<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, 1998
Commission File No. 0-4123
MOYCO TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1697233
- ---------------------------------- ----------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of 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
--------------
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 November 2, 1998: 4,549,974 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
(Unaudited)
September 30, June 30,
1998 1998
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,521,399 $ 1,486,554
Marketable securities 185,904 185,904
Accounts receivable, net of reserves of
$267,741 2,289,198 2,504,645
Other receivables 15,585 71,531
Inventories, estimated (Notes 2 and 4) 4,569,175 4,335,174
Deferred income taxes 221,856 257,305
Prepaid taxes 231,786 --
Prepaid expenses 37,230 42,026
------------ ------------
Total current assets 9,072,133 8,883,139
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 602,433
Buildings and improvements 4,587,511 4,587,511
Machinery and equipment 5,814,073 5,751,307
Furniture and fixtures 842,968 840,413
Automotive equipment 139,630 139,630
------------ ------------
11,986,615 11,921,294
Less- Accumulated depreciation and amortization (6,066,746) (5,885,594)
------------ ------------
Net property, plant and equipment 5,919,869 6,035,700
------------ ------------
OTHER ASSETS:
Goodwill, less accumulated amortization of
$67,611 and $59,734 405,009 412,886
Other 368,049 408,187
------------ ------------
Total other assets 773,058 821,073
------------ ------------
$ 15,765,060 $ 15,739,912
============ ============
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 900,000 $ --
Current portion of long-term debt 975,064 988,518
Accounts payable 779,816 1,323,170
Income taxes payable -- 245,326
Accrued expenses 911,471 750,672
---------------- ----------------
Total current liabilities 3,566,351 3,307,686
---------------- ----------------
OTHER LONG-TERM LIABILITIES 370,000 465,000
---------------- ----------------
LONG-TERM DEBT 5,737,791 5,946,251
---------------- ----------------
DEFERRED INCOME TAXES 128,065 141,006
---------------- ----------------
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, 5,205,547 shares issued 26,028 26,028
Additional paid-in capital 5,103,443 5,103,443
Retained earnings 975,842 883,896
Less- Treasury stock of 655,573 and 653,923 shares
at cost (142,460) (133,398)
---------------- ----------------
Total shareholders' equity 5,962,853 5,879,969
---------------- ----------------
$ 15,765,060 $ 15,739,912
================ ================
</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
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET SALES $ 3,539,927 $ 3,585,511
COST OF GOODS SOLD 2,068,886 2,044,653
----------- -----------
Gross profit 1,471,041 1,540,858
OPERATING EXPENSES:
Sales and marketing 548,891 580,948
Research and development 15,114 186,929
General and administrative 616,002 717,354
----------- -----------
Income from operations 291,034 55,627
INTEREST EXPENSE, net (156,149) (181,793)
OTHER INCOME, net 12,457 1,025
----------- -----------
Income (loss) before taxes 147,342 (125,141)
INCOME TAX (EXPENSE) BENEFIT (55,396) 68,493
----------- -----------
NET INCOME (LOSS) $ 91,946 $ (56,648)
=========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE (Note 3) $ .02 $ (.01)
=========== ===========
SHARES USED IN COMPUTING BASIC EARNINGS (LOSS) PER COMMON SHARE (Note 3) 4,550,553 4,552,174
=========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE (Note 3) $ .02 $ (.01)
=========== ===========
SHARES USED IN COMPUTING DILUTED EARNINGS (LOSS) PER COMMON SHARE (Note 3) 4,556,446 4,552,174
=========== ===========
</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
--------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 91,946 $ (56,648)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 191,949 194,605
Deferred income taxes 22,508 (1,716)
(Increase) decrease in-
Accounts receivable 215,447 (182,116)
Other receivables 55,946 --
Inventories (234,001) (340,925)
Prepaid taxes and expenses (226,990) (15,689)
Other assets 37,218 (559)
Increase (decrease) in-
Accounts payable (543,354) 157,794
Income taxes payable (245,326) --
Reserve for litigation settlements (95,000) (169,750)
Other accrued expenses 160,799 75,882
----------- -----------
Net cash used in operating activities (568,858) (339,122)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (65,321) (38,334)
----------- -----------
Net cash used in investing activities (65,321) (38,334)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit 900,000 (625,000)
Proceeds from long-term debt -- 1,600,000
Payments of long-term debt (221,914) (338,761)
Purchase of Common stock for treasury (9,062) --
----------- -----------
Net cash provided by financing activities 669,024 636,239
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 34,845 258,783
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,486,554 1,454,083
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,521,399 $ 1,712,866
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 94,791 $ 159,064
=========== ===========
Income taxes paid $ 510,000 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
1. THE COMPANY:
Moyco Technologies, Inc. and subsidiaries (the "Company") operates in two
business segments: Dental Supplies and Precision Abrasives. The Dental Supplies
segment involves the manufacturing, marketing and distributing of dental
supplies, such as waxes, abrasives, medicaments, dental mirrors, endodontic
(root canal) instruments, materials and equipment, sundry dental items, hand
instruments, sterilization items, as well as 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 and other high-tech manufacturing procedures which require
extremely fine abrasive films and/or slurries to achieve consistently uniform
polishing results.
