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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended September 30, 2000.
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 Identification
incorporation or organization) 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 October 30, 2000, 10,138,922 shares of common stock, par value $.01 per
share, were outstanding.
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SCHICK TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
March 31, 2000 ........................................................... Page 1
Consolidated Statements of Operations for the three and six
months ended September 30, 2000 and 1999 (unaudited)....................... Page 2
Consolidated Statements of Cash Flows for the six
months ended September 30, 2000 and 1999 (unaudited)...................... Page 3
Notes to Consolidated Financial Statements (unaudited).................... Page 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ Page 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk................. Page 10
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.......................................................... Page 11
Item 2. Changes in Securities and Use of Proceeds ................................ Page 12
Item 3. Defaults Upon Senior Securities............................................ Page 12
Item 4. Submission of Matters to a Vote of Security Holders........................ Page 12
Item 5. Other Information.......................................................... Page 12
Item 6. Exhibits and Reports on Form 8-K........................................... Page 12
SIGNATURES ........................................................................... Page 13
EXHIBIT 27 ........................................................................... Page 14
</TABLE>
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PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc.
Consolidated Balance Sheet
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
---- ----
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 561 $ 1,429
Short - term investments 9 8
Accounts receivable, net of allowance for
doubtful accounts of $2,368 and $2,449, respectively 509 1,535
Inventories 4,593 5,612
Income taxes receivable 44 127
Prepayments and other current assets 141 166
-------- --------
Total current assets 5,857 8,877
-------- --------
Equipment, net 4,454 5,206
Investments 815 815
Other assets 1,313 1,392
-------- --------
Total assets $ 12,439 $ 16,290
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current maturities of long term debt $ 676 $ 245
Accounts payable and accrued expenses 3,442 4,255
Accrued salaries and commissions 614 878
Income taxes payable 49 --
Deferred revenue 2,150 1,681
Deposits from customers 323 666
Warranty obligations 176 278
Capital lease obligations 11 33
-------- --------
Total current liabilities 7,441 8,036
-------- --------
Long term debt 6,391 6,938
-------- --------
Total liabilities 13,832 14,974
-------- --------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock ($0.01 par value; 2,500,000
shares authorized; none issued and outstanding) -- --
Common stock ($0.01 par value; 25,000,000 shares authorized:
10,137,193 and 10,134,384 shares issued and outstanding) 101 101
Additional paid-in capital 42,480 42,347
(Accumulated deficit) (43,974) (41,132)
-------- --------
Total stockholders' equity (1,393) 1,316
-------- --------
Total liabilities and stockholders' equity $ 12,439 $ 16,290
======== ========
</TABLE>
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* The accompanying notes are an integral part of these consolidated financial
statements
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Schick Technologies, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue, net $ 3,390 $ 4,565 $ 9,633 $ 11,803
------------ ------------ ------------ ------------
Cost of sales 1,849 4,317 4,945 9,581
Excess and obsolete inventory 552 111 552 609
------------ ------------ ------------ ------------
Total cost of sales 2,401 4,428 5,497 10,190
------------ ------------ ------------ ------------
Gross profit 989 137 4,136 1,613
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 1,235 1,633 2,848 4,411
General and administrative 1,279 1,805 2,440 3,515
Research and development 550 685 1,104 1,569
Bad debt expense -- 9 -- 9
------------ ------------ ------------ ------------
Total operating costs 3,064 4,132 6,392 9,504
------------ ------------ ------------ ------------
Loss from operations (2,075) (3,995) (2,256) (7,891)
------------ ------------ ------------ ------------
Other income (expense)
Gain from sale of investment -- 565 -- 565
Interest income 19 26 34 39
Int Interest expense (246) (193) (606) (287)
------------ ------------ ------------ ------------
Total other income (expense) (227) 398 (572) 317
------------ ------------ ------------ ------------
Loss before income taxes (2,302) (3,597) (2,828) (7,574)
Provision for income taxes 14 -- 14 --
------------ ------------ ------------ ------------
