<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
Commission File No. 0-4123
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MOYCO TECHNOLOGIES, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-1697233
- ------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
200 Commerce Drive
Montgomeryville, Pennsylvania 18936
- --------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 855-4300
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- -------------------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.005 per share
- --------------------------------------------------------------------------------
(Title of Class)
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
---- ----
The aggregate market value, based on the closing price of such stock as reported
by NASDAQ, of the voting stock held by non-affiliates of the Registrant as of
June 30, 1997 was $7,768,919, and the number of shares outstanding of the
Registrant's Common Stock was 4,138,340.
1
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PART I
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ITEM 1. BUSINESS.
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Moyco Technologies, Inc. was incorporated in 1968 under the laws of the
Commonwealth of Pennsylvania. As used herein, the term "Moyco" or the "Company,"
includes Moyco Technologies, Inc. and subsidiaries unless the context otherwise
indicates.
General
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The Company operates in two business segments: Dental Supplies and Precision
Abrasives. The Dental Supplies segment involves the manufacturing and
distributing of dental waxes, endodontic instruments, materials and equipment,
dental abrasives, dental mirrors, medicaments, general supplies and instruments
and the repacking and distributing of other dental products for sale to the
professional dental market. The Precision Abrasives segment involves the
manufacturing of commercial coated abrasives, precision submicron coated
abrasives, slurries (wet abrasives) and polishing agents. These products are
used for various applications and industries, including but not limited to,
fiber optics, lapidary, nail files, dentistry, plastics and woods, semiconductor
manufacturing such as chemical mechanical planarization ("CMP") and other
high-tech manufacturing procedures which require extremely fine abrasive films
and/or slurries to achieve consistently uniform polishing results. The Precision
Abrasives segment works closely with customers to develop specific products to
meet each customer's unique finishing requirements.
In August 1996, the Company acquired all of the outstanding Common stock of
Thompson Dental Mfg. Co. ("Thompson"), a manufacturer of dental hand instruments
and related products. Thompson's business activities are included in the
Company's Dental Supplies segment.
Business Segments
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Financial information relating to Moyco's two business segments and operations,
both domestically and internationally, is provided in the Notes to Consolidated
Financial Statements.
Dental Supplies
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Moyco, through its Dental Supplies segment, is engaged in the manufacturing and
distributing of dental supplies, such as waxes, abrasives, medicaments, dental
mirrors, endodontic materials and equipment, sundry dental items, as well as the
repackaging and distributing of other dental products for sale to the
professional dental market.
The Dental Supplies segment sells products under the "Moyco Union Broach" and
"Thompson" tradenames. Moyco Union Broach is based in York, Pennsylvania.
Thompson is based in Missoula, Montana. Moyco Union Broach manufactures various
patented and/or proprietary products under well known tradenames including, but
not limited to, FLEX-R Files, LIGHTNING Strips, ONYX-R Files, MASTERSOL, and
BEAUTY PINK wax. Thompson also offers the professional dental market various
proprietary products such as TACTILE TONE hand instruments and the RE-BAG
reusable sterilization pouch.
2
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All products are generally sold through salaried salespersons to dental supply
wholesalers and distributors serving the professional dental market in the
United States and overseas, as well as to a limited number of end users. Sales
to overseas customers were 10.5%, 7.0% and 6.5% of total net sales for the years
ended June 30, 1997, 1996 and 1995, respectively. See Note 9 of Notes to
Consolidated Financial Statements.
Sales of the Company's endodontic (root canal) instruments accounted for over
15% of the Company's net sales for the Dental Supplies segment for the years
ended June 30, 1997, 1996 and 1995.
The sales growth of the U.S. Dental Supplies business continues to lag behind
the economy as a whole. The professional dental products market has been
relatively stagnant over the past five years. Additionally, the Company is also
experiencing an increase in the price sensitivity of its customer base in its
Dental Supplies segment. This leaves the Company with little opportunity for
price increases which continue to reduce the margins on its higher quality
products as normal operating costs rise. Additionally, the Company's dental
distribution customers have been in an environment characterized by
consolidations. As a result of these mergers, the Company could experience a
reduction in sales as the merged entities combine their inventories and
purchasing power.
Precision Abrasives
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Moyco, through its Precision Abrasives segment, is engaged in the manufacture of
commercial abrasive materials under the name "Flex-I-Grit" and the production of
extremely fine sub-micron and namometer abrasive films and slurries under the
trademark "Ultralap." The Company's abrasives are often manufactured to the
specifications of customers for various unique fine polishing requirements.
Moyco's abrasive films are manufactured for more than twenty different
applications and, therefore, are made in numerous varieties which take into
account many factors such as (i) type of grit (i.e., aluminum oxide, diamond,
cerium, etc.), (ii) grit size, (iii) grit consistency, (iv) color, (v) type of
backing or substrate, (vi) finished product delivery type (i.e., rolls, disks,
sheets, strips, etc.) and (vii) customer requirements. The Company sells its
Precision Abrasive products to the following markets: hobby industry, dentistry,
lapping gems, semiconductor manufacturing, and fiber optics.
Moyco's abrasives made for the hobby industry ("Flexi-I-Grit") are sold by a
master distributor and other repackers through the use of private label
arrangements, while the "Ultralap" products are sold by the Company's salesmen
either directly to end users or to distributors. Sales to overseas customers
were 3.6%, 3.7% and 3.4% of total net sales for the years ended June 30, 1997,
1996 and 1995, respectively. See Note 9 of Notes to Consolidated Financial
Statements.
Moyco also manufactures slurries (wet abrasives) for various fine finishing
procedures, including the CMP process, which is being used by semiconductor
manufacturers for the next generation of computer chips. Moyco CMP slurries are
sold under the tradename "Ultraplane" and exclusively incorporate Nanotek
ultrafine molecular particles. In addition to allowing reduced step heights from
0.50 micron to 0.35 micron and below, Ultraplane slurries have
3
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provided superior CMP process results including: minimal defectivity, high rate
of stock removal, optimized selectivity, robust process, and maximum
cleanability. As a result of initial superior CMP testing results, the Company
secured a joint development agreement with a major semiconductor manufacturer to
optimize the Moyco product with CMP tools, pads, and various process
specifications. The Company is continually considering any and all strategic
opportunities to increase its value. Strategic opportunities considered are as
follows: the selling of its CMP slurry product line and/or licensing its
technologies and related products. On August 7, 1997, the Company entered into a
non-binding letter of intent with Ashland Chemical Company, a division of
Ashland, Inc., pertaining to the potential purchase of certain of the Company's
intellectual properties and technologies for manufacturing of slurries used in
CMP of wafers produced for the global micro-electronics industry. The
contemplated purchase will include worldwide rights to the Company's proprietary
CMP slurry manufacturing processes, formulas, patent applications and trade
secrets. The proposed transaction anticipates combining a lump-sum payment with
an ongoing royalty stream based on sales.
Additionally, the Company is constantly evaluating its capital structure and
considering opportunities for strategic alliances, a sale of the Company,
secondary offerings and private placements. The Company continually evaluates
and considers possible acquisition and/or merger opportunities. Among other
items, the Company would consider the following factors in determining whether
or not to pursue an acquisition or alliance: (i) synergy with the Company's
current lines of business products, (ii) growth potential, (iii) return on
investment and (iv) technologies. However, at this time, none of the above
opportunities, except for the proposed CMP slurry transaction, are planned or in
process.
Backlog
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There is a backlog of orders in the aggregate of $1,283,596 as of June 30, 1997.
There had been a backlog of $1,992,092 as of June 30, 1996. Approximately 36%
and 27% of the backlog at June 30, 1997 and 1996, respectively, relates to the
Dental Supplies segment.
Sources and Availability of Supplies
- ------------------------------------
The Company procures its raw materials and supplies from various sources and
does not expect to have any difficulty in procurement during the coming year or
the foreseeable future.
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Research and Development
- ------------------------
The Company engages in research activities directed toward the development of
new products relating to current product lines and the improvement of existing
products. Spending for research and development totaled $186,196, $6,660 and
$35,718 for the years ended June 30, 1997, 1996 and 1995, respectively.
Competition
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All of the lines of business in which the Company is presently engaged are
highly competitive. There are numerous other manufacturers, many of which are
larger and have greater financial resources and more sales representatives than
the Company. The Company's material competitors in its Precision Abrasives
segment are: Minnesota Mining and Manufacturing Company, Nippon Mining Company
and Cabot Corporation. The Company's material competitors in its Dental Supplies
segment are: DENTSPLY International Inc., Sybron International Corporation,
Premier Dental, Hu-Friedy, and Miltex.
Employees
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As of September 29, 1997, the Company employs 145 persons, of whom 107 are
involved in manufacturing products for the Precision Abrasives and Dental
Supplies segments, and 38 are engaged in administration, sales, engineering,
supervision and clerical work. The Company has had no work stoppages and
considers its relationship with its employees to be good.
Other
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The Company believes it produces no significant discharges of waste or
pollutants into the air, and there are no significant effects on the Company in
complying with current Federal, State and local environmental laws and
regulations.
ITEM 2. PROPERTIES.
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The Company is the owner of three buildings. The Montgomeryville, Pennsylvania,
facility is a one-story, cinder block building containing approximately 40,125
square feet, of which 14,250 square feet are used for manufacturing; 19,875
square feet for warehousing and 6,000 square feet for offices. This facility is
primarily used for the manufacture of precision abrasives. The York,
Pennsylvania, facility is 68,995 square feet, of which approximately 45,807
square feet are used for manufacturing; 16,542 for warehousing and 6,646 for
offices. The Missoula, Montana, facility is 9,600 square feet, of which
approximately 7,800 square feet are used for manufacturing and warehousing and
1,800 square feet for offices. The York, Pennsylvania, and Missoula, Montana,
facilities are used by the Company's Dental Supplies segment. There are
mortgages on all of the Company's properties. Moyco's facilities are suitable
for their respective uses and are, in general, adequate for Moyco's present
needs.
5
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ITEM 3. LEGAL PROCEEDINGS.
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As of the date of this Form 10-K, other than the litigation filed against the
Company by Cabot Corporation and the foot powder investigation (each of which
are described below), the Company was not involved in any material legal
proceedings, other than ordinary litigation incidental to the business and,
specifically, was not involved in any environmental litigation or governmental
proceedings.
