<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, 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 February 8, 1999: 4,547,774 shares of Common stock, par value
$.005 per share.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,235,554 $ 1,486,554
Marketable securities 185,904 185,904
Accounts receivable, net of reserves of
$267,741 2,478,357 2,504,645
Other receivables -- 71,531
Inventories, estimated (Notes 2 and 4) 4,705,343 4,335,174
Deferred income taxes 219,729 257,305
Prepaid taxes 273,437 --
Prepaid expenses 90,472 42,026
------------ ------------
Total current assets 9,188,796 8,883,139
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 602,433
Buildings and improvements 4,590,836 4,587,511
Machinery and equipment 6,104,431 5,751,307
Furniture and fixtures 653,813 840,413
Automotive equipment 139,630 139,630
------------ ------------
12,091,143 11,921,294
Less- Accumulated depreciation and amortization (6,246,706) (5,885,594)
------------ ------------
Net property, plant and equipment 5,844,437 6,035,700
------------ ------------
OTHER ASSETS:
Goodwill, less accumulated amortization of
$75,488 and $59,734 397,132 412,886
Other 309,336 408,187
------------ ------------
Total other assets 706,468 821,073
------------ ------------
$ 15,739,701 $ 15,739,912
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 1,000,000 $ --
Current portion of long-term debt 665,979 988,518
Accounts payable 1,284,417 1,323,170
Income taxes payable -- 245,326
Accrued expenses 592,071 750,672
------------ ------------
Total current liabilities 3,542,467 3,307,686
------------ ------------
OTHER LONG-TERM LIABILITIES 370,000 465,000
------------ ------------
LONG-TERM DEBT 5,877,822 5,946,251
------------ ------------
DEFERRED INCOME TAXES 115,399 141,006
------------ ------------
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 852,740 883,896
Less- Treasury stock of 657,773 and 653,923 shares,
at cost (148,198) (133,398)
------------ ------------
Total shareholders' equity 5,834,013 5,879,969
------------ ------------
$ 15,739,701 $ 15,739,912
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
December 31 December 31
--------------------------------------------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 3,775,659 $ 4,208,407 $ 7,315,586 $ 7,793,918
COST OF GOODS SOLD 2,220,449 2,395,499 4,289,335 4,440,152
------------ ------------ ------------- -------------
Gross profit 1,555,210 1,812,908 3,026,251 3,353,766
OPERATING EXPENSES:
Sales and marketing 687,801 718,624 1,236,692 1,299,572
Research and development 9,711 791,825 24,825 978,754
General and administrative 959,406 769,976 1,575,408 1,487,330
------------ ------------ ------------- -------------
Income (loss) from operations (101,708) (467,517) 189,326 (411,890)
INTEREST EXPENSE, net (115,787) (134,545) (271,936) (316,338)
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 42,204 19,602 54,661 20,627
------------ ------------ ------------- -------------
Income (loss) before taxes (175,291) 1,301,023 (27,949) 1,175,882
INCOME TAX BENEFIT (EXPENSE) 52,189 (462,146) (3,207) (393,653)
------------ ------------ ------------- -------------
NET INCOME (LOSS) $ (123,102) $ 838,877 $ (31,156) $ 782,229
============ ============ ============= =============
BASIC EARNINGS (LOSS) PER COMMON SHARE
(Note 3) $ .(03) $ .18 $ (.01) $ .17
============ ============ ============= =============
SHARES USED IN COMPUTING BASIC EARNINGS (LOSS)
PER COMMON SHARE (Note 3) 4,548,964 4,552,174 4,549,768 4,552,174
============ ============ ============= ============
DILUTED EARNINGS (LOSS) PER COMMON SHARE
(Note 3) $ (.03) $ .18 $ (.01) $ .17
============ ============ ============= ============
SHARES USED IN COMPUTING DILUTED EARNINGS
(LOSS) PER COMMON SHARE (Note 3) 4,548,964 4,563,705 4,549,768 4,563,481
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the
Six Months Ended
December 31
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (31,156) $ 782,229
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 382,705 392,257
Deferred income tax provision 11,969 24,141
Gain on sale of CMP business -- (1,660,483)
Gain on sale of particle dispersion technology -- (223,000)
(Increase) decrease in-
Accounts receivable 26,288 (318,621)
Other receivables 71,531 (774,703)
Inventories (370,169) (540,306)
Prepaid taxes and expenses (321,883) 98,190
Other assets 93,012 (7,279)
Increase (decrease) in-
Accounts payable (38,753) 106,282
Income taxes payable (245,326) 336,580
Accrued expenses (158,601) (272,018)
Reserve for litigation settlements (95,000) (162,610)
----------- -----------
Net cash used in operating activities (675,383) (2,219,341)
----------- -----------
INVESTING ACTIVITIES:
Purchases of and deposits on property, plant and equipment (169,849) (181,636)
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 (169,849) 2,491,364