Net loss $ (2,316) $ (3,597) $ (2,842) $ (7,574)
============ ============ ============ ============
Basic and diluted loss per share $ (0.23) $ (0.36) $ (0.28) $ (0.75)
============ ============ ============ ============
Weighted average common shares
outstanding (basic and diluted) 10,134,696 10,059,384 10,134,540 10,059,384
============ ============ ============ ============
</TABLE>
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* The accompanying notes are an integral part of these consolidated financial
statements
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Schick Technologies, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
September 30
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,842) $(7,574)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 1,099 1,091
Provision for doubtful accounts -- 9
Provision for excess and obsolete inventory 552 609
Gain from sale of investment in Photobit Corporation -- (565)
Interest accretion 22 --
Changes in assets and liabilities:
Accounts receivable 1,026 1,497
Inventories 467 2,707
Income taxes receivable 83 2,593
Prepayments and other current assets 25 124
Other assets (19) 218
Account payable and accrued expenses (1,216) (3,921)
Income taxes payable 49 --
Deferred revenue 469 (72)
Deposits from customers (343) 258
Warranty obligations (102) (34)
------- -------
Net cash used in operating activities (730) (3,060)
------- -------
Cash flows from investing activities
Proceeds from maturities of held-to-maturity investments -- 360
Proceeds from sale of investment in Photobit Corporation -- 1,000
Capital expenditures net (141) (194)
------- -------
Net cash (used in) provided by investing activities (141) 1,166
------- -------
Cash flows from financing activities
Proceeds from issuance of common stock 3 --
Proceeds from long term borrowings -- 1,222
------- -------
Net cash provided by financing activities 3 1,222
------- -------
Net decrease in cash and cash equivalents (868) (672)
Cash and cash equivalents at beginning of period 1,429 1,415
------- -------
Cash and cash equivalents at end of period $ 561 $ 743
======= =======
</TABLE>
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* The accompanying notes are an integral part of these consolidated financial
statements
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Schick Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except share and per share amounts)
1. Basis of Presentation
The consolidated financial statements of Schick Technologies, Inc. (the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America ("US GAAP") for interim financial
information and the rules of the Securities and Exchange Commission (the "SEC")
for quarterly reports on Form 10-Q, and do not include all of the information
and footnote disclosures required by US GAAP for complete financial statements.
These statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended March 31, 2000
included in the Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results of operations for the
interim periods. The results of operations for the six months ended September
30, 2000 are not necessarily indicative of the results to be expected for the
full year ending March 31, 2001.
The consolidated financial statements of the Company, at September 30, 2000
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances have been eliminated.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Inventories
Inventories at September 30, 2000 and March 31, 2000 are comprised of the
following:
September 30, 2000 March 31, 2000
------------------ --------------
Raw materials ................................ $2,821 $3,651
Work-in-process .............................. 268 39
Finished goods ............................... 1,504 1,922
------ ------
Total inventories ................... $4,593 $5,612
====== ======
3. Debt
Long-term debt at September 30, 2000 and March 31, 2000 is summarized as
follows:
September 30, 2000 March 31, 2000
------------------ --------------
Term notes ................................... $6,457 $6,596
Secured credit facility ...................... 610 587
------ ------
7,067 7,183
Less current maturities ...................... 676 245
------ ------
Total long-term debt .............. $6,391 $6,938
====== ======
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Term Notes
In June 2000, the Company amended its term note increasing its principal
balance to $6,596 (the "amended note"). The term note was originally issued in
March 1999 for $5,000 and renewed in July 1999 for $6,222 (the "renewed note").
The increase in the principal amounts resulted from the conversion of certain
trade payables owed to the lender into the principal balance of the notes. The
amended note is segregated into two term loans: Term Loan A amounting to $5,000
and Term Loan B amounting to $1,596.
Term Loan A
The principal balance of term loan A is payable in 49 monthly payments
commencing April 15, 2001, with interest payable monthly at the prime rate plus
2.5% commencing April 15, 2000.