2. 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 September
30, 1998, the results of operations and the cash flows for the three months
ended September 30, 1998 and 1997. 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 September 30, 1998
consist of certificates of deposit and an investment in a money market account.
Interest income earned on the investment of cash was $15,085 and $10,807 for the
three months ended September 30, 1998 and 1997, respectively.
Marketable Securities
Investments in marketable securities are categorized as either trading,
available-for-sale, or held-to-maturity. At September 30, 1998, marketable
securities consisted of certificates of deposit with contractual maturities of
less than one year which are being held to maturity. The certificates of deposit
are stated at amortized cost.
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.
<PAGE>
Goodwill
Goodwill represents the excess of the purchase price of the Thompson Dental
Manufacturing Co., Inc. 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 September 30,
1998 and 1997, 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, 1998, 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.
Research and Development
Research and development expenses are charged to expense as incurred.
Earnings (loss) per Common Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which supersedes Accounting Principles Board Opinion No.
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 (loss) per share, which
replaces primary earnings (loss) per share, is calculated by dividing net income
(loss) available to Common shareholders by the weighted average number of Common
shares outstanding for the period. Diluted earnings (loss) per share, which
replaces fully diluted earnings (loss) 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 (loss) 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 (loss) per Common share computations. All share, per
share, options to purchase shares, and option exercise prices per share have
been adjusted to reflect the 10% stock dividend issued on September 30, 1998
(see Note 3):
<TABLE>
<CAPTION>
For the Three Months Ended September 30
-------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------- -------------------------------------------
Income Shares Per Share Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss)
per Common share
Net income (loss) $ 91,946 4,550,553 $ 0.02 $ (56,648) 4,552,174 $ (0.01)
======= ========
Effect of dilutive
securities
Stock options -- 5,893 -- --
----------- ------------ ---------- -----------
Diluted earnings (loss)
per Common share
Net income (loss)
and assumed
conversions $ 91,946 4,556,446 $ 0.02 $ (56,648) 4,552,174 $ (0.01)
========= ============ ======= ========= ============ ========
</TABLE>
Options to purchase 7,122 shares of Common stock with an average exercise price
per share of $5.56 were outstanding during the three months ended September 30,
1998, but were not included in the computation of diluted earnings per Common
share because the options' exercise prices were greater than the average market
price of the Common shares during the period. The options which expire at
various times through October 2006, were still outstanding as of September 30,
1998. Options to purchase 25,245 shares of Common stock with an average exercise
price of $3.08 were outstanding during the three months ended September 30,
1997, but were not included in the computation of diluted loss per Common share
because the Company had a net loss for the period and all outstanding options
would have been anti-dilutive.
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
sales and marketing expense 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 September 30, 1998, management has evaluated the Company's
asset base, under the guidelines established by SFAS No. 121, and believes that
no impairment has occurred.
Recent Accounting Pronouncements
Effective with the first quarter of fiscal 1999, the Company was subject to the
provisions of SFAS No. 130 "Reporting Comprehensive Income." SFAS No. 130 had no
impact on the Company's financial statements as the Company does not have any
"comprehensive income" type earnings (losses).
3. STOCK DIVIDEND:
During the three months ended September 30, 1998, the Company declared a 10%
stock dividend to shareholders of record as of September 18, 1998. The new
shares were distributed to shareholders on September 30, 1998. Accordingly,
amounts equal to the fair market value (based on the quoted market price) of the
additional shares issued were charged to retained earnings and credited to
Common stock and additional paid-in capital effective June 30, 1998, and as
disclosed in the Company's annual report on Form 10-K for the fiscal year ended
June 30, 1998. Earnings (loss) per Common share, shares used in computing
earnings (loss) per Common share and all share and option balances and prices
have been restated to reflect the 10% stock dividend.
