- --------------
Raw ................................. $ 4,849 $ 7,108
materials
Work-in-process ..................... 6,022 3,466
Finished ............................ 4,790 1,578
goods
Reserve for slow moving/obsolete .... (1,832) --
-------- --------
........
Total inventories ............. $ 13,829 $ 12,152
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3. Prior Periods Adjustments
The Company's previously reported results of operations for the three month
period ended June 30, 1998 and the three and six months ended September 30,
1998 will be restated to reflect certain prior period adjustments. The
effects of these adjustments to correct the accounting for revenue
recognition, and reserves and allowances for returns and bad debts in the
three months ended September 30 and June 30, 1998 are set forth in the
following table.
Three months Three months Six months
ended June 30, ended September ended September
1998 30, 1998 30, 1998
Revenue $(1,559) $ 773 $ (786)
Provision for sales returns (1,962) (1,378) (3,340)
Cost of sales 1,068 (1,174) (106)
Provision for bad debt expense (346) (98) (444)
Accrued expenses 44 (4) 40
Net of tax effect 948 68 1,016
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$(1,807) $(1,813) $(3,620)
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Beginning in the second quarter ended September 30, 1998 and accelerating
in the third quarter ended December 31, 1998, product returns and unpaid
accounts receivable increased significantly. The reasons for significant
increases in bad debts and product returns are believed to be : (a) a
change in sensor and computer hardware technology announced early in the
first quarter of fiscal 1999; (b) initial problems in servicing and
installing orders for new CDR(TM) systems; and (c) unsuccessful follow-up
on accounts receivable. Resultant accounts receivable charge-offs and
provisions for returns exceeded the respective accounting reserves
4
and allowances for bad debts and product returns. Management has reanalyzed
the basis for its previous estimates and determined that insufficient
provisions had been made in the first and second quarters of fiscal 1999
and that additional provisions for bad debts and product returns are needed
in the period ended December 31, 1998.
The Company has analyzed these economic factors and current and prior rates
of returns and bad debts and has revised its current and projected
estimates for product returns and bad debts accordingly. Also, based
primarily upon subsequent reevaluation of factors relating to certain sales
to customers, revenues recognized in the first quarter ended June 30, 1998
in the amount of $1,559 were shifted to the second quarter and certain
revenue recognized in the second quarter ended September 30, 1998, in the
amount of $785, was eliminated.
In response to the aforementioned market events, Management also reviewed
the adequacy of the Company's reserve for inventory obsolescence, and
inventory reserves have been increased by $ 1.8 million during the three
months ended December 31, 1998.
The previously reported results of operations for the three months ended
June 30, 1998 and the three and six months ended September 30, 1998, as
reported on Forms 10-Q with the Securities and Exchange Commission, will be
amended to reflect the above prior period adjustments. The effects of such
prior period adjustments on the Company's two previously reported quarters
are set forth below.
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Three months ended Three months ended Six months ended
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June 30, 1998 September 30, 1998 September 30, 1998
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As reported As restated As reported As restated As reported As restated
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Revenues, net $ 15,980 $ 12,459 $ 14,236 $ 13,631 $ 30,216 $ 26,090
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Cost of sales 7,217 6,149 6,935 8,110 14,152 14,259
-------- -------- -------- -------- -------- --------
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Gross profit 8,763 6,310 7,301 5,521 16,064 11,831
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Total operating expenses 6,540 6,842 7,208 7,309 13,747 14,151
-------- -------- -------- -------- -------- --------
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Income (loss) from operations 2,223 (532) 93 (1,788) 2,317 (2,320)
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Total other income (expense) 243 243 180 180 422 423
-------- -------- -------- -------- -------- --------
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Income (loss) before taxes 2,466 (289) 273 (1,608) 2,739 (1,897)
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Provision for (benefit from) income taxes 983 35 103 35 1,086 70
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Net income (loss) $ 1,483 $ (324) $ 170 $ (1,643) $ 1,653 $ (1,967)
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Basic earnings (loss) per share $ 0.15 $ (0.03) $ 0.02 $ (0.16) $ 0.17 $ (0.20)
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Diluted earnings (loss) per share $ 0.14 $ (0.03) $ 0.02 $ (0.16) $ 0.16 $ (0.19)
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5
4. Initial Public Offering
In July 1997, the Company completed its initial public offering (the
"IPO"), selling 2,012,500 shares of common stock at a price of $18.50 per
share providing gross proceeds to the Company of $37,231 and net proceeds,
after underwriting discounts and commissions and offering expenses payable
by the Company, of $33,508.