Term Loan B
The principal balance of term loan B is payable in 27 monthly payments
commencing January 15, 2001 with interest payable monthly at the prime rate plus
2.5% commencing April 15, 2000. During the six months ended September 30, 2000
the loan was reduced by $139 as a result of collections by the lender of third
party obligations which are the basis of the loan.
The Company is also required to make additional principal payments equal to
fifty percent of the "positive actual cash flow", as defined. The term loans
have been classified based upon the terms of the amended note. The tangible and
intangible assets of the Company, as defined, collateralize the term loans.
In connection with the renewed note, the Company granted the lender 650,000
warrants at an exercise price of $2.19 expiring on November 15, 2004. The fair
value of the warrants amounted to $596, and is accounted for as deferred
financing costs. In connection with the amended note, the warrants' exercise
price was reduced to $.75 and the expiration date extended to December 2006.
Additional deferred financing costs of $130 were incurred. The costs are
included in "Other Assets" in the accompanying balance sheet and are being
amortized on a straight-line basis over the five-year life of the amended note.
Interest expense of approximately $128 relating to these warrant issuances were
recognized for the six months ending September 30, 2000.
Effective August 28, 2000, the lender sold all its rights, title and
interest in, to, and under the warrants and notes, payable as described above,
to the Company's secured creditor (Greystone). By letter dated October 11, 2000,
the lender directed the Company to make all remaining payments due under the
Loan Agreement directly to Greystone.
Secured Credit Facility
In December 1999,the Company entered into a Loan Agreement (the "Loan
Agreement") with Greystone Funding Corporation ("Greystone") to provide up to
$7.5 million of subordinated debt in the form of a secured credit facility.
Under the Loan Agreement, the Company appointed two of Greystone's executive
officers, one as President of the Company and both as Directors. Pursuant to the
Loan Agreement, and to induce Greystone to enter into said Agreement, the
Company issued to Greystone and its designees, warrants to purchase 3,000,000
shares of the Company's Common Stock at an exercise price of $0.75 per share.
The Company agreed to issue to Greystone or its designees warrants to purchase
an additional 2,000,000 shares at an exercise price of $0.75 per share in
connection with a cash payment of $1 million by Greystone to the Company in
consideration of a sale of Photobit stock by the Company to Greystone. The
President of the Company has been issued 750,000 warrants as a Greystone
designee. The sale of the Photobit stock was made subject to a right of first
refusal held by Photobit and its founders. By letter dated February 17, 2000,
counsel for Photobit informed the Company that Photobit considers the Company's
sale of its shares to Greystone to be void on the basis of the Company's
purported failure to properly comply with Photobit's right of first refusal.
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On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended Loan
Agreement") pursuant to which Greystone agreed to provide up to $7.5 million of
subordinated debt in the form of a secured credit facility. The $1 million cash
payment to the Company was converted as of December 27, 1999 into an initial
advance of $1 million under the Amended Loan Agreement. Pursuant to the Amended
Loan Agreement, and to induce Greystone and its designees to enter into said
Agreement, the Company issued warrants to Greystone or its designees, consisting
of those warrants previously issued under the Loan Agreement, to purchase
5,000,000 shares of the Company's Common Stock at an exercise price of $0.75 per
share, exercisable at any time after December 27, 1999. Under the Amended Loan
Agreement, the Company also issued to Greystone or its designees warrants (the
"Additional Warrants") to purchase an additional 13,000,000 shares of common
stock, which Additional Warrants will vest and be exercisable at a rate of two
shares of Common Stock for each dollar advanced under the Amended Loan Agreement
in excess of the initial draw of $1,000,000. Any Additional Warrants which do
not vest prior to expiration or surrender of the line of credit will be
forfeited and canceled. In connection with the Greystone secured credit
facility, effective as of February 15, 2000, the Company's senior lender
consented to the Company's grant to Greystone of a second priority lien
encumbering the Company's assets, under and subject in priority and right of
payment to all liens granted by the Company under the term notes.
