<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File No. 0-4123
MOYCO TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1697233
- ------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
200 Commerce Drive
Montgomeryville, Pennsylvania 18936
- ---------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code:) (215) 855-4300
--------------
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 _____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of September 30, 1997: 4,138,340 shares of common stock, par
value $.005 per share.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
MOYCO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,712,866 $ 1,454,083
Accounts receivable, net of reserves of
$251,330 and $251,330 2,130,401 1,948,285
Inventories, estimated (Note 3 and 4) 4,243,066 3,902,141
Deferred income taxes 488,676 507,198
Prepaid taxes 99,708 32,843
Prepaid expenses 53,431 104,607
------------ ------------
Total current assets 8,728,148 7,949,157
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 602,433
Buildings and improvements 4,576,882 4,569,460
Machinery and equipment 5,744,919 5,717,084
Furniture and fixtures 644,445 641,368
Automotive equipment 48,511 48,511
------------ ------------
11,617,190 11,578,856
Less- Accumulated depreciation and amortization (5,289,570) (5,105,474)
------------ ------------
Net property, plant and equipment 6,327,620 6,473,382
------------ ------------
OTHER ASSETS:
Goodwill, less accumulated amortization of
$36,103 and $28,226 436,517 444,394
Other 175,726 177,799
------------ ------------
Total other assets 612,243 622,193
------------ ------------
$ 15,668,011 $ 15,044,732
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 500,000 $ 1,125,000
Current portion of long-term debt 1,162,972 846,928
Accounts payable 1,510,363 1,352,569
Accrued expenses 617,492 895,360
------------ ------------
Total current liabilities 3,790,827 4,219,857
------------ ------------
OTHER LONG-TERM LIABILITIES 514,000 330,000
------------ ------------
LONG-TERM DEBT 6,200,458 5,255,263
------------ ------------
DEFERRED INCOME TAXES 398,809 419,047
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
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 4,732,215 shares issued 23,661 23,661
Additional paid-in capital 3,981,584 3,981,584
Retained earnings 889,845 946,493
Less- Treasury stock of 593,875 and 593,875 shares
at cost (131,173) (131,173)
------------ ------------
Total shareholders' equity 4,763,917 4,820,565
------------ ------------
$ 15,668,011 $ 15,044,732
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30
--------------------------------
1997 1996
------------- ------------
<S> <C> <C>
NET SALES $ 3,585,511 $ 3,245,693
COST OF GOODS SOLD 2,044,653 1,967,748
----------- -----------
Gross profit 1,540,858 1,277,945
OPERATING EXPENSES:
Sales and marketing 580,948 451,262
Research and development 186,929 3,205
General and administrative 717,354 446,853
----------- -----------
Income from operations 55,627 376,625
INTEREST EXPENSE, net (181,793) (163,626)
OTHER INCOME, net 1,025 4,416
----------- -----------
Income (loss) before taxes (125,141) 217,415
INCOME TAX BENEFIT (EXPENSE) 68,493 (68,405)
----------- -----------
NET INCOME (LOSS) $ (56,648) $ 149,010
=========== ===========
PRIMARY AND FULLY DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ (.01) $ 0.04
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,138,340 4,118,738
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
September 30
----------------------------------
1997 1996
--------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (56,648) $ 149,010
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Provision for accounts receivable reserves -- 38,061
Depreciation and amortization 194,605 195,033
Deferred income taxes (1,716) --
(Increase) decrease in-
Accounts receivable (182,116) 11,640
Inventories (340,925) (150,492)
Prepaid taxes and expenses (15,689) 57,670
Other assets (559) 3,147
Increase (decrease) in-
Accounts payable 157,794 (143,373)
Reserves for litigation (169,750) --
Other accrued expenses 75,882 (119,792)
----------- -----------
Net cash provided by (used in) operating activities (339,122) 40,904
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (38,334) (46,111)
Acquisition of Thompson Dental Mfg. Co., net cash acquired -- 1,663
Net cash used in investing activities (38,334) (44,448)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under lines of credit (625,000) (100,000)
Proceeds from long-term debt 1,600,000 750,000
Payments of long-term debt (338,761) (533,021)
Proceeds from exercise of stock options -- 1,425
----------- -----------
Net cash provided by financing activities 636,239 118,404
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 258,783 114,860
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,454,083 1,402,088
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,712,866 $ 1,516,948
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 159,064 $ 175,926
=========== ===========
Income taxes paid $ -- $ 4,638
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
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 ("CMP") and other high-tech manufacturing procedures
which require extremely fine abrasive films and/or slurries to achieve
consistently uniform polishing results.
