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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<PAGE>
SCHICK TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc.
Consolidated Balance Sheet
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
----------------- --------------
(unaudited)
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
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Schick Technologies, Inc.
Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
------------------------------- ------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
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Schick Technologies, Inc.
Consolidated Statement of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended December 31,
------------------------------
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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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
======== ========
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.
<TABLE>
<CAPTION>
Three months Three months Six months
ended June 30, ended September ended September
1998 30, 1998 30, 1998
<S> <C> <C> <C>
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
---------------------------------------
$(1,807) $(1,813) $(3,620)
---------------------------------------
</TABLE>
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
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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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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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<S> <C> <C> <C> <C> <C> <C>
Revenues, net $ 15,980 $ 12,459 $ 14,236 $ 13,631 $ 30,216 $ 26,090
- -----------------------------------------------------------------------------------------------------------------------------------
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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</TABLE>
5
<PAGE>
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:
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
</TABLE>
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
<PAGE>
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
<PAGE>
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
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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
<PAGE>
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
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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
11
<PAGE>
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.
12
<PAGE>
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.
13
<PAGE>
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
14
<PAGE>
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)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,376
<SECURITIES> 3,359
<RECEIVABLES> 12,815
<ALLOWANCES> 2,368
<INVENTORY> 13,829
<CURRENT-ASSETS> 35,037
<PP&E> 9,170
<DEPRECIATION> 1,190
<TOTAL-ASSETS> 45,651
<CURRENT-LIABILITIES> 13,256
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 41,236
<TOTAL-LIABILITY-AND-EQUITY> 45,651
<SALES> 43,179
<TOTAL-REVENUES> 43,179
<CGS> 29,530
<TOTAL-COSTS> 24,534
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,416)
<INCOME-TAX> (495)
<INCOME-CONTINUING> (9,921)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,921)
<EPS-PRIMARY> (.99)
<EPS-DILUTED> (.96)
</TABLE>
EXHIBIT 99
CAUTIONARY STATEMENT
The statements contained in this Form 10-Q include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 ("PSLRA"). When used in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
presentations to securities analysts or investors, or in oral statements made by
or with the approval of an executive officer of the Company, 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. Any forward-looking
statement involves risks and uncertainties that may have a material adverse
effect on the business, results of operation, financial condition or prospects,
financial or other, of the Company and may cause the Company's actual results to
differ materially from historical results or the results discussed in the
forward-looking statements.
The following discussions contain cautionary statements regarding the
Company's business that investors and others should consider. This discussion is
intended to take advantage of the "safe harbor" provisions of the PSLRA. In
making these cautionary statements, the Company is not undertaking to address or
update each factor in future filings or communications regarding the Company's
business or results.
DEPENDENCE ON CDR(TM)
To date the Company's revenues are primarily generated from sales of its
CDR(TM) system and, to a lesser extent, the CDRCam(TM), accuDEXA(TM) and the CDR
Discovery 60/70 DC(TM). There can be no assurance that any of these devices will
not be rendered obsolete or inferior as a result of technological change,
changing customer needs or new product introductions, each of which would have a
material adverse effect on the Company. There can be no assurance that the
Company's competitors will not succeed in developing or marketing technologies
and products that are more commercially attractive than the CDR(TM) system,
CDRCam(TM) or accuDEXA(TM). The Company's success will depend in part on its
ability to improve and enhance its products in a timely manner. While the
Company is actively engaged in research and development to improve and enhance
the CDR(TM) system and CDRCam(TM), there can be no assurance that the Company
will be successful. The failure to enhance any of the Company's products in a
timely manner could have a material adverse effect on the Company.
DEPENDENCE ON DEVELOPING AND MARKETING NEW PRODUCTS AND ENHANCEMENTS TO EXISTING
PRODUCTS
The Company is currently developing new products for the dental and medical
markets. The Company expects to file 510(k) applications with the FDA in
connection with the digital mammography sensors currently under development by
the Company, and other future products. There can be no assurance that the
Company will obtain pre-market clearance for the digital mammography sensors or
any other future products, or that in order to obtain 510(k) clearance, the
Company will not be required to submit additional data or meet additional FDA
requirements that may substantially delay the 510(k) process and result in
substantial additional expense. Moreover, such pre-marketing clearance, if
obtained, may be subject to conditions on the marketing or manufacturing of the
digital mammography sensors which could impede the Company's ability to
manufacture and/or market the product. In addition, while the Company intends to
distribute the digital mammography sensors through a direct sales force and
other established independent distributors and manufacturers of medical and
radiological equipment, there can be no assurance that the Company will be able
to successfully develop any such distribution channel. While the Company is
actively engaged in research and development to develop digital mammography
sensors and other new products, there can be no assurance that the Company will
be successful in such endeavors. There can be no assurance that the digital
mammography sensors or any other products to be developed by the Company will be
approved by or receive marketing clearance from applicable governmental
authorities. If the Company is unable to develop, obtain regulatory approval for
and market new products and enhancements to existing products, it will have a
material adverse effect on the Company.
RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapid and
significant technological change, evolving industry standards and new product
introductions. The Company's products require significant planning, design,
development and testing which require significant capital commitments and
investment by the Company. There can be no assurance that the Company's products
or proprietary technologies will not become uncompetitive or obsolete as a
result of technological change, evolving industry standards or new product
introductions or that the Company will be able to generate any economic return
on its investment in product development. If the Company's products or
technologies become uncompetitive or obsolete, it will have a material adverse
effect on the Company.
17
<PAGE>
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF PATENT INFRINGEMENT
The Company currently has issued United States patents for an 'Intra-Oral
Sensor For Computer Aided Radiography,' which expires on October 16, 2012, a
'Large Area Image Detector' which expires on November 20, 2016 and a 'Method and
Apparatus for Measuring Bone Density' which expires on September 24, 2017. The
Company also has five additional patent applications currently pending before
the United States Patent and Trademark Office (the 'PTO').
The Company is the licensee in certain fields of biomedical radiology of
certain patents, patent applications and other know-how related to APS
technology (collectively, the 'APS Technology'), which was developed by the
California Institute of Technology. The Company has been advised by the licensor
of the APS Technology that the Company's rights to such technology are subject
to government rights to use, noncommercial educational rights to use by
California Tech and the right of a third party to obtain a nonexclusive license
from the California Institute of Technology with respect to such technology. The
Company believes that, as of the date of this filing, except for such third
party's exercise of its right to obtain a nonexclusive license to use APS
Technology in a field other than biomedical radiology, none of the foregoing
parties have given notice of their exercise of any of their respective rights to
the APS Technology. There can be no assurance that this will continue to be the
case, and any such exercise could have a material adverse effect on the Company.
There can be no assurance that any of the Company's patents, any of the
patents of which the Company is a licensee or any patents which may issue to the
Company or which the Company may license in the future, will provide the Company
with a competitive advantage or afford the Company protection against
infringement by others, or that the patents will not be successfully challenged
or circumvented by competitors of the Company.
The Company is also the owner of certain trade secrets, which it protects
by, among other things, entering into non-disclosure, confidentiality,
non-solicitation and non-competition agreements. However, there can be no
assurance that the duties imposed by these agreements, such as the duty to
maintain confidentiality and the duty not to compete, will not be breached, or
that such breaches will not have a material adverse effect on the Company.
There also can be no assurance that the technology practiced by the Company
will not infringe upon the patents of others. The Company's CDR(TM) system is
currently the subject of litigation regarding the patent rights of others. In
the event that any such infringement claim is successful, there can be no
assurance that the Company would be able to negotiate with the patent holder for
a license, in which case the Company could be prevented from practicing the
subject matter claimed by such patent. In addition, there can be no assurance
that the Company would be able to redesign its products to avoid infringement.
The inability of the Company to practice the subject matter of patents claimed
by others or to redesign its products to avoid infringement could have a
material adverse effect on the Company.
18
<PAGE>
LITIGATION AND INSURANCE
The Company is a named defendant in two lawsuits instituted by Trophy
Radiologie, S.A. ('Trophy S.A.'). One lawsuit was instituted in France and the
other in the United States.
The French lawsuit was filed in November 1995, in the tribunal de Grande
Instance de Bobigny, the French patent court, and originally alleged that the
Company's CDR(TM) system infringes French Patent No. 2,547,495, European Patent
No. 129,451 and French Certificate of Addition No. 2,578,737. These patents, all
of which are related, are directed to a CCD-based intra-oral sensor. Since
filing its lawsuit, Trophy S.A. has withdrawn its allegation of infringement
with respect to the Certificate of Addition. Trophy S.A. is seeking a permanent
injunction and unspecified damages, including damages for its purported lost
profits.
