<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 March 31, 1998
Commission File No. 0-4123
------
MOYCO TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 23-1697233
- -------------------------------------------- -------------------------------------------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification Number)
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
-------------------------------------------------------------
</TABLE>
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 March 31, 1998: 4,138,440 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>
March 31, June 30,
1998 1997
----------------- --------------------
ASSETS (Unaudited)
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,998,059 $ 1,454,083
Accounts receivable, net of reserves of $251,330 1,971,061 1,948,285
Other receivables 509,219 --
Inventories, estimated (Notes 3 and 4) 4,768,371 3,902,141
Deferred income taxes 466,115 507,198
Prepaid taxes -- 32,843
Prepaid expenses 56,328 104,607
----------------- --------------------
Total current assets 9,769,153 7,949,157
----------------- --------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 602,433
Buildings and improvements 4,587,512 4,569,460
Machinery and equipment 5,739,665 5,717,084
Furniture and fixtures 644,445 641,368
Automotive equipment 139,630 48,511
----------------- --------------------
11,713,685 11,578,856
Less- Accumulated depreciation and amortization (5,654,492) (5,105,474)
----------------- --------------------
Net property, plant and equipment 6,059,193 6,473,382
----------------- --------------------
OTHER ASSETS:
Goodwill, less accumulated amortization of $51,857
and $28,226 420,763 444,394
Other 341,672 177,799
----------------- --------------------
Total other assets 762,435 622,193
----------------- --------------------
$ 16,590,781 $ 15,044,732
================= ====================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 850,000 $ 1,125,000
Current portion of long-term debt 812,610 846,928
Accounts payable 1,241,369 1,352,569
Income taxes payable 350,056 --
Accrued expenses 601,680 895,360
---------------- ----------------
Total current liabilities 3,855,715 4,219,857
---------------- ----------------
OTHER LONG-TERM LIABILITIES 458,000 330,000
---------------- ----------------
LONG-TERM DEBT 6,100,358 5,255,263
---------------- ----------------
DEFERRED INCOME TAXES 452,812 419,047
---------------- ----------------
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, 4,732,315 and 4,732,215 shares issued 23,662 23,661
Additional paid-in capital 3,981,883 3,981,584
Retained earnings 1,849,524 946,493
Less- Treasury stock of 593,875 shares at cost (131,173) (131,173)
---------------- ----------------
Total shareholders' equity 5,723,896 4,820,565
---------------- ----------------
$ 16,590,781 $ 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 For the
Three Months Ended Nine Months Ended
March 31 March 31
----------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 3,467,104 $ 3,260,066 $ 11,261,022 $ 10,256,774
COST OF GOODS SOLD 1,915,645 2,053,774 6,355,797 6,291,433
------------ ------------ ------------- -------------
Gross profit 1,551,459 1,206,292 4,905,225 3,965,341
OPERATING EXPENSES:
Sales and marketing 623,065 551,212 1,922,637 1,579,260
Research and development 1,578 4,619 980,332 23,967
General and administrative 656,391 772,562 2,143,721 1,922,683
------------ ------------ ------------- -------------
Income (loss) from operations 270,425 (122,101) (141,465) 439,431
INTEREST EXPENSE, net (152,088) (70,276) (468,426) (397,333)
GAIN ON SALE OF CMP BUSINESS -- -- 1,660,483 --
GAIN ON SALE OF PARTICLE DISPERSION
TECHNOLOGY -- -- 223,000 --
OTHER INCOME, net 66,648 3,006 87,275 38,875
------------ ------------ ------------- -------------
Income (loss) before taxes 184,985 (189,371) 1,360,867 80,973
INCOME TAX (EXPENSE) BENEFIT (64,183) 47,079 (457,836) (27,530)
------------ ------------ ------------- -------------
NET INCOME (LOSS) $ 120,802 $ (142,292) $ 903,031 $ 53,443
============ ============ ============= =============
BASIC EARNINGS (LOSS) PER
COMMON SHARE $ .03 $ (.03) $ .22 $ .01
============ ============ ============= =============
DILUTED EARNINGS (LOSS) PER
COMMON SHARE $ .03 $ (.03) $ .22 $ .01
============ ============ ============= =============
</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
Nine Months Ended
March 31
------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 903,031 $ 53,443
Adjustments to reconcile net income to net cash
used in operating activities-
Provision for accounts receivable reserves 45,714 114,185
Depreciation and amortization 592,332 598,410
Deferred income taxes 74,848 (20,238)
Gain on sale of CMP business (1,660,483) --
Gain on sale of particle dispersion technology (223,000) --
(Increase) decrease in-
Accounts receivable (68,490) 105,237
Other receivables (509,219) --
Inventories (1,116,230) (376,878)
Prepaid taxes and expenses 81,122 62,776
Other assets (59,137) (77,710)
Increase (decrease) in-
Accounts payable (111,200) (141,786)
Income taxes payable 350,056 --
Reserve for litigation settlements (226,000) --
Other accrued expenses (374,680) (384,145)
-------------- -------------