5. Patent Litigation Settlement
In July 1997, in connection with the settlement of certain pending patent
litigation involving a United States patent directed to a display for
digital dental radiographs, the Company was granted a worldwide,
non-exclusive fully paid license covering such patent in consideration for
a payment by the Company of $600. The Company expensed the license fee in
the quarter ended June 30, 1997.
6. Earnings (Loss) Per Share
Effective December 31, 1997, the Company adopted statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128") which
requires presentation of basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS"). Basic EPS is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted EPS gives effect to
all dilutive potential common shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or
contingent exercise of securities that would have an antidilutive effect on
earnings. Earnings per share for the three and six month periods ended
September 30,1997 have been restated for the adoption of FAS 128. The
adoption of FAS 128 did not have a significant impact on the loss per share
for the periods ended September 30, 1997.
The computation of basic earnings per share and diluted earnings per share
for the three- and nine-month periods ended December 31, 1998 and 1997 are
as follows:
Three months ended December 31, Nine months ended December 31,
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net income available to common (7,955) $ 1,225 (9,921) $ 1,538
stockholders
Weighted average shares outstanding 10,002,987 9,981,154 9,996,023 9,307,598
for basic earnings per share
Dilutive effect of stock options and warrants 278,291 438,183 340,972 301,534
----------- ----------- ----------- -----------
Weighted average shares outstanding
for diluted earnings per share 10,281,278 10,281,278 10,336,995 9,609,132
Basic earnings per share ($ 0.80) $ 0.12 ($ 0.99) $ 0.17
=========== =========== =========== ===========
Diluted earnings per share ($ 0.77) $ 0.12 ($ 0.96) $ 0.16
=========== =========== =========== ===========
7. Investment in Photobit
On July 14, 1998, the Company invested an additional $250 in Photobit
Corporation, a developer of complementary metal-oxide semiconductor
("CMOS"), active-pixel ("APS") imaging technology. As of December 31, 1998
the Company's investment in Photobit Corporation amounts to $1,250. The
Company is the exclusive licensee of the APS technology for medical
applications and utilizes the technology in both its bone-mineral density
assessment device and certain components of its computed dental x-ray
imaging system.
6
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 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 in Exhibit 99 to this Report 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 large-area
radiographic imaging devices for digital mammography.
Results of Operations
Net revenue for the three months ended December 31, 1998 increased $5.2 million
(44%) to $17.1 million from $11.9 million during the comparable period of fiscal
1998. Net revenue for the nine months ended December 31, 1998, increased $17.0
million (65%) to $43.2 million from $26.2 million during the comparable period
of fiscal 1998. The revenue growth is due to increased sales of the Company's
CDR(R) dental product and accuDEXA(TM) bone density assessment device. The
accuDEXA was introduced during the third quarter of fiscal 1998, and did not
contribute significantly to revenues until the first and second quarters of
fiscal 1999.
Fiscal 1999 revenues were negatively affected by a rate of return for the
Company's products shipped within the third fiscal quarter which was higher than
the historical return rate for the Company's products, as well as returns for
products shipped during the first and second quarters of fiscal 1999, which were
returned in the second and third quarters. In addition, revenues were negatively
affected by an increase in reserves for goods which may be returned in the
future.
The following table depicts the effect of returns, upon the Company's net
revenues in the third fiscal quarter of 1999.
(In Millions)
Gross Revenues: $23.7
Sales Returns and Allowances: $(6.6)
==================================================================
Net Revenue: $17.1
Provisions for returns are comprised of actual returns and estimates for future
returns.
On a net of returns basis, in the third quarter of fiscal 1999, accuDEXA
represented approximately $2.6 million (15%) of the Company's sales and CDR
represented approximately $14.5 million (85%) of the Company's sales.