Cabot Corporation Litigation
- ----------------------------
On March 14, 1997, a Complaint was filed in the United States District Court for
the Northern District of California against the Company by Cabot Corporation
("Cabot"), a manufacturer of chemical products. The Complaint alleges that a CMP
slurry manufactured by the Company infringes on a United States patent owned by
Cabot.
The Company has categorically denied that its CMP slurry products infringe on
the patented Cabot product. Furthermore, the Company in its Answer and
Counterclaim to the Cabot Complaint contends that the Company did not infringe
on the Cabot patent, that Cabot's patent is invalid because of prior art and
failure to disclose the best mode, that Cabot violated federal anti-trust laws
by attempting to monopolize the CMP slurry market and restrain trade, that Cabot
interfered with the Company's business relationships, participated in unfair
competition and has used the patent laws for improper purposes, all of which
have caused significant financial damage to the Company.
The Company manufactures proprietary CMP slurries which it will vigorously
defend in this case. The Company's management believes that this litigation
represents an improper strategic move by Cabot to prevent the Company from
competing in that market.
Recent testing and studies have demonstrated that Moyco slurries, which are
formulated using a patented feedstock manufactured by Nanophase Corporation of
Burr Ridge, Illinois, produce outstanding semiconductor polishing results
including (i) significantly smoother surfaces, (ii) more selective removal of
excess metal, and (iii) easier cleaning during the manufacturing process. For
purposes of manufacturing CMP slurry products, the Company, as previously
announced, retains exclusive rights to Nanophase proprietary powders consisting
of extremely small particles of nanocrystalline alumina and ceria.
The Company has retained counsel to vigorously defend against the Cabot
Complaint which it believes to be without basis and against which the Company
has raised meritorious defenses.
The Company's net sales from the CMP slurry, which is the subject of the Cabot
litigation, have been immaterial to date.
Foot Powder Investigation
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In the fourth quarter of fiscal 1996, the Company became aware that the United
States Government represented by the United States attorney for the Eastern
District of Pennsylvania (the "Government") was investigating Itch-Away foot
powder ("foot powder") which the Company manufactured and sold pursuant to
contracts with the U.S. Department of Defense. At that time, the Company did not
have any specific knowledge concerning the nature of the
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Government's foot powder investigation because the Government would not disclose
such information to the Company.
Based on the investigation, the Government alleged that, between 1990 and 1996,
the Company manufactured and sold to the U.S. Department of Defense $1,700,000
of foot powder without performing appropriate stability tests to assure that the
product met contractual requirements. This matter was placed before a grand jury
and the Government issued the Company a target letter. An indictment was not
issued against the Company by the Government and, thus, the specific relief
which may be sought by the Government could not be determined at that time.
In April of 1997, the Company pleaded guilty to a two count information charging
it with distributing adulterated drugs and mail fraud. A plea agreement was
filed in the United States District Court for the Eastern District of
Pennsylvania, and was the result of negotiations between the Company and the
Government. The Company has accepted responsibility for failing to maintain
required quality control and stability testing procedures for foot powder which
it sold to the Government from 1992 to 1996.
In August of 1997, the Company entered into a settlement agreement with the
Government to resolve the Company's civil liability with regard to the foot
powder matter. The agreement provides that the Company will pay the Government a
total of $505,000 over four years. The Company agreed to pay $100,000 within ten
(10) days of the execution of the settlement agreement and the remaining amount
in equal installments of $101,250 upon the anniversary date of the settlement
agreement for four years. The payment of these amounts is secured by an
irrevocable letter of credit the Company obtained from a bank.
The fine range with respect to the criminal allegations is set forth in the plea
agreement and is from $175,000 to $700,000 and will be specifically determined
by the assigned judge at the sentencing hearing which is scheduled for October
1997. The fine will be based on various factors.
The foot powder involved in this matter is no longer manufactured by the Company
and was never a part of its core business. The Company has retained the law firm
which represented it in the Government's investigation to implement a new
compliance program which should prevent problems of this nature in the future.
As a result of the settlement, the Government agreed to settle its claims under
the False Claims Act, the Federal Debt Collection Procedures Act and at common
law arising out of alleged fraudulent billings which the Company caused to be
submitted to the Government. The Company has recorded the estimated financial
charges related to both the civil and criminal aspects of the foot powder
investigation in the fiscal year ended June 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
None.
7
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PART II
ITEM 5. MARKET PRICE FOR MOYCO'S COMMON STOCK AND RELATED SECURITY
- ------------------------------------------------------------------
HOLDER MATTERS.
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Since January 26, 1996, Moyco's Common stock has been traded on the NASDAQ
National Market. Prior to that date, the Company's Common stock was traded in
the over-the-counter market between dealers in securities, and quotations do not
include retail mark-up, markdown or commissions and do not necessarily represent
actual transactions.
Stock price comparisons are as follows: NASDAQ National Market Composite
Transactions after January 26, 1996; Quotations in the over-the-counter market
prior to January 26, 1996. The following table sets forth the low and high sales
prices per share for each quarter during fiscal year 1997 and 1996.
<TABLE>
<CAPTION>
Low High
---------------- ----------------
<S> <C> <C>
First quarter ended September 30, 1996 $ 5.00 $ 9.56
Second quarter ended December 31, 1996 3.63 7.00
Third quarter ended March 31, 1997 4.00 7.25
Fourth quarter ended June 30, 1997 3.00 7.25
Low High
First quarter ended September 30, 1995 $ 4.75 $ 15.50
Second quarter ended December 31, 1995 7.50 13.50
Third quarter ended March 31, 1996 6.50 10.75
Fourth quarter ended June 30, 1996 5.50 12.00
</TABLE>
There were no dividends paid during the fiscal years ended June 30, 1997, 1996
and 1995. The ability of the Company to pay any cash dividends on its Common
stock is dependent on the Company's earnings and profits and cash requirements.
The Company does not anticipate that it will declare or pay any cash dividends
on its Common stock for the foreseeable future. The Company continually reviews
the advisability of declaring a stock dividend or a stock split. However,
currently, the Company has no intention of declaring a stock dividend or a stock
split. The number of shareholders of record at June 30, 1997 was approximately
634.
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ITEM 6. SELECTED STATEMENT OF CONSOLIDATED OPERATIONS AND BALANCE SHEET DATA.
- -----------------------------------------------------------------------------
Selected statement of consolidated operations data:
- ---------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended June 30
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1997 (1) 1996 1995 1994 1993
------------ -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 13,982,927 $ 11,914,303 $ 11,880,186 $ 10,031,343 $ 11,237,214
COST OF GOODS SOLD 8,581,493 7,293,200 6,986,736 5,692,546 6,504,821
------------ -------------- --------------- --------------- ---------------
Gross profit 5,401,434 4,621,103 4,893,450 4,338,797 4,732,393
OPERATING EXPENSES 6,296,883 3,268,965 3,473,919 3,246,350 3,696,019
------------ -------------- --------------- --------------- ---------------
Income (loss) from
operations (895,449) 1,352,138 1,419,531 1,092,447 1,036,374
INTEREST (EXPENSE) AND OTHER
INCOME, net (492,783) (420,605) (404,873) (231,593) (268,336)
INCOME TAX BENEFIT
(EXPENSE) 379,604 (186,394) (478,344) (408,838) (258,246)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- -- (60,168) --
------------ -------------- --------------- ---------------- ---------------
NET INCOME (LOSS) $ (1,008,628) $ 745,139 $ 536,314 $ 391,848 $ 509,792
============ ============== =============== =============== ===============
PRIMARY AND FULLY DILUTED
EARNINGS (LOSS) PER
COMMON SHARE $ (.24) $ .19 $ .14 $ .10 $ .13
============ ============== =============== =============== ===============
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 4,137,590 4,024,665 3,938,915 3,931,385 3,927,235
============ ============== =============== =============== ===============
</TABLE>
(1) On August 8, 1996, the Company acquired all of the outstanding Common
stock of Thompson, a manufacturer of dental hand instruments and related
products. The acquisition was accounted for as a purchase business
combination. See Note 2 of Notes to Consolidated Financial Statements.
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Selected balance sheet data:
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<TABLE>
<CAPTION>
June 30
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1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working capital $ 3,729,300 $ 4,717,373 $ 4,589,745 $ 3,003,840 $ 3,490,282
============= ============ ============ ============ ============
Total assets $ 15,044,732 $12,544,014 $ 12,983,665 $ 9,765,891 $ 8,013,251
============= =========== ============ ============ ============
Long-term debt $ 5,255,263 $ 5,616,112 $ 6,735,460 $ 3,046,168 $ 2,734,393
============= ============ ============ ============ ============
Shareholders' equity $ 4,820,565 $ 4,975,488 $ 4,150,575 $ 3,613,011 $ 3,219,333
============= ============ ============ ============ ============
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
- ----------------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
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Safe Harbor for Forward-Looking Statements
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From time to time, the Company may publish statements which are not historical
fact, but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new
products, research and development activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provides safe harbor for
forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical and
anticipated results or other expectations expressed in the Company's
forward-looking statements. Such forward-looking statements may be identified by
the use of certain forward-looking terminology, such as, "may," "will,"
"expect," "anticipate," "intend," "estimate," "believe," "goal," or "continue,"
or comparable terminology that involves risks or uncertainties. Actual future
results and trends may differ materially from historical results or those
anticipated depending on a variety of factors, including, but not limited to (i)
competition within the Company's industries; (ii) changes in the economics of
dentistry, including consolidation, reduced growth in expenditures by private
dental insurance plans, and the effects of healthcare reform, which may affect
future per capita expenditures for dental services and the ability of dentists
to invest in or obtain reimbursement for the use of dental products; (iii) the
effect of economic conditions; (iv) supply risks, including shortages and
increases in the costs of key raw materials; (v) the successful integration of
Thompson's operations; (vi) dependence on the services of the Company's
executive officers, and other key operations and technical personnel; and (vii)
legal proceedings. (See discussion of legal proceedings in Part I, Item 3 of
this Form 10-K.)
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Overview
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As a result of the foot powder investigation, the civil settlement and the plea
agreement (see Legal Proceedings in Part I, Item 3, of this Form 10-K), the
Company recorded a charge of $855,000 in fiscal 1997 for the estimated cost to
settle this matter. In addition, the Company incurred legal and professional
fees related to this matter of approximately $400,000 during fiscal 1997. Those
charges and expenses are the primary causes of the Company's $.24 loss per
Common share for fiscal year 1997. These events placed significant stress on the
Company's financial position. The Company also believes that operations suffered
as a result of management's focus on the foot powder investigation. For these
reasons, the Company believes that it was in the best interests of its
shareholders and the Company to resolve the matter as soon as possible and to
focus its attention on operations and various growth opportunities.
