UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): August 25, 1999
SCHICK TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
State of Delaware 000-22673 11-3374812
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
31-00 47th Avenue
Long Island City, New York 11101
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (718) 937-5765
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(Former Name or Former Address, if
Changed Since Last Report)
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ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
(a) Previous independent accountants
(i) On August 25, 1999 PricewaterhouseCoopers LLP informed the Chief
Financial Officer of Schick Technologies Inc. (the "Company") of its
resignation as the independent accountants of the Company.
(ii) The reports of PricewaterhouseCoopers LLP on the financial statements
of the Company for the years ended March 31, 1997 and 1998 contained
no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle.
PricewaterhouseCoopers LLP did not complete their audit or issue an
audit opinion on the financial statements for the year ended March 31,
1999.
(iii) The decision to resign was made by PricewaterhouseCoopers LLP and was
neither recommended nor approved by the Company's Audit Committee or
Board of Directors.
(iv) In connection with its audits for the years ended March 31, 1997 and
1998 and through August 25, 1999, there have been no disagreements
with PricewaterhouseCoopers LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused them to make reference
thereto in their report on the financial statements for such years.
(v) The following matters were previously communicated by
PricewaterhouseCoopers LLP during the years ended March 31, 1998 and
1999 and the interim period through August 25, 1999, and are included
herein pursuant to Paragraph 304(a) (1) (v) of Regulation S-K:
(a) In their report to the Audit Committee of the Company, entitled
"Recommendations to Improve Internal Accounting Controls and
Administrative Efficiencies," dated May 9, 1997 (which related to
the audit of the March 31, 1997 financial statements and was
presented to the Audit Committee on October 27, 1997),
PricewaterhouseCoopers LLP noted certain matters involving
internal control and its operation that they considered to be
reportable conditions under standards established by the American
Institute of Certified Public Accountants. PricewaterhouseCoopers
LLP noted that certain deferrals, accruals and estimates required
to present accurate and consistent interim financial results had
not been reflected in the Company's interim financial statements.
PricewaterhouseCoopers LLP recommended the Company implement
formal procedures to ensure that its interim financial statements
be prepared on a basis consistent with the preparation of its
annual statements.
PricewaterhouseCoopers LLP also noted a lack of written evidence
of approval for transactions with related parties by an
independent unrelated officer of the Company.
PricewaterhouseCoopers recommended that all
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transactions with related parties be reviewed and authorized by
an independent and unrelated officer of the Company and that
supporting documentation be signed by such officer indicating
evidence of review.
PricewaterhouseCoopers LLP noted that monthly physical inventory
counts were not all inclusive and that count sheets for items
counted were not maintained. PricewaterhouseCoopers LLP further
noted that labor and overhead rates and inventory pricing were
not updated on a monthly basis. The Company did not have
perpetual inventory or standard cost systems at that time.
PricewaterhouseCoopers LLP recommended that the Company perform a
complete count of physical inventory, update raw material
pricing, production yields and labor and overhead rates on a
monthly basis and retain original count sheets from each monthly
physical count for at least four fiscal quarters.
PricewaterhouseCoopers LLP noted that the Company did not
maintain formal procedures to track compliance with its debt
covenants. PricewaterhouseCoopers LLP recommended that the
Company implement formal procedures to track and ensure
compliance with covenants contained in its debt agreements.
(b) In their report to the Audit Committee of the Company, entitled
"Recommendations to Improve Internal Accounting Controls and
Administrative Efficiencies," dated June 9, 1998 (which related
to the audit of the March 31, 1998 financial statements and was
presented to the Audit Committee on September 11, 1998),
PricewaterhouseCoopers LLP noted certain matters involving
internal control and its operation that they considered to be
reportable conditions under standards established by the American
Institute of Certified Public Accountants. PricewaterhouseCoopers
LLP considered certain of those reportable conditions to be
material control weaknesses.
PricewaterhouseCoopers LLP recommended that the Company implement
a computerized perpetual inventory system, which it believed
would allow the Company to (i) manage its inventory in a more
efficient and accurate manner, (ii) better match inventory levels
to the Company's production needs and sales projections, and
(iii) assist management in determining whether inventory includes
items which are obsolete or in excess of current demand.
