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, 2002.
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 August 5, 2002, 10,145,961 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, 2002 (unaudited)
and March 31,2002 ........................................... Page 1
Consolidated Statements of Operations for the three months
ended June 30, 2002 and 2001 (unaudited) .................... Page 2
Consolidated Statements of Cash Flows for the three months
ended June 30, 2002 and 2001 (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 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk .. Page 13
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings ........................................... Page 13
Item 2. Changes in Securities and Use of Proceeds ................... Page 14
Item 3. Defaults Upon Senior Securities ............................. Page 14
Item 4. Submission of Matters to a Vote of Security Holders ......... Page 14
Item 5. Other Information ........................................... Page 14
Item 6. Exhibits and Reports on Form 8-K ............................ Page 14
SIGNATURES ............................................................. Page 15
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,
-------- ---------
2002
----
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 3,115 $ 1,622
Short - term investments 463 472
Accounts receivable, net of allowance for
doubtful accounts of $717 2,348 2,812
Inventories 3,006 2,805
Income taxes receivable 13 13
Prepayments and other current assets 513 427
-------- --------
Total current assets 9,458 8,151
-------- --------
Equipment, net 2,714 2,939
Goodwill, net 266 266
Other assets 571 601
-------- --------
Total assets $ 13,009 $ 11,957
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current maturity of long term debt $ 1,640 $ 1,815
Accounts payable and accrued expenses 1,309 957
Accrued salaries and commissions 416 565
Deposits from customers 68 30
Warranty obligations 87 72
Deferred revenue 3,753 3,579
-------- --------
Total current liabilities 7,273 7,018
-------- --------
Long term debt 1,496 2,039
-------- --------
Total liabilities 8,769 9,057
-------- --------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock ($0.01 par value; 2,500,000
shares authorized; none issued and outstanding) -- --
Common stock ($0.01 par value; 50,000,000 shares
authorized: 10,142,782 shares issued and outstanding) 101 101
Additional paid-in capital 42,485 42,481
(Accumulated deficit) (38,346) (39,682)
-------- --------
Total stockholders' equity 4,240 2,900
-------- --------
Total liabilities and stockholders' equity $ 13,009 $ 11,957
======== ========
- ----------
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
(unaudited)
2002 2001
---- ----
Revenue, net $6,904 $5,841
Cost of sales:
Cost of sales 2,183 2,198
Excess and obsolete inventory 109 100
------------ ------------
Total cost of sales 2,292 2,298
------------ ------------
Gross profit 4,612 3,543
------------ ------------
Operating expenses:
Selling and marketing 1,441 1,302
General and administrative 1,102 980
Research and development 666 530
Bad debt recovery -- (43)
------------ ------------
Total operating costs 3,209 2,769
------------ ------------
Income from operations 1,403 774
------------ ------------
Other income (expense):
Other income -- 43
Interest income 23 20
Interest expense (90) (210)
------------ ------------
Total other expense, net (67) (147)
------------ ------------
Net income $1,336 $627
============ ============
Basic earnings per share $0.13 $0.06
============ ============
Diluted earnings per share $0.09 $0.05
============ ============
Weighted average common shares (basic) 10,138,900 10,137,193
============ ============
Weighted average common shares (diluted) 15,212,574 11,470,010
============ ============
- ----------
The accompanying notes are an integral part of these financial statements.