----------- -----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit 1,000,000 (475,000)
Proceeds from long-term debt 975,000 1,600,000
Payments on long-term debt (1,365,968) (588,341)
Purchase of Common stock for treasury (14,800) --
----------- -----------
Net cash provided by financing activities 594,232 536,659
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (251,000) 808,682
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,486,554 1,454,083
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,235,554 $ 2,262,765
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 236,614 $ 344,624
=========== ===========
Income taxes paid $ 510,000 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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.
On December 31, 1997, the Company sold its chemical mechanical planarization
("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 agreed that during 1999 it would purchase a portion of the Company's
raw material inventory as of 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. This payment is included in research and development expense in the
accompanying consolidated statements of operations.
-1-
<PAGE>
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 December
31, 1998 and the results of operations and the cash flows for the three and six
months ended December 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.
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, 1998
consist of certificates of deposit and an investment in a money market account.
Interest income earned on the investment of cash was $20,596 and $10,807 for the
three months ended December 31, 1998 and 1997, respectively, and $35,681 and
$28,392 for the six months ended December 31, 1998 and 1997, respectively.
-2-
<PAGE>
Marketable Securities
Investments in marketable securities are categorized as either trading,
available-for-sale or held-to-maturity. At December 31, 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.
Goodwill
Goodwill represents the excess of the purchase price for the acquisition of
Thompson Dental Manufacturing Co., Inc. 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,
1998 and 1997, respectively, and $15,754 for the six months ended December 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 December 31, 1998, no such
write-down was required.
-3-
<PAGE>
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 costs are charged to expense as incurred.
Earnings (Loss) per Common Share
The Company has provided basic and diluted earnings (loss) per Common share
pursuant to SFAS No. 128, "Earnings per Share." 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 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 reflects the
potential dilution from the exercise or conversion of securities into Common
stock, such as stock options.
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 December 31
---------------------------------------------------------------------------------------
1998 1997
------------------------------------------ -------------------------------------------
Loss Shares Per Share Income 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) $ (123,102) 4,548,964 $ (.03) $ 838,877 4,552,174 $ .18
=========== =========
Effect of dilutive
securities
Stock options -- -- -- 11,531
----------- ------------ ----------- -------------
Diluted earnings (loss) per
Common share
Net income (loss) and
assumed conversions $ (123,102) 4,548,964 $ (.03) $ 838,877 4,563,705 $ .18
=========== ============ ============ =========== ============= =========
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended December 31
-------------------------------------------------------------------------------------
1998 1997
------------------------------------------ -----------------------------------------
Loss Shares Per Share Income 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) $ (31,156) 4,549,768 $ (.01) $ 782,229 4,552,174 $ .17
============ ==========
Effect of dilutive
securities
Stock options -- -- -- 11,307
----------- ------------ ----------- -------------
Diluted earnings (loss) per
Common share
Net income (loss) and
assumed conversions $ (31,156) 4,549,768 $ (.01) $ 782,229 4,563,481 $ .17
=========== ============ ============ =========== ============= ==========
</TABLE>
Options to purchase 25,135 shares of Common stock with an average exercise price
per share of $3.08 were outstanding during the three months and six months ended
December 31, 1998, 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. Options to purchase 4,923
shares of Common stock with an average exercise price per share of $5.91 were
outstanding during the three months ended December 31, 1997, 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 December 31, 1998.