PricewaterhouseCoopers LLP believed that the lack of such a
system contributed to the significant increase in inventory
levels, which exceeded the corresponding increase in sales volume
and expanded production requirements. The lack of a perpetual
inventory system during fiscal 1998 required the Company to
perform a full physical inventory each month to determine
inventory on hand and cost of sales. PricewaterhouseCoopers LLP
indicated that the lack of a perpetual inventory system
significantly increases the risk of an inaccurate inventory
valuation, and limited the ability of management to assess levels
of excess and obsolete inventory and to determine what items are
on hand at any point in time. PricewaterhouseCoopers LLP
considered the Company's lack of a perpetual inventory system to
be a material control weakness.
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PricewaterhouseCoopers LLP noted significant errors in the
calculation of inventory value. Such errors resulted from the
cumbersome preparation process and the lack of timely management
review of inventory costing and valuation reports. Labor and
overhead rates, as well as inventory prices were not updated on a
timely basis. In addition, new products were not allocated labor
and overhead. Labor costs were not captured and measured by
product and the allocation of the costs of miscellaneous
production supplies was not well supported.
PricewaterhouseCoopers LLP recommended that the Company update
raw material pricing, production yields, and labor and overhead
rates on a monthly basis and that inventory valuation
calculations be appropriately reviewed in a timely manner each
month. PricewaterhouseCoopers LLP considered the Company's lack
of timely update and review of inventory costing and valuation to
be a material control weakness.
PricewaterhouseCoopers LLP noted that the Company did not
maintain the detail of parts issued to customers pursuant to
warranty obligations. (If the customer requires a replacement
component the Company will ship the replacement component prior
to receiving the potentially defective component from the
customer ("RMA part").) PricewaterhouseCoopers LLP recommended
the Company implement procedures to maintain and update on a
timely basis a detailed listing of RMA parts, and such listing
should be compared on a monthly basis to the corresponding value
included in inventory.
PricewaterhouseCoopers LLP also noted the Company did not have
formal procedures for managing inventory held by third parties,
nor did it have procedures for tracking and reconciling advances
and payments made to such third parties against quantities
produced and shipped. PricewaterhouseCoopers LLP recommended that
the Company establish formal procedures to manage, track and
reconcile both inventory levels of components manufactured and
held by third parties and amounts advanced and paid to third
parties.
(c) On February 22, 1999, PricewaterhouseCoopers LLP advised the
Audit Committee that the previously weak internal control
structure had further deteriorated, and PricewaterhouseCoopers
LLP can give no assurance on the quarterly financial statements.
Further, on March 23, 1999, PricewaterhouseCoopers LLP provided
the Audit Committee with an update of Material Control Weaknesses
and Reportable Conditions resulting from limited procedures
performed by them, not comprising an audit, relating to the
quarter ended December 31, 1998. PricewaterhouseCoopers LLP made
the following recommendations regarding material control
weaknesses:
(i) The Company should improve the accuracy of its perpetual
inventory records and fully integrate its perpetual
inventory system with the general ledger. The Company should
create standard reports from its inventory system to allow
management to manage inventory in a more efficient and
accurate manner, better match
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inventory levels and purchasing requirements to production
needs and sales projections, and to assist management in
evaluating obsolete and slow moving inventory.
(ii) Ensure that product returns are recorded in the Company's
accounting system in a timely manner.
(iii) Enforce procedures for approval of returns in accordance
with Company policies.
(iv) Formally document and enforce credit granting policies,
prior to shipment of goods, in order to ensure proper
revenue recognition and collectability of accounts
receivable.
The following recommendations were made by PricewaterhouseCoopers
LLP regarding reportable conditions:
(i) Analyze and reconcile all inventory and cost of sales
related accounts in the general ledger.
(ii) Establish procedures to maintain and update the detailed
listing of RMA-parts inventory, including tracking of
recovery rates.
(iii) Establish formal procedures to manage, track and reconcile
both the inventory levels of components manufactured and
held by third parties and amounts advanced and paid to third
parties.
(iv) Establish policies to review inventory balances for
obsolete, slow moving and excess items.
(v) Establish procedures to track sales returns by product and
the reason for return in order to better analyze and report
the results of operations.
(vi) Establish procedures for timely review of the status of
accounts receivable including accounts receivable aging and
significant outstanding balances. Management should assess
the recoverability of accounts receivable and establish
appropriate reserves for bad debts as necessary.