The rate of returns in fiscal 1999 increased significantly over 1998. The
increased return rate for CDR is believed to be attributable to several factors,
including the following:
7
First, the Company experienced 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. The Company has provided for replacements of systems
shipped during this period where practical and provided for anticipated returns
for units which were not upgradeable. In September 1998, the Company began
shipping a new version of the APS sensor which has addressed problems associated
with the first version. Management anticipates that the aforementioned problem
has been resolved and all returns associated therewith have been provided for.
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.
The Company also experienced a higher than normal rate of returns of accuDEXA
units. The Company believes that these returns are 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. The Company has taken steps to address
these problems and believes that failure rates have dropped significantly.
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. This sales policy had been used successfully by the Company in the
past, without causing the rate of returns to escalate. In December 1998, the
Company resumed its customary policy of charging 10% deposits.
Cost of sales for the three months ended December 31, 1998 increased $9.8
million (176%) to $15.3 million (89% of net revenue) from $5.5 million (46% of
net revenue) for the comparable period of fiscal 1998. Cost of sales for the
nine months ended December 31, 1998, increased $17.3 million (142%) to $29.5
million (68% of net revenues) from $12.2 million (47% of net revenues) during
the comparable period of fiscal 1998.
Cost of sales was impacted by an increase in reserves for obsolete inventory,
which was due primarily to changes in technology, including sensors, cameras and
associated electronics, including the Company's phaseout of production of its
CCD Sensors (as well as its first generation APS Sensors) in favor of its new
APS Sensors. In addition, the Company moved forward with the development of a
new intra-oral dental camera which, the Company believes, may ultimately replace
the CDRCam(R) product which the Company currently sells. As a result, the
Company took reserves against inventory associated with these products.
In general, cost of goods was increased by additional direct and indirect labor
costs, increased warranty expenditures, increased material costs, increased
royalty costs for certain goods and increased overhead. 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.
Selling & Marketing expenses for the three months ended December 31, 1998,
increased $2.6 million (88%) to $5.5 million (32% of net revenue) from $2.9
million (24% of net revenue) for the comparable period of fiscal 1998. Selling
and marketing expenses for the nine months ended December 31, 1998, increased
$7.4 million (109%) to $14.2 million (33% of net revenue) from $6.8 million (26%
of net revenue) during the comparable period of fiscal 1998. The increase was
due to increases in direct selling expenses in the CDR and accuDEXA product
lines. The Company continued to expand its sales forces during the third quarter
of fiscal 1999, to a total of 125 at the end of the third quarter. In addition,
expenses were affected by the cost of two major dental industry trade shows
which occurred during the third quarter of fiscal 1999. In January 1999, the
Company reduced the number of its direct salespersons to 98.
8
General and administrative expenses for the three months ended December 31,
1998, increased $2.8 million (237%) to $4.0 million (24% of net revenue) from
$1.2 million (10% of net revenue) for the comparable period of fiscal 1998.
General and administrative expenses for the nine months ended December 31, 1998,
increased $4.6 million (158%) to $7.5 million (17% of net revenue) from $2.9
million (11% of net revenue) during the comparable period of fiscal 1998.
General and administrative expenses included an increase of $1.2 million for
reserves for doubtful accounts and $142 thousand in write offs for bad debts.
The increase in reserves for doubtful accounts was partly offset by increases of
$443 thousand in the reserves for the restated first and second quarters of
fiscal 1999 due to reevaluation of collections information related to sales in
the first and second quarter of fiscal 1999. General and administrative cost
increases were also attributable to increased administrative expenditures.
Research and development expenses for the three months ended December 31, 1998,
decreased $0.4 million (30%) to $0.9 million (5% of net revenue) from $1.3
million (11% of net revenue) for the comparable period of fiscal 1998. Research
and development expenses for the nine months ended December 31, 1998, decreased
$ 0.1 million (4%) to $2.8 million (6% of net revenue) from $2.9 million (11% of
net revenue) for the comparable period of fiscal 1998. The decrease in costs for
the three-month period ended December 31, 1998 primarily reflects lower spending
on testing materials and services and the transfer of research and development
employees to the quality control department.
