<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 December 31, 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 Identification Number)
incorporation or organization)
200 Commerce Drive
Montgomeryville, Pennsylvania 18936
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including (215) 855-4300
area code:) ------------------------------------
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 December 31, 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
December 31, June 30,
1997 1997
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,262,765 $ 1,454,083
Accounts receivable, net of reserves of
$251,330 2,266,906 1,948,285
Other receivables 774,703 --
Inventories, estimated (Notes 3 and 4) 4,192,447 3,902,141
Deferred income taxes 498,821 507,198
Prepaid taxes -- 32,843
Prepaid expenses 39,260 104,607
----------- -----------
Total current assets 10,034,902 7,949,157
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 602,433
Buildings and improvements 4,584,443 4,569,460
Machinery and equipment 5,660,724 5,717,084
Furniture and fixtures 644,445 641,368
Automotive equipment 48,511 48,511
----------- -----------
11,540,556 11,578,856
Less-Accumulated depreciation and amortization (5,462,294) (5,105,474)
----------- -----------
Net property, plant and equipment 6,078,262 6,473,382
----------- -----------
OTHER ASSETS:
Goodwill, less accumulated amortization of
$43,980 and $28,226 428,640 444,394
Other 280,814 177,799
----------- -----------
Total other assets 709,454 622,193
----------- -----------
$16,822,618 $15,044,732
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31, June 30,
1997 1997
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Line of credit $ 650,000 1,125,000
Current portion of long-term debt 1,186,023 846,928
Accounts payable 1,458,851 1,352,569
Income taxes payable 336,580 --
Accrued expenses 704,732 895,360
----------- -----------
Total current liabilities 4,336,186 4,219,857
----------- -----------
OTHER LONG-TERM LIABILITIES 521,000 330,000
----------- -----------
LONG-TERM DEBT 5,927,827 5,255,263
----------- -----------
DEFERRED INCOME TAXES 434,811 419,047
----------- -----------
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 shares issued 23,661 23,661
Additional paid-in capital 3,981,584 3,981,584
Retained earnings 1,728,722 946,493
Less-Treasury stock of 593,875 shares at cost (131,173) (131,173)
----------- -----------
Total shareholders' equity 5,602,794 4,820,565
----------- -----------
$16,822,618 $15,044,732
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
December 31 December 31
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $4,208,407 $3,751,015 $7,793,918 $6,996,708
COST OF GOODS SOLD 2,395,499 2,266,706 4,440,152 4,237,659
---------- ---------- ---------- ----------
Gross profit 1,812,908 1,484,309 3,353,766 2,759,049
OPERATING EXPENSES:
Sales and marketing 718,624 576,786 1,299,572 1,028,048
Research and development 791,825 16,143 978,754 19,348
General and administrative 769,976 706,473 1,487,330 1,150,121
---------- ---------- ---------- ----------
Income (loss) from
operations (467,517) 184,907 (411,890) 561,532
INTEREST EXPENSE, net (134,545) (163,431) (316,338) (327,057)
GAIN ON SALE OF CMP BUSINESS 1,660,483 -- 1,660,483 --
GAIN ON SALE OF PARTICLE DISPERSION TECHNOLOGY 223,000 -- 223,000 --
OTHER INCOME, net 19,602 31,453 20,627 35,869
---------- ---------- ---------- ----------
Income before taxes 1,301,023 52,929 1,175,882 270,344
INCOME TAX EXPENSE (462,146) (6,204) (393,653) (74,609)
---------- ---------- ---------- ----------
NET INCOME $ 838,877 $ 46,725 $ 782,229 $ 195,735
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ .20 $ .01 $ .19 $ .05
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ .20 $ .01 $ .19 $ .05
========== ========== ========== ==========
</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
Six Months Ended
December 31
---------------------------
1997 1996
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income 782,229 195,735
Adjustments to reconcile net income to net cash
used in operating activities-
Provision for accounts receivable reserves -- 76,123
Depreciation and amortization 392,257 381,988
Deferred income taxes 24,141 (10,000)
Gain on sale of CMP business (1,660,483) --
Gain on sale of particle dispersion technology (223,000) --
(Increase) decrease in-
Accounts receivable (318,621) (100,136)
Other accounts receivable (774,703) --
Inventories (540,306) (230,071)
Prepaid taxes and expenses 98,190 47,369
Other assets (7,279) (5,978)
Increase (decrease)in-
Accounts payable 106,282 (154,005)