4. INVENTORIES:
September 30, June 30,
1998 1998
---------------- ---------------
Raw materials and supplies $ 1,726,446 $ 1,638,030
Work-in-process 1,788,644 1,697,043
Finished goods 1,054,085 1,000,101
---------------- ---------------
$ 4,569,175 $ 4,335,174
================ ===============
<PAGE>
5. ACCRUED EXPENSES:
September 30, June 30,
1998 1998
------------ ------------
Compensation and related benefits $ 227,149 $ 247,377
Reserve for litigation (Note 9 ) 171,000 171,000
Other 513,322 332,295
------------ ------------
$ 911,471 $ 750,672
============ ============
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, 1998, subject to renewal. Borrowings under the
line bear interest at prime (8.5% at September 30, 1998) and are secured by all
assets of the Company. In addition, the Company has an additional convertible
line of credit with the same bank to finance legal fees and related expenses
under which it may borrow up to $500,000. Repayments on the line will be made in
monthly installments based upon the then outstanding amount with the final
payment due September 2003. Borrowings under the line bear interest at prime
(8.5% at September 30, 1998) and are secured by a note. There were no
outstanding balances on these lines at September 30, 1998.
Thompson Dental Manufacturing Co., Inc., a subsidiary of the Company, is a
guarantor and surety of borrowings under these credit facilities.
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- --------
<S> <C> <C>
Note payable to bank in monthly installments
of $36,667, plus interest at prime minus
.05%, through April 1, 2003. (Interest rate
not to exceed 8.45% or be below 8.20%) $ 2,374,090 $ 2,564,330
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 1,289,956 1,294,583
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 975,000 975,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- --------
<S> <C> <C>
Mortgage payable to municipal authority in
monthly installments of $6,371, including
interest at 2%, through July 1, 2010 $ 800,326 $ 804,998
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 436,777 438,522
Mortgage payable to municipal authority in monthly
installments of $1,952, including interest at
2%, through April 1, 2010 223,740 238,828
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 194,773 199,455
Mortgage payable to bank in monthly installments
of $2,543, including interest at prime plus
1.5%, through December 1, 2011 229,664 230,524
Capital lease obligation payable in monthly
installments of $1,148, including interest at
prime plus 2%, through March 2002 28,432 28,432
Capital lease obligation payable in monthly
installments of $4,843, including interest at
prime plus 2%, through December 2001 160,097 160,097
----------- -----------
6,712,855 6,934,769
Less- Current portion (975,064) (988,518)
----------- -----------
$ 5,737,791 $ 5,946,251
=========== ===========
</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.
<PAGE>
As of September 30, 1998, long-term debt matures as follows:
1999 $ 975,064
2000 996,442
2001 985,243
2002 681,325
2003 600,294
Thereafter 2,474,487
-------------
$ 6,712,855
=============
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, 1998 and 1997 is as follows:
1998 1997
----------- -----------
Net Sales:
Domestic and U.S. government customers-
Dental Supplies $ 2,219,423 $ 2,026,339
Precision Abrasives 698,843 950,494
International customers-
Dental Supplies 384,812 421,938
Precision Abrasives 236,849 186,740
----------- -----------
$ 3,539,927 $ 3,585,511
=========== ===========
Operating income (loss):
Dental Supplies $ 57,355 $ 245,231
Precision Abrasives 233,679 (189,604)
----------- -----------
$ 291,034 $ 55,627
=========== ===========
Depreciation and amortization:
Dental Supplies $ 127,807 $ 128,225
Precision Abrasives 64,142 66,380
----------- -----------
$ 191,949 $ 194,605
=========== ===========
Capital expenditures:
Dental Supplies $ 30,989 $ 22,410
Precision Abrasives 34,332 15,924
----------- -----------
$ 65,321 $ 38,334
=========== ===========
<PAGE>
9. COMMITMENTS AND CONTINGENCIES:
Dentsply Litigation
On April 22, 1998, the Company was served with a complaint in the United States
District Court for the Middle District of Pennsylvania by DENTSPLY
International, Inc. ("Dentsply") claiming infringement of a Dentsply patent by
the Company's manufacturing process to fabricate nickel titanium endodontic
(root canal) instruments. The Company has retained counsel to vigorously defend
against the Dentsply complaint which it believes to be without basis. The
Company has filed defenses which it believes meritorious. In addition, the
Company has filed counterclaims alleging, among other things, that Dentsply is
infringing three Company patents, violating the Sherman Antitrust Act, the
Lanham Act, and interfering with the Company's business relationships.