2
Schick Technologies, Inc. and Subsidiary Consolidated Statements of Cash Flows -
(unaudited)Three months ended June 30,
(In thousands)
2002 2001
---- ----
Cash flows from operating activities
Net income $ 1,336 $ 627
Adjustments to reconcile net income to
net cash provided by (used in) operating activities
Depreciation and amortization 310 391
Bad debt recovery -- (43)
Provision for excess and obsolete inventory 109 100
Amortization of deferred financing charge 30 27
Interest accretion -- 12
Changes in assets and liabilities:
Accounts receivable 464 (822)
Inventories (310) 19
Income taxes receivable -- 6
Prepayments and other current assets (86) (11)
Other assets -- 1
Accounts payable and accrued expenses 203 438
Deposits from customers 38 (385)
Warranty obligations 15 --
Deferred revenue 174 532
------- -------
Net cash provided by operating activities 2,283 892
------- -------
Cash flows from investing activities
Proceeds of short term investments 9 --
Capital expenditures (85) (467)
------- -------
Net cash used in investing activities (76) (467)
------- -------
Cash flows from financing activities
Issuance of common stock 4 --
Payment of long term debt (718) (1,009)
------- -------
Net cash used in financing activities (714) (1,009)
------- -------
Net increase (decrease) in cash and cash equivalents 1,493 (584)
Cash and cash equivalents at beginning of period 1,622 2,167
------- -------
Cash and cash equivalents at end of period $ 3,115 $ 1,583
======= =======
- ----------
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, 2002
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,
2002, are not necessarily indicative of the results to be expected for the full
year ending March 31, 2003.
The consolidated financial statements of the Company, at June 30, 2002,
include the accounts of the Company and its wholly owned subsidiary. All
significant intercompany balances have been eliminated.
2. Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections," on April 30, 2002. Statement No. 145
rescinds Statement No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Upon adoption of Statement
No. 145, companies will be required to apply the criteria in APB Opinion No. 30,
"Reporting the Results of Operations - reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" in determining the classification of gains and losses
resulting from the extinguishments of debt. Statement No. 145 is effective for
fiscal years beginning after May 15, 2002. The Company believes this
pronouncement has no material effect on its financial statements.
On July 30, 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company believes this pronouncement has
no material effect on its financial statements.
3. Inventories
Inventories are comprised of the following:
June 30, 2002 March 31, 2002
------------- --------------
Raw materials $2,102 $2,141
Work-in-process 98 16
Finished goods 806 648
------ ------
Total inventories $3,006 $2,805
====== ======
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.
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 quarter ending
September 30, 2002 which would be recorded as a cumulative effect of an
accounting change as of April 1, 2002. The Company believes an impairment
charge, if any, would be immaterial.
4
5. Debt
Long-term debt is summarized as follows:
June 30, 2002 March 31, 2002
------------- --------------
Term notes $3,136 $3,854
Less current maturities 1,640 1,815
------ ------
$1,496 $2,039
====== ======
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 2002 the
Company made a prepayment of $236 in satisfaction of this provision. The lender
agreed to permit the Company to make an additional payment of $200 during July
2002 in satisfaction of this provision for the quarter ended June 30, 2002. 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 $0.75, 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
5
expense of approximately $24 relating to this warrants issuance was recognized
for the three months ending June 30, 2002 and June 30, 2001.
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.
Principal maturities of long-term debt are as follows:
Year ending June 30,
--------------------
2003 $1,640
2004 1,311
2005 185
------
$3,136
======
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 provided the SEC with the subpoenaed
materials. In addition, investigators associated with the U.S. Attorney's Office
for the Southern District of New York made inquiries of certain former and
current employees, apparently in connection with the same event.
The Company has been informed that since January 2002 the SEC and the
United States Attorney's Office for the Southern District of New York have
served subpoenas upon and/or contacted certain individuals, including current
and former officers and employees of the Company, and a current Director, in
connection with this matter. On June 13, 2002, the Company was advised by
counsel to David Schick, the Company's Chief Executive Officer, that the United
States Attorney's Office for the Southern District of New York had recently
notified such counsel that Mr. Schick was a target of the United States
6
Attorney's investigation of this matter. The Company has cooperated fully with
the SEC staff and U.S. Attorney's Office, and intends to continue such
cooperation. The Company cannot predict the potential outcome of the inquiry.
Litigation
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. The income tax benefit
utilized for the three months ended June 30, 2002 and 2001 approximates $0.6
million and 0.3 million, respectively.