In addition to the above noted charges, the Company has strategically invested
significant funds to refine its CMP slurry products and in an effort to increase
its commercial sales of CMP slurries.
Summary
- -------
The following table sets forth for the periods indicated the Company's key
financial information by segment.
<TABLE>
<CAPTION>
For the Year Ended June 30
-------------------------------------------------
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Net Sales:
Dental Supplies $ 9,537,098 $ 7,496,812 $ 7,399,768
Precision Abrasives 4,445,829 4,417,491 4,480,418
--------------- --------------- ---------------
$ 13,982,927 $ 11,914,303 $ 11,880,186
=============== =============== ===============
Gross profit:
Dental Supplies $ 3,718,354 $ 3,196,272 $ 3,487,510
Precision Abrasives 1,683,080 1,424,831 1,405,940
--------------- --------------- ---------------
$ 5,401,434 $ 4,621,103 $ 4,893,450
=============== =============== ===============
Operating Income (Loss):
Dental Supplies $ (977,814) $ 1,255,047 $ 894,036
Precision Abrasives 82,365 97,091 525,495
--------------- --------------- ---------------
$ (895,449) $ 1,352,138 $ 1,419,531
================ =============== ===============
</TABLE>
11
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Results of Operations
- ---------------------
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
- -------------------------------------------------------------
Net sales in fiscal 1997 totaled $13,982,927, an increase of $2,068,624 from
fiscal 1996 net sales of $11,914,303. Net sales in the Dental Supplies segment
increased $2,040,286, primarily due to the Company's acquisition of Thompson in
the first quarter. Overall, sales prices have remained relatively constant,
while volumes have increased primarily due to the acquisition of Thompson. Net
sales in the Precision Abrasives segment remained relatively constant,
increasing $28,338 to $4,445,829 in fiscal 1997.
Gross profit increased $780,331 from fiscal 1996. The gross profit in the Dental
Supplies segment increased $522,082 from $3,196,272 (42.6% of Dental Supplies
net sales) in 1996 to $3,718,354 (39.0% of Dental Supplies net sales) in 1997.
The gross profit in the Precision Abrasives segment increased $258,249 from
$1,424,831 (32.3% of Precision Abrasives net sales) in 1996 to $1,683,080 (37.9%
of Precision Abrasives net sales) in 1997. Gross profit as a percentage of net
sales in the Dental Supplies division decreased primarily due to the Thompson
acquisition, as Thompson products historically have had a lower gross profit
percentage than other products sold by the Company. The Company expects gross
profit percentages related to Thompson products will increase as the Company
continues to improve the Thompson manufacturing processes after the acquisition.
Increasing gross profit percentages in the Precision Abrasives segment are
attributable to continued efficiencies gained in the manufacturing process and a
shift in the product mix to the Company's higher gross profit products.
Operating expenses increased $2,672,358 from $3,624,525 (30.4% of net sales) in
1996, excluding the gain on settlement of litigation, to $6,296,883 (45.0% of
net sales) in 1997. This increase resulted partially from the Thompson
acquisition which caused sales and marketing expenses to increase $644,873 from
$1,746,501 (14.7% of net sales) in 1996 to $2,391,374 (17.1% of net sales) in
1997. General and administrative expenses increased $992,949 from $1,871,364
(15.7% of net sales) in 1996 to $2,864,313 (20.5% of net sales) in 1997. The
Company expects both sales and marketing and general and administrative expenses
as a percentage of net sales to return to the historical lower levels as the
Company continues to fully integrate the operations of Thompson. In addition to
the Thompson acquisition, operating expenses increased due to the various legal
proceedings involving the Company during the current fiscal year (see Legal
Proceedings in Part I, Item 3 of this Form 10-K). During the current fiscal
year, the Company incurred approximately $400,000 in professional fees related
to these proceedings, and recorded an additional provision of $855,000 for the
estimated future costs related to the settlement of the foot powder matter.
While any revisions to the estimated settlement costs or additional charges
could have a material adverse impact on the Company's net income in the quarter
in which they are recorded, the Company believes that such revisions or
additional charges, if any, would not have a material adverse effect on the
Company's consolidated financial position or results of operations. Research and
development expenses increased $179,536 due to increased spending on research on
and development of the Company's CMP slurry technology.
Other income, net decreased $68,745 in fiscal 1997 from 1996 due to a $57,000
gain on property dispositions which was recorded in fiscal 1996.
12
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Interest expense and interest income remained relatively constant in fiscal 1997
and 1996.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
- -------------------------------------------------------------
Net sales increased $34,117, primarily due to an increase in the net sales of
the Dental Supplies segment of $97,044. This increase primarily resulted from
annual price increases. Dental Supplies volume remained relatively consistent
with fiscal 1995. The increased net sales in the Dental Supplies segment was
partially offset by a decrease of $62,927, in the Precision Abrasives segment.
Gross profit decreased $272,347 caused by a $291,238 decrease in the Dental
Supplies segment as a result of an increase in cost of sales resulting from the
inefficiencies of operating two facilities for the segment at the same time
while the Company completed its move from its facility in Philadelphia to its
facility in York, Pennsylvania. The facility in Philadelphia was subsequently
closed. The inefficiencies primarily included duplication in manufacturing
space, personnel and certain overhead costs, which consisted primarily of
utilities. Gross profit in the Precision Abrasives segment increased $18,891 due
to efficiencies gained in the Company's manufacturing processes.
Operating expenses increased $150,606 from $3,473,919 (29.2% of net sales) in
fiscal 1995 to $3,624,525 (30.4% of net sales) in fiscal 1996, excluding the
gain on settlement of litigation. This increase was a result of increased legal
and professional fees related to due diligence investigations of potential
acquisitions for the Company. In addition, the Company settled a suit against
two parties in one action for patent infringement for a gain of $355,560.
Other income, net increased $51,093 in fiscal 1996 from 1995 due to the loss
recorded for the donation of the Company's former Philadelphia facility in
fiscal 1995 of $96,322.
Interest expense, net increased $66,825 as the Company incurred a full year of
interest expense on debt incurred in connection with its new York, Pennsylvania
facility and the expansion of its Montgomeryville, Pennsylvania facility.
Interest income was consistent in fiscal 1996 and 1995.
Liquidity and Capital Resources
- -------------------------------
Historically, the Company's primary source of liquidity has been cash flow from
operations. These funds, combined with borrowings under long-term debt
obligations with both banks and municipal authorities, have provided the
liquidity to finance the Company's capital expenditures. Substantially all of
the Company's assets are pledged as collateral for its long-term debt.
Net cash of $498,645, $1,456,521 and $864,299 was provided by operations for the
years ended June 30, 1997, 1996 and 1995, respectively. The increasing cash
flows from operations between fiscal 1996 and fiscal 1995 were a result of
increased net income, as well as the timing of collections from the Company's
larger customers. In fiscal 1997, cash flows from operations decreased due to
the net loss experienced and the timing of collections from the Company's larger
customers.
Expenditures for property, plant and equipment totaled $466,983 in 1997,
$537,638 in 1996, and $3,342,633 in 1995. The primary expenditures in 1995 were
the completion of the new facility in
13
<PAGE>
York, Pennsylvania, and the addition to the facility in Montgomeryville,
Pennsylvania. The projects were funded primarily through the proceeds received
from long-term debt, which were $340,000 in 1997, $140,000 in 1996, and
$5,380,978 in 1995, respectively. In fiscal 1997, 1996 and 1995, the Company
made payments on long-term debt of $1,337,535, $890,894 and $3,255,403.
The Company has a commitment for a $3,000,000 line of credit with a bank which
will expire on December 31, 1997, subject to renewal. The line of credit bears
interest at the prime rate and is secured by substantially all of the Company's
assets. In 1997, the Company used $1,025,000 in net borrowings under this line
of credit to retire approximately $670,000 in debt acquired in the Thompson
acquisition, as well as for general working capital purposes. In addition to the
line of credit, the Company has available a $850,000 convertible line of credit
and a $750,000 term loan facility. No borrowings were outstanding on either of
these credit facilities at June 30, 1997.
The Company expects to spend approximately $500,000 in fiscal 1998 on capital
expenditures, primarily for new office computer equipment and dental instrument
manufacturing equipment. In addition, the Company is obligated to pay a minimum
of $505,000 over four years relating to the settlement of the foot powder matter
(see Legal Proceedings in Part I, Item 3 of this Form 10-K). The Company
anticipates that sufficient cash will be generated from operations to fund these
payments and, to the extent they are not, they will be funded using the
Company's credit facilities.
The Company believes that inflation has not, and will not, have a material
impact on the Company's financial condition and results of operations.
Recent Accounting Pronouncements
- --------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No.
128 requires dual presentation of basic and diluted earnings per share for
complex capital structures on the face of the statements of operations.
According to SFAS No. 128, basic earnings per share, which replaces primary
earnings per share, is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share, which replaces fully diluted earnings per
share, reflects the potential dilution from the exercise or conversion or
securities into common stock, such as stock options. SFAS No. 128 is required to
be adopted for the Company's financial statements for the period ending December
31, 1997; earlier application is not permitted. The adoption of this
pronouncement is expected to have no significant impact on the Company's
reported earnings (loss) per share.
Additionally, in June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 is required to be adopted for the
Company's fiscal year ending June 30, 1999. The adoption of this pronouncement
is expected to have no impact on the
14
<PAGE>
Company's financial position or results of operations. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is required to be adopted for the Company's fiscal 1999
financial statements. The adoption of this pronouncement should not have any
impact on the Company's existing disclosures.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
Index to Consolidated Financial Statements:
Page
----
Report of Independent Public Accountants 17
Consolidated Balance Sheets - June 30, 1997 and 1996 18
Consolidated Statements of Operations - For the Years Ended 20
June 30, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity - For the 21
Years Ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - For the Years Ended 22
June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 23
Schedule II - Valuation and Qualifying Accounts (included in 48
Part IV of this Form 10-K)
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Moyco Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of Moyco
Technologies, Inc. (a Pennsylvania corporation) and Subsidiaries as of June 30,
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit. The consolidated financial statements and schedule as of June 30, 1996
and for each of the two years in the period then ended were audited by other
auditors whose report dated August 28, 1996 expressed an unqualified opinion on
those statements and schedule.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Moyco Technologies, Inc. and
Subsidiaries as of June 30, 1997, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the Index to Consolidated
Financial Statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/Arthur Andersen LLP
Philadelphia, Pa.