The $1 million proceeds of the initial draw has been allocated to the loan
and 15 million warrants issued, based upon their relative fair values at
issuance. The carrying value of the note of $575 is being accreted to the face
value of $1 million using the interest method over the five-year term of the
loan. However, in the event that the loan is paid sooner, the Company will
recognize a charge for the unamortized discount remaining in such period. The
fair value of 3 million warrants issued in connection with the agreement,
amounting to $90, is being accounted for as deferred financing cost. This cost,
included in "Other Assets" in the accompanying balance sheet, is being amortized
on a straight-line basis over the five-year life of the loan. Interest under the
credit line is due monthly at an annual rate of 10% until December 2005 when the
outstanding loan is due to be repaid.
The term notes and secured facility are subject to various financial and
restrictive covenants including, among others, interest coverage, current ratio,
and EBITDA.
Principal maturities of long-term debt including interest accretion are as
follows:
Year ending September 30,
---------------------------
2001 $676
2002 1,574
2003 1,186
2004 1,071
2005 2,950
-----
$7,457
======
4. Contingencies
Product Liability
The Company is subject to the risk of product liability and other liability
claims in the event that the use of its products results in personal injury or
other claims. Although the Company has not experienced any product liability
claims to date, any such claims could have an adverse impact on the Company. The
Company maintains insurance coverage related to product liability claims, but
there can be no assurance that product or other claims will not exceed its
insurance coverage limits, or that such insurance will continue to be available
on commercially acceptable terms, or at all.
SEC Investigation and Other
In August 1999, the Company, through its outside counsel, contacted the
Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings.
On August 17, 2000, the SEC served a subpoena upon the Company, pursuant to a
formal order of investigation, requiring the production of certain documents.
The Company is cooperating
6
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fully with the SEC staff and has provided responsive documents to it. In
addition, investigators associated with the U.S. Attorney's Office have made
inquires of certain former and current employees, apparently in connection with
the same event. The inquiries are in a preliminary stage and the Company cannot
predict their potential outcome.
Litigation
In May 2000, the Company entered into an agreement for the settlement of
the class action lawsuit naming the Company, certain of its officers and former
officers and various third parties as defendants. The complaint alleged that
certain defendants issued false and misleading statements concerning the
Company's publicly reported earnings in violation of the federal securities
laws. The complaint sought certification of a class of persons who purchased the
Company's common stock between July 1, 1997 and February 19, 1999, inclusive,
and did not specify the amount of damages sought. Under the settlement
agreement, reflected in a memorandum of understanding, all claims against the
Company and the other defendants are to be dismissed without presumption or
admission of any liability or wrongdoing. The principal terms of the settlement
agreement call for payment to the plaintiffs, for the benefit of the class, in
the amount of the sum of $3.4 million. The settlement amount will be paid in its
entirety by the Company's insurance carrier and is not expected to have any
material impact on the financial results of the Company. The terms of the
settlement are subject to approval by the Court.
During 1996, the Company was named as defendant in patent infringement
litigation commenced by a competitor in the United States and France. In
September 2000, the French patent court, the Tribunal De Grande Instance De
Bobigny, dismissed the French action. The court also ordered Trophy to pay
approximately $10 thousand to the Company as partial reimbursement for legal
fees. The French court's decision is appealable. The Company has filed a
countersuit against the competitor for infringement of a U.S. Patent which had
been exclusively licensed to the Company. The Company has obtained a formal
opinion of intellectual property counsel that its products do not infringe on
the competitor's U.S. patent. The Company has filed motions for Summary Judgment
seeking the dismissal of the action in the United States. Such motions are
currently pending. The Company is unable to predict the ultimate outcome of this
litigation. The outcome, if unfavorable, could have a material adverse effect on
the financial position and results of operations of the Company. No provision
has been made for any potential losses at September 30, 2000 as the range of
potential loss, if any, cannot be reasonably estimated.