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
7
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.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company to make
estimates and assumptions that affect amounts reported in the accompanying
consolidated financial statements and related footnotes. These estimates and
assumptions are evaluated on an ongoing basis based on historical developments,
market conditions, industry trends and other information the Company believes to
be reasonable under the circumstances. There can be no assurance that actual
results will conform to the Company's estimates and assumptions, and that
reported results of operations will not be materially adversely affected by the
need to make accounting adjustments to reflect changes in these estimates and
assumptions from time to time. The following policies are those that the Company
believes to be the most sensitive to estimates and judgments.
Revenue recognition
The Company recognizes revenue when each of the following four criteria
are met: 1) a contract or sales arrangement exists; 2) products have been
shipped and title has been transferred or services have been rendered; 3) the
price of the products or services is fixed or determinable; and 4)
collectibility is reasonably assured. The Company records sales revenue upon
shipment to international dealers and to end-users in the U.S. In the case of
sales made by Patterson, revenue is recognized upon shipment from Patterson's
warehouses to end-users. Revenue arising from inventory in Patterson's
possession is recorded in deferred revenue. The Company records warranty renewal
revenue over the warranty renewal period (generally one-year). The unamortized
portion of warranty revenue is recorded in deferred revenue.
Accounts receivable
The Company primarily sells on open credit terms to Patterson and to the
US Government, hospitals and universities based upon signed purchase orders. The
Company's international sales are generally prepaid, guaranteed by irrevocable
letter of credit or underwritten by credit insurance. There are a limited number
of cases in which the Company has granted international dealers modest open
credit terms. Warranty shipments are prepaid. The Company's estimate of doubtful
accounts relates, primarily, to shipments made before fiscal 2000, when credit
policies were less restrictive. Revenue from customers is subject to agreements
allowing limited rights of return. Accordingly, the Company reduces revenue
recognized for estimated future returns. The estimate of future returns is
adjusted periodically based upon historical rates of return.
Inventories
Inventories are stated at the lower of cost or market. The cost of
inventories is determined principally on the standard cost method for
manufactured goods and on the average cost method for other inventories, each of
which approximates actual cost on the first-in, first-out ("FIFO") method. The
Company establishes reserves for inventory estimated to be obsolete,
unmarketable or slow moving inventory equal to the difference between the cost
8
of inventory and estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those anticipated or if changes in technology affect the Company's products
additional inventory reserves may be required.
Goodwill and other long-lived assets
Effective April 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and other Intangible
Assets". This statement requires that the amortization of goodwill be
discontinued and instead an annual impairment approach be applied. The
impairment tests will be performed upon adoption and annually thereafter (or
more often if adverse events occur) and will be based upon a fair value approach
rather than an evaluation of the undiscounted cash flows. If impaired, the
resulting charge reflects the excess of the asset's carrying value to the extent
it exceeds the recalculated goodwill.
Other long-lived assets such as patent and property and equipment are
amortized or depreciated over their estimated useful lives. These assets are
reviewed for impairment whenever events or circumstances provide evidence that
suggest that the carrying amount of the asset may not be recoverable with
impairment being based upon an evaluation of the identifiable undiscounted cash
flows. If impaired, the resulting charge reflects the excess of the asset's
carrying cost over its fair value.
If market conditions become less favorable, future cash flows, the key
variable in assessing the impairment of these assets, may decrease and as a
result the Company may be required to recognize impairment charges.
Income taxes
Income taxes are determined in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), which requires recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income liabilities and assets are
determined based on the difference between financial statements and tax bases of
liabilities and assets using enacted tax rates in effect for the year in which
the differences are expected to reverse. SFAS 109 also provides for the
recognition of deferred tax assets if it is more likely than not that the assets
will be realized in future years. A valuation allowance has been established for
deferred tax assets for which realization is not likely. At June 30, 2002 the
deferred tax asset ($19.2 million) has been fully reserved. In assessing the
valuation allowance, the Company has considered future taxable income and
ongoing tax planning strategies. Changes in these circumstances, such as a
decline in future taxable income, may result in the continuation of a full
valuation allowance being required.