September 19, 1997
17
<PAGE>
MOYCO TECHNOLOGIES, INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30
----------------------------------
ASSETS 1997 1996
------ --------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,454,083 $ 1,402,088
Accounts receivable, net of reserves of $251,330 and $78,990 1,948,285 1,600,764
Inventories 3,902,141 3,283,779
Deferred income taxes 507,198 68,856
Prepaid taxes 32,843 117,644
Prepaid expenses 104,607 43,952
--------------- ---------------
Total current assets 7,949,157 6,517,083
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 452,433
Buildings and improvements 4,569,460 4,386,877
Machinery and equipment 5,717,084 4,822,188
Furniture and fixtures 641,368 534,068
Automotive equipment 48,511 48,511
--------------- ----------------
11,578,856 10,244,077
Less- Accumulated depreciation and amortization (5,105,474) (4,350,226)
--------------- ---------------
Net property, plant and equipment 6,473,382 5,893,851
--------------- ----------------
OTHER ASSETS:
Goodwill, less accumulated amortization of $28,226 444,394 --
Other 177,799 133,080
--------------- ---------------
Total other assets 622,193 133,080
--------------- ---------------
$ 15,044,732 $ 12,544,014
=============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
MOYCO TECHNOLOGIES, INC.
------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Continued)
<TABLE>
<CAPTION>
June 30
----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ --------------- ----------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 1,125,000 $ ---
Current portion of long-term debt 846,928 895,408
Accounts payable 1,352,569 381,372
Accrued expenses 895,360 522,930
--------------- ----------------
Total current liabilities 4,219,857 1,799,710
--------------- ----------------
OTHER LONG-TERM LIABILITIES 330,000 ---
--------------- ----------------
LONG-TERM DEBT 5,255,263 5,616,112
--------------- ----------------
DEFERRED INCOME TAXES 419,047 152,704
--------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Preferred stock, $.005 par value,
2,500,000 shares authorized,
none issued and outstanding -- --
Common stock, $.005 par value, 15,000,000
shares authorized, 4,732,215 and
4,616,740 shares issued 23,661 23,084
Additional paid-in capital 3,981,584 3,118,236
Retained earnings 946,493 1,955,121
Less- Treasury stock of 593,875
and 591,875 shares at cost (131,173) (120,953)
--------------- ----------------
Total shareholders' equity 4,820,565 4,975,488
--------------- ----------------
$ 15,044,732 $ 12,544,014
=============== ================
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
MOYCO TECHNOLOGIES, INC.
------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the Year Ended June 30
---------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
NET SALES $ 13,982,927 $ 11,914,303 $ 11,880,186
COST OF GOODS SOLD 8,581,493 7,293,200 6,986,736
--------------- --------------- ---------------
Gross profit 5,401,434 4,621,103 4,893,450
OPERATING EXPENSES:
Sales and marketing 2,391,374 1,746,501 1,661,623
Research and development 186,196 6,660 35,718
General and administrative 2,864,313 1,871,364 1,776,578
Provision for litigation 855,000 -- --
Gain on settlement of litigation -- (355,560) --
--------------- --------------- ---------------
Income (loss) from operations (895,449) 1,352,138 1,419,531
INTEREST EXPENSE, net (505,432) (501,999) (435,174)
OTHER INCOME, net 12,649 81,394 30,301
--------------- --------------- ---------------
Income (loss) before taxes (1,388,232) 931,533 1,014,658
INCOME TAX BENEFIT (EXPENSE) 379,604 (186,394) (478,344)
--------------- --------------- ---------------
NET INCOME (LOSS) $ (1,008,628) $ 745,139 $ 536,314
=============== =============== ===============
PRIMARY AND FULLY DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (.24) $ .19 $ .14
=============== =============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,137,590 4,024,665 3,938,915
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
MOYCO TECHNOLOGIES, INC.
------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------- Paid-In Retained
Shares Amount Capital Earnings
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994 4,529,390 $ 22,647 $ 3,037,647 $ 673,668
Exercise of Common stock
options 1,500 8 1,242 --
Net income -- -- -- 536,314
------------- ------------- ------------- ---------------
BALANCE, JUNE 30, 1995 4,530,890 22,655 3,038,889 1,209,982
Exercise of Common stock
options 85,850 429 79,347 --
Net income -- -- -- 745,139
------------- ------------- ------------- ---------------
BALANCE, JUNE 30, 1996 4,616,740 23,084 3,118,236 1,955,121
Issuance of Common stock
in connection with purchase
of Thompson 115,000 575 861,925 --
Treasury stock purchase -- -- -- --
Exercise of Common stock
options 475 2 1,423 --
Net loss -- -- -- (1,008,628)
------------- ------------- ------------- ---------------
BALANCE, JUNE 30, 1997 4,732,215 $ 23,661 $ 3,981,584 $ 946,493
============= ============= ============= ===============
Treasury Stock
------------------------------
Shares Amount Total
------------- ------------- -------------
BALANCE, JUNE 30, 1994 591,875 $ (120,953) $ 3,613,009
Exercise of Common stock
options -- -- 1,250
Net income -- -- 536,314
------------- ------------- -------------
BALANCE, JUNE 30, 1995 591,875 (120,953) 4,150,573
Exercise of Common stock
options -- -- 79,776
Net income -- -- 745,139
------------- ------------- -------------
BALANCE, JUNE 30, 1996 591,875 (120,953) 4,975,488
Issuance of Common stock
in connection with purchase
of Thompson Dental Mfg. Co. -- -- 862,500
Purchase of Common stock for Treasury 2,000 (10,220) (10,220)
Exercise of Common stock
options -- -- 1,425
Net loss -- -- (1,008,628)
------------- ------------- -------------
BALANCE, JUNE 30, 1997 593,875 $ (131,173) $4,820,565
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
MOYCO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended June 30
-------------------------------------------------
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,008,628) $ 745,139 $ 536,314
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Provision for accounts receivable reserves 152,245 -- 20,000
Depreciation and amortization 843,352 648,517 542,062
(Gain) loss on disposition of property and equipment -- (57,000) 80,833
Deferred income taxes (401,259) (91,016) 35,419
(Increase) decrease in-
Accounts receivable (222,171) 332,149 (280,567)
Inventories (17,567) (65,702) (399,303)
Prepaid taxes and expenses 41,990 102,602 (236,274)
Other assets 27,643 333,344 46,599
Increase (decrease) in-
Accounts payable 625,925 (581,859) 677,944
Accrued expenses 457,115 90,347 (158,728)
-------------- ------------- -------------
Net cash provided by operating activities 498,645 1,456,521 864,299
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (466,983) (537,638) (3,342,633)
Acquisition of Thompson, net cash acquired 1,663 -- --
Proceeds from sale of equipment -- 57,000 22,500
-------------- ------------- -------------
Net cash used in investing activities (465,320) (480,638) (3,320,133)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 1,025,000 -- --
Proceeds from long-term debt 340,000 140,000 5,380,978
Payments of long-term debt (1,337,535) (890,894) (3,255,403)
Proceeds from exercise of stock options 1,425 79,776 1,250
Purchase of Common stock for treasury (10,220) -- --
Deferred financing costs -- -- (21,233)
-------------- ------------- -------------
Net cash provided by (used in) financing activities 18,670 (671,118) 2,105,592
-------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
51,995 304,765 (350,242)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,402,088 1,097,323 1,447,565
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,454,083 $ 1,402,088 $ 1,097,323
============== ============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 554,081 $ 559,240 $ 501,649
============== ============= =============
Income taxes paid $ 4,638 $ 436,034 $ 521,976
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
MOYCO TECHNOLOGIES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1997
-------------
1. THE COMPANY:
-----------
Moyco Technologies, Inc. (formerly Moyco Industries, Inc.) and subsidiaries (the
"Company") operates in two business segments: Dental Supplies and Precision
Abrasives. The Dental Supplies segment involves the manufacturing and
distributing of dental waxes, endodontic instruments, materials and equipment,
dental abrasives, dental mirrors, medicaments, general supplies and instruments
and the repacking of other dental products for the professional dental market.
The Precision Abrasives segment involves the manufacturing of commercial coated
abrasives, precision submicron coated abrasives, slurries (wet abrasives) and
polishing agents. These products are used for various applications and
industries, including but not limited to, fiber optics, lapidary, nail files,
dentistry, plastics and woods, semiconductor manufacturing such as chemical
mechanical planarization and other high-tech manufacturing procedures which
require extremely fine abrasive films and/or slurries to achieve consistently
uniform polishing results.
2. ACQUISITIONS:
------------
In August 1996, the Company acquired all of the outstanding Common stock of
Thompson Dental Mfg. Co. ("Thompson"), a manufacturer of dental hand instruments
and related products, for 115,000 shares of the Company's Common stock and an
additional $450,000 cash "earn-out" payable to the selling shareholders over
seven years, contingent upon Thompson meeting certain sales targets. The
acquisition was accounted for under the purchase method of accounting. The fixed
portion of the purchase price of $911,154 includes $862,500 for the 115,000
shares issued and $48,654 for transaction costs. The $450,000 contingent portion
of the purchase price will be recorded when earned. The purchase price was
allocated to identifiable assets and liabilities based on their estimated fair
values. The $472,620 excess of the purchase price over the fair value of the net
assets acquired was allocated to goodwill and is being amortized on a
straight-line basis over 15 years.
23
<PAGE>
The noncash assets and liabilities that were consolidated as a result of the
Thompson acquisition are as follows:
<TABLE>
<CAPTION>
<S> <C>
Noncash assets (liabilities):
Accounts receivable, net $ 277,595
Inventories 600,795
Prepaid expenses 17,844
Property, plant and equipment 915,036
Goodwill 472,620
Other assets 85,000
Line of credit (100,000)
Accounts payable (345,272)
Accrued expenses (245,315)
Debt (588,206)
Deferred income taxes (229,260)
---------------
Net noncash assets acquired 860,837
Less - Common stock issued (862,500)
---------------
Net cash acquired $ 1,663
===============
</TABLE>
The following unaudited pro forma information is presented as if the acquisition
of Thompson had occurred on July 1, 1995. The unaudited pro forma information
does not purport to be indicative of the results that would have been attained
if the operations had actually been combined for the periods presented and is
not necessarily indicative of the operating results to be expected in the
future.