In addition, there is a related arbitration to be held in Tulsa, Oklahoma before
the American Arbitration Association which will address issues related to a
settled litigation between the Company and an entity subsequently acquired by
Dentsply.
Foot Powder Investigation
The Company has settled the Government investigation of Itch-Away Foot Powder
which the Company manufactured and sold pursuant to contracts with the United
States Defense Department. The Company entered into a civil settlement of the
matter agreeing to pay the Government a total of $505,000, without interest.
These payments are secured by an irrevocable letter of credit obtained by the
Company from a bank. The Company made the first payment of $100,000 in August of
1997 and the second payment of $101,250 in August of 1998 and will make three
similar annual payments. In connection with this matter, the Company was fined
$350,000 which is payable in five annual installments commencing in January of
1998 and the Company has paid the first installment. Interest is payable at
5.42% per annum and is due at the end of the fiscal year payout.
<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," "plan," "project," "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) dependence on the services
of the Company's executive officers, and other key operations and technical
personnel; and (vi) legal proceedings. (See discussion of legal proceedings in
Part I, Item 1, Footnote No. 9, to the Consolidated Financial Statements of this
Form 10-Q.)
Overview
The Company recorded net income of $91,946 for the three months ended September
30, 1998 compared to a loss of $56,648 for the three months ended September 30,
1997. The improved operating results reflect a decrease in operating expenses
due to lower professional and legal fees incurred in the three months ended
September 30, 1998 compared to the three months ended September 30, 1997 and
substantially higher research and development costs incurred in prior year to
refine the Company's chemical mechanical planarization ("CMP") slurry products.
<PAGE>
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
-----------------------------------
1998 1997
-------------- --------------
Net Sales:
Dental Supplies $ 2,604,235 $ 2,448,277
Precision Abrasives 935,692 1,137,234
-------------- --------------
$ 3,539,927 $ 3,585,511
============== ==============
Gross Profit:
Dental Supplies $ 1,178,070 $ 1,101,788
Precision Abrasives 292,971 439,070
-------------- --------------
$ 1,471,041 $ 1,540,858
============== ==============
Operating Income (Loss):
Dental Supplies $ 57,355 $ 245,231
Precision Abrasives 233,679 (189,604)
-------------- --------------
$ 291,034 $ 55,627
============== ==============
Results of Operations
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Results of Operations
Net sales for the three months ended September 30, 1998 decreased $45,584 from
the three months ended September 30, 1997. Net sales in the Dental Supplies
segment increased $155,958 primarily due to increased sales of the Company's
proprietary and patented endodontic instruments. Net sales in the Precision
Abrasives segment decreased $201,542 from $1,137,234 for the three months ended
September 30, 1997 to $935,692 for the three months ended September 30, 1998
primarily as a result of the sale of the Company's CMP product line for the
electronics industry on December 31, 1997 and the introduction of a new sales,
marketing and growth strategy which has led to a reevaluation of target
customers and thus a temporary decrease in net sales. Management believes this
new strategy will increase net sales in the future.
Gross profit for the three months ended September 30, 1998 decreased $69,817
from the three months ended September 30, 1997. Gross profit in the Dental
Supplies segment increased $76,282 from $1,101,788 (45.0% of Dental Supplies net
sales) for the three months ended September 30, 1997 to $1,178,070 (45.2% of
Dental Supplies net sales) for the three months ended September 30, 1998. Gross
profit in the Precision Abrasives segment decreased from $439,070 (38.6% of
Precision Abrasives net sales) for the three months ended September 30, 1997 to
$292,971 (31.3% of Precision Abrasives net sales) for the three months ended
September 30, 1998. 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.
<PAGE>
Sales and marketing expenses decreased $32,057 from $580,948 (16.2% of net
sales) for the three months ended September 30, 1997 to $548,891 (15.5% of net
sales) for the three months ended September 30, 1998 primarily as a result of
lower sales commissions. General and administrative expenses decreased $101,352
from $717,354 (20.0% of net sales) to $616,002 (17.4% of net sales) due to lower
professional and legal fees incurred in the three months ended September 30,
1998 compared to the three months ended September 30, 1997. The Company believes
it will incur significant costs, which the Company is unable to estimate due to
the nature of litigation, related to the Dentsply litigation for the forseeable
future that will have a material adverse effect on the Company's consolidated
financial position and results of operations. (See discussion of legal
proceedings in Part I, Item 1, Footnote No. 9, to the consolidated financial
statements of this Form 10-Q.) Research and development expenses decreased
$171,815 due to substantially higher research and development costs incurred in
the three months ended September 30, 1997 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 $568,858 was used in operating activities in the three months ended
September 30, 1998. Net cash of $339,122 was used in operating activities in the
three months ended September 30, 1997. The increasing use of cash between
periods was a result of the timing of payments to vendors and taxing
authorities, offset by increased income and the timing of accounts receivable
collections.