Warranty obligations
Products sold are generally covered by a warranty against defects in
material and workmanship for a period of one year. The Company accrues a
warranty reserve for estimated costs to provide warranty services. The Company
estimates costs to service warranty obligations based on historical experience
and expectation of future conditions. To the extent the Company experiences
increased warranty claim activity or increased costs associated with servicing
9
those claims, warranty accrual will increase, resulting in decreased gross
profit.
Litigation and contingencies
The Company and its subsidiary are from time to time parties to lawsuits
and regulatory administrative proceedings arising out of their respective
operations. The Company records liabilities when a loss is probable and can be
reasonably estimated. These estimates are based on an analysis made by internal
and external legal counsel who consider information known at the time. The
Company believes it has estimated well in the past; however court decisions
could cause liabilities to be incurred in excess of estimates.
Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations and commercial
commitments at June 30, 2002:
========================================================================
PAYMENTS DUE BY PERIOD
------------------------------------------------
Less
CONTRACTUAL Than 1-3 4-5 After 5
OBLIGATIONS Total 1 year years years years
------------------------------------------------------------------------
Long-Term Debt $3,136 $1,640 $1,496 $ -- $ --
------------------------------------------------------------------------
Operating leases 2,459 454 963 1,042 --
------------------------------------------------------------------------
Employment agreements 1,637 859 778 -- --
------ ------ ------ ------ ------
------------------------------------------------------------------------
Total Contractual
Cash Obligations $7,232 $2,953 $3,237 $1,042 $ --
====== ====== ====== ====== ======
========================================================================
Results of Operations
Net revenues for the three months ended June 30, 2002 increased $1.1
million (18.2%) to $6.9 million from $5.8 million for the comparable period in
fiscal 2002. The increase is due to increased sales of the CDR (R) radiography
product. AccuDEXA sales decreased $0.1 million (33.3%) to $0.2 million from $0.3
million for the comparable period in fiscal 2002. CDR product sales increased
$1.2 million (28.3%) to $5.5 million (79.7% of the Company's net revenues) as
compared to $4.3 million (74.1% of the Company's net revenues) for the
comparable period in fiscal 2002. The Company believes that this increase was
due to increased sales by its exclusive domestic distributor, Patterson Dental
Company ("Patterson"). CDR (R) warranty revenue was unchanged at $1.3 million
from the comparable period in fiscal 2002. Total domestic revenues increased
$1.6 million (39.8%) to $5.5 million (79.7% of the Company's net revenues) as
compared to $3.9 million (67.2% of the Company's net revenues) for the
comparable period in fiscal 2002. International revenues declined $0.5 million
(24.4%) to $1.4 million from $1.9 million for the comparable period in fiscal
2002. This decrease was the result of a decline in sales to one customer in
Europe.
Total cost of sales for the three months ended June 30, 2002 was unchanged
at $2.3 million (33.2% and 39.3% of net revenue in the three months ended June
30, 2002 and 2001, respectively). 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.
10
Selling and marketing expenses for the three months ended June 30, 2002,
increased $0.1 million (10.7%) to $1.4 million (20.9% of net revenue) from $1.3
million (22.3% of net revenue) for the comparable period of fiscal 2002. This
increase is principally attributable to increases in advertising and other
promotional expenses.
General and administrative expenses for the three months ended June 30,
2002, increased $0.1 million (12.4%) to $1.1 million (%16.0 of net revenue) from
$1.0 million (16.8% of net revenue) for the comparable period of fiscal 2002.
The increase in general and administrative expenses was primarily attributable
to increases in payroll and related costs.
Research and development expenses for the three months ended June 30,
2002, increased $0.2 million (25.7%) to $0.7 million (9.6% of net revenue) from
$0.5 million (9.1% of net revenue) for the comparable period of fiscal 2001. The
increase is primarily attributable to increases in research and development
activities.
Interest expense for the three-month period ended June 30, 2002 decreased
$0.1 million (57.1%) to $0.1 million from $0.2 million for the comparable period
of fiscal 2002. 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 income of $1.3 million for the three months ended June 30, 2002 as
compared to net income of $0.6 million for the comparable period of fiscal 2002.