<TABLE>
<CAPTION>
For the Year Ended
June 30
--------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Unaudited pro forma net sales $ 14,278,042 $ 14,599,009
=============== ===============
Unaudited pro forma operating income (loss) $ (892,707) $ 876,482
=============== ===============
Unaudited pro forma net income (loss) $ (1,023,143) $ 583,947
=============== ===============
Unaudited pro forma earnings (loss) per
Common share $ (.25) $ .15
=============== ===============
</TABLE>
The pro forma adjustments reflected in the above information consist of
increased depreciation and amortization charges for assets which were recorded
at their estimated fair values at the purchase date and goodwill. The
depreciation adjustment was $10,812 and $100,675 for the years ended June 30,
1997 and 1996, respectively. The goodwill amortization adjustment was $3,282 and
$31,508 for the years ended June 30, 1997 and 1996, respectively.
24
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Management's Use of Estimates
- -----------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Statements of Cash Flows
- ------------------------
For the purpose of determining cash flows, the Company considers all highly
liquid investment instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents at June 30, 1997 consist
of certificates of deposit and an investment in a money market account. Interest
income earned on the investment of cash was $47,708, $26,991 and $48,649 for the
years ended June 30, 1997, 1996 and 1995, respectively.
Inventories
- -----------
Inventories are valued at the lower of cost, determined on the first-in,
first-out method, or market.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are recorded at cost. Significant additions or
improvements are capitalized, while repairs and maintenance are charged to
expense as incurred. Depreciation and amortization is provided on a
straight-line basis over the estimated useful lives of the assets as follows:
Buildings and improvements 10-25 years
Machinery and equipment 5-10 years
Furniture and fixtures 5-10 years
Automotive equipment 3 years
Interest expense related to and incurred during the construction period of
buildings is capitalized as part of the cost of such assets and depreciated over
the estimated useful life of the building. Interest of $70,225 was capitalized
in 1995 relating to two construction projects completed during the period.
Goodwill
- --------
Goodwill represents the excess of the purchase price of the Thompson acquisition
over the estimated fair value of the net assets acquired. Goodwill is being
amortized on a straight-line basis over 15 years. Amortization expense was
$28,226 for the year ended June 30, 1997. The
25
<PAGE>
Company evaluates the realizability of intangible assets based on estimates of
undiscounted future cash flows over the remaining useful life of the asset. If
the amount of such estimated undiscounted future cash flows is less than the net
book value of the asset, the asset is written down to its net realizable value.
As of June 30, 1997, no such write-down was required.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, the liability method is used for income taxes. Under this method,
deferred tax assets or liabilities are determined based on the differences
between the financial reporting and tax basis of assets and liabilities and are
measured using enacted tax rates and the laws that are expected to be in effect
when the differences reverse.
Reclassifications
- -----------------
The financial statements for prior years have been reclassified to conform with
the current-year presentation.
Research and Development
- ------------------------
Research and development expenses are charged to expense as incurred.
Earnings (loss) per Common Share
- --------------------------------
The Company utilizes the treasury stock method to compute earnings (loss) per
Common share. Earnings (loss) per Common share (primary earnings (loss) per
Common share) is computed using the weighted average number of Common shares and
Common share equivalents (stock options) outstanding. Earnings (loss) per Common
share, assuming full dilution (fully diluted earnings (loss) per Common share),
is based upon an increased number of shares that would be outstanding assuming
exercise of stock options when the Company's stock price at the end of the
period is higher than the average price within the respective period. If the
inclusion of Common stock equivalents has an anti-dilutive effect in the
aggregate, it is excluded from the earnings per share calculation. In fiscal
1997, 1996, and 1995, the weighted average shares outstanding for primary
earnings (loss) per share were 4,137,590 , 4,024,665, and 3,938,915,
respectively. Shares used to calculate fully diluted earnings (loss) per Common
share were not materially different from those used to calculate primary
earnings (loss) per Common share.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which supersedes APB 15. SFAS No. 128 requires dual
presentation of basic and diluted earnings per share for complex capital
structures on the face of the statements of operations. According to SFAS No.
128, basic earnings per share, which replaces primary earnings per share, is
calculated by dividing net income available to Common shareholders by the
weighted average number of Common shares outstanding for the period. Diluted
earnings per share, which replaces fully diluted earnings per share, reflects
the potential dilution from the exercise or conversion of securities into Common
stock, such as stock options. SFAS No. 128 is required to be adopted for the
Company's financial statements for the period ended December 31, 1997; earlier
application is not permitted.
26
<PAGE>
Revenue Recognition
- -------------------
The Company recognizes revenue upon the shipment of its products.
Advertising Costs
- -----------------
Advertising costs are charged to expense as incurred. The amounts charged to
expense for the years ended June 30, 1997, 1996, and 1995, were $303,285,
$228,049, and $251,984, respectively.
Long-Lived Assets
- -----------------
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," effective July 1, 1996.
SFAS No. 121 requires that long-lived assets to be held and used or disposed of
by an entity be reviewed for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment is recognized to the extent that the sum of undiscounted estimated
future cash flows expected to result from use of the assets is less than the
carrying value. As of June 30, 1997, management has evaluated the Company's
asset base, under the guidelines established by SFAS No. 121, and believes that
no impairment has occurred.
27
<PAGE>
Fair Value of Financial Instruments
- -----------------------------------
For certain of the Company's financial instruments, including accounts
receivables, accounts payable and accrued expenses, management believes that the
carrying amounts approximate fair value due to their short maturities. The
carrying amount and estimated fair value of debt at June 30, 1997 is $6,102,191
and $5,686,823, respectively, and $6,511,520 and $6,080,263 at June 30, 1996.
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current prices for the
same or similar issues offered to the Company for debt of the same remaining
maturities.
<TABLE>
<CAPTION>
4. INVENTORIES:
-----------
June 30
----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Raw materials and supplies $ 1,418,353 $ 959,485
Work-in-process 1,265,386 873,884
Finished goods 1,218,402 1,450,410
--------------- ----------------
$ 3,902,141 $ 3,283,779
=============== ================
5. ACCRUED EXPENSES:
----------------
June 30
---------------------------------
1997 1996
--------------- ---------------
Compensation and related benefits $ 222,279 $ 205,092
Reserve for litigation (Note 11) 525,000 --
Other 148,081 317,838
--------------- ---------------
$ 895,360 $ 522,930
============== ==============
</TABLE>
6. LINE OF CREDIT:
--------------
The Company has a line of credit with a bank under which it may borrow up to
$3,000,000 through December 31, 1997, subject to renewal. Borrowings under the
line bear interest at prime (8.5% at June 30, 1997) and are secured by all
assets of the Company. The highest level of borrowings during the year ended
June 30, 1997 was $1,125,000, while the weighted average interest rate on
borrowings was 8.3%. The Company did not make any borrowings under the line of
credit in fiscal 1996 or 1995.
In addition to the line of credit, the bank has made available a $850,000
convertible line of credit. On December 31, 1997, the then outstanding borrowing
will convert to a 60-month term loan. Interest on borrowings under this facility
are at prime plus .25%, with interest only payable prior to the conversion date.
Also, a $750,000 term loan facility has been made available by the bank.
Interest on term loan borrowings will bear interest at prime plus .25% and
principal is payable in 60 monthly installments of $12,500 through July 1, 2002.
There were no borrowings under these two credit facilities at June 30, 1997.
28
<PAGE>
Thompson Dental Manufacturing Co., Inc., a subsidiary of the Company, is a
guarantor and surety of borrowings under these credit facilities.
<TABLE>
<CAPTION>
7. LONG-TERM DEBT:
--------------
June 30
----------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Mortgage payable to bank in monthly installments of $14,950, including
interest at 9.25% for five years and at prime plus 1% for the remaining
term, through May 1, 2010. $ 1,354,090 $ 1,403,848
Notepayable with quarterly interest-only payments through 1996, thereafter,
payable in 20 equal quarterly payments including principal and interest
at prime. (Interest rate not to exceed 10% or be below 8%). Rate at June
30, 1997, was 8.5%. Subordinated to prime lender.
1,350,000 1,500,000
Term note payable in monthly installments of $30,000, plus interest at
prime rate plus1/2%, through August 1, 2000. 1,110,000 1,470,000
Mortgage payable to municipal authority in monthly installments of $6,371,
including interest at 2%, through July 1, 2010.
874,501 932,735
Mortgage payable to bank in monthly installments of $5,053, including
interest at 8.75% for five years and at prime plus 1% for the
remaining term, through December 1, 2009. 460,891 479,696
Mortgage payable to municipal authority in monthly installments of $1,952,
including interest at 2%, through April 1, 2010.
260,309 278,314
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Mortgage payable to bank in monthly installments of $6,569, including
interest at 85% of prime (not to exceed 15% or be below 8.5%), through
August 2001. Rate at June 30, 1997 was 8.7%.
257,683 306,827
Mortgage payable to bank in monthly installments of $2,543, including
interest at prime plus 1.5%, through December 1, 2011.
237,696 --
Note payable in monthly installments of $2,333, plus interest at 8.65%,
through November 1, 2000. 95,673 121,336
Capital lease obligation payable in monthly installments of $2,009,
including interest at 10%, through December 2000 92,893 --
Auto loan payable in monthly installments of $838, plus interest at
7.75%, through June 1, 1998 8,455 18,764
--------------- ---------------
6,102,191 6,511,520
Less- Current portion (846,928) (895,408)
---------------- ---------------
$ 5,255,263 $ 5,616,112
=============== ===============
</TABLE>
Substantially all of the Company's assets are pledged as collateral for the
long-term debt. In addition, the two mortgages payable to municipal authorities
are collateralized by an aggregate of $150,000 in standby letters of credit.
As of June 30, 1997, long-term debt matures as follows:
1998 $ 846,928
1999 853,444
2000 889,761
2001 569,089
2002 665,978
Thereafter 2,276,991
--------------
$ 6,102,191
==============
8. EMPLOYEE BENEFIT PLANS:
----------------------
Profit Sharing Plan
- -------------------
The Company has a noncontributory profit sharing plan for employees who have
completed one full year of service and have attained the age of 21. The Company,
at the discretion of the Board of Directors, may make contributions to the plan.
The contributions cannot exceed the maximum amount which will constitute an
allowable deduction for federal income tax purposes and is based on the
Company's profitability and shall be paid from the Company's net and/or retained
earnings.