Net cash used in operating activities (2,301,336) (66,706)
-------------- -------------
INVESTING ACTIVITIES:
Purchases of and deposits on property, plant and equipment (363,765) (210,457)
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 2,309,235 (208,794)
-------------- -------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit (275,000) 850,000
Proceeds from long-term debt 4,260,000 340,000
Payments of long-term debt (3,449,223) (1,110,316)
Proceeds from exercise of stock options 300 1,425
Purchase of Common stock for treasury -- (10,220)
-------------- -------------
Net cash provided by financing activities 536,077 70,889
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 543,976 (204,611)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,454,083 1,402,088
-------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,998,059 $ 1,197,477
============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 506,724 $ 432,326
============== =============
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
MARCH 31, 1998
(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 that was on hand at December 31, 1997 for $250,000.
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-
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 nine months ended March
31, 1997, 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>
-3-
Unaudited pro forma net sales $ 10,551,889
================
Unaudited pro forma operating income $ 442,173
================
Unaudited pro forma net income $ 38,928
================
Unaudited pro forma basic earnings per
Common share $ .01
================
Unaudited pro forma diluted earnings per Common
share $ .01
================
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 nine months ended March 31, 1997.
The goodwill amortization adjustment was $3,282 for the nine months ended
March 31, 1997.
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 March 31, 1998, the results of operations for the three and nine months
ended March 31, 1998 and 1997, and the cash flows for the nine months ended
March 31, 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.
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.
<PAGE>
-4-
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 March 31, 1998
consist of certificates of deposit and an investment in a money market
account. Interest income earned on the investment of cash was $11,559 and
$12,709 for the three months ended March 31, 1998 and 1997, respectively, and
$39,951 and $34,993 for the nine months ended March 31, 1998 and 1997,
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 March 31, 1998 and 1997 and
$23,631 and $20,349 for the nine months ended March 31, 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 March 31, 1998, no such write-down was
required.
<PAGE>
-5-
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 (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 (loss) 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 replaced 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 replaced
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>
-6-
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per Common share computations:
<TABLE>
<CAPTION>
For the Three Months Ended March 31
------------------------------------------------------------------------------------
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) $ 120,802 4,138,346 $ .03 $ (142,292) 4,138,651 $ (.03)
========= =========
Effect of dilutive
securities
Stock options -- 8,407 -- --
----------- ------------- ----------- -----------
Diluted earnings (loss)
per Common share
Net income (loss) and
assumed conversions
$ 120,802 4,146,753 $ .03 $ (142,292) 4,138,651 $ (.03)
=========== ============= ========= =========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended March 31
------------------------------------------------------------------------------------
1998 1997
----------------------------------------- ----------------------------------------
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 $ 903,031 4,138,342 $ .22 $ 53,443 4,123,823 $ .01
========= =========
Effect of dilutive
securities
Stock options -- 10,534 -- 18,087
----------- ------------- ----------- ------------
Diluted earnings per
Common share
Net income and
assumed conversions
$ 903,031 4,148,876 $ .22 $ 53,443 4,141,910 $ .01
=========== ============= ========= =========== ============ =========
</TABLE>
Options to purchase 6,475, 4,475 and 4,475 shares of Common stock at weighted
average exercise prices of $6.11, $6.50 and $6.50 per share were outstanding
during the three months ended March 31, 1998 and the nine months ended March
31, 1998 and 1997, respectively, 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 2006, were
still outstanding as of March 31, 1998. In addition, options to purchase
22,950 shares of Common stock at a weighted average exercise price of $3.39
were outstanding during the three months ended March 31, 1997, but were not
included in the computation of diluted loss per Common share because they were
anti-dilutive.
Revenue Recognition
The Company recognizes revenue upon the shipment of its products.
<PAGE>
-7-
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.