Income taxes payable 336,580 --
Reserve for litigation settlements (162,610) --
Other accrued expenses (272,018) (250,697)
----------- ----------
Net cash used in operating activities (2,219,341) (49,672)
----------- ----------
INVESTING ACTIVITIES:
Purchases of and deposits on property, plant
and equipment (181,636) (61,144)
Acquisition of Thompson Dental Mfg. Co., net cash
acquired -- 1,663
Proceeds from sale of CMP business 2,450,000 --
Proceeds from sale of particle dispersion technology 223,000 --
----------- ----------
Net cash provided by (used in) investing activities 2,491,364 (59,481)
----------- ----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit (475,000) 650,000
Proceeds from long-term debt 1,600,000 151,801
Payments of long-term debt (588,341) (690,159)
Proceeds from exercise of stock options -- 1,425
----------- ----------
Net cash provided by financing activities 536,659 113,067
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 808,682 3,914
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,454,083 1,402,088
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,262,765 $1,406,002
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 344,624 354,022
=========== ==========
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
DECEMBER 31, 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 December 31, 1997, the Company sold its CMP assets and CMP business product
line for the electronics industry and related intellectual property to EKC
Technology, Inc. ("EKC"), a subsidiary of ChemFirst Inc. for $2,450,000 in
cash, as well as a deferred payment by EKC contingent on sales of CMP products
during the period through June 30, 1999, and varying royalties based on sales of
CMP products through 2004. This transaction resulted in a pre-tax gain of
$1,660,483 for the Company. In connection with the sale, EKC has agreed that
during 1999, it would purchase a portion of the Company's raw material
inventory as of December 31, 1997 for $250,000. As of December 31, 1997,
$774,703 related to this sale had not been received by the Company and is
included in other receivables on the accompanying consolidated balance sheet.
Subsequent to December 31, 1997, the Company received this balance.
Also on December 31, 1997, the Company sold certain particle dispersion
technology to Nanophase Technologies Corporation ("Nanophase") for $223,000 in
cash, resulting in a one-time pre-tax gain of $223,000.
During the three months ended December 31, 1997, the Company made a one-time
payment of $775,000 to Nanophase relating to certain research and development
fees.
<PAGE>
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 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 six months ended
December 31, 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 period presented and is not necessarily
indicative of the operating results to be expected in the future.
<PAGE>
Unaudited pro forma net sales $7,291,823
==========
Unaudited pro forma operating income $ 564,274
==========
Unaudited pro forma net income $ 181,220
==========
Unaudited pro forma basic earnings per
Common share $ .04
==========
Unaudited pro forma diluted earnings per
Common share $ .04
==========
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 six months ended December 31,
1996. The goodwill amortization adjustment was $3,282 for the six months ended
December 31, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Quarterly Financial Information and Results of Operations
In the opinion of management, the accompanying unaudited Consolidated
Financial Statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position as
of December 31, 1997, the results of operations for the three and six months
ended December 31, 1997 and 1996, and the cash flows for the six months ended
December 31, 1997 and 1996. While management 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.
<PAGE>
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 December 31, 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 December 31, 1997 and 1996, respectively,
and $28,392 and $22,284 for the six months ended December 31, 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.
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 for the three months ended December 31, 1997 and 1996, and
$15,754 and $12,472 for the six months ended December 31, 1997 and 1996,
respectively. The Company evaluates the realizability of intangible assets
<PAGE>
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 December 31, 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.