Interest income decreased to $46 thousand in the three months ended December 31,
1998 from $449 thousand in the comparable period of fiscal 1998. Interest income
for the nine months ended December 31, 1998 decreased to $469 thousand from $858
thousand for the comparable period of fiscal 1998. 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 (the "IPO"). Interest expense of $77 thousand for the six month period
ended December 31,1997 was principally attributable to a loan from Merck & Co.
Inc. that was repaid upon consummation of the IPO.
Liquidity and Capital Resources
Net proceeds from the July 1997 IPO were approximately $33.5 million. At
December 31, 1998, the Company had $1.4 million in cash and cash equivalents,
$3.4 million in short-term investments and $21.8 million in working capital
compared to $6.2 million in cash and cash equivalents, $14.0 million in
short-term investments and $33.7 million in working capital at March 31, 1998.
During the nine months ended December 31, 1998, cash used in operations was
$12.1 million compared to $5.4 million used in operations during the comparable
period of fiscal 1998. The increased cash used in operations is primarily
attributable to increases in the Company's inventory and accounts receivable
levels. Accounts receivable increased from $10.2 million at March 31, 1998 to
$12.8 million at December 31, 1998 due to increases in sales volume. The
increase in inventory of $1.6 million from $12.2 million at March 31, 1998 to
$13.8 million at December 31, 1998 is primarily attributable to the unsold (or
returned) CDR and accu DEXA units. The Company has made estimated tax payments
and anticipates receiving a refund of approximately $1.7 million and expects a
$600 thousand refund claim resulting from the net operating loss carryback
generated in the current period.
The Company's capital expenditures during the nine-month period ended December
31, 1998 were in the amount of $3.2 million. Such expenditures included
leasehold improvements, computers, and production equipment.
Management currently believes that existing capital resources, which have been
diminished in fiscal 1999, will be adequate to meet its current cash
requirements. However, there can be no assurance that such capital resources are
adequate or that changes in the Company's plans or other events affecting the
Company's operations will not result in accelerated or unexpected cash
requirements. The ability of the Company to satisfy its cash requirements is
dependent in part on the Company's ability to collect its accounts receivable on
a timely basis. There can be no assurance that the Company's collection efforts
will be successful or, even if successful, that such collection will satisfy the
Company's cash requirements. The Company is
9
currently in discussions with various potential financing sources to obtain a
line of credit for working capital requirements. There can be no assurance that
a line of credit will be available to the Company on commercially reasonable
terms, if at all. Failure to obtain a line of credit could materially adversely
affect the Company's liquidity.
10
Year 2000 Compliance
GENERAL
As the century concludes, the Company is aware of the risks associated with the
Year 2000 computer problem. The Year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. A computer program that has date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. If
systems fail to process date information correctly when the year changes to
2000, many problems could occur.
The Company `s Y2K Task Force is assessing the Company's potential for Year 2000
related problems on a continuing basis. The Y2K Task Force is evaluating the
Company's information technology ("IT") and non-information technology systems.
The Y2K Task Force program includes three phases: (1) an assessment phase to
identify Year 2000 issues; (2) a modification phase to correct any area of the
Company's business which is not Year 2000 compliant; and (3) a test phase to
confirm that all systems work successfully. The Company's potential problems
focus on three key areas of business operations: products and services provided
to the Company by third-party vendors; systems used by the Company to run its
business internally; and the Company's product line.
The potential impact of the Year 2000 issue depends heavily on the way in which
the Year 2000 issue is addressed by vendors, service providers, utilities,
governmental agencies and other entities with which the Company does business
(collectively known as the "Vendors"). The Y2K Task Force mailed Y2K surveys to
the Company's Vendors in December 1998 to determine if their operations and the
products and services they provide are Year 2000 compliant. Responses to the Y2K
surveys arrive daily and are helping the Company evaluate the extent to which it
may be vulnerable to its Vendors' own Year 2000 issues. Where practicable, the
Company will attempt to mitigate its risks with respect to Vendors which are not
Year 2000 compliant and may, for example, seek alternative sources of supplies.
However, Year 2000 related failures by Vendors remain a possibility and could
have a material adverse impact on the Company's results of operations or
financial condition.
