| SCHICK TECHNOLOGIES INC ITEM 1A RISK FACTORS Forward-Looking Statements The statements contained in this Form 10-K include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”) |
| When used in this Form 10-K and in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases, presentations to stockholders, 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 10 ______________________________________________________________________ on the business, results of operations, 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 carefully 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 |
| We are dependent on a small number of products for most of our revenue, and our revenues could significantly decrease if any of these products are rendered obsolete or inferior |
| Our revenues are primarily generated from sales of our suite of CDR® dental imaging products and, to a lesser extent, from our sales of other products |
| These products, or any of the products which we may sell in the future, could be rendered obsolete or inferior as a result of technological change, changing customer needs, new product introductions or other developments, each of which would have a material adverse effect on us |
| Furthermore, our competitors may succeed in developing or marketing technologies and/or products that are superior to and/or commercially more attractive than ours |
| Our success will depend in part on our ability to improve and enhance our products in a timely manner |
| We are dependent upon an exclusive North American distributor for a significant portion of our revenue, and the loss or significant reduction in the sales volume of this distributor could have a material adverse effect on us |
| Since May 1, 2000, we have marketed and distributed our CDR® product line in the United States and Canada exclusively through Patterson Dental Company (“Patterson”) |
| From fiscal 2002 through 2006, Patterson was the single largest contributor to our revenues, and we anticipate that Patterson will continue to be the single largest contributor to our revenues in the coming fiscal year |
| During fiscal 2006, the Agreement was extended through December 2007 |
| We cannot assure you that Patterson will purchase any specified minimum quantity of products from us or that it will continue to purchase any products at all from us |
| If Patterson fails to purchase a significant volume of product from us, it could have a material adverse effect on us |
| We are dependent on third-party distributors outside of North America, and the loss or significant reduction in the sales volume of one or more of those distributors could have a material adverse effect on us |
| Outside of North America, we distribute our products through third-party independent distributors |
| Historically, a limited number of distributors have accounted for a significant portion of our revenues |
| In general, these distributors could discontinue marketing our products with little or no notice to us |
| Certain of our distributors also could market products which compete with ours |
| The loss of or significant reduction in the sales volume of one or more of our distributors could have a material adverse effect on us |
| Since we operate in markets outside of the United States, we are subject to additional risks |
| In fiscal 2006, 2005 and 2004, our sales to customers outside of the United States were approximately 23prca, 27prca and 25prca, respectively, of our revenues, and we anticipate that international sales will continue to account for a significant percentage of our revenues |
| International revenues are subject to a number of uncertainties, including but not limited to the following: agreements may be difficult to enforce and receivables difficult to collect; foreign customers and distributors may have relatively long payment cycles; foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade; fluctuations in exchange rates may affect product demand; United States export licenses may be difficult to obtain; and intellectual property rights in foreign countries may be difficult or impossible to enforce |
| Moreover, many foreign countries have their own regulatory approval requirements for the sale of our products |
| As a result, our introduction of new products into international markets could be prevented and/or costly and/or time-consuming, and we cannot assure you that we will be able to obtain the required regulatory approvals on a timely basis, if at all |
| We also cannot assure you that any of these factors will not have a material adverse effect on us |
| Any failure to complete the proposed transaction between us and Sirona Dental Systems or a delay in the completion of the proposed transaction could cause us to incur substantial costs and negatively affect our results of operations |
| 11 ______________________________________________________________________ If the proposed combination of our Company and Sirona Dental Systems, which is to be voted upon at a Special Shareholders Meeting scheduled for June 14, 2006, is not completed on a timely basis or at all, we may suffer negative consequences to our business, results of operations, financial condition and prospects, including, among others, incurring substantial fees and expenses related to the combination (including legal and accounting fees and disbursements), which must be paid even if the combination is not completed; and if the Agreement with Sirona is terminated and our board of directors determines to pursue another transaction, it may not be able to find a partner at all or on terms as attractive as those provided for in the agreement with Sirona |
| If we lose our key management personnel or are unable to attract and retain qualified personnel, it could have a material adverse effect on us |
| Our success is dependent, in part, upon our ability to hire and retain management, sales, technical, research and other personnel who are in high demand and are often subject to competing employment opportunities |
| Our inability to hire or retain key management, sales, technical, research or other personnel could have a material adverse effect on us |
| At the current time, only two of our executive officers, the Chief Executive Officer and the Executive Vice President, are employed pursuant to written employment agreements |
| We cannot assure you that they or that any of our other employees will continue to be active with us |
| We may be a party to legal actions that are not covered by insurance |
| We may be a party to a variety of legal actions, such as employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, shareholder suits, governmental investigations and intellectual property related litigation |
| In addition, we could be subject to a variety of legal actions relating to our business operations |
| Recent court decisions and legislative activity may increase our exposure for any of these types of claims |
| In some cases, substantial punitive damages could be sought |
| We currently have 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 |