The Company may be a party to a variety of legal actions (in addition to
those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the nature of
its business, the Company is subject to a variety of legal actions relating to
its business operations. Recent court decisions and legislative activity may
increase the Company's exposure for any of these types of claims. In some cases,
substantial punitive damages may be sought. The Company currently has insurance
coverage for some of these potential liabilities. Other potential liabilities
may not be covered by insurance, insurers may dispute coverage, or the amount of
insurance may not be sufficient to cover the damages awarded. In addition,
certain types of damages, such as punitive damages, may not be covered by
insurance, and insurance coverage for all or certain forms of liability may
become unavailable or prohibitively expensive in the future.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations --
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words or
phrases "believes," "may," "will likely result," "estimates," "projects,"
"anticipates," "expects" or similar expressions and variations thereof are
intended to identify such forward-looking statements. Actual results, events and
circumstances could differ materially from those set forth in such statements
due to various factors. Such factors include risks relating to recent
substantial operating losses, dependence on financing, dependence on products,
competition, the changing economic and competitive conditions in the medical and
dental digital radiography markets, dependence on key personnel, dependence on
7
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distributors, ability to manage growth, fluctuation in results and seasonality,
governmental approvals and investigations, technological developments,
protection of technology utilized by the Company, patent infringement claims and
other litigation, need for additional financing and further risks and
uncertainties, including those detailed in the Company's other filings with the
Securities and Exchange Commission.
General
The Company designs, develops and manufactures digital imaging systems for
the dental and medical markets. In the field of dentistry, the Company has
developed, and currently manufactures and markets, an intra-oral digital
radiography system. The Company has also developed a bone mineral density
assessment device to assist in the diagnosis and treatment of osteoporosis. The
Company is also developing a radiographic imaging device for digital
mammography, and has commenced development of a general digital radiography
device for intended use in various applications.
Results of Operations
Net revenues for the three months ended September 30, 2000 decreased $1.2
million (26%) to $3.4 million from $4.6 million during the comparable period of
fiscal 2000. Net revenues for the six months ended September 30, 2000, decreased
$2.2 million (18%) to $9.6 million from $11.8 million during the comparable
period of fiscal 2000. The Company believes the decrease in revenue is due to
lower sales of the Company's CDR and accuDEXA(TM) bone density assessment
device. The Company believes the decrease in CDR sales results primarily from
the startup of its new exclusive domestic distribution agreement with Patterson
Dental Company ("Patterson"). The Company believes that Patterson will require
additional time in which to become fully productive. AccuDEXA represented
approximately $0.1 million (3%) of the Company's net revenues and CDR
represented approximately $3.3 million (97%) of the Company's net revenues in
the second quarter of fiscal 2001 as compared to $0.7 million (15%) and $3.9
million (85%) in the second quarter of fiscal 2000 for accuDEXA and CDR,
respectively.
Total cost of sales for the three months ended September 30, 2000 decreased
$2.0 million (46%) to $2.4 million (71% of net revenues) from $4.4 million (97%
of net revenues) for the comparable period of fiscal 2000. Total cost of sales
for the six months ended September 30, 2000, decreased $4.7 million (46%) to
$5.5 million (57% of net revenues) from $10.2 million (86% of net revenues)
during the comparable period of fiscal 2000. The decrease in the relative total
cost of sales is due to several factors including increased sale prices,
improved product mix and increased warranty revenues, which exceeded the
increase in the provision for excess and obsolete inventory. Additionally,
indirect labor costs, warranty expenditures, material costs, royalty costs, rent
and overhead costs decreased due to a January 2000 reduction in plant and
facilities, improved utilization of facilities and an improved rate of recovery
of warranty replacement inventory from customers. The Company increased its
provision for excess and obsolete inventory as a result of the decrease in sales
of its accuDEXA product during the quarter ended September 30, 2000.
Selling and marketing expenses for the three months ended September 30,
2000, decreased $.4 million (24%) to $1.2 million (36% of net revenues) from
$1.6 million (36% of net revenues) for the comparable period of fiscal 2000.
Selling and marketing expenses for the six months ended September 30, 2000,
decreased $1.6 million (35%) to $2.8 million (30% of net revenues) from $4.4
million (37% of net revenues) during the comparable period of fiscal 2000. This
decrease is principally attributable to a reduction in direct selling expenses
of the CDR and accuDEXA, including, primarily, a reduction in the Company's
direct sales force and reduction in other promotional and trade show expenses
principally as a result of the Patterson distribution agreement.