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. This proposed transaction will not be completed until
satisfactory due diligence is performed by both parties.
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
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<PAGE>
purchase price over the fair value of net assets acquired was allocated to
goodwill and is being amortized on a straight-line basis over 15 years.
The noncash assets and liabilities that were consolidated as a result of the
Thompson acquisition are as follows:
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
=========
The following unaudited pro forma information for the three months ended
September 30, 1996, is presented as if the acquisition of Thompson had occurred
on July 1, 1996. 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.
Unaudited pro forma net sales $3,540,808
==========
Unaudited pro forma operating income $ 379,367
==========
Unaudited pro forma net income $ 134,495
==========
Unaudited pro forma earnings per
Common share $ .03
==========
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 for the three months ended September 30,
1996. The goodwill amortization adjustment was $3,282 for the three months ended
September 30, 1996.
-2-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Quarterly Financial Information and Results of Operations
In the opinion of the Company, the accompanying unaudited Consolidated Financial
Statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 1997, the results of operations for the three months ended September 30,
1997 and 1996, and the cash flows for the three months ended September 30, 1997
and 1996. While the Company believes that the disclosures presented are adequate
to make the information not misleading, these Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements and the
notes included in the Company's latest annual report on Form 10-K.
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 September 30, 1997
consist of certificates of deposit and an investment in a money market account.
Interest income earned on the investment of cash was $10,807 and $12,300 for the
three months ended September 30, 1997 and 1996, respectively.
Inventories
Inventories are valued at the lower of cost, determined on the first-in,
first-out method, or market. Ending inventories at interim periods are primarily
estimated using the gross profit method.
-3-
<PAGE>
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.
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
$7,877 and $4,595 for the three months ended September 30, 1997 and 1996,
respectively. The 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 September 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 periods have been reclassified to conform
with the current-period presentation.
Research and Development
Research and development expenses are charged to expense as incurred.
-4-
<PAGE>
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 (loss) per share calculation. For
the three months ended September 30, 1997 and 1996, the weighted average shares
outstanding for primary earnings (loss) per share were 4,138,340 and 4,118,738,
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.
Revenue Recognition
The Company recognizes revenue upon the shipment of its products.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs are
included in sales and marketing expenses on the accompanying consolidated
statements of operations.
-5-
<PAGE>
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 September 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.
4. INVENTORIES:
The components of inventories are as follows:
September 30, June 30,
1997 1997
---------- ----------
Raw materials and supplies $1,400,212 $1,418,353
Work-in-process 1,272,920 1,265,386
Finished goods 1,569,934 1,218,402
---------- ----------
$4,243,066 $3,902,141
========== ==========
5. ACCRUED EXPENSES:
September 30, June 30,
1997 1997
-------- --------
Compensation and related benefits $257,839 $222,279
Reserve for litigation (Note 9 ) 171,250 525,000
Other 188,403 148,081
-------- --------
$617,492 $895,360
======== ========
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 September 30, 1997) and are secured by all
assets of the Company.
Thompson Dental Manufacturing Co., Inc., a subsidiary of the Company, is a
guarantor and surety of borrowings under these credit facilities.
-6-
<PAGE>
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
------------ ------------
<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. $ 1,341,168 $ 1,354,090
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%). Subordinated to prime lender. 1,200,000 1,350,000
Termnote payable in monthly installments of $30,000, plus interest at
prime rate plus 1/2%, through August 1, 2000. 1,020,000 1,110,000
Mortgage payable to municipal authority in monthly installments of $6,371,
including interest at 2%, through July 1, 2010. 854,798 874,501
Notepayable with monthly interest-only payments through December 31,
1997, thereafter payable in 60 equal monthly payments plus interest
at prime rate plus 1/4%, through December 31, 2002. 850,000 --
Termnote payable in monthly installments of $12,500, plus interest at
prime rate plus 1/2%, through July 1, 2002. 725,000 --
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. 456,009 460,891
Mortgage payable to municipal authority in monthly installments of $1,952,
including interest at 2%, through April 1, 2010. 254,221 260,309
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, June 30,
1997 1997
------------ ------------
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. 244,783 257,683
Mortgage payable to bank in monthly installments of $2,543, including
interest at prime plus 1.5%, through December 1, 2011. 236,616 237,696
Notepayable in monthly installments of $2,333, plus interest at 8.65%,
through November 1, 2000. 86,341 95,673
Capital lease obligation payable in monthly installments of $2,009,
including interest at 10%, through December 2000. 88,553 92,893
Autoloan payable in monthly installments of $838, plus interest at
7.75%, through June 1, 1998. 5,941 8,455
----------- -----------
7,363,430 6,102,191
Less- Current portion (1,162,972) (846,928)
----------- -----------
$ 6,200,458 $ 5,255,263
=========== ===========
</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 September 30, 1997, long-term debt matures as follows:
1998 $ 1,162,972
1999 1,210,702
2000 1,161,222
2001 847,187
2002 510,279
Thereafter 2,471,068
-------------
$ 7,363,430
=============
-8-
<PAGE>
8. 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.