The lawsuit in the United States was filed in March 1996 by Trophy S.A.,
Trophy Radiology, Inc., a United States subsidiary of Trophy S.A. ('Trophy
Inc.') and the named inventor on the patent in suit, Francis Mouyen, a French
citizen. The suit was brought in the United States District Court for the
Eastern District of New York, and alleges that the Company's CDR(TM) system
infringes United States Patent No. 4,593,400 (the ' '400 patent'), which is
related to the patents in the French lawsuit. Trophy S.A., Trophy Inc. and
Mouyen are seeking a permanent injunction and unspecified damages, including
damages for purported lost profits, enhanced damages for the Company's purported
willful infringement and an award of attorney fees.
In addition, the Company has counter-sued Trophy S.A. and Trophy Inc. for
infringement of United States Patent No. 4,160,997, a recently-expired patent
which was exclusively licensed to the Company by its inventor, Dr. Robert
Schwartz, and for false advertising and unfair competition. The Company believes
that its counter-suits are meritorious, and is vigorously pursuing them.
On September 12, 1997, the Company served two motions for summary judgment
seeking dismissal of the action pending in the United States District Court for
the Eastern District of New York, on the grounds of non-infringement and the
"best mode" defense. Those motions are currently pending.
While the Company believes such suits against it are without merit, there
can be no assurance that the Company will be successful in its defense of any of
these actions, or in its counter-suits. If the Company is unsuccessful in its
defense of any of these actions, it could have a material adverse effect upon
the Company.
In addition, the Company and certain of its current and former officers and
directors are defendants in shareholder complaints described in this Report in
"Part II, Item I - Legal Proceedings."
The Company may be a party to a variety of legal actions (including 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
non-economic or 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 enough 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.
19
<PAGE>
DEPENDENCE ON KEY SUPPLIERS; VOLATILITY OF SEMICONDUCTOR MARKET
Semiconductors are the most significant product components the Company
purchases. The availability and price of these components may be subject to
change due to interruptions in production, changing market conditions and other
events. There can be no assurance that, if the Company were to enter into
purchase arrangements with other suppliers, such suppliers would be able to
deliver such semiconductors at an acceptable price or in a timely manner. If the
Company were unable to develop reasonably-priced alternative sources in a timely
manner, or if the Company encountered delays or other difficulties in the supply
of such products and other materials from third parties, there could be a
material adverse effect on the Company. In past years, semiconductors have been
subject to significant price fluctuations. There can be no assurance that the
Company can mitigate the effect of future price increases on its results of
operations and financial condition.
PRODUCT WARRANTIES; WARRANTS
The Company generally warrants each of its products against defects in
materials and workmanship for a period of one year from the date of shipment.
Costs associated with product returns, including servicing and/or repair of
products, during the warranty period increased substantially in fiscal 1999.
Product returns could have a material adverse effect on the Company by, among
other things, requiring additional expenditures for parts and personnel as well
as damaging the Company's reputation and goodwill.
REGULATORY AND LEGISLATIVE RISKS
The Company must obtain certain approvals by and marketing clearances from
governmental authorities, including the FDA and similar health authorities in
foreign countries, to market and sell its products in those countries. The FDA
regulates the marketing, manufacturing, labeling, packaging, advertising, sale
and distribution of 'medical devices,' as do various foreign authorities in
their respective jurisdictions. The FDA enforces additional regulations
regarding the safety of equipment utilizing x-rays. Various states also impose
similar regulations. The Company's CDR(TM) system is currently regulated by such
authorities and certain of the Company's new products will require approval by
or marketing clearance from various governmental authorities, including the FDA.
The FDA review process typically requires extended proceedings pertaining
to the safety and efficacy of new products. A 510(k) application is required in
order to market a new or modified medical device. If specifically required by
the FDA, a pre-market approval ("PMA") may be necessary. Such proceedings, which
must be completed prior to marketing a new medical device, are potentially
expensive and time consuming. They may delay or hinder a product's timely entry
into the marketplace. Moreover, there can be no assurance that the review or
approval process for these products by the FDA or any other applicable
governmental authorities will occur in a timely fashion, if at all, or that
additional regulations will not be adopted or current regulations amended in
such a manner as will adversely affect the Company. The FDA also regulates the
content of advertising and marketing materials relating to medical devices.