Expenditures for property, plant and equipment totaled $65,321 for the three
months ended September 30, 1998 and $38,334 for the three months ended September
30, 1997.
Proceeds received from long-term debt were $1,600,000 for the three months ended
September 30, 1997. 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, 1998 and 1997, the Company made
payments on long-term debt of $221,914 and $338,761, respectively.
<PAGE>
The Company has a commitment for a $3,000,000 line of credit with a bank which
will expire on December 31, 1998, 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. In addition, the Company has an additional convertible line of
credit with the same bank to finance legal fees and related expenses under which
it may borrow up to $500,000. Repayments on the line will be made in monthly
installments based upon the then outstanding amount with the final payment due
September 2003. Borrowings under the line bear interest at prime and are secured
by a note.
Subsequent to September 30, 1998, the Company re-financed certain of its
mortgages and loans to secure more favorable terms and interest rates.
The Company expects to spend approximately $300,000 in fiscal 1999 on capital
expenditures, primarily for new office computer equipment and dental instrument
manufacturing equipment. In addition, the Company is obligated to pay $583,750
over four years relating to the settlement of the foot powder matter, and
expects to spend significant funds on the Dentsply litigation. (See discussion
of legal proceedings in Part I, Item 1, 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 expenditures
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 June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." 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.
Risks Associated with the Year 2000
I. Background
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions and information, send invoices, or engage in
similar normal business activities.
<PAGE>
II. Readiness Efforts
The Company does not believe that it has material exposure to the Year 2000
issue with respect to its own information and non-information systems
technology. The Company has reviewed its existing information and
non-information systems technology and they either correctly define the year
field in its programs with four digits or will be replaced before Year 2000
issues will arise.
In addition, the Company is conducting an analysis to determine the extent to
which its major vendors' systems (insofar as they relate to the Company's
business) are subject to the Year 2000 issue. The Company is currently unable to
predict the extent to which it would be vulnerable to its vendors' failure to
remediate any Year 2000 issues on a timely basis. The failure of a major vendor
subject to the Year 2000 issue to convert its systems on a timely basis or a
conversion that is incompatible with the Company's systems could have a material
adverse effect on the Company.
The Company also faces potential loss of revenue from customers who may have
Year 2000 issues. Currently, the Company is unable to predict how and to what
extent its operations may be effected by Year 2000 issues at its customers;
however, Year 2000 issues at a significant customer could have a material
adverse effect on the Company.
III. Current Status
The expected completion date of the review of vendors' systems is June 1999.
The expected completion date of the review of customer systems is September
1999.
IV. Costs
Historical and estimated costs directly related to Year 2000 issue remediation
at the Company have been and are expected to be immaterial as the Company's
systems have been and will be upgraded on a normal replacement schedule with
only immaterial opportunity costs of Company personnel to ensure new systems and
third parties are Year 2000 compliant.
<PAGE>
V. Risk Assessment
Based upon current information related to the progress of its major vendors and
service providers, management has determined that the Year 2000 issue will not
pose significant operational problems for its computer systems. This
determination is based on the ability of those vendors and service providers to
renovate, in a timely manner, the products and services on which the Company's
systems rely. However, the Company can give no guarantees that the systems of
these suppliers will be timely renovated.
The Company is developing in 1999, contingency plans to address third party Year
2000 risks, realizing that some disruption may occur despite its best efforts.
The Company is in the process of developing those contingency plans for each
critical system in the event that one or more of these systems fail.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Reference is made to Part I, Item 1, 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 September 4, 1998,
announcing a ten percent (10%) stock dividend on all shares
of common stock outstanding of record September 18, 1998.
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.
<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 13, 1998 BY: /s/ Marvin E. Sternberg
-----------------------------------------
Marvin E. Sternberg
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive
Officer) and Director
Dated: November 13, 1998 BY: /s/William G. Woodhead
-----------------------------------------
William G. Woodhead
Secretary/Treasurer, Principal Financial
Officer and Principal Accounting
Officer and Director
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