Earnings 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.
The Company was required to and did adopt SFAS No. 128 during the period ended
December 31, 1997, as earlier application was not permitted. As required by
SFAS No. 128, all prior-period earnings per Common share data has been
restated to conform with the provisions of this statement.
<PAGE>
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per Common share computations:
<TABLE>
<CAPTION>
For the Three Months Ended December 31
---------------------------------------------------------------------------
1997 1996
------------------------------------ ----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- --------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
Common share
Net income $ 838,877 4,138,340 $ .20 $ 46,725 4,140,340 $ .01
====== =======
Effect of dilutive securities
Stock options -- 10,483 -- 9,459
----------- --------- ---------- ---------
Diluted earnings per
Common share
Net income and assumed
conversions $ 838,877 4,148,823 $ .20 $ 46,725 4,149,799 $ .01
=========== ========= ====== ========== ========= =======
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended December 31
---------------------------------------------------------------------------
1997 1996
------------------------------------ ----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- --------- ------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per
Common share
Net income $ 782,229 4,138,340 $ .19 $ 195,735 4,116,441 $ .05
====== =======
Effect of dilutive securities
Stock options -- 11,581 -- 10,626
----------- --------- ---------- ---------
Diluted earnings per
Common share
Net income and assumed
conversions $ 782,229 4,149,921 $ .19 $ 195,735 4,127,067 $ .05
=========== ========= ====== ========== ========= =======
</TABLE>
Options to purchase 4,475 shares of Common stock at $6.50 per share were
outstanding during the three months ended December 31, 1997 and the three and
six months ended December 31, 1996, but were not included in the respective
computations of diluted earnings per Common share because the options'
exercise prices were greater than the average market price of the Common
shares during the respective periods. The options, which expire in October
2006, were still outstanding as of December 31, 1997.
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.
<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 December 31, 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:
December 31, June 30,
1997 1997
---------- ----------
Raw materials and supplies $1,509,281 $1,418,353
Work-in-process 1,383,507 1,265,386
Finished goods 1,299,659 1,218,402
---------- ----------
$4,192,447 $3,902,141
========== ==========
<PAGE>
5. ACCRUED EXPENSES:
December 31, June 30,
1997 1997
---------- ----------
Compensation and related benefits $ 216,273 $ 222,279
Reserve for litigation settlements (Note 9) 171,390 525,000
Other 317,069 148,081
---------- ----------
$ 704,732 $ 895,360
========== ==========
6. LINE OF CREDIT:
The Company had a line of credit with a bank under which it could borrow up to
$3,000,000 through December 31, 1997. Borrowings under the line bore interest
at prime (8.5% at December 31, 1997) and were secured by all assets of the
Company. Subsequent to December 31, 1997, the line was extended to March 31,
1998, subject to renewal. As of December 31, 1997, $650,000 was outstanding
under this line of credit.
Thompson Dental Manufacturing Co., Inc., a subsidiary of the Company, is a
guarantor and surety of borrowings under this credit facility.