Failure to comply with such regulations may result in a delay in obtaining
approval for the marketing of such products or the withdrawal of such approval
if previously obtained. There can be no assurance that the Company's advertising
and marketing materials regarding its products are and will be in compliance
with such regulations. The Company is also subject to other federal, state and
local laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices. The extent of government regulation that
might result from any future legislation or administrative action cannot be
accurately predicted. Failure to comply with regulatory requirements could have
a material adverse effect on the Company. International sales of the Company's
products are subject to the regulatory agency product registration requirements
of each country in which the Company's products are sold. The regulatory review
process varies from country to country and may in some cases require the
submission of clinical data. The Company typically relies on its distributors in
foreign countries to obtain the required regulatory approvals. There can be no
assurance, however, that such approvals will be obtained on a timely basis, if
at all, or that the failure to obtain such approval by a distributor will not
have a material adverse effect on the Company. The Company's customers operate
in the health care industry, which is highly regulated. Both existing and future
governmental regulations could adversely impact the Company. Additionally,
cost-containment
20
<PAGE>
efforts by health maintenance organizations may adversely affect the potential
market for the Company's devices.
POTENTIAL FOR PRODUCT RECALL AND PRODUCT LIABILITY CLAIMS
Products such as those sold by the Company may be subject to recall for
unforeseen reasons. In addition, certain applications, including projected
applications, of the Company's products entail the risk of product liability
claims. Such risks will exist even with respect to those products that have
received, or in the future may receive, regulatory approval for commercial sale.
These claims may be made by consumers, distributors, wholesalers or others.
Although the Company has maintained insurance coverage related to product
liability claims, no assurance can be given that product liability insurance
coverage will continue to be available or, if available, that it can be obtained
in sufficient amounts or at reasonable cost or that it will be sufficient to
cover any claims that may arise. The Company does not maintain any insurance
relating to potential recalls of its products. Costs associated with potential
product recalls or product liability claims could have a material adverse effect
on the Company.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT
Third-party payors, including government health administration authorities,
private health care insurers and other organizations regulate the reimbursement
of fees related to certain diagnostic procedures or medical treatments.
Third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. While the Company cannot predict what effect
the policies of government entities and other third-party payors will have on
future sales of the Company's products, there can be no assurance that such
policies would not have a material adverse effect on the Company.
INTENSE COMPETITION
Competition relating to the Company's current products is intense and
includes various companies, both within and outside of the United States. The
Company anticipates that competition for its future products will also be
intense and include various companies, both within and outside of the United
States. Many of the Company's competitors are large companies with substantially
greater financial, sales and marketing, and technical resources, larger and more
experienced research and development staffs, more extensive physical facilities
and substantially greater experience in obtaining regulatory approvals and in
marketing products than the Company. In addition, there can be no assurance that
the Company's competitors are not currently developing, or will not attempt to
develop, technologies and products that are more effective than those being
developed by the Company or that would otherwise render the Company's existing
and new technology and products obsolete or uncompetitive. No assurance can be
given that the Company will be able to compete successfully. The inability of
the Company to compete successfully or the development by the Company's
competitors of technology and products that are more effective than those being
developed by the Company would have a material adverse effect on the Company.
DEPENDENCE ON THIRD-PARTY DISTRIBUTORS
The Company markets and distributes a significant portion of its CDR(TM)
systems overseas through third-party independent distributors. From time to
time, a limited number of distributors account for a significant portion of the
Company's revenues. In 1996, one distributor, Dental Computer/Dental
Technologies, accounted for 18.0% of the Company's sales. In general, these
distributors could discontinue marketing the Company's products with little or
no notice. Certain of the Company's distributors also could market products
which compete with the Company's products. Additionally, the Company intends to
market its current and future products in the United States and its future
products overseas through independent third-party distributors. The loss of, or
a significant reduction in sales volume through, one or more of the Company's
distributors could have a material adverse effect on the Company.
UNCERTAINTIES ASSOCIATED WITH INTERNATIONAL MARKETS
In fiscal 1998, 1997 and 1996, international sales accounted for 18%, 24%
and 31% respectively, of the Company's revenues, and the Company anticipates
that international sales will continue to account for a significant percentage
of the Company's revenues. International revenues are subject to a number of
21
<PAGE>
uncertainties, including the following: agreements may be difficult to enforce
and receivables difficult to collect; foreign customers and distributors may
have longer payment cycles, foreign countries may impose additional withholding
taxes or otherwise tax the Company's foreign income, impose tariffs or adopt
other restrictions on foreign trade; fluctuations in exchange rates may affect
product demand in relation to foreign competitors that may achieve advantageous
pricing based on the comparative strength of the United States dollar; United
States export licenses may be difficult to obtain; and intellectual property
rights in foreign countries may be difficult to enforce. Moreover, many foreign
countries have their own regulatory approval requirements for the sale of the
Company's products. As a result, the Company's introduction of new products into
international markets could be costly and time-consuming, and there can be no
assurance that the Company will be able to obtain the required regulatory
approvals on a timely basis, if at all. There can be no assurance that any of
these factors will not have a material adverse effect on the Company.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is dependent, in part, upon its ability to hire
and retain management, sales and research personnel who are in high demand and
are often subject to competing employment opportunities. The inability of the
Company to hire or retain key management, sales or research personnel could have
a material adverse effect on the Company. In addition, the development of the
Company's business has been primarily dependent upon the efforts of David B.