Revenue Recognition
The Company recognizes revenue upon the shipment of its products.
Advertising Costs
Advertising costs are charged to expense as incurred. The amounts are charged to
sales and marketing expense in the accompanying consolidated statements of
operations.
Long-Lived Assets
The Company follows SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." 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, 1998, management has evaluated the Company's asset base, under the
guidelines established by SFAS No. 121, and believes that no impairment has
occurred.
-5-
<PAGE>
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 has
had no impact on the Company's financial statements as the Company does not have
any "comprehensive income" type earnings (losses).
3. STOCK DIVIDEND:
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. 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,
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:
December 31, June 30,
1998 1998
---------- ----------
Raw materials and supplies $1,384,217 $1,638,030
Work-in-process 2,105,606 1,697,043
Finished goods 1,215,520 1,000,101
---------- ----------
$4,705,343 $4,335,174
========== ==========
5. ACCRUED EXPENSES:
December 31, June 30,
1998 1998
---------- ----------
Compensation and related benefits $212,405 $247,377
Reserve for litigation (Note 9 ) 171,000 171,000
Other 208,666 332,295
-------- --------
$592,071 $750,672
======== ========
-6-
<PAGE>
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, 1999, subject to renewal. There was $1,000,000
of borrowings outstanding at December 31, 1998. Borrowings under the line bear
interest at prime (8.25% at December 31, 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 of borrowings under the convertible
line will be made in monthly installments based upon the then outstanding amount
with the final payment due September 2003. Borrowings under the convertible line
bear interest at prime (8.25% at December 31, 1998) and are secured by a note.
There was no outstanding balance on the convertible line at December 31, 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>
December 31, June 30,
1998 1998
--------------- ----------------
<S> <C> <C>
Note payable to bank in monthly installments of
$31,667, plus interest at prime minus .05%,
through April 1, 2003. (Interest rate not to exceed
8.45% or be below 8.20%). $ 2,274,339 $ 2,564,330
Mortgage payable to bank in monthly installments of
$11,307, plus interest at LIBOR plus 1.63%,
through August 2008 (Interest rate not to exceed
7.29% or be below 7.04%). 1,280,296 1,294,583
Note payable (Repaid in December 1998). -- 975,000
Mortgage payable to municipal authority in monthly
installments of $6,371, including interest at 2%,
through July 1, 2010. 795,640 804,998
Mortgage payable to bank in monthly installments of
$3,730, plus interest at LIBOR plus 1.63%, through
August 2008 (Interest rate not to exceed
7.29% or be below 7.04%). 432,676 438,522
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Note payable to bank in monthly installments of
$16,525, plus interest at LIBOR plus 2.24%,
through November 2003 (Interest rate not to exceed
7.52% or be below 7.27%). $ 975,000 $ --
Mortgage payable to municipal authority in monthly
installments of $1,952, including interest at 2%,
through April 1, 2010. 208,577 238,828
Mortgage payable to bank in monthly installments of
$5,305, plus interest at a floating interest rate
through August 2001 (Interest rate not to exceed
5.85% or be below 5.69%). 169,767 199,455
Mortgage payable to bank in monthly installments of
$2,543, including interest at prime plus 0.75%,
through December 1, 2011. 227,043 230,524
Capital lease obligation payable in monthly
installments of $1,148, including interest at prime
plus 2%, through March 2002. 21,988 28,432
Capital lease obligation payable in monthly
installments of $4,843, including interest at prime
plus 2%, through December 2001. 158,475 160,097
--------------- ----------------
6,543,801 6,934,769
Less- Current portion (665,979) (988,518)
--------------- ----------------
$ 5,877,822 $ 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.