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 March 31, 1998, 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:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
---------------- ---------------
<S> <C> <C>
Raw materials and supplies $ 1,716,614 $ 1,418,353
Work-in-process 1,573,562 1,265,386
Finished goods 1,478,195 1,218,402
----------------- ---------------
$ 4,768,371 $ 3,902,141
================= ===============
</TABLE>
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
---------------- ---------------
<S> <C> <C>
Compensation and related benefits $ 241,356 $ 222,279
Reserve for litigation settlements (Note 9) 171,000 525,000
Other 189,324 148,081
---------------- ---------------
$ 601,680 $ 895,360
================ ===============
</TABLE>
<PAGE>
-8-
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 March 31, 1998. Borrowings under the line bore interest at
prime (8.5% at March 31, 1998) and were secured by all assets of the Company.
Subsequent to March 31, 1998, the line was extended to December 31, 1998,
subject to renewal. As of March 31, 1998, $850,000 was outstanding under this
line of credit.
Thompson, a subsidiary of the Company, is a guarantor and surety of borrowings
under this credit facility.
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- --------
<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%)
$ 2,596,667 $ --
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
1,308,909 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 1,050,000 1,350,000
Term note payable in monthly installments of $30,000, plus interest
at prime plus 1/2%, through August 1, 2000. (Repaid in March,
1998) -- 1,110,000
Mortgage payable to municipal authority in monthly
installments of $6,371, including interest at
2%, through July 1, 2010 824,997 874,501
</TABLE>
<PAGE>
-9-
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- --------
<S> <C> <C>
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 $ 439,353 $ 460,891
Mortgage payable to municipal authority in monthly
installments of $1,952, including interest at 2%
through April 1, 2010 245,011 260,309
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 217,939 257,683
Mortgage payable to bank in monthly installments of
$2,543, including interest at prime plus 1.5%
through December 1, 2011 230,092 237,696
Note payable in monthly installments of $2,333, plus interest at
8.65% through November 1, 2000 (Repaid in March, 1998) -- 95,673
Capital lease obligation payable in monthly
installments of $2,009, including interest at 10%
through December 2000. (Repaid in March, 1998) -- 92,893
Auto loan payable in monthly installments of $838, plus
interest at 7.75% through June 1, 1998. (Repaid in
March, 1998) -- 8,455
----------- -----------
6,912,968 6,102,191
Less- Current portion (812,610) (846,928)
----------- -----------
$ 6,100,358 $ 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.
<PAGE>
-10-
As of March 31, 1998, long-term debt matures as follows:
1999 $ 812,610
2000 828,299
2001 842,629
2002 791,955
2003 792,747
Thereafter 2,844,728
-------------
$ 6,912,968
=============
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 is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended March 31 Ended March 31
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales:
Domestic and U.S.
government customers-
Dental Supplies $ 1,673,497 $ 1,615,026 $ 5,871,540 $ 5,511,700
Precision Abrasives 747,536 982,260 2,826,674 3,148,991
International
customers-
Dental Supplies 855,828 423,472 1,980,389 1,089,286
Precision Abrasives 190,243 239,308 582,419 506,797
-------------- ------------- -------------- -------------
$ 3,467,104 $ 3,260,066 $ 11,261,022 $ 10,256,774
============== ============= ============== =============
Operating income (loss):
Dental Supplies $ 218,598 $ (220,996) $ 802,255 $ 241,051
Precision Abrasives 51,827 98,895 (943,720) 198,380
-------------- ------------- -------------- -------------
$ 270,425 $ (122,101) $ (141,465) $ 439,431
============== ============= ============== =============
Depreciation and amortization:
Dental Supplies $ 134,382 $ 129,446 $ 378,897 $ 389,309
Precision Abrasives 65,693 86,976 213,435 209,101
-------------- ------------- -------------- -------------
$ 200,075 $ 216,422 $ 592,332 $ 598,410
============== ============= ============== =============
Capital expenditures:
Dental Supplies $ 56,947 $ 124,281 $ 149,537 $ 158,615
Precision Abrasives 15,182 25,032 104,228 51,842
Corporate 110,000 - 110,000 -
------------- ------------- ------------- ------------
$ 182,129 $ 149,313 $ 363,765 $ 210,457
============= ============= ============= =============
</TABLE>
<PAGE>
-11-
March 31, June 30,
1998 1997
------------- -------------
Total assets:
Dental supplies $ 10,468,896 $ 10,439,585
Precision Abrasives 4,897,781 3,946,981
Corporate 1,224,104 658,166
------------- -------------
$ 16,590,781 $ 15,044,732
============= =============
9. COMMITMENTS AND CONTINGENCIES:
Dentsply Litigation
On April 22, 1998, the Company was served with a complaint by Dentsply
International, Inc. ("Dentsply") claiming infringement of a Dentsply patent
covering a 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 and
against which the Company will raise meritorious defenses and counterclaims.