| We must develop new products and enhancements to existing products in order to remain competitive, and our failure to do so could have a material adverse effect on us |
| We are currently developing new products and enhancements to our existing products |
| We cannot assure you that we will initiate, continue with and/or succeed in our efforts to develop or enhance such products |
| We expect to file 510(k) applications with the FDA in connection with our future products and certain of our future product enhancements |
| We cannot assure you that we will file applications for or obtain regulatory approval from the FDA, either in the form of a pre-market clearance or a 510(k) clearance, for any of our future products, or that in order to obtain FDA clearance, we will not be required to submit additional data or meet additional FDA requirements that may substantially delay the application process and result in substantial additional expense |
| Moreover, such pre-market clearance, if obtained, may be subject to conditions on marketing or manufacturing which could impede our ability to manufacture and/or market our products |
| While we are engaged in research and development of new products, we cannot assure you that we will be successful in such endeavors |
| There can be no assurance that any products which we may develop will be approved by or receive marketing clearance from applicable domestic and/or international governmental or regulatory authorities |
| If we are unable to develop, obtain regulatory approval for and market new products and enhancements to existing products, it will have a material adverse effect on us |
| Our business may be negatively affected if we do not continue to adapt to rapid technological change, evolving industry standards and new product introductions |
| The market for our products is characterized by rapid and significant technological change, evolving industry standards and new product introductions |
| Our products require significant planning, design, development and testing which require significant capital commitments and investment by us |
| We cannot assure you that our products or proprietary technologies will not become noncompetitive or obsolete as a result of technological change, evolving industry standards or new product introductions or that we will be able to generate any economic return on our investment in product development |
| If our products or technologies become noncompetitive or obsolete, it would have a material adverse effect on us |
| 12 ______________________________________________________________________ Competition in the market is intense and we may not be able to compete effectively |
| Competition relating to our current products is intense and includes various companies, both within and outside of the United States |
| We anticipate that competition for our future products will also be intense and include various companies, both within and outside of the United States |
| Our competitors and potential competitors include large companies with substantially greater financial, sales and marketing, technical and other 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 we have |
| In addition, we cannot assure you that our competitors are not currently developing, or will not attempt to develop, technologies and products that are more effective than those being developed by us or that would otherwise render our existing and new technology and products obsolete or noncompetitive |
| We cannot assure you that we will be able to compete successfully |
| Our inability to compete successfully or the development by our competitors of technology and products that is more effective than those being developed by us would have a material adverse effect on us |
| We are dependent upon a limited number of suppliers for critical components |
| If these suppliers delay or discontinue the manufacture of these components, we could experience significant delays in our shipment of products, increased costs, and cancellation of orders for our products and damage to our reputation |
| We rely on key suppliers for various critical components |
| We procure certain components, including the substantial majority of the sensor chips used in our manufacturing process, from outside sources which are sole suppliers |
| The availability and price of these components may be subject to change due to interruptions in production, changing market conditions and other events |
| Furthermore, availability may be adversely impacted if we fail to make timely payments to our key suppliers |
| We cannot assure you that we would be able to enter into purchase arrangements with other suppliers, or that if we were to do so, such suppliers would be able to deliver such components at an acceptable price or in a timely manner, if at all |
| If we were unable to develop reasonably-priced alternative sources in a timely manner, or if we 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 us, including damage to our reputation |
| In past years, semiconductors have been subject to significant price fluctuations |
| While we have, in the past, attempted to mitigate the effects of such potential fluctuations, we cannot assure you that we will continue to do so or that we will be able to successfully mitigate the effect of future price increases on our results of operations and financial condition |
| Our patents may not provide us with sufficient protection from infringement by others; our exclusive right to sublicense certain intellectual property related to CMOS technology is subject to certain rights to use by others, and our products may infringe on the intellectual property rights of others |
| We currently have issued and allowed patents and patent applications, as described in Item 1 -- “Business,” of this Form 10-K There can be no assurance that any of our patents, any of the patents of which we are a licensee or any patents which may be issued to us or which we may license in the future, will provide us with a competitive advantage or afford us protection against infringement by others, or that the patents will not be successfully challenged or circumvented by third parties, including our competitors |
| We are the exclusive sub-licensee for use in medical radiography applications of certain patents, patent applications and other know-how related to complementary metal oxide semiconductor active pixel sensor technology (the “APS Technology”), which was developed by the California Institute of Technology and sublicensed to us |
| Our exclusive rights to such technology are subject to government rights to use, noncommercial educational and research rights to use by California Institute of Technology and the Jet Propulsion Laboratory, and the right of a third party to obtain a nonexclusive license from the California Institute of Technology with respect to such technology |
| We believe that, except for such third party’s exercise of its right to obtain a nonexclusive license to use APS Technology in a field other than medical radiography, none of the foregoing parties have given notice of their exercise of any of their respective rights to the APS Technology |