As of December 31, 1998, long-term debt matures as follows:
1999 $ 665,979
2000 683,360
2001 683,592
2002 578,185
2003 1,723,259
Thereafter 2,209,426
-------------
$ 6,543,801
=============
-8-
<PAGE>
8. BUSINESS SEGMENTS:
The Company operates in two business segments: Dental Supplies and Precision
Abrasives. See Note 1 for description of the Company's business segments.
Financial information for each business segment for the three and six months
ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended December 31 Ended December 31
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Sales:
Domestic and U.S.
government customers-
Dental Supplies $ 2,259,854 $ 2,171,704 $ 4,479,277 $ 4,198,043
Precision Abrasives 794,900 1,128,664 1,493,743 2,079,138
International customers-
Dental Supplies 497,149 702,623 881,961 1,124,561
Precision Abrasives 223,756 205,416 460,605 392,176
------------- ------------- ------------- --------------
$ 3,775,659 $ 4,208,407 $ 7,315,586 $ 7,793,918
============= ============= ============= ==============
Operating income (loss):
Dental Supplies $ 276,824 $ 338,426 $ 334,179 $ 583,657
Precision Abrasives (378,532) (805,943) (144,853) (995,547)
------------- ------------- ------------- --------------
$ (101,708) $ (467,517) $ 189,326 $ (411,890)
============= ============= ============= ==============
Depreciation and amortization:
Dental Supplies $ 111,182 $ 116,290 $ 238,989 $ 244,515
Precision Abrasives 79,574 81,362 143,716 147,742
------------- ------------- ------------- --------------
$ 190,756 $ 197,652 $ 382,705 $ 392,257
============= ============= ============= ==============
Capital expenditures:
Dental Supplies $ 44,586 70,180 $ 75,575 $ 92,590
Precision Abrasives 59,942 $ 73,122 94,274 89,046
------------- ------------- ------------- -------------
$ 104,528 $ 143,302 $ 169,849 $ 181,636
============= ============= ============= =============
</TABLE>
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. By amendment, a claim for infringement of a second
related patent was later added. The Company has retained counsel to vigorously
defend against the Dentsply complaint which it believes to be without basis. The
-9-
<PAGE>
Company has asserted 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 settled a 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 1997 and
the second payment of $101,250 in August 1998 and will make three additional
annual payments. In connection with this matter, the Company was fined $350,000,
which is payable in five annual installments commencing in January 1998. The
Company has paid the first and second installment. Interest is payable at 5.42%
per year and is due at the end of the fiscal year payout.
-10-
<PAGE>
ITEM 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations
Safe Harbor for Forward-Looking Statements
From time to time, the Company may publish statements which are not historical
fact, but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new
products, research and development activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical and
anticipated results or other expectations expressed in the Company's
forward-looking statements. Such forward-looking statements may be identified by
the use of certain forward-looking terminology such as, "may," "will," "expect,"
"anticipate," "intend," "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 a loss of $123,102 for the three months ended December 31,
1998 due to a decrease in net revenues from international customers in the
Dental Supplies segment and lower revenues caused by the on-going introduction
of a new sales, marketing and growth strategy in the Precision Abrasives
segment. The Precision Abrasives segment has targeted four applications and
markets to generate additional revenues for its precision lapping films and
slurries. The growth strategy is to target specific opportunities related to the
finishing and polishing of computer heads, floppy disks, ceramic rolls and
automotive parts. In addition, the Company incurred significant professional and
legal fees related to the Dentsply litigation that will continue to have a
material adverse effect on the Company's consolidated financial position and
results of operations for the foreseeable future.
Due to the loss incurred in the three months ended December 31, 1998, the
Company has a net loss of $31,156 for the six months ended December 31, 1998.