Cabot 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
alleged that a chemical mechanical planarization slurry manufactured by the
Company infringed on a United States patent owned by Cabot.
On April 20, 1998, the Company and Cabot settled the litigation.
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>
-12-
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.)
Overview
The Company recorded net income of $120,802 for the three months ended March
31, 1998, fueled by increased international sales in the Dental Supplies
segment, primarily in South America. In addition, the Company continues to see
sales growth in its proprietary endodontic dental instruments.
For the nine months ended March 31, 1998, the Company recorded net income of
$903,031 primarily as a result of the sale of its CMP assets and CMP business
product line for the electronics industry and related intellectual property,
as well as, certain particle dispersion technology during the three months
ended December 31, 1997.
<PAGE>
-13-
Summary
The following table sets forth for the periods indicated the Company's key
financial information by segment.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended March 31 Ended March 31
-------------------------------- -------------------------------
1998 1997 1998 1997
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales:
Dental Supplies $ 2,529,325 $ 2,038,498 $ 7,851,929 $ 6,600,986
Precision Abrasives 937,779 1,221,568 3,409,093 3,655,788
-------------- --------------- -------------- ---------------
$ 3,467,104 $ 3,260,066 $ 11,261,022 $ 10,256,774
============== =============== ============== ===============
Gross profit:
Dental Supplies $ 1,185,046 $ 793,526 $ 3,588,159 $ 2,706,073
Precision Abrasives 366,413 412,766 1,317,066 1,259,268
-------------- --------------- -------------- ---------------
$ 1,551,459 $ 1,206,292 $ 4,905,225 $ 3,965,341
============== =============== ============== ===============
Operating income (loss):
Dental Supplies $ 218,598 $ (220,996) $ 802,255 $ 241,051
Precision Abrasives 51,827 98,895 (943,720) 198,380
-------------- --------------- -------------- ---------------
$ 270,425 $ (122,101) $ (141,465) $ 439,431
============== =============== ============== ===============
</TABLE>
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997
Net sales for the three months ended March 31, 1998 increased $207,038 from
the three months ended March 31, 1997. Net sales in the Dental Supplies
segment increased $490,827, from $2,038,498 for the three months ended March
31, 1997 to $2,529,325 for the three months ended March 31, 1998 primarily due
to increased international sales as the Company continues to expand its
foreign sales base. Net sales in the Precision Abrasives segment decreased
$283,789 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 March 31, 1998 increased $345,167 from
the three months ended March 31, 1997. Gross profit in the Dental Supplies
segment increased $391,520 from $793,526 (38.9% of Dental Supplies net sales)
for the three months ended March 31, 1997 to $1,185,046 (46.9% of Dental
Supplies net sales) for the three months ended March 31, 1998. Gross profit in
the Precision Abrasives segment decreased $46,353 from $412,766 (33.8% of
Precision Abrasives net sales) for the three months ended March 31, 1997, to
$366,413 (39.1% of Precision Abrasives net sales) for the three months ended
March 31, 1998. The changes in gross profit are due to the aforementioned
changes 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.
<PAGE>
-14-
Sales and marketing expenses increased $71,853 from $551,212 (16.9% of net
sales) for the three months ended March 31, 1997 to $623,065 (18.0% of net
sales) for the three months ended March 31, 1998 due to increased advertising
spending by the Company. General and administrative expenses decreased
$116,171 from $772,562 (23.7% of net sales) to $656,391 (18.9% of net sales)
due to higher legal fees incurred in the three months ended March 31, 1997.
Interest expense increased due to increased borrowings related to the funding
of the Company's current operations.
Research and development expenses, interest income and other income remained
relatively constant between periods.