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 2002 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 continued to amortize under its old method until April 1,
2002. Thereafter, annual goodwill and quarterly goodwill amortization of $107
and $27 respectively, are no longer being 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 quarter ending September 30, 2002, which would
be recorded as a cumulative effect of an accounting change as of April 1, 2002.
The Company believes an impairment charge, if any, would be immaterial.
Liquidity and Capital Resources
At June 30, 2002, the Company had $3.1 million in cash and cash
equivalents and working capital of $2.2 million, compared to $1.6 million in
cash and cash equivalents and $1.1 million of working capital at March 31, 2002.
11
During the three months ended June 30, 2002 cash provided by operations
was $2.3 million compared to $0.9 million in fiscal 2001. Increases in cash were
primarily provided by improved operating performance and collection of accounts
receivable. The Company's capital expenditures decreased $0.3 million in fiscal
2003 from $0.4 in fiscal 2002. Fiscal 2002 capital expenditures were incurred in
connection with Company's consolidation and relocation into a portion of its
space after fiscal 2002.
In January 1999, DVI Financial Services, Inc. ("DVI") 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 (4 3/4% at March 31, 2002) 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 $236 and $750 of
outstanding principal during the first quarter of fiscal 2003 and 2002,
respectively. The Lender agreed to permit the Company to make a $200 payment
during July 2002 in satisfaction of prepayment covenants for the three months
ended June 30, 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.
Effective as of December 17, 1999 (as amended on March 17, 2000), the
Company entered into a Loan Agreement (the "Amended Loan Agreement") with
Greystone to provide up to $7.5 million of subordinated debt in the form of a
secured credit facility. No funds were advanced under the Amended Loan Agreement
in excess of an 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 the Amended
Loan Agreement. Approximately $423 representing the unamortized discount and
deferred financing costs relating to the Amended Loan Agreement was 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 for 0.75 per
share 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 (who was seconded by
Greystone) holds the office of President of the Company, the Company would
reimburse Greystone in the amount of $17 thousand monthly.
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Effective November 1, 2001 Mr. Slovin joined the Company on a full-time basis as
President and Chief Operating Officer, thereby canceling this reimbursement
provision of the agreement.
Based upon the Company's present operating conditions, management
anticipates that it will be able to meet its financing requirements on a
continuing basis. The ability of the Company to meet its cash requirements is
dependent, in part, on the Company's ability to maintain adequate sales and
profit levels, to satisfy 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 its existing capital
resources and other potential sources of credit are adequate to meet its current
cash requirements. However, if the Company's cash needs are greater than
anticipated the Company will be required to seek additional or alternative
financing sources and could consider the reduction of certain discretionary
expenses and the sale of certain assets. There can be no assurance that such
financing will be available or available on terms acceptable to the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The DVI 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 future 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
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 provided the SEC with the subpoenaed
materials. In addition, investigators associated with the U.S. Attorney's Office
for the Southern District of New York have made inquires of certain former and
current employees, apparently in connection with the same event.
The Company has been informed that since January 2002 the SEC and the
United States Attorney's Office for the Southern District of New York have
served subpoenas upon and/or contacted certain individuals, including current
and former officers and employees of the Company, and a current Director, in
connection with this matter. On June 13, 2002, the Company was advised by
counsel to David Schick, the Company's Chief Executive Officer, that the United
States Attorney's Office for the Southern District of New York had recently
notified such counsel that Mr. Schick was a target of the United States
Attorney's investigation of this matter. The Company has cooperated fully with
13
the SEC staff and U.S. Attorney's Office, and intends to continue such
cooperation. The Company cannot predict the potential outcome of the inquiry.
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
99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350.
99.2 Certification of Principal Accounting Officer Pursuant to 18
U.S.C. ss.1350.
(b) Reports on Form 8-K
None
14
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 8, 2002 By: /S/ David Schick
-------------------
David B. Schick
Chief Executive Officer
By: /S/ Ronald Rosner
-------------------
Ronald Rosner
Director of Finance and
Administration
(Principal Accounting Officer)
15