-11-
<PAGE>
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 Six Months
Ended December 31 Ended December 31
------------------------------------------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net Sales:
Dental Supplies $ 2,757,003 $ 2,874,327 $ 5,361,238 $ 5,322,604
Precision Abrasives 1,018,656 1,334,080 1,954,348 2,471,314
--------------- -------------- --------------- --------------
$ 3,775,659 $ 4,208,407 $ 7,315,586 $ 7,793,918
=============== ============== =============== ==============
Gross Profit:
Dental Supplies $ 1,188,044 $ 1,301,325 $ 2,366,114 $ 2,403,113
Precision Abrasives 367,166 511,583 660,137 950,653
--------------- -------------- --------------- --------------
$ 1,555,210 $ 1,812,908 $ 3,026,251 $ 3,353,766
=============== ============== =============== ==============
Operating Income (Loss):
Dental Supplies $ 276,824 $ 338,426 $ 334,179 $ 583,657
Precision Abrasives (378,532) (805,943) (144,853) (995,547)
--------------- -------------- --------------- --------------
$ (101,708) $ (467,517) $ 189,326 $ (411,890)
=============== ============== =============== ==============
</TABLE>
Results of Operations
Three Months Ended December 31, 1998 Compared to Three Months Ended
December 31, 1997
Net sales for the three months ended December 31, 1998 decreased $432,748 from
the three months ended December 31, 1997. Net sales in the Dental Supplies
segment decreased $117,324 primarily due to a slow-down in sales to
international distributors caused by various international monetary problems
offset by a continued increase in sales of the Company's proprietary and
patented endodontic (root canal) instruments. Net sales in the Precision
Abrasives segment decreased $315,424 from $1,334,080 for the three months ended
December 31, 1997 to $1,018,656 for the three months ended December 31, 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 on-going introduction of a new
sales, marketing and growth strategy which has led to a re-evaluation 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 December 31, 1998 decreased $257,698
from the three months ended December 31, 1997. Gross profit in the Dental
Supplies segment decreased $113,281 from $1,301,325 (45.3% of Dental Supplies
net sales) for the three months ended December 31, 1997 to $1,188,044 (43.1% of
Dental Supplies net sales) for the three months ended December 31, 1998. Gross
profit in the Precision Abrasives segment decreased from $511,583 (38.3% of
Precision Abrasives net sales) for the three months ended December 31, 1997 to
$367,166 (36.0% of Precision Abrasives net sales) for the three months ended
-12-
<PAGE>
December 31, 1998. The decreases in gross profit are due to the aforementioned
decreases 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 decreased $30,823 from $718,624 (17.1% of net
sales) for the three months ended December 31, 1997 to $687,801 (18.2% of net
sales) for the three months ended December 31, 1998 primarily as a result of
lower sales commissions. General and administrative expenses increased $189,430
from $769,976 (18.3% of net sales) to $959,406 (25.4% of net sales) due to
higher professional and legal fees incurred in the three months ended December
31, 1998 compared to the three months ended December 31, 1997. The Company
believes it will incur significant costs, for the foreseeable future which the
Company is unable to estimate due to the nature of litigation, related to the
Dentsply litigation and that such costs 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 $782,114 due to the one-time payment to Nanophase of $775,000
in the three months ended December 31, 1997 in connection with certain research
and development fees.
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.
Interest expense, interest income and other income remained relatively constant
between periods.
Six Months Ended December 31, 1998 Compared to Six Months Ended December 31,
1997
Net sales for the six months ended December 31, 1998 decreased $478,332 from the
six months ended December 31, 1997. Net sales in the Dental Supplies segment
increased $38,634 due to an increase in sale of endodontic instruments. Net
sales in the Precision Abrasives segment decreased $516,966 from $2,471,314 for
the six months ended December 31, 1997 to $1,954,348 for the six months ended
December 31, 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 re-evaluation of
target customers and thus a temporary decrease in net sales.