The Company is currently in the process of evaluating the capabilities of its
internal systems to process the Year 2000 correctly. The Company believes that
most vendor-developed software which it utilizes in its internal operations will
be made Year 2000 compliant before April 1999 through vendor-provided updates or
replacements with other Year 2000 compliant hardware and software. If
modifications or conversion to existing software or conversion to new software
become necessary and modifications or conversions are not made, or are not
completed timely, the Year 2000 issue could have a material adverse effect on
the Company's business, financial condition and results of operations.
Additionally, the Company is testing its internally developed software and
hardware which are included in the products sold to customers. Such assessments
are expected to be completed by April 1999.
COSTS
The total costs associated with required modifications to become Year 2000
compliant are not expected to be material to the Company's financial position.
Current estimated costs for the Y2K Task Force program are approximately
$250,000; however, such costs are subject to change as a result of ongoing
evaluation of the extent of the Year 2000 problem at the Company and its
suppliers and affiliates. As of the current date, costs incurred in connection
with the Y2K Task Force program have been immaterial.
RISKS
The Company is developing specific contingency plans in the event that the
Company's Year 2000 issues are not resolved prior to the time that any system
failures or interruptions in day-to-day business operations could occur. The
contingency plans are evolving as Year 2000 assessment progresses.
There can be no assurances that the Year 2000 compliance activities performed by
the Company will adequately identify and test all of the Company's critical
internal and external systems to ensure Year 2000 compliance. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
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uncertainty of the Year 2000 readiness of third parties with whom the Company
relies on, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material adverse impact on the
Company's results of operations but the Company believes that, with the
completion of the project as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Nine shareholder complaints purporting to be class action lawsuits were
filed with the United States District Court for the Eastern District of New York
alleging that the Company and several of its current and former directors and
officers violated sections 10(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), Rule 10b-5 promulgated by the Commission
thereunder, and Section 20(a) of the Exchange Act. Named as defendants in one or
more of the complaints are the Company, David B. Schick, Thomas E. Rutenberg,
Mark Bane, Euval Barrekette, Fred Levine, Daniel Neugroschl, Zvi N. Raskin,
Howard Wasserman and David Spector.
The complaints allege that defendants issued false and misleading
statements concerning the Company's publicly reported earnings. The complaints
seek certification of a class of persons who purchased the Company's Common
Stock between February 4, 1998 and December 10, 1998, inclusive (the "Class
Period") and do not specify the amount of damages sought. No responsive pleading
has been filed and no discovery has been taken. The Company has retained
counsel, believes that these lawsuits are without merit, and intends to
vigorously defend them. 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 Company. See Exhibit
99 to this Report - "Cautionary Statement."
Item 2. Changes in Securities and Use of Proceeds
(c) During the quarter ended December 31, 1998, existing warrant holders
surrendered an aggregate of 142,520 warrants exercisable at $7.86 per share in
cashless exercises to purchase an aggregate of 44,364 shares of Common Stock and
an aggregate of 58,240 warrants exercisable at $8.21 per share in cashless
exercises to purchase an aggregate of 15,558 shares of Common Stock. Such
issuances were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(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
fees, commissions and expenses were $33.5 million. During the period of July 1,
1997 through December 31, 1998, such net proceeds have been applied as follows:
(i) $1.4 million for leasehold improvements; (ii) $5.9 million for property,
plant, and equipment; (iii) $1.5 million to purchase certain assets of Keystone
Dental X-Ray Corp.; (iv) $1.3 million to purchase an interest in Photobit, Inc.;
(v) $1.5 million to pay the notes payable and the interest thereon to Merck &
Co., Inc.; (vi) $3.0 million to short term investments; (vii) $0.4 million to
money market investments; and (viii) the remaining $21.3 million was used for
working capital purposes. None of the net proceeds were paid, directly or
indirectly, to directors, officers, controlling stockholders, or affiliates of
the Company.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule (Filed in electronic format only)
(99) Cautionary Statement for Purposes of the "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995
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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: February 22, 1999 By: /S/ David B. Schick
------------------------------
David B. Schick
President and
Chief Executive Officer
By: /S/ Thomas E. Rutenberg
------------------------------
Thomas E. Rutenberg
Director of Finance
(Principal Financial Officer)
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