Nine Months Ended March 31, 1998 Compared to Nine Months Ended March 31, 1997
Net sales for the nine months ended March 31, 1998 increased $1,004,248 as
compared to the nine months ended March 31, 1997. Net sales in the Dental
Supplies segment increased $1,250,943, from $6,600,986 for the nine months
ended March 31, 1997 to $7,851,929 for the nine months ended March 31, 1998
primarily due to increased international sales and increased sales of the
Company's proprietary endodontic instruments. Net sales in the Precision
Abrasives segment decreased $246,695 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 nine months ended March 31, 1998 increased $939,884 as
compared to the nine months ended March 31, 1997. Gross profit in the Dental
Supplies segment increased $882,086 from $2,706,073 (41.0% of Dental Supplies
net sales) for the nine months ended March 31, 1997 to $3,588,159 (45.7% of
Dental Supplies net sales) for the nine months ended March 31, 1998. Gross
profit in the Precision Abrasives segment increased $57,798 from $1,259,268
(34.4% of Precision Abrasives net sales) for the nine months ended March 31,
1997, to $1,317,066 (38.6% of Precision Abrasives net sales) for the nine
months ended March 31, 1998. The change in gross profit in the Dental Supplies
segment is due to the aforementioned change 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; therefore,
gross profit in the Precision Abrasives segment has not declined with net
sales.
Sales and marketing expenses increased $343,377 from $1,579,260 (15.4% of net
sales) for the nine months ended March 31, 1997 to $1,922,637 (17.1% of net
sales) for the nine months ended March 31, 1998 partially as a result of the
Thompson acquisition and partially due to increased advertising spending by
the Company. General and administrative expenses increased $221,038 from
$1,922,683 (18.7% of net sales) to $2,143,721 (19.0% of net sales) due to the
Thompson acquisition, as well as legal and professional fees of approximately
$390,000 related to the conclusion of the foot powder investigation and the
Cabot Corporation litigation. Research and development expenses increased
$956,365 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 increased due to
increased borrowings related to the funding of the Company's current
operations.
<PAGE>
-15-
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 $2,301,336 and $66,706 was used in operating activities in the
nine months ended March 31, 1998 and 1997, respectively. The decreasing cash
flows from operations between periods were a result of the net loss from
operations for the nine months ended March 31, 1998, 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 payments relating to 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).
Expenditures for property, plant and equipment totaled $363,765 for the nine
months ended March 31, 1998 and $210,457 for the nine months ended March 31,
1997. 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 nine months ended March 31, 1998.
Proceeds received from long-term debt were $4,260,000 and $340,000 for the
nine months ended March 31, 1998 and 1997, respectively. During the nine
months ended March 31, 1998, the Company refinanced a portion of its line of
credit with long-term debt with a bank. For the nine months ended March 31,
1998 and 1997, the Company made payments on long-term debt of $3,449,223 and
$1,110,316, respectively, which includes payments of $2,562,921 related to the
refinancing of certain long-term debt during the nine months ended March 31,
1998.
The Company has a commitment for a $3,000,000 line of credit with a bank
through December 31, 1998, subject to renewal. Management expects to renew the
line of credit under similar terms and conditions. As of March 31, 1998, the
outstanding balance under this line of credit was $850,000. 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 $350,000 during the next twelve
months 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.
<PAGE>
-16-
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>
-17-
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
None.
<PAGE>
-18-
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.
<TABLE>
MOYCO TECHNOLOGIES, INC.
<S> <C>
Dated: May 14, 1998 BY: /s/Marvin E. Sternberg
--------------------------------------------
Marvin E. Sternberg
Chairman of the Board, President
and Chief Executive Officer (Principal Executive
Officer) and Director
Dated: May 14, 1998 BY: /s/William G. Woodhead
----------------------------------------------------
William G. Woodhead
Secretary/Treasurer, Principal Financial Officer and
Principal Accounting Officer and Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,998,059
<SECURITIES> 0
<RECEIVABLES> 2,480,280
<ALLOWANCES> (251,330)
<INVENTORY> 4,768,371
<CURRENT-ASSETS> 9,769,153
<PP&E> 11,713,685
<DEPRECIATION> (5,654,492)
<TOTAL-ASSETS> 16,590,781
<CURRENT-LIABILITIES> 3,855,715
<BONDS> 0
0
0
<COMMON> 23,662
<OTHER-SE> 5,700,234
<TOTAL-LIABILITY-AND-EQUITY> 16,590,781
<SALES> 3,467,104
<TOTAL-REVENUES> 3,467,104
<CGS> 1,915,645
<TOTAL-COSTS> 1,915,645
<OTHER-EXPENSES> 1,281,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152,088
<INCOME-PRETAX> 184,985
<INCOME-TAX> 64,183
<INCOME-CONTINUING> 120,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,802
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