Gross profit for the six months ended December 31, 1998 decreased $327,515 from
the six months ended December 31, 1997. Gross profit in the Dental Supplies
segment decreased $36,999 from $2,403,113 (45.1% of Dental Supplies net sales)
-13-
<PAGE>
for the six months ended December 31, 1997 to $2,366,114 (44.1% of Dental
Supplies net sales) for the six months ended December 31, 1998. Gross profit in
the Precision Abrasives segment decreased $290,516 from $950,653 (38.5% of
Precision Abrasives net sales) for the six months ended December 31, 1997 to
$660,137 (33.8% of Precision Abrasives net sales) for the six months ended
December 31, 1998. The decreases in gross profit are due to the aforementioned
decreases 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 decreased $62,880 from $1,299,572 (16.7% of net
sales) for the six months ended December 31, 1997 to $1,236,692 (16.9% of net
sales) for the six months ended December 31, 1998 primarily as a result of lower
sales commissions. General and administrative expenses increased $88,078 from
$1,487,330 (19.1% of net sales) to $1,575,408 (21.5% of net sales) due to higher
legal and professional fees in connection with the Dentsply litigation. Research
and development expenses decreased $953,929 as a result of costs incurred in the
six months ended December 31, 1997 in connection with certain research and
development fees paid to Nanophase, as well as the investment of funds during
the same period to refine the Company's CMP slurry products.
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.
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 $675,383 and $2,219,341 was used in operating activities in the six
months ended December 31, 1998 and 1997, respectively. The decreasing use of
cash between periods was a result of an increase in income from operations and
the timing of accounts receivable collections offset by the timing of payments
to taxing authorities.
-14-
<PAGE>
Expenditures for property, plant and equipment totaled $169,849 for the six
months ended December 31, 1998 and $181,636 for the six months ended December
31, 1997.
Proceeds received from long-term debt were $975,000 and $1,600,000 for the six
months ended December 31, 1998 and 1997, 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, 1998 and
1997, the Company made payments on long-term debt of $1,365,968 and $588,341,
respectively, which includes payments of $975,000 related to a separate
refinancing of certain long-term debt during the six months ended December 31,
1998.
During the three months ended December 31, 1998, the Company renegotiated
certain of its mortgages and loans to secure more favorable terms and interest
rates.
The Company has a commitment for a $3,000,000 line of credit with a bank which
will expire on December 31, 1999, 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. During the six months ended December 31, 1998, the Company
borrowed $1,000,000 under this line of credit. 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
convertible line will be made in monthly installments based upon the then
outstanding amount with the final payment due September 2003. Borrowings under
the convertible line bear interest at prime and are secured by a note.
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 $513,750
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.
-15-
<PAGE>
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.
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.
-16-
<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.
-17-
<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
On November 13, 1998, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing the transfer
of its Common stock listing from the Nasdaq National Market
to the Nasdaq SmallCap Market. The transfer did not affect
the ability of shareholders to trade the Company's stock.
-18-
<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.
<TABLE>
<S> <C>
MOYCO TECHNOLOGIES, INC.
Dated: February 12, 1999 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, 1999 BY: /s/William G. Woodhead
---------------------------------------------
William G. Woodhead
Secretary/Treasurer (Principal Financial Officer and
Principal Accounting Officer) and Director
</TABLE>
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,235,554
<SECURITIES> 185,904
<RECEIVABLES> 2,746,098
<ALLOWANCES> (267,741)
<INVENTORY> 4,705,343
<CURRENT-ASSETS> 9,188,796
<PP&E> 12,091,143
<DEPRECIATION> (6,246,706)
<TOTAL-ASSETS> 15,739,701
<CURRENT-LIABILITIES> 3,542,467
<BONDS> 0
0
0
<COMMON> 26,028
<OTHER-SE> 5,807,985
<TOTAL-LIABILITY-AND-EQUITY> 15,739,701
<SALES> 7,315,586
<TOTAL-REVENUES> 7,315,586
<CGS> 4,289,335
<TOTAL-COSTS> 4,289,335
<OTHER-EXPENSES> 2,782,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 271,936
<INCOME-PRETAX> (27,949)
<INCOME-TAX> 3,207
<INCOME-CONTINUING> (31,156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,156)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