Schick, the Company's President and Chief Executive Officer. Although the
Company has expanded the depth of the expertise of its personnel, the loss of
Mr. Schick or turnover in other management positions could have a material
adverse affect on the Company. The Company does not have employment agreements
with any of its current employees, including Mr. Schick, and there can be no
assurance that he or any other key employee will continue to be active with the
Company. The Company maintains and is the named insured party under a $1,000,000
life insurance policy on Mr. Schick. There is no assurance that such insurance
can be maintained or will be adequate to meet the Company's future needs.
RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH
There can be no assurance that the growth experienced by the Company will
continue or that the Company will be able to achieve the growth contemplated by
its business strategy. Furthermore, there are significant risks, expenses and
difficulties associated with managing the operation and sustaining the
development of an expanding business. The Company's growth has placed, and will
continue to place, significant demands on the Company's financial and other
resources. The Company will be required to continually improve operating,
financial, and other systems, as well as to train, motivate, and manage its
employees. If the Company's management is unable to manage growth effectively or
new employees are unable to achieve appropriate levels of performance, it could
have a material adverse effect on the Company.
CONTROL OF THE COMPANY BY CERTAIN STOCKHOLDERS
Currently, the executive officers and directors of the Company collectively
beneficially own approximately 39% of the outstanding shares of Common Stock.
Accordingly, they may effectively have the ability to elect all of the directors
of the Company and determine the outcome of all other matters submitted for the
approval of the stockholders. In particular, David B. Schick and members of his
immediate family beneficially own approximately 26% of the outstanding shares of
Common Stock and, accordingly, may be able to exert significant influence over
the Company.
PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
The Company's Common Stock is currently listed on The Nasdaq National
Market. The stock market historically has experienced volatility which has
affected the market price of securities of many companies and which has
historically been unrelated to the operating performance of such companies. The
market prices for securities of medical technology companies have historically
been highly volatile. Future technological innovations or new commercial
products, results of clinical testing, changes in regulation, litigation and
public concerns as to product safety as well as period-to-period fluctuations in
financial performance and fluctuations in securities markets generally could
cause the market price of the Common Stock to fluctuate substantially. In
addition, the stock market prices of many medical technology companies have
experienced substantial fluctuations. Such price fluctuations have often been
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unrelated to the operating performance of the affected companies. These broad
market fluctuations may adversely affect the market price of the Common Stock.
POTENTIALLY SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
Several factors may significantly affect the Company's revenues, expenses
and results of operations from quarter to quarter, including the timing of new
product introductions by the Company or its competitors, developments regarding
new treatments for osteoporosis, developments in government reimbursement
policies, product mix, the ability to supply products to meet customer demand
and fluctuations in manufacturing costs. In addition, the Company's CDR(TM)
products are subject to seasonal variations. Historically, the Company has
experienced higher sales growth rates in its first and third fiscal quarters
than in its second and fourth fiscal quarters. Consequently, quarterly results
of operations can be expected to fluctuate. Such fluctuations in quarterly
results of operation could adversely affect the market price of the Common
Stock.
NEED FOR ADDITIONAL FINANCING
The Company may require additional outside financing to expand its core
technology and develop new products, for working capital and for capital
expenditures. There can be no assurance that such financing will be available on
acceptable terms or at all. The inability of the Company to obtain such
financing could have a material adverse effect on the Company. In addition, the
Company may issue additional shares of Common Stock or other securities, whether
through public or private offerings. Such offerings would have a dilutive effect
on the percentage of ownership in the Company of any holder of shares of Common
Stock. In the event the Company is unable to raise necessary additional
financing in the future, it may experience cash flow difficulties and/or be
forced to curtail its expansion activities.
THE YEAR 2000
The Company is in the process of modifying its computer systems to
accommodate the Year 2000. The Company currently expects to complete this
modification enough in advance of the Year 2000 to avoid adverse impacts on our
operations. The Company is expensing the costs incurred to make these
modifications. The Company's operations could be adversely affected if the
Company is unable to complete its Year 2000 modifications in a timely manner or
if other companies with which the Company does business fail to complete their
Year 2000 modifications in a timely manner.
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