30
<PAGE>
A participating employee's full account becomes payable to the employee's
designated beneficiary upon normal retirement, upon retirement at any age due to
disability, or upon death. In the event employment is terminated before normal
retirement, a portion of the Company's contribution is forfeited unless the
employee has at least seven full years of service.
The Company did not make any contributions in fiscal 1997 or fiscal 1996. The
Company's contributions were $15,000 in fiscal 1995.
Employee Savings Plan
- ---------------------
The tax deferred employee savings and protection plan under Section 401(k) of
the Internal Revenue Code is available for all eligible employees. This plan
allows an employee to contribute between 3% and 10% of compensation to the plan
and these contributions are not subject to current federal income taxes. The
Company matches 50% of the employee's contributions, to a maximum of 3%, subject
to the deferral limit under the Internal Revenue Code. Participants are at all
times fully vested in their contributions and the Company contributions become
vested at various percentages based on years of service with 20% vested after
three years and 20% for each year thereafter.
The Company's matching contributions for the years ended June 30, 1997, 1996,
and 1995 were $46,855, $64,509 and $62,220, respectively.
9. BUSINESS SEGMENTS:
-----------------
The Company operates in two business segments: Dental Supplies and Precision
Abrasives. See Note 1 for description of the Company's business segments.
31
<PAGE>
Financial information for each business segment as of June 30, 1997, 1996 and
1995 and for the years ended June 30, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Net Sales:
Domestic and U.S. government customers-
Dental Supplies $ 8,071,312 $ 6,662,894 $ 6,624,273
Precision Abrasives 3,939,032 3,981,706 4,074,581
International customers-
Dental Supplies 1,465,786 833,918 775,495
Precision Abrasives 506,797 435,785 405,837
--------------- --------------- ---------------
$ 13,982,927 $ 11,914,303 $ 11,880,186
=============== =============== ===============
Operating income (loss):
Dental Supplies $ (977,814) $ 1,255,047 $ 894,036
Precision Abrasives 82,365 97,091 525,495
--------------- --------------- ---------------
$ (895,449) $ 1,352,138 $ 1,419,531
=============== =============== ===============
Total assets:
Dental Supplies $ 9,062,379 $ 3,776,974 $ 7,570,516
Precision Abrasives 4,403,386 7,021,154 3,613,166
Corporate 1,578,967 1,745,886 1,799,983
--------------- --------------- ---------------
$ 15,044,732 $ 12,544,014 $ 12,983,665
=============== =============== ===============
Depreciation and amortization:
Dental Supplies $ 568,649 $ 417,358 $ 378,433
Precision Abrasives 274,703 231,159 163,629
--------------- --------------- ---------------
$ 843,352 $ 648,517 $ 542,062
=============== =============== ===============
Capital expenditures:
Dental Supplies $ 310,864 $ 255,740 $ 2,254,105
Precision Abrasives 156,119 281,898 1,088,528
--------------- --------------- ---------------
$ 466,983 $ 537,638 $ 3,342,633
=============== =============== ===============
</TABLE>
For the years ended June 30, 1996 and 1995, net sales to various agencies of the
U.S. government represented 1.6%, and 1.0%, respectively, of the Company's total
net sales. Net sales to the U.S. government were less than 0.5% for the year
ended June 30, 1997.
32
<PAGE>
<TABLE>
<CAPTION>
10. INCOME TAXES:
------------
For the Year Ended June 30
---------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ (3,316) $ 192,093 $ 314,442
State 24,971 85,317 128,483
--------------- --------------- ---------------
21,655 277,410 442,925
--------------- --------------- ---------------
Deferred:
Federal (322,748) (55,520) 25,126
State (78,511) (35,496) 10,293
--------------- --------------- ---------------
(401,259) (91,016) 35,419
--------------- --------------- ---------------
$ (379,604) $ 186,394 $ 478,344
================ =============== ===============
</TABLE>
A reconciliation of the U.S. Federal Income Tax rate to the effective income tax
rate is as follows:
<TABLE>
<CAPTION>
For the Year Ended June 30
------------------------------------------------
1997 1996 1995
---------------- ---------------- ------------
<S> <C> <C> <C>
Federal taxes at graduated rates from
15% to 39% (34.0)% 12.2% 34.0%
State taxes (2.3) 7.8 13.1
Other 9.0 -- --
------------ ------------- ------------
(27.3)% 20.0% 47.1%
============ ============= ============
</TABLE>
33
<PAGE>
Deferred income tax assets and liabilities are classified as current and
noncurrent based on the financial reporting classification of the related assets
and liabilities which gave rise to the temporary difference. Significant
components of the deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
June 30
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable reserves and inventory costs not
currently deductible $ 236,684 $ 32,018
Litigation reserves 193,302 --
Other accruals not currently deductible 77,212 36,838
------------ ------------
507,198 68,856
Deferred income tax liabilities:
Depreciation and amortization (419,047) (152,704)
------------ ------------
Net deferred income tax assets (liabilities) $ 88,151 $ (83,848)
============ ============
</TABLE>
Management believes that a valuation allowance was not required for the net
deferred income tax assets as management believes it is more likely than not
that the net deferred income tax assets will be realized.
11. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Cabot Corporation Litigation
- ----------------------------
On March 14, 1997, a complaint was filed in the United States District Court for
the Northern District of California against the Company by Cabot Corporation
("Cabot"), a manufacturer of chemical products. The Complaint alleges that a CMP
slurry manufactured by the Company infringes on a United States patent owned by
Cabot.
The Company has denied that its CMP slurry products infringe on the patented
Cabot product. Furthermore, the Company in its Answer and Counterclaim to the
Cabot Complaint contends that the Company did not infringe on the Cabot patent,
that Cabot's patent is invalid because of prior art and failure to disclose the
best mode, that Cabot violated federal anti-trust laws by attempting to
monopolize the CMP slurry market and restrain trade, that Cabot interfered with
the Company's business relationships, participated in unfair competition and has
used the patent laws for improper purposes.
The Company has retained counsel to vigorously defend against the Cabot
Complaint, which it believes to be without basis and against which the Company
has raised meritorious defenses. Additionally, the Company's net sales from the
CMP slurry, which is the subject of the Cabot litigation, have been immaterial
to date. No reserve for this claim has been made in the June 30, 1997
consolidated financial statements.
34
<PAGE>
Foot Powder Investigation
- -------------------------
In the fourth quarter of fiscal 1996, the Company became aware that the United
States attorney for the Eastern District of Pennsylvania (the "Government") was
investigating certain foot powder which the Company manufactured and sold
pursuant to contracts with the U.S. Department of Defense. Based on the
investigation, the Government alleged that, between 1990 and 1996, the Company
manufactured and sold to the U.S. Department of Defense $1,700,000 of foot
powder without performing appropriate stability tests to assure that the product
met contractual requirements. This matter was placed before a grand jury and the
Government issued the Company a target letter. An indictment was not issued
against the Company by the Government.
In April of 1997, the Company pleaded guilty to a two count information charging
it with distributing adulterated drugs and mail fraud. A plea agreement was
filed in the United States District Court for the Eastern District of
Pennsylvania, and was the result of negotiations between the Company and the
Government. The Company has accepted responsibility for failing to maintain
required quality control and stability testing procedures for foot powder which
it sold to the Government from 1992 to 1996.
In August of 1997, the Company entered into a settlement agreement with the
Government to resolve the Company's civil liability with regard to the foot
powder matter. The agreement provides that the Company will pay the Government
$505,000 over four years. The Company agreed to pay $100,000 within ten (10)
days of the execution of the settlement agreement and the remaining amount in
four equal installments of $101,250 upon the anniversary date of the settlement
agreement. The payment of these amounts is secured by an irrevocable letter of
credit the Company obtained from a bank.
The fine range with respect to the criminal allegations is set forth in the plea
agreement and is from $175,000 to $700,000 and will be specifically determined
by the assigned judge at the sentencing hearing. The sentencing hearing is
scheduled to be held in October 1997.
The foot powder involved in this matter is no longer manufactured by the Company
and was never a part of its core business.
As a result of the settlement, the Government agreed to settle all other claims
made against the Company. The Company has recorded a charge of $855,000 in
fiscal 1997 related to both the civil and criminal aspects of the foot powder
matter.
Purchase Agreement
- ------------------
In March 1997, the Company entered into a purchase and distribution agreement
with a supplier for certain feedstock relating to its cmp slurries. The purchase
commitment is for approximately $30,000,000 over the five-year term of the
agreement. The agreement may be terminated by either party with 30 days written
notice. In addition to the purchase commitment, the Company agreed to pay the
supplier a $100,000 research and development fee over a two-year period.
35
<PAGE>
12. SETTLEMENT OF PATENT INFRINGEMENT SUIT:
--------------------------------------
In a prior year, the Company filed suit against two parties in one action for
patent infringement. This suit was settled in fiscal 1996 resulting in a gain of
$355,560.
13. STOCK OPTIONS:
-------------
The Company has an incentive stock option plan that provides for the awarding of
options for the purchase of up to 200,000 shares of Common stock. Under the
plan, options are granted at a price not less than the fair market value at the
grant date and become exercisable upon such date. Employee options expire 10
years after the grant date and directors' options expire five years after the
grant date. Of the total options authorized for issuance, 117,275 shares have
been granted and 92,725 shares have been exercised, and 1,600 shares have been
cancelled.
The following summarizes information relative to the stock option plan:
<TABLE>
<CAPTION>
Weighted
Exercise Average
Price Exercise Price Aggregate
Options (per share) (per share) Proceeds
--------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance as of June 30, 1994 86,500 $ 0.75 - $1.00 $ 0.79 $ 68,225
Granted 500 1.00 1.00 500
Exercised (1,500) 0.75 - 1.00 0.83 (1,250)
--------------- -------------- ------------ -------------
Balance as of June 30, 1995 85,500 0.75 - 1.00 0.79 67,475
Granted 17,300 3.00 3.00 51,900
Exercised (85,850) 0.75 - 3.00 0.93 (79,776)
--------------- -------------- ------------ -------------
Balance as of June 30, 1996 16,950 0.75 - 3.00 2.34 39,599
Granted 6,475 5.25 - 6.50 6.11 39,588
Exercised (475) 3.00 3.00 (1,425)
--------------- ---------------- ------------ -------------
Balance as of June 30, 1997 22,950 $0.75 - $6.50 $ 3.39 $ 77,762
=============== ================ ============ =============
</TABLE>
36
<PAGE>
The following table summarizes information about the stock option plan as of
June 30, 1997 based upon the different ranges in exercise prices of the
outstanding options:
<TABLE>
<CAPTION>
Weighted
Range of Average Weighted
Exercise Remaining Average
Prices Options Exercise Period Exercise Price
(per share) Outstanding (years) (per share)
----------- ----------- ------- -----------
<S> <C> <C> <C> <C>
$0.75 5,000 5.5 $ 0.75
$3.00 11,475 8.0 $ 3.00
$ 5.25 - $6.50 6,475 9.3 $ 6.11
--------
22,950
========
</TABLE>
The Company accounts for its options under APB Opinion No. 25, "Accounting for
Stock Issued to Employees," under which no compensation cost has been
recognized. In 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair
value based method of accounting for stock-based compensation plans. SFAS No.