<PAGE>
7. LONG-TERM DEBT:
December 31, June 30,
1997 1997
---------- ----------
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. $1,327,603 $1,354,090
Note payable 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. 1,125,000 1,350,000
Term note payable in monthly installments of
30,000, plus interest at prime plus 1/2%, through
August 1, 2000. 930,000 1,110,000
Mortgage payable to municipal authority in monthly
installments of $6,371, including interest at 2%,
through July 1, 2010. 844,898 874,501
Note payable with monthly interest-only payments
through December 31, 1997; thereafter, payable in
60 equal monthly payments plus interest at prime
plus 1/4% through December 31, 2002. 850,000 --
Term note payable in monthly installments of
$12,500, plus interest at prime
plus 1/4% through July 1, 2002. 700,000 --
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. 450,909 460,891
Mortgage payable to municipal authority in monthly
installments of $1,952, including interest at 2%
through April 1, 2010. 251,161 260,309
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. 231,534 257,683
<PAGE>
December 31, June 30,
1997 1997
---------- ----------
Mortgage payable to bank in monthly installments of
$2,543, including interest at prime plus 1.5%
through December 1, 2011. $235,035 $237,696
Note payable in monthly installments of $2,333, plus
interest at 8.65% through November 1, 2000. 79,342 95,673
Capital lease obligation payable in monthly
installments of $2,009, including interest at 10%
through December 2000. 84,104 92,893
Auto loan payable in monthly installments of $838,
plus interest at 7.75% through June 1, 1998. 4,264 8,455
----------- -----------
7,113,850 6,102,191
Less-Current portion (1,186,023) (846,928)
----------- -----------
$ 5,927,827 $ 5,255,263
=========== ===========
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 December 31, 1997, long-term debt matures as follows:
1998 1,186,023
1999 1,273,398
2000 1,135,345
2001 865,357
2002 479,334
Thereafter 2,174,393
-----------
$ 7,113,850
===========
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.
<PAGE>
Financial information for each business segment for the three and six months
ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended December 31 Ended December 31
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales:
Domestic and U.S.
government customers-
Dental Supplies $2,171,704 $2,156,223 $4,198,043 $3,896,674
Precision Abrasives 1,128,664 1,065,511 2,079,138 2,166,731
International customers-
Dental Supplies 702,623 404,023 1,124,561 665,814
Precision Abrasives 205,416 125,258 392,176 267,489
---------- ---------- ---------- ----------
$4,208,407 $3,751,015 $7,793,918 $6,996,708
========== ========== ========== ==========
Operating income (loss):
Dental Supplies $ 338,426 $ 206,376 $ 583,657 $ 462,047
Precision Abrasives (805,943) (21,469) (995,547) 99,485
---------- ---------- ---------- ----------
$ (467,517) $ 184,907 $ (411,890) $ 561,532
========== ========== ========== ==========
Depreciation and Amortization:
Dental Supplies $ 116,290 $ 125,469 $ 244,515 $ 259,863
Precision Abrasives 81,362 61,486 147,742 122,125
---------- ---------- ---------- ----------
$ 197,652 $ 186,955 $ 392,257 $ 381,988
========== ========== ========== ==========
Capital expenditures:
Dental Supplies $ 70,180 $ 11,978 $ 92,590 $ 34,334
Precision Abrasives 73,122 3,055 89,046 26,810
---------- ---------- ---------- ----------
$ 143,302 $ 15,033 $ 181,636 $ 61,144
========== ========== ========== ==========
</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 to defend this litigation vigorously. 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.
<PAGE>
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 December 31, 1997 consolidated financial
statements.
Foot Powder Investigation
As noted in the Company's Form 10-Q for the period ended September 30, 1997,
the investigation of foot powder manufactured by the Company for the U.S.
Department of Defense has been settled. The Company will pay a $350,000 fine
in five annual installments commencing within 90 days of the judgment date,
plus interest payable at 5.42% per annum which is due at the end of the
payout. The Company will also pay $505,000 for the settlement and restitution
of related civil claims in five annual installments commencing within 10
days of the settlement date, without interest. The Company has made the first
of each of these annual payments. The payment to settle the civil matter is
secured by an irrevocable letter of credit the Company obtained from a bank.
<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 I, Note No. 9 to the Consolidated Financial Statements of
this Form 10-Q.)
<PAGE>
Overview
On December 31, 1997, the Company sold its CMP assets and CMP business product
line for the electronics industry and related intellectual property to EKC, a
subsidiary of ChemFirst Inc. for $2,450,000 in cash, as well as a deferred
payment by EKC contingent on sales of CMP products during the period through
June 30, 1999, and varying royalties based on sales of CMP products through
2004. This transaction resulted in a pre-tax gain of $1,660,483 for the
Company.