General and administrative expenses for the three months ended September
30, 2000, decreased $.5 million (29%) to $1.3 million (38% of net revenues) from
$1.8 million (40% of net revenues) for the comparable period of fiscal 2000.
General and administrative expenses for the six months ended September 30, 2000,
decreased $1.1 million (31%) to $2.4 million (25% of net revenues) from $3.5
million (30% of net revenues) during the comparable period of fiscal 2000. The
decrease in general and administrative expenses was primarily attributable to a
decrease in payroll and related costs due to reduction in personnel and a
decrease in professional services.
Research and development expenses for the three months ended September 30,
2000, decreased $0.1
8
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million (20%) to $0.6 million (18% of net revenues) from $0.7 million (15% of
net revenues) for the comparable period of fiscal 2000. Research and development
expenses for the six months ended September 30, 2000, decreased $0.5 million
(30%) to $1.1 million (12% of net revenues) from $1.6 million (13% of net
revenues) for the comparable period of fiscal 2000. The decrease is primarily
attributable to a decrease in payroll and related costs due to a reduction in
personnel and decreases in test services and materials expenses.
Interest expense for the three-month period ended September 30, 2000 is
unchanged at $0.2 million. Interest expense for the six-month period ended
September 30, 2000 increased $0.3 million to $0.6 million (6% of net revenues)
from $0.3 million (2%) of net revenues) for the comparable period of fiscal
2000. The increase was principally attributable to the amortization of deferred
financing cost in connection with term note and the secured credit facility
entered into during the third quarter of fiscal 2000.
Liquidity and Capital Resources
At September 30, 2000, the Company had $0.6 million in cash and cash
equivalents and a working capital deficiency of $1.6 million, compared to $1.4
million in cash and cash equivalents and $0.8 million in working capital at
March 31, 2000.
During the six months ended September 30, 2000, cash used in operations was
$0.7 million compared to $3.1 million used in operations during the comparable
period of fiscal 2000. The decrease in cash used in operations is primarily
attributable to the reduction of the Company's net loss and accounts payable and
accrued expenses and deferred revenues, offset by decreases in accounts
receivable, inventory levels, collection of income taxes receivable and deposits
from customers. Accounts receivable decreased from $1.5 million at March 31,
2000 to $0.5 million at September 30, 2000 due to lower rates of sales and
limiting the availability of credit to select dealers, hospitals, universities
and governmental agencies. The decrease in inventory of $1.0 million from $5.6
million at March 31, 2000 to $4.6 million at September 30, 2000 is primarily
attributable to planned reductions and increase in the reserve for excess and
obsolete inventory.
The Company's capital expenditures during the six-month period ended
September 30, 2000 amounted to $141 thousand. Such expenditures included
leasehold improvements, computers, and production equipment.
DVI Financial Services, Inc. ("DVI") had provided the Company with term
notes aggregating $6.6 million which are secured by first priority liens on
substantially all of the Company's assets. The Company issued promissory notes
and security agreements that provide, in part, that the Company may not permit
creation of any additional lien or encumbrance on the Company's property or
assets. The notes are due in varying installments through fiscal 2006. Interest
is paid monthly at the prime rate (9-1/2% at September 30, 2000) plus 2-1/2%.
Effective August 28, 2000, the lender sold all its rights, title and interest
in, to, and under the warrants and notes, payable as described above, to the
Company's secured creditor (Greystone). By letter dated October 11, 2000, the
lender directed the Company to make all remaining payments due under the Loan
Agreement directly to Greystone.