123 requires that an employer's financial statements include certain disclosures
about stock-based employee compensation arrangements regardless of the method
used to account for the plan. Had the Company recognized compensation cost for
its stock options consistent with the provisions of SFAS No. 123, the Company's
pro forma net income (loss) and pro forma earnings (loss) per Common share would
have been as follows:
<TABLE>
<CAPTION>
For the Year Ended June 30
--------------------------------
1997 1996
--------------- -------------
<S> <C> <C>
Net Income (Loss):
As reported $ (1,008,628) $ 745,139
=============== =============
Pro forma $ (1,035,363) $ 727,839
=============== =============
Pro Forma Earnings (Loss) per Common share:
As reported $ (.24) $ .19
============= =============
Pro forma $ (.25) $ .18
============= =============
</TABLE>
The weighted average fair value of the stock options granted during fiscal 1997
and 1996 was $4.13 and $1.52, respectively. The fair value of each option is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Risk-free interest rate 6.4% 5.9%
Expected dividend yield 0% 0%
Expected life 5 years 5 years
Expected volatility 80.0% 80.0%
</TABLE>
37
<PAGE>
14. CUSTOMER INFORMATION:
--------------------
The Company's customer base in the Dental Supplies segment consists principally
of distributors in the professional dental supply market. The Company's customer
base in the Precision Abrasives segment consists principally of large companies
in the high-technology industry. The Company did not have any customers with net
sales in excess of 10% of its total net sales for the years ended June 30, 1997,
1996 and 1995.
15. OTHER INCOME, NET:
-----------------
<TABLE>
<CAPTION>
For the Year Ended June 30
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Other income $ 15,479 $ 24,394 $ 111,134
Other expense (2,830) -- --
Gain on disposition of property and equipment
-- 57,000 15,489
Building donation -- -- (96,322)
--------------- --------------- ---------------
$ 12,649 $ 81,394 $ 30,301
=============== =============== ===============
</TABLE>
In March 1995, the Company donated its Philadelphia building to a qualified
charity. At the time of the donation, the book value of the building was
$96,322.
16. QUARTERLY RESULTS (UNAUDITED):
----------------------------
The following tables summarize quarterly financial data for the fiscal year's
ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------------------
1997 Sept. 30 Dec. 31 March 31 June 30
---- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 3,245,693 $ 3,751,015 $ 3,260,066 $ 3,726,153
Cost of goods sold(1) 1,970,953 2,266,706 2,053,774 2,290,060
--------------- --------------- --------------- ---------------
Gross profit $ 1,274,740 $ 1,484,309 $ 1,206,292 $ 1,436,093
=============== =============== =============== ===============
Net income (loss) $ 149,010 $ 46,725 $ (142,292) $ (1,062,071)
=============== =============== =============== ===============
Primary and fully diluted earnings
(loss) per Common share
$ .04 $ .01 $ (.04) $ (.26)
=============== =============== =============== ===============
</TABLE>
38
<PAGE>
(1)During the current year, the first three quarters' inventory computation was
based on the prior year's gross profit percentage by department, which overall
was 38.5% (as adjusted for Thompson). The year-end actual inventory valuation
resulted in a 38.6% gross profit percentage. Therefore, fourth quarter results
reflect the entire year's percentage increase.
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------------------
1996 Sept. 30 Dec. 31 March 31 June 30
---- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 2,710,084 $ 3,181,420 $ 2,879,413 $ 3,143,386
Cost of goods sold(2) 1,662,983 1,776,816 1,754,900 2,098,501
--------------- --------------- --------------- ---------------
Gross profit $ 1,047,101 $ 1,404,604 $ 1,124,513 $ 1,044,885
=============== =============== =============== ===============
Net income (loss) $ 68,478 $ 177,750 $ 428,807 $ 70,104
=============== =============== =============== ===============
Primary and fully diluted earnings
(loss) per Common share
$ .02 $ .04 $ .11 $ .02
=============== ============== =============== ===============
</TABLE>
(2)During fiscal 1996, the first three quarters' inventory computation was based
on the prior year's gross profit percentage by department, which overall was
38.8%. The year-end actual inventory valuation resulted in a 41.2% gross profit
percentage. Therefore fourth quarter results reflect the entire year's
percentage decrease. The gross profit percentage decrease was a result of
increased costs due to expansion and construction of two facilities in the year
ended June 30, 1996.
17. SUBSEQUENT EVENT:
----------------
On August 7, 1997, the Company entered into a non-binding letter of intent with
Ashland Chemical Company, a division of Ashland, Inc., pertaining to the
potential purchase of certain of the Company's intellectual properties and
technologies for manufacturing of slurries used in chemical mechanical
planarization ("CMP") of wafers produced for the global micro-electronics
industry. The contemplated purchase will include worldwide rights to the
Company's proprietary CMP slurry manufacturing processes, formulas, patent
applications and trade secrets. The proposed transaction anticipates combining a
lump-sum payment with an ongoing royalty stream based on sales.
39
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
Change in Registrant's Certifying Accountant
- --------------------------------------------
Heffler, Radetich & Saitta was previously the principal accountant for the
Company. On June 23, 1997, the Company decided to terminate Heffler, Radetich &
Saitta's appointment as principal accountants of the Company and to engage
Arthur Andersen LLP as the Company's independent accountants. The Company's
anticipated worldwide expansion and growth initiated the change. The decision to
engage Arthur Andersen LLP and to terminate Heffler, Radetich & Saitta was
subsequently recommended to and approved by the members of the Company's Board
of Directors.
In connection with the audits of the three fiscal years ended June 30, 1996 and
the interim period through June 23, 1997, there were no disagreements with
Heffler, Radetich & Saitta on any matter of accounting principles or practices,
financial statement disclosures, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreements.
The audit reports of Heffler, Radetich & Saitta on the consolidated financial
statements of the Company as of June 30, 1996 and 1995, and for each of the
years in the three year period ended June 30, 1996, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
Disagreements with Accountants on Accounting and Financial Disclosures.
- -----------------------------------------------------------------------
None.
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- --------------------------------------------------------
(1) Executive Officers of the Company:
(a) The names, ages and positions with the Company of all of the
executive officers of the Company, none of whom are related by
blood, marriage or adoption to each other, are as follows:
<TABLE>
<CAPTION>
Name Age Position with the Registrant
---- --- ----------------------------
<S> <C> <C> <C>
Marvin E. Sternberg 63 Chairman of the Board, President and Chief
Executive Officer
Clarence F. Bartron 53 Vice President Ultralap Division
Joseph S. Sternberg 34 Vice President and Corporate Counsel
Mark E. Sternberg 30 Vice President Manufacturing-Ultralap Division
Jerome Lipkin 63 Vice President*
William Woodhead 60 Secretary/Treasurer
</TABLE>
*Resigned on April 28, 1997 from the positions of director and
executive officer.
(b) The executive officers hold their respective offices until the
first meeting of newly elected directors following the next
annual meeting of the Company and the election of successor
officers unless otherwise terminated by the Board of Directors.
(c) The following is a brief account of the business experience of
the executive officers of the Registrant:
Mr. Marvin E. Sternberg joined Moyco in March of 1974, as a
Management Consultant and was elected President of Moyco on
August 9, 1974. From 1965 to 1973, Mr. Sternberg was Trustee and
Operating Officer for the Robinson Trust, Philadelphia,
Pennsylvania. From 1965 to present, Mr. Sternberg has been a
partner and/or director in a number of other companies in the
Philadelphia, Pennsylvania, and Fort Lauderdale, Florida, areas
including the RBB Fund, a family of Mutual funds, and Cellucap
Manufacturing Company, a producer of disposable headwear and
garments. Mr. Sternberg has been a member of the Company's Board
of Directors since 1974.
Mr. Joseph Sternberg joined the Company on October 14, 1991, at
which time he was named Vice President and Corporate Counsel.
Prior to that time he was engaged in the private practice of
law.
Mr. Mark Sternberg joined Moyco on August 15, 1991 at which time
he was named Vice President-Manufacturing Ultralap Division
Mr. Jerome Lipkin joined Moyco on June 12, 1974 as assistant to
the Vice-President. He was elected to Vice-President in charge
of operations on March 20, 1978. Mr. Lipkin was a member of the
Company's Board of Directors from 1978 until his resignation
from the positions of director and executive officer on April
28, 1997.
Mr. William Woodhead joined Moyco on January 7, 1985 as
Controller. He was elected Secretary/Treasurer on December 18,
1985. Mr. Woodhead has been a member of the Company's Board of
Directors since 1985.
41
<PAGE>
(2) Directors of the Company:
(a) The following table sets forth the name of each director of the
Company and all offices presently held by him. The term of each
director will expire on such date as the Annual Meeting of
Shareholders is held and his successor is duly elected and
qualified.
<TABLE>
<CAPTION>
Name Age Other Position with Registrant
---- --- ------------------------------
<S> <C> <C> <C>
Marvin E. Sternberg 63 Chairman of the Board, President and Chief
Executive Officer
Irvin Paul 67 None
Marvin Cravetz 60 None
William Woodhead 60 Secretary/Treasurer
</TABLE>
Mr. Irvin Paul, DDS, has engaged in the practice of Dentistry,
with offices in Upper Darby, Pennsylvania, for more than thirty
years. Mr. Paul has been a member of Company's Board of
Directors since 1974.
Mr. Marvin Cravetz, DDS, was engaged in the practice of
Dentistry, with offices in Hatboro, Pennsylvania, for more than
twenty years. Mr. Cravetz has been a member of the Company's
Board of Directors since 1974.
The experience of the other directors is reported under Section
1 of ITEM 10 -- Executive Officers of the Company.
(b) There are no family relationships between any director or
executive officer of the Registrant.