Also on December 31, 1997, the Company sold certain particle dispersion
technology to Nanophase for $223,000 in cash, resulting in a one-time pre-tax
gain of $223,000.
As a result of the above transactions, the Company recorded net income of
$838,877 for the three months ended December 31, 1997 and net income of
$782,229 for the six months ended December 31, 1997.
Summary
The following table sets forth for the periods indicated the Company's key
financial information by segment.
For the Three Months For the Six Months
Ended December 31 Ended December 31
----------------------- ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Net Sales:
Dental Supplies $2,874,327 $2,560,246 $5,322,604 $4,562,488
Precision Abrasives 1,334,080 1,190,769 2,471,314 2,434,220
---------- ---------- ---------- ----------
$4,208,407 $3,751,015 $7,793,918 $6,996,708
========== ========== ========== ==========
Gross Profit:
Dental Supplies $1,301,325 $1,073,369 $2,403,113 $1,912,547
Precision Abrasives 511,583 410,940 950,653 846,502
---------- ---------- ---------- ----------
$1,812,908 $1,484,309 $3,353,766 $2,759,049
========== ========== ========== ==========
Operating Income (Loss):
Dental Supplies $ 338,426 $ 206,376 $ 583,657 $ 462,047
Precision Abrasives (805,943) (21,469) (995,547) 99,485
---------- ---------- ---------- ----------
$ (467,517) $ 184,907 $ (411,890) $ 561,532
========== ========== ========== ==========
<PAGE>
Results of Operations
Three Months Ended December 31, 1997 Compared to Three Months Ended
December 31, 1996
Net sales for the three months ended December 31, 1997 increased $457,392 from
the three months ended December 31, 1996. Net sales in the Dental Supplies
segment increased $314,081, primarily due to increased foreign sales as the
Company expands its foreign sales base, while sales in the Precision Abrasives
segment increased $143,311, from $1,190,769 for the three months ended
December 31, 1996 to $1,334,080 for the three months ended December 31, 1997
due to increased orders for the Company's abrasive products.
<PAGE>
Gross profit for the three months ended December 31, 1997 increased $328,599
from the three months ended December 31, 1996. Gross profit in the Dental
Supplies segment increased $227,956 from $1,073,369 (41.9% of Dental Supplies
net sales) for the three months ended December 31, 1996 to $1,301,325 (45.3%
of Dental Supplies net sales) for the three months ended December 31, 1997.
Gross profit in the Precision Abrasives segment increased $100,643 from
$410,940 (34.5% of Precision Abrasives net sales) for the three months ended
December 31, 1996, to $511,583 (38.3% of Precision Abrasives net sales) for
the three months ended December 31, 1997. The increase in gross profit is due
to the aforementioned increases in net sales. 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.
Sales and marketing expenses increased $141,838 from $576,786 (15.4% of net
sales) for the three months ended December 31, 1996 to $718,624 (17.1% of net
sales) for the three months ended December 31, 1997 due to increased
advertising spending by the Company. General and administrative expenses
increased $63,503 from $706,473 (18.8% of net sales) to $769,976 (18.3% of net
sales). Research and development expenses increased $775,682 due to costs
incurred in connection with certain research and development fees paid to
Nanophase.
Interest expense, interest income and other income remained relatively
constant between periods.
Six Months Ended December 31, 1997 Compared to Six Months Ended December 31,
1996
Net sales for the six months ended December 31, 1997 increased $797,210 from
the six months ended December 31, 1996. Net sales in the Dental Supplies
segment increased $760,116 due to an increase in foreign sales and as a result
of the Company's acquisition of Thompson in the first quarter of fiscal 1997.
Net sales in the Precision Abrasives segment remained relatively constant
increasing $37,094 from $2,434,220 for the six months ended December 31, 1996
to $2,471,314 for the six months ended December 31, 1997.