Financial information for each business segment for the three months ended
September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- -----------
<S> <C> <C>
Net Sales:
Domestic and U.S. government customers-
Dental Supplies $ 2,026,339 $ 1,740,451
Precision Abrasives 950,494 1,101,220
International customers-
Dental Supplies 421,938 261,791
Precision Abrasives 186,740 142,231
-------------- -------------
$ 3,585,511 $ 3,245,693
============== =============
Operating income (loss):
Dental Supplies $ 245,231 $ 255,671
Precision Abrasives (189,604) 120,954
--------------- -------------
$ 55,627 $ 376,625
=============== =============
Depreciation and amortization:
Dental Supplies $ 128,225 $ 134,394
Precision Abrasives 66,380 60,639
--------------- -------------
$ 194,605 $ 195,033
=============== =============
Capital expenditures:
Dental Supplies $ 22,410 $ 22,356
Precision Abrasives 15,924 23,755
--------------- -------------
$ 38,334 $ 46,111
=============== =============
</TABLE>
9. 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. The Company believes the Cabot complaint to be without any basis
and has directed its counsel defend this litigation vigorously. The Company in
its answer and counterclaim to the Cabot complaint contends that the Company did
not infringe on the
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<PAGE>
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.
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 September 30, 1997 consolidated financial statements.
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. As a result of the
negotiations between the Company and the Government, a plea agreement was filed
in the United States District Court for the Eastern District of Pennsylvania.
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. On October 24, 1997, the judge assigned to the
matter determined the fine related to the criminal allegations. The fine was
$350,000, which was within the range as set forth in the plea agreement. The
fine is payable in five equal annual installments of $70,000 plus interest
commencing in October 1997.
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 of 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 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 recorded a charge in the quarter ended
June 30, 1997 to fully reserve for both the civil and criminal aspects of the
foot powder matter; and therefore, no additional charges were required during
the three months ended September 30, 1997.
-10-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations
Safe Harbor for Forward-Looking Statements
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 a 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 II, Item 1 and
Part I, Footnote No. 9, to the Consolidated Financial Statements of this Form
10-Q.)
Overview
The Company recorded a loss of $56,648 for the three months ended September 30,
1997, primarily caused by legal and professional fees of approximately $140,000
related to the conclusion of the foot powder investigation and the discovery
stage of the Cabot Corporation litigation. Additionally, the Company has
continued to strategically invest significant funds in research and development
to refine its CMP slurry products in an effort to increase its commercial sales
of CMP slurries. The Company also believes that operations suffered as a result
of management's focus on the foot powder investigation. For this reason, the
Company believes that it was in the best interest of its shareholders and the
Company to resolve the matter and focus its attention on operations and various
growth opportunities.
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
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<PAGE>
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. This proposed transaction will not be
completed until satisfactory due diligence is performed by both parties.
Summary
The following table sets forth for the periods indicated the Company's key
financial information by segment.
For the Three Months Ended
September 30
-------------------------------------
1997 1996
---------------- ----------------
Net Sales:
Dental Supplies $ 2,448,277 $ 2,002,242
Precision Abrasives 1,137,234 1,243,451
---------------- ----------------
$ 3,585,511 $ 3,245,693
================ ================
Gross Profit:
Dental Supplies $ 1,101,788 $ 839,178
Precision Abrasives 439,070 438,767
---------------- ----------------
$ 1,540,858 $ 1,277,945
================ ================
Operating Income (Loss):
Dental Supplies $ 245,231 $ 255,671
Precision Abrasives (189,604) 120,954
---------------- ----------------
$ 55,627 $ 376,625
================ ================
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Results of Operations
Net sales for the three months ended September 30, 1997 increased $339,818 from
the three months ended September 30, 1996. Net sales in the Dental Supplies
segment increased $446,035 primarily due to the Company's acquisition of
Thompson in the first quarter of fiscal 1997. Net sales in the Precision
Abrasives segment decreased $106,217 from $1,243,451 for the three months ended
September 30, 1996 to $1,137,234 for the three months ended September 30, 1997
due to a shift in the product mix to the Company's higher gross profit products
and less focus on selling higher volume lower margin products.