In December 1999 and as later amended in March 2000, the Company entered
into a Secured Loan Agreement ("Amended Loan Agreement") with Greystone Funding
Corporation ("Greystone") to provide up to $7.5 million of subordinated debt in
the form of a secured credit facility. Pursuant to the Loan Agreement, and to
induce Greystone to enter into said Agreement, the Company issued to Greystone
or its designees, warrants to purchase 5,000,000 shares of Company's Common
Stock at an exercise price of $0.75 per share, exercisable at any time after
December 27, 1999. Under the Amended Loan Agreement, the Company also issued to
Greystone or its designees warrants (the "Additional Warrants") to purchase an
additional 13,000,000 shares of common stock, which Additional Warrants will
vest and be exercisable at a rate of two shares of Common Stock for each dollar
advanced under the Amended Loan Agreement in excess of the initial draw of $1
million. Any additional warrants, which do not vest prior to expiration or
surrender of the line of credit will be forfeited and canceled. In connection
with the Greystone secured credit facility, effective as of February 15, 2000,
DVI consented to the Company's grant to Greystone of a second priority lien
encumbering the Company's assets, under and subject in priority and right of
payment to all liens granted by the Company to DVI. To date, no additional funds
have been advanced under the Amended Loan Agreement in excess of the initial
draw of $1 million.
The Company has also undertaken various cost-cutting measures including
reduction of facilities and personnel from peak levels of fiscal 1999. The
Company discontinued certain promotional programs, which
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had resulted in increased credit risk, and concomitantly limited credit to
selected domestic dealers. The Company continues efforts to improve its products
and methods of production. Effective May 1, 2000 the Company entered an
exclusive distribution agreement with Patterson Dental Company ("Patterson").
Under the terms of this agreement the Company discontinued all direct domestic
sales of its dental products, with the exception of those to governmental
agencies and universities. As a result of the agreement, the Company further
reduced its sales force. Remaining domestic sales representatives have become
manufacturer representatives charged with support of the Patterson sales effort.
The Company terminated all existing dealer agreements including its agreement
with Henry Schein, Inc.
The Company believes that its financing agreements, cost reductions and
distribution agreement with Patterson should permit the Company to generate
sufficient working capital to meet its obligations as they mature. The ability
of the Company to meet its cash requirements is dependent, in part, on the
Company's ability to attain adequate sales and profit levels and to satisfy its
existing warranty obligations without incurring expenses substantially in excess
of related warranty revenue and to collect its accounts receivable on a timely
basis. Management believes that existing capital resources and sources of
credit, including the Greystone credit facility, are adequate to meet its
current cash requirements. However, if the Company's cash needs are greater than
anticipated or the Company does not satisfy drawdown conditions under the
Amended Loan Agreement, the Company will be required to seek additional or
alternative financing sources. There can be no assurance that such financing
will be available or available on terms acceptable to the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The term notes bear an annual interest rate based on the prime rate plus
2.5%, provided however, that if any payments are past due for more than 60 days,
interest will thereafter accrue at the prime rate plus 5.5%. Because the
interest rate is variable, the Company's cash flow may be adversely affected by
increases in interest rates. Management does not, however, believe that any risk
inherent in the variable-rate nature of the loan is likely to have a material
effect on the Company's interest expense or available cash.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or certain of its officers and former officers, are
involved in the proceedings described below:
I. The Company is a named defendant in two lawsuits instituted by Trophy
Radiologie, S.A. (`Trophy S.A.'), a subsidiary of Trex Medical Corporation. One
lawsuit was instituted in France and the other in the United States.
The French lawsuit was filed in November 1995, in the tribunal de Grande
Instance de Bobigny, the French patent court, and originally alleged that the
Company's CDR(R) system infringes French Patent No. 2,547,495, European Patent
No. 129,451 and French Certificate of Addition No. 2,578,737. These patents, all
of which are related, are directed to a CCD-based intra-oral sensor. Since
filing its lawsuit, Trophy S.A. has withdrawn its allegation of infringement
with respect to the Certificate of Addition. Trophy S.A. was seeking a permanent
injunction and unspecified damages, including damages for its purported lost
profits. In October 2000, the French patent court dismissed this lawsuit. The
court dismissed all of Trophy's claims, finding no infringement of either
patent. The court also ordered Trophy to pay the sum of $10 thousand to the
Company as partial reimbursement for legal fees. The court's decision is
appealable.