Gross profit for the six months ended December 31, 1997 increased $594,717
from the six months ended December 31, 1996. Gross profit in the Dental
Supplies segment increased $490,566 from $1,912,547 (41.9% of Dental Supplies
net sales) for the six months ended December 31, 1996 to $2,403,113 (45.1% of
Dental Supplies net sales) for the six months ended December 31, 1997. Gross
profit in the Precision Abrasives segment increased $104,151 from $846,502
(34.8% of Precision Abrasives net sales) for the six months ended December 31,
1996 to $950,653 (38.5% of Precision Abrasives net sales) for the six months
ended December 31, 1997. The increase in gross profit is due to the
aforementioned increases in net sales. 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.
Sales and marketing expenses increased $271,524 from $1,028,048 (14.7% of net
sales) for the six months ended December 31, 1996 to $1,299,572 (16.7% of net
sales) for the six months ended December 31, 1997 partially as a result of the
<PAGE>
Thompson acquisition and partially due to increased advertising spending by
the Company. General and administrative expenses increased $337,209 from
$1,150,121 (16.4% of net sales) to $1,487,330 (19.1% of net sales) due to the
Thompson acquisition, as well as legal and professional fees of approximately
$304,000 related to the conclusion of the foot powder investigation and the
Cabot Corporation litigation. Research and development expenses increased
$959,406 due to costs incurred in connection with certain research and
development fees paid to Nanophase, as well as the investment of funds to
refine the Company's CMP slurry products.
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 $2,219,341 and $49,672 was used in operating activities in the six
months ended December 31, 1997 and 1996, respectively. The decreasing cash
flows from operations between periods were a result of the net loss from
operations for the six months ended December 31, 1997, due to the funding of
the Company's research and development expenses. The decrease was also due to
the funding of an increase in inventories and the timing of accounts
receivable collections from the Company's larger customers at December 31,
1997.
Expenditures for property, plant and equipment totaled $181,636 for the six
months ended December 31, 1997 and $61,144 for the six months ended December
31, 1996. The Company received proceeds of $2,673,000 related to the sale of
its CMP assets, the CMP business product line for the electronics industry
and related intellectual property, and certain particle dispersion technology
during the six months ended December 31, 1997.
Proceeds received from long-term debt were $1,600,000 and $151,801 for the
six months ended December 31, 1997 and 1996, respectively. During the six
months ended December 31, 1997, the Company refinanced a portion of its line
of credit with long-term debt with a bank. For the six months ended December
31, 1997 and 1996, the Company made payments on long-term debt of $588,341 and
$690,159, respectively.
The Company has a commitment for a $3,000,000 line of credit with a bank
through March 31, 1998, subject to renewal. Management expects to renew the
line of credit under similar terms and conditions. As of December 31, 1997,
the outstanding balance under this line of credit was $650,000. The line of
credit bears interest at the prime rate and is secured by substantially all of
the Company's assets.
<PAGE>
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 $685,000, plus interest, over four years relating to the
settlement of the foot powder matter (see discussion of legal proceedings in
Part I, Note 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.
The Company has assessed its systems and equipment in relation to the Year
2000 issue and has determined that additional costs to be incurred related to
this issue are immaterial.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to Part I, Note 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 December 29, 1997, regarding
the termination of negotiations pertaining to the possible
purchase by Ashland Chemical Company of the Company's
intellectual properties, technologies and certain other
intangible assets for the chemical mechanical polishing of
wafers produced for the global microelectronics industry.
Additionally, the Company announced that it was close to
signing an agreement for a similar sale with another party.
<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 February 12, 1998 BY: /s/Marvin E. Sternberg
--------------------------------------------
Marvin E. Sternberg
Chairman of the Board, President
and Chief Executive Officer (Principal
Executive Officer) and Director
Dated February 12, 1998 BY: /s/William G. Woodhead
--------------------------------------------
William G. Woodhead
Secretary/Treasurer, Principal Financial\
Officer and Principal Accounting Officer and
Director
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<PERIOD-START> OCT-01-1997
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