Gross profit for the three months ended September 30, 1997 increased $262,913
from the three months ended September 30, 1996. Gross profit in the Dental
Supplies segment increased $262,610 from $839,178 (41.9% of Dental Supplies net
sales) for the three months
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<PAGE>
ended September 30, 1996 to $1,101,788 (45.0% of Dental Supplies net sales) for
the three months ended September 30, 1997. Gross profit in the Precision
Abrasives segment remained relatively constant, increasing $303 from $438,767
(35.3% of Precision Abrasives net sales) for the three months ended September
30, 1996 to $439,070 (38.6% of Precision Abrasives net sales) for the three
months ended September 30, 1997. The increase in gross profit in the Dental
Supplies segment is due to the increased sales resulting from the Thompson
acquisition. As the Company continues to primarily use the gross profit method
to estimate ending inventories at interim periods, changes in gross profit as a
percentage of net sales are due to changes in the product mix offered by the
Company; therefore, the aforementioned shift in the product mix in the Precision
Abrasives segment caused the gross profit as a percentage on net sales to
increase.
Sales and marketing expenses increased $129,686 from $451,262 (13.9% of net
sales) for the three months ended September 30, 1996 to $580,948 (16.2% of net
sales) for the three months ended September 30, 1997 partially as a result of
the Thompson acquisition and partially due to increased advertising spending by
the Company. General and administrative expenses increased $270,501 from
$446,853 (13.8% of net sales) to $717,354 (20.0% of net sales) due to the
Thompson acquisition, as well as the legal and professional fees of
approximately $140,000 related to the conclusion of the foot powder
investigation and the discovery stage of the Cabot Corporation litigation.
Research and development expenses increased $183,724 due to the investment of
significant funds by the Company, in research and development to refine its CMP
slurry products in an effort to increase its commercial sales of CMP slurries.
Interest expense, interest income and other income remained relatively constant
between periods.
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 $339,122 was used in operating activities in the three months ended
September 30, 1997. Net cash of $40,904 was provided by operating activities in
the three months ended September 30, 1996. The decreasing cash flows from
operations between periods were a result of the net loss for the three months
ended September 30, 1997, as well as the funding of an increase in inventory and
the timing of accounts receivable collections from the Company's larger
customers at September 30, 1997.
Expenditures for property, plant and equipment totaled $38,334 for the three
months ended September 30, 1997 and $46,111 for the three months ended September
30, 1996.
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<PAGE>
Proceeds received from long-term debt, were $1,600,000 and $750,000 for the
three months ended September 30, 1997 and 1996, respectively. During the three
months ended September 30, 1997, the Company refinanced a portion of its
line of credit with long-term debt with a bank. For the three months ended
September 30, 1997 and 1996, the Company made payments on long-term debt of
$338,761 and $533,021, respectively.
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. Management intends to
renew the line of credit under similar terms and conditions. The line of credit
bears interest at the prime rate and is secured by substantially all of the
Company's assets.
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 $755,000 over five years relating to the settlement of the foot powder matter
(see Legal Proceedings in Part II, Item 1 and Part I, Footnote No. 9, to the
Consolidated Financial Statements of this Form 10-Q). 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.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to Part I, Footnote No. 9 to the Consolidated Financial
Statements of this Form 10-Q for the appropriate information concerning the
Company's legal proceedings.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following is a list of exhibits filed as part of the Form 10-Q.
27.0 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only, and not filed.
(b) Reports on Form 8-K
1. The Company filed a Form 8-K on June 27, 1997, as amended by
an Amended Form 8-K on July 3, 1997 concerning a change in
the Company's independent public accountants.
2. The Company filed a Form 8-K on August 7, 1997 regarding the
government's investigation. See Part II, Item 1 of this Form
10-Q 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 sales of certain of the
Company's intellectual property rights.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MOYCO TECHNOLOGIES, INC.
Dated: November 12, 1997 BY: /s/Marvin E. Sternberg
------------------------------------------
Marvin E. Sternberg
Chairman of the Board, President
and Chief Executive Officer (Principal
Executive Officer) and Director
Dated: November 12, 1997 BY: /s/William G. Woodhead
------------------------------------------
William G. Woodhead
Secretary/Treasurer, Principal Financial
Officer and Principal Accounting
Officer and Director
-16-
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