Furthermore, in the course of the preparation of the Company's
1999 financial statements, the Company's Chief Financial Officer
(who commenced employment with the Company on March 1, 1999)
identified certain customer sales and sales promotion programs
undertaken during fiscal 1999, some of which circumvented the
Company's system of internal controls and raised revenue
recognition questions (the "Sales Practices"). In June 1999, the
Company's management brought the Sales Practices to the attention
of PricewaterhouseCoopers LLP for consideration in connection
with their audit of the financial statements for the year ended
March 31, 1999. In addition, in the course of its audit work,
PricewaterhouseCoopers LLP received an accounts receivable
confirmation reply from one of the Company's customers indicating
that a Company salesperson had granted the customer extended
payment terms in a side letter to the customer. In a meeting with
the Audit Committee of the Board of Directors of the Company on
June 29, 1999, PricewaterhouseCoopers LLP discussed the Sales
Practices with the Audit Committee and requested that the Audit
Committee perform an independent investigation.
PricewaterhouseCoopers LLP also informed the Audit Committee that
no assurance can be given on the Company's quarterly financial
statements by PricewaterhouseCoopers LLP and that the audit of
the Company's
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March 31, 1999 financial statements was incomplete, and that
after the investigation was completed, PricewaterhouseCoopers LLP
would reassess the scope of the audit. On July 1, 1999 the Audit
Committee engaged independent legal counsel to provide legal
advice to the Committee and to perform an investigation of the
Sales Practices.
Legal counsel was asked by the Audit Committee to: (i) determine
the facts and circumstances of the Sales Practices and their
potential effects on the Company's fiscal 1999 interim and annual
financial statements; (ii) take reasonable steps to identify any
other sales practices that may have a material effect on the
Company's interim and annual financial statements for fiscal
1999; and (iii) make recommendations to the Audit Committee
concerning appropriate remedial measures based on legal counsel's
findings. Legal counsel conducted the investigation in an
expedited manner to ensure a prompt response to the Audit
Committee. PricewaterhouseCoopers LLP was consulted with
concerning the initial scope of the investigation.
In addition, the Audit Committee also engaged independent
accountants, Ernst & Young LLP, to perform certain agreed-upon
procedures concerning the Company's revenue recognition policies
and practices during fiscal 1999. PricewaterhouseCoopers LLP was
consulted with concerning the initial scope of the agreed-upon
procedures performed by Ernst & Young LLP.
During the course of the investigation consultations were held
with PricewaterhouseCoopers LLP to discuss preliminary findings
and the results of the agreed-upon procedures performed by Ernst
& Young LLP. During these consultations PricewaterhouseCoopers
LLP requested that certain additional agreed-upon procedures be
performed based on the preliminary findings. The Company accepted
all suggestions for additional agreed-upon procedures.
On August 12, 1999, legal counsel and Ernst & Young LLP met with
PricewaterhouseCoopers LLP to discuss the results of their work
and the preliminary recommendations of legal counsel. At such
meeting, PricewaterhouseCoopers LLP commented upon legal
counsel's preliminary recommendations and as a result legal
counsel added recommendations.
In a report dated August 13, 1999, legal counsel reported the
following conclusions:
1. Financial statements for the year ended March 31, 1999. The
Sales Practices legal counsel was asked to investigate were
largely trial programs and consignment orders. Nothing came
to counsel's attention during the course of their
investigation that indicates that the Company continued to
engage in any of the Sales Practices as of March 31, 1999,
or that any material misstatement exists in the Company's
financial statements as of March 31, 1999 as a result of any
sales practices.
2. Interim financial statements for the quarters ended June 30,
September 30 and December 31, 1998. Legal counsel
determined, in conjunction with Ernst & Young LLP, that
certain transactions they investigated failed to qualify as
sales or were prematurely (or in some
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cases erroneously) recognized as sales. These transactions
primarily consisted of "Bill & Hold" transactions,
promotional programs whereby the customer was provided a
trial period prior to the actual purchase of the Company's
CDR and accuDEXA systems and consignment sales to
distributors. In addition, during the course of the
investigation certain additional revenue recognition issues
were identified. None of the additional issues affected the
financial statements as of March 31, 1999. These additional
issues consisted of trial programs "Bill & Hold"
transactions recorded during the first quarter of fiscal
1999, the deferral of sales revenue and unusual extended
payment terms. Upon consultation with Ernst & Young LLP,
legal counsel concluded that the magnitude of prematurely
and/or improperly recorded revenues was material to the
Company's interim financial statements for the first, second
and third quarters of fiscal 1999. Accordingly, the Company
intends to restate such interim financial statements as soon
as practical after the retention of new independent
accountants.