42
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------
The following table shows for fiscal years ended June 30, 1997, 1996 and 1995,
the cash compensation, as well as certain other compensation paid to the named
executive officers:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term Compensation
---------------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------- ---------------------- --------------------
Securities Long-
Other Under- Term
Annual Restricted lying Incentive All
Name and principal Compen- Stock Options/ Plan Other
position Year Salary Bonus sation Award(s) SARs Payouts Compensation
-------- ---- ------ ----- ------ -------- ---- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marvin E. Sternberg 1997 $ 270,000 $ -- $ -- $ -- $ -- $ -- $3,450
Chairman of the Board, 1996 270,000 -- -- -- -- -- 3,450
President and CEO 1995 270,000 -- -- -- -- 1,450 4,620
Clarence F. Bartron 1997 131,593 -- -- -- -- -- 1,950
Vice President
Ultralap Division
Joseph S. Sternberg 1997 99,210 -- -- -- -- -- 2,193
Vice President
and Corporate
Counsel
Mark E. Sternberg 1997 98,850 -- -- -- -- -- 2,193
Vice President
Manufacturing
-Ultralap Division
Jerome Lipkin 1997 124,880 -- -- -- -- -- 2,995
Vice President 1996 112,470 10,000 -- -- -- -- 3,587
1995 103,200 10,000 -- -- -- 630 4,448
William Woodhead 1997 87,830 5,000 -- -- -- -- 2,184
Secretary/ 1996 78,200 10,000 4,800 -- -- -- 2,550
Treasurer 1995 70,900 10,000 4,800 -- -- 464 2,427
</TABLE>
STOCK OPTIONS
- -------------
The following table shows stock options exercised and fiscal year-end values for
the named executive officers under the Company's stock option plan. The plan
does not permit the grant of stock appreciation rights ("SARs"). There have been
no stock options granted in the current fiscal year to the named executive
officers.
43
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Shares Options/SARs At Fiscal Year End
Acquired on Value at Fiscal Year End Exercisable (2)/
Name Exercise (1) Realized (2) Exercisable Unexercisable
- ----------------------------- ------------ ----------------- --------------------- ------------------
<S> <C> <C> <C> <C>
Marvin E. Sternberg -- $ -- -- $ --/--
Clarence F. Bartron -- $ -- -- $ --/--
Joseph S. Sternberg -- $ -- -- $ --/--
Mark E. Sternberg -- $ -- 5,000 $32,500/--
Jerome Lipkin -- $ -- -- $ --/--
William Woodhead -- $ -- -- $ --/--
</TABLE>
(1) Upon exercise of an option, the optionee must pay the exercise price in
cash.
(2) Represents the difference between the fair market value of the common stock
underlying the option and the exercise price at exercise, or fiscal
year-end, respectively.
DIRECTORS COMPENSATION
- ----------------------
Each non-employee director receives options to purchase 1,000 shares of the
Company's Common stock for each meeting attended. The exercise price of these
options are equal to the fair market value of the Company's Common stock on the
date of grant. All directors who are also employees do not receive any
compensation for serving as directors.
44
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
(a) The following table sets forth information as of June 30, 1997 with respect
to any person who is known to the Registrant to be the beneficial owner of
more than 5% of any class of Registrant's voting securities:
<TABLE>
<CAPTION>
Shares Percentage
Beneficially of
Title of Class Name and Address Owned Class
-------------- ---------------- ----- -----
<S> <C> <C> <C>
Common stock Marvin E. Sternberg 2,922,565 (1) (2) 70.6%
937 Mt. Pleasant Rd.
Bryn Mawr, PA 19010
</TABLE>
(1) Of these shares 2,408,355 shares are held
by Marvin E. Sternberg, legally and
beneficially in his own name; 16,900
shares by Susan Sternberg, wife of said
Marvin E. Sternberg, legally and
beneficially in her own name; and 497,310
shares are held by said Susan Sternberg
together with T. Allen Lipsky in trusts
consisting of 165,770 shares each for the
respective beneficial interests of Joseph
S. Sternberg, Mark E. Sternberg and Janet
L. Sternberg, children of said Marvin E.
Sternberg and Susan Sternberg.
(2) None of Marvin E. Sternberg, Susan
Sternberg or T. Allen Lipsky claim any
beneficial interests in the shares herein
described which are not reported here for
his or her respective legal and beneficial
interest.
(b) The following table sets forth information, as of June 30, 1997, as to
each class of equity securities of the Registrant beneficially owned,
directly or indirectly, by all directors and officers of the Registrant,
as a group:
<TABLE>
<CAPTION>
Shares Percentage
Beneficially of
Title of Class Beneficial Owner Owned (1) Class
------------------- ---------------------------------- ------------------------------- -----------
<S> <C> <C> <C>
Common stock Marvin E. Sternberg 2,922,565 70.6%
Common stock Irvin Paul -- --
Common stock Marvin Cravetz 5,000 0.1%
Common stock Jerome Lipkin 128,900 3.1%
Common stock William Woodhead 10,300 0.2%
Common stock All Officers and Directors -- --
(5 in number) 3,066,765 74.1%
</TABLE>
(1) Refer to Footnotes (1) and (2) of previous
table.
45
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
No director or officer had any material interest, direct or indirect, in any
business transaction of the Company during the period July 1, 1996 through June
30, 1997, or in any such proposed transaction.
PART IV
-------
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- ----------------------------------------------------------------------------
FORM 8-K.
- ---------
Financial Statements: The following is a list of the Consolidated Financial
Statements of the Company and Supplementary data filed as part of Item 8 hereof:
Report of Independent Public Accountants
Consolidated Balance Sheets -- June 30, 1997 and 1996
Consolidated Statements of Operations -- For the Years Ended June 30, 1997,
1996 and 1995 Consolidated Statements of Shareholders' Equity -- For the
Years Ended June 30, 1997, 1996 and 1995 Consolidated Statements of Cash
Flows -- For the Years Ended June 30, 1997, 1996 and 1995 Notes to
Consolidated Financial Statements
Financial Statement Schedules: Included in Part IV of this report.
-----------------------------
Forthe Years Ended June 30, 1997, 1996 and 1995 --Schedule II -- Valuation
and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
Exhibits:
---------
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Heffler, Radetich & Saitta L.L.P.
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only, and not
filed.
46
<PAGE>
Reports On Form 8-K:
--------------------
1. The Company filed a Form 8-K on December 20, 1996 regarding the
government's investigation. See Item 3 to this Form 10-K for more
information relative to this government investigation.
2. The Company filed a Form 8-K on March 3, 1997 regarding its exclusive
$30,000,000 supply requirements contract with Nanophase Technologies
Corporation.
3. The Company filed a Form 8-K on April 3, 1997 regarding a patent
infringement lawsuit filed against the Company by Cabot Corporation.
See Item 3 of this Form 10-K for more information relative to this
litigation.
4. The Company filed a Form 8-K on April 14, 1997 regarding the
government's investigation. See Item 3 of this Form 10-K for more
information relative to this government investigation.
5. The Company filed an Amended Form 8-K on July 3, 1997 concerning a
change in the Company's independent public accountants.
6. The Company filed a Form 8-K on August 7, 1997 regarding the
government's investigation. See Item 3 of this Form 10-K for more
information relative to this government investigation. Additionally,
this Form 8-K announced the Company's non-binding letter of intent with
Ashland Chemical Company regarding the potential sale of certain of the
Company's intellectual property rights.
47
<PAGE>
MOYCO TECHNOLOGIES, INC.
------------------------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
FOR THE THREE YEARS ENDED JUNE 30, 1997
---------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------------------- -------------- ----------------------------------- ---------------- ------------
Additions
Balance at Charged Charged Balance at
Beginning to to Other End of
of Period Expense Accounts Deductions (1) Period
-------------- --------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Accounts receivable
reserves:
June 30, 1997 $ 78,990 $ 152,245 $ 57,065(2) $ 36,970 $ 251,330
============= =============== =============== ================ ============
June 30, 1996 $ 78,990 $ -- $ -- $ -- $ 78,990
============= =============== =============== ================ ============
June 30, 1995 $ 58,990 $ 20,000 $ -- $ -- $ 78,990
============= =============== =============== ================ ============
</TABLE>
(1) Represents accounts written off against the reserve.
(2) Represents balance at acquisition of Thompson.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MOYCO TECHNOLOGIES, INC.
Dated: September 29, 1997 BY: /s/Marvin E. Sternberg
--------------------------------
Marvin E. Sternberg
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
/s/Marvin E. Sternberg Dated: September 29, 1997
- --------------------------------
Marvin E. Sternberg
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer) and Director
/s/William Woodhead Dated: September 29, 1997
- --------------------------------
William Woodhead
Secretary/Treasurer, Principal Financial Officer
and Principal Accounting Officer and Director
/s/ Marvin Cravetz, DDS Dated: September 29, 1997
- --------------------------
Marvin Cravetz, DDS
Director
49
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-5574.
/s/ Arthur Andersen LLP
-----------------------------------
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
September 29, 1997
50
<PAGE>
EXHIBIT 23.2
CONSENT
We consent to the incorporation by reference in the Annual Report (Form 10-K) of
Moyco Technologies, Inc. of our report dated August 28, 1996, included in the
1996 Annual Report to Shareholders of Moyco Technologies, Inc.
Our audits also included the financial statement schedule of Moyco Technologies,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ Heffler, Radetich & Saitta L.L.P.
Philadelphia, PA
September 29, 1997
51
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,454,083
<SECURITIES> 0
<RECEIVABLES> 2,199,615
<ALLOWANCES> (251,330)
<INVENTORY> 3,902,141
<CURRENT-ASSETS> 7,949,157
<PP&E> 15,044,732
<DEPRECIATION> (5,105,474)
<TOTAL-ASSETS> 15,044,732
<CURRENT-LIABILITIES> 4,219,857
<BONDS> 0
0
0
<COMMON> 23,661
<OTHER-SE> 4,796,904
<TOTAL-LIABILITY-AND-EQUITY> 15,044,732
<SALES> 13,982,927
<TOTAL-REVENUES> 13,982,927
<CGS> 8,581,493
<TOTAL-COSTS> 8,581,493
<OTHER-EXPENSES> 6,284,234
<LOSS-PROVISION> 152,245
<INTEREST-EXPENSE> 505,432
<INCOME-PRETAX> (1,388,232)
<INCOME-TAX> (379,604)
<INCOME-CONTINUING> (1,388,232)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,008,628)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