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 citizen
of France. The suit was brought in the United States District Court for the
Eastern District of New York, and alleges that the Company's CDR(R) system
infringes United States Patent No. 4,593,400 (the `400 patent'), which is
related to the patents in the French lawsuit. Trophy S.A., Trophy Inc. and
Mouyen 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. The Company believes that
the lawsuit is without merit and is vigorously defending it. The Company's
counsel in the United States suit has issued a formal opinion that the CDR
system does not infringe the 400 patent.
In addition, the Company has counter-sued Trophy S.A. and Trophy Inc. for
infringement of United States Patent No. 4,160,997, an expired patent which was
exclusively licensed to the Company by its inventor, Dr. Robert Schwartz, and
for false advertising and unfair competition. The Company believes that its
counter-suit is meritorious, and is vigorously pursuing it.
On September 12, 1997, after having been given permission to do so by the
Court, the Company served two motions for summary judgment seeking dismissal of
the action pending in the United States District Court for the Eastern District
of New York, on the grounds of non-infringement and patent invalidity. On
February 22, 2000, the Court heard oral argument on these motions. The motions
are currently pending.
While the Company believes the suit against it is without merit, there can
be no assurance that the Company will be successful in its defense of this
action, or in its counter-suit. If the Company is unsuccessful in its defense of
this action, it could have a material adverse effect upon the Company. Moreover,
regardless of its outcome, the Company may be forced to expend significant
amounts of money in legal fees in connection with this lawsuit.
II. In late 1998 through early 1999, nine shareholder complaints purporting
to be class action lawsuits were filed in the United States District Court for
the Eastern District of New York. Plaintiffs filed a Consolidated and Amended
Complaint on or about May 27, 1999 and, on or about November 24, 1999 filed a
Second Amended and Consolidated Complaint (the "Complaint"). The Complaint named
as defendants the Company, David B. Schick, Thomas E. Rutenberg, and David
Spector (collectively, the "Individual Defendants"), as well as
PricewaterhouseCoopers LLP.
The Complaint alleged, inter alia, that certain defendants issued false and
misleading statements concerning the Company's publicly reported earnings in
violation of the federal securities laws. The Complaint sought certification of
a class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and did not specify the amount of damages
sought.
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In May 2000, an agreement was reached to settle the consolidated securities
class action lawsuit. Under the agreement, all claims against the Company and
individuals named as defendants will be dismissed without presumption or
admission of any liability or wrongdoing. The principal terms of the agreement
call for payment to the Plaintiffs, for the benefit of the class, of the sum of
$3.4 million. The settlement amount is to be paid in its entirety by the
Company's insurance carrier and is not expected to have any direct material
impact on the financial results of the Company. The terms of the settlement are
subject to approval by the Court.
III. In August 1999, the Company, through its outside counsel, contacted
the Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings.
Subsequent thereto, the SEC formally requested the production of certain
documents. On August 17, 2000, the SEC served a subpoena upon the Company,
pursuant to a formal order of investigation, requiring the production of certain
documents. The Company is cooperating fully with the SEC staff and has provided
responsive documents to it. The inquiry is in a preliminary stage and the
Company cannot predict its potential outcome.
The Company could become a party to a variety of legal actions (in addition
to those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the nature of
its business, the Company is subject to a variety of legal actions relating to
its business operations. Recent court decisions and legislative activity may
increase the Company's exposure for any of these types of claims. In some cases,
substantial punitive damages could be sought. The Company currently has
insurance coverage for some of these potential liabilities. Other potential
liabilities may not be covered by insurance, insurers may dispute coverage, or
the amount of insurance may not be sufficient to cover the damages awarded. In
addition, certain types of damages, such as punitive damages, may not be covered
by insurance and insurance coverage for all or certain forms of liability may
become unavailable or prohibitively expensive in the future.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule (Filed in electronic format only)
(b) Reports on Form 8-K
None.
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SCHICK TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHICK TECHNOLOGIES, INC.
Date: October 27, 2000 By: /S/ David B. Schick
David B. Schick
Chief Executive Officer
By: /S/ Ronald Rosner
Ronald Rosner
Director Of Finance
(Principal Financial and Accounting Officer)
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