Based on its findings the legal counsel recommended the following
remedial actions to the Audit Committee:
1. Chief Operating Officer. Legal counsel recommended that the
Company hire an experienced executive for a newly-created
position of Chief Operating Officer, who will have
responsibility for managing the operations of the Company,
including the accounting and financial reporting functions.
2. Personnel Changes. As part of the Company's efforts to
improve its control environment and put an end to the Sales
Practices that led to the misstatements of the Company's
interim financial statements, legal counsel recommended that
the Company's incumbent vice president of sales and
marketing, its vice president of operations and its director
of vendor relations be removed from their positions.
3. Documentation and enforcement of Policies Concerning Sales.
Legal counsel recommended that the Company (i) ensure that
all policies relating to sales terms, returns and payments
are fully and clearly documented; (ii) prepare written
policies requiring appropriate authorizations for any
variances from established policies and requiring the
recording of any such variances in the Company's order
processing system; and (iii) strictly enforce all policies.
4. Change in the constitution of the Audit Committee. Although
legal counsel noted that it was impressed by the
professionalism and responsiveness of both members of the
Audit Committee and believed that the Audit Committee had
properly discharged its responsibilities during 1999,
counsel noted that one member of the Committee, Euval
Barrekette, is related by marriage to David Schick, the
Chief Executive Officer of the Company. In order to avoid
any potential appearance of a conflict of interest, counsel
recommended that it would be desirable to replace Mr.
Barrekette on the Audit Committee with another outside
director who has no family or business relationship to any
member of management.
5. Other recommendations. Legal counsel also recommended that
the
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Audit Committee consult with PricewaterhouseCoopers LLP as
to any additional recommendations that
PricewaterhouseCoopers LLP may have to improve the Company's
internal controls, or, otherwise, to put in place
structural, personnel or organizational changes that will
help minimize the risk of material misstatements of any
future financial statements.
A summary of legal counsel's findings and a copy of Ernst & Young
LLP's report of agreed-upon procedures were provided to
PricewaterhouseCoopers LLP on August 16, 1999.
On August 25, 1999, the Audit Committee of the Company provided
PricewaterhouseCoopers LLP with a letter stating that (a) the Board of
Directors would undertake all reasonable measures, in a timely fashion, to
retain an appropriate individual to fill the role of Chief Operating
Officer with full authority for the operations of the Company, including
the accounting and financial reporting functions; (b) the Chief Operating
Officer and Chief Financial Officer will report directly to the Audit
Committee; (c) the Chief Executive Officer will be involved in decisions
regarding overall Company strategy and will report to the Audit Committee;
(d) the Audit Committee will assume responsibility for the implementation
of the roles of the Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer; and (e) the Board has also undertaken to adopt and
is implementing the recommendations contained in the report of legal
counsel. Subsequent to its receipt of such letter, PricewaterhouseCoopers
LLP informed the Company of its resignation as independent accountants for
the Company. PricewaterhouseCoopers LLP did not indicate the reason for its
resignation and stated to Company management that it was
PricewaterhouseCoopers LLP's firm policy not to provide the reason for
resignation. At the time of its resignation, PricewaterhouseCoopers LLP had
not completed its audit of the financial statements of the Company for the
fiscal year ended March 31, 1999 and had not reassessed the scope of its
audit in light of the results of the independent investigation.
(b) New independent accountants
The Company is seeking to retain new independent accountants in as
expedient a manner as possible.
The Registrant has submitted a copy of this Form 8-K to
PricewaterhouseCoopers LLP and has requested that PricewaterhouseCoopers
LLP furnish the Registrant with a letter addressed to the Commission
stating whether it agrees with the statements made by the Registrant herein
and, if not, stating the respects in which it does not agree. The
Registrant has requested that PricewaterhouseCoopers LLP provide the letter
as promptly as possible so that the Registrant can file the letter with the
Commission within ten business days after the date of filing this Form 8-K,
by amendment to this Form 8-K.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
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10.1 Letter from PricewaterhouseCoopers, LLP (to be filed by
amendment)
This Report on Form 8-K contains forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. Statements regarding the
Company's retention of new independent accountants and intent to restate interim
financial statements, as well as any other statements which are not historical,
are 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 the process of seeking to retain new independent
accountants and complete preparation of financial statements and other risks and
uncertainties, including those detailed in the Company's other filings with the
Securities and Exchange Commission.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SCHICK TECHNOLOGIES, INC.
(Registrant)
Date: September 1, 1999 By: /s/ David B. Schick
-----------------------------------
David B. Schick
President and Chief Executive Officer
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