| We cannot assure you that this will continue to be the case, and any such exercise could have a material adverse effect on us |
| We are also the owner of certain trade secrets, which we seek to protect by, among other things, entering into non-disclosure, confidentiality, non-solicitation and non-competition agreements |
| However, we cannot assure you 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 us |
| We also cannot assure you that the technology we practice will not infringe upon the patents of others |
| In the event that any future infringement claim against us is successful, there would be no assurance that we would be 13 ______________________________________________________________________ able to negotiate with the patent holder for a license, in which case we could be prevented from practicing the subject matter claimed by the subject patent |
| In addition, there can be no assurance that we would be able to redesign our products to avoid infringement |
| Our inability 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 us |
| If we were to fail to obtain necessary approvals from the FDA or other regulatory agencies, we would not be able to sell our products |
| We 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 our 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 |
| Our CDR(R) system is currently regulated by such authorities and certain of our new products will require approval by or marketing clearance from various governmental authorities, including the FDA In addition, various additional requirements are imposed upon us to make us eligible to sell products to the United States Government |
| 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 us |
| 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 our advertising and marketing materials regarding our products are and will be in compliance with such regulations |
| We are 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 us |
| International sales of our products are subject to the regulatory agency product registration requirements of each country in which our products are sold |
| The regulatory review process varies from country to country and may in some cases require the submission of clinical data |
| We typically rely on our distributors in foreign countries to obtain the required regulatory approvals |
| We cannot assure you, however, that any of the foregoing approvals will be obtained, or that we would be able to satisfy any of the foregoing requirements on a timely basis, if at all |
| Our failure to obtain any of such approvals or to comply with any of such requirements on a timely basis could have a material adverse effect on us |
| Our customers operate in the health care industry, which is highly regulated |
| Additionally, cost-containment efforts by health maintenance organizations may adversely affect the potential market for our devices |
| The need for warranty service could have a material adverse effect on us |
| We generally warrant each of our products against defects in materials and workmanship for a period of up to two years from the date of shipment plus any extended warranty period purchased by the customer |
| The need for warranty service could have a material adverse effect on us by, among other things, requiring additional expenditures for parts and personnel as well as damaging our reputation and goodwill |
| If any product liability claims were asserted against us or there was a recall of any of our products, it could have a material adverse effect on us |
| In addition, certain applications, including projected applications, of our 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 or others |
| Although we have maintained insurance coverage related to product liability claims, we cannot assure you that product liability insurance coverage will continue to be available or, if available, that it can be obtained in sufficient amounts or at reasonable 14 ______________________________________________________________________ cost or that it will be sufficient to cover any claims that may arise |
| We do not maintain any insurance relating to potential recalls of our products |
| Costs associated with potential product recalls or product liability claims could have a material adverse effect on us |
| If levels of third-party reimbursement for procedures which use our products were to decline, it could cause our revenues to decline |
| Third-party payers, 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 payers are increasingly challenging the price and cost-effectiveness of medical products and services |
| While we cannot predict what effect the policies of government entities and other third-party payers will have on future sales of our products, we cannot assure you that such policies would not have a material adverse effect on the Company |
| Several factors may significantly affect our revenues, expenses and results of operations from quarter to quarter, including the timing of new product introductions by us or our competitors, our ability to supply products to meet customer demand, and fluctuations in our manufacturing costs |
| In addition, our CDR(R) products have been subject to seasonal variations at various times in the past |
| Consequently, quarterly results of operations may fluctuate |
| Such fluctuations in quarterly results of operations could adversely affect the market price of our Common Stock |
| The volatility of the price of our Common Stock may adversely affect our shareholders |
| The stock market historically has experienced volatility which has affected the market price of securities of many companies and which may be 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 |
| These broad market fluctuations may adversely affect the market price of the Common Stock |
| We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of 2002 |
| We are required under Section 404 of the Sarbanes-Oxley Act to provide a report on our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls |
| If we, or the surviving company following our proposed combination with Sirona Dental Systems, are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NASDAQ National Market |
| Any such action could adversely affect our financial results or investors’ confidence in our company and could cause our stock price to fall |
| In addition, our controls and procedures may not comply with all the relevant rules and regulations of the SEC and the NASDAQ National Market |
| If we fail to develop and maintain effective controls and procedures, we may be unable to provide financial information in a timely and reliable manner |
| If we were to issue preferred stock it might adversely affect the holders of our Common Stock |
| Our Certificate of Incorporation authorizes the issuance of a series or designation of Preferred Stock with such rights, preferences, privileges and restrictions as may be determined from time to time by our Board of Directors |
| Accordingly, the Board of Directors is empowered, without the need for shareholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of our Common Stock |
| There currently are no shares of Preferred Stock designated or issued |