<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, 1999
Commission File No. 0-4123
------
MOYCO TECHNOLOGIES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<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 (215) 855-4300
area code:) -------------------------------------------------------------
</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, 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>
March 31, June 30,
1999 1998
----------- -----------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,729,597 $ 1,486,554
Marketable securities 185,904 185,904
Accounts receivable, net of reserves of
$241,741 2,488,720 2,504,645
Other receivables 128,391 71,531
Inventories, estimated (Notes 2 and 4) 4,602,643 4,335,174
Deferred income taxes 194,354 257,305
Prepaid taxes 382,151 --
Prepaid expenses 41,370 42,026
----------- -----------
Total current assets 9,753,130 8,883,139
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 602,433
Buildings and improvements 4,608,502 4,587,511
Machinery and equipment 6,405,500 5,751,307
Furniture and fixtures 654,633 840,413
Automotive equipment 139,630 139,630
----------- -----------
12,410,698 11,921,294
Less- Accumulated depreciation and amortization (6,463,091) (5,885,594)
------------ -----------
Net property, plant and equipment 5,947,607 6,035,700
----------- -----------
OTHER ASSETS:
Goodwill, less accumulated amortization of
$83,365 and $59,734 389,255 412,886
Other 327,778 408,187
----------- -----------
Total other assets 717,033 821,073
----------- -----------
$16,417,770 $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>
March 31, June 30,
1999 1998
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 1,800,000 $ --
Current portion of long-term debt 984,136 988,518
Accounts payable 1,235,907 1,323,170
Income taxes payable -- 245,326
Accrued expenses 717,613 750,672
----------- -----------
Total current liabilities 4,737,656 3,307,686
----------- -----------
OTHER LONG-TERM LIABILITIES 311,000 465,000
----------- -----------
LONG-TERM DEBT 5,636,544 5,946,251
----------- -----------
DEFERRED INCOME TAXES 102,593 141,006
----------- -----------
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 648,704 883,896
Less- Treasury stock of 657,773 and 653,923 shares,
at cost (148,198) (133,398)
----------- -----------
Total shareholders' equity 5,629,977 5,879,969
----------- -----------
$16,417,770 $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 Nine Months Ended
March 31 March 31
------------------------ -------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $3,821,678 $3,467,104 $11,137,264 $11,261,022
COST OF GOODS SOLD 2,271,609 1,915,645 6,560,944 6,355,797
---------- ---------- ----------- -----------
Gross profit 1,550,069 1,551,459 4,576,320 4,905,225
OPERATING EXPENSES:
Sales and marketing 727,423 623,065 1,964,115 1,922,637
Research and development 2,862 1,578 27,687 980,332
General and administrative 1,025,309 656,391 2,600,717 2,143,721
---------- ---------- ----------- -----------
Income (loss) from operations
(205,525) 270,425 (16,199) (141,465)
INTEREST EXPENSE, net (232,550) (152,088) (504,486) (468,426)
GAIN ON SALE OF CMP BUSINESS -- -- -- 1,660,483
GAIN ON SALE OF PARTICLE DISPERSION
TECHNOLOGY -- -- -- 223,000
OTHER INCOME, net 137,899 66,648 192,560 87,275
---------- ---------- ----------- -----------
Income (loss) before taxes (300,176) 184,985 (328,125) 1,360,867
INCOME TAX (EXPENSE) BENEFIT 96,140 (64,183) 92,933 (457,836)
---------- ---------- ----------- -----------
NET INCOME (LOSS) $ (204,036) $ 120,802 $ (235,192) $ 903,031
========== ========== =========== ===========
BASIC EARNINGS (LOSS) PER
COMMON SHARE (Note 3) $ (.04) $ .03 $ (.05) $ .20
========== ========== =========== ===========
SHARES USED IN COMPUTING BASIC EARNINGS
(LOSS) PER COMMON SHARE (Note 3)
4,547,774 4,552,180 4,549,090 4,552,176
========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER
COMMON SHARE (Note 3) $ (.04) $ .03 $ (.05) $ .20
========== ========== =========== ===========
SHARES USED IN COMPUTING DILUTED EARNINGS
(LOSS) PER COMMON SHARE (Note 3)
4,547,774 4,561,428 4,549,090 4,559,102
========== ========== =========== ===========
</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
Nine Months Ended
March 31
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (235,192) $ 903,031
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Provision for accounts receivable reserves -- 45,714
Depreciation and amortization 612,806 592,332
Deferred income tax provision 24,538 74,848
Gain on sale of CMP business -- (1,660,483)
Gain on sale of particle dispersion technology -- (223,000)
(Increase) decrease in-
Accounts receivable 15,925 (68,490)
Other receivables (56,860) (509,219)
Inventories (267,469) (1,116,230)
Prepaid taxes and expenses (381,495) 81,122
Other assets 68,731 (59,137)
Increase (decrease) in-
Accounts payable (87,263) (111,200)
Income taxes payable (245,326) 350,056
Reserve for litigation settlements (154,000) (226,000)
Other accrued expenses (33,059) (374,680)
------------ -----------
Net cash used in operating activities (738,664) (2,301,336)
------------ -----------
INVESTING ACTIVITIES:
Purchases of and deposits on property, plant and equipment (221,194) (363,765)
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 (221,194) 2,309,235
------------ -----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit 1,800,000 (275,000)
Proceeds from long-term debt 975,000 4,260,000
Payments on long-term debt (1,557,299) (3,449,223)
Proceeds from exercise of stock options -- 300
Purchase of Common stock for treasury (14,800) --
------------ -----------
Net cash provided by financing activities 1,202,901 536,077
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 243,043 543,976
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,486,554 1,454,083
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,729,597 $ 1,998,059
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 567,222 $ 506,724
=========== ===========
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
------------------------------------------
MARCH 31, 1999
--------------
(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. As of March
31,1999, EKC has purchased $62,500 of this inventory.
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 statement of operations for the nine months ended
March 31, 1998.
-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 March 31,
1999 and the results of operations and the cash flows for the three and nine
months ended March 31, 1999 and 1998. 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 March 31, 1999
consist of certificates of deposit and an investment in a money market account.
Interest income earned on the investment of cash was $17,459 and $11,559 for the
three months ended March 31, 1999 and 1998, respectively, and $53,140 and
$39,951 for the nine months ended March 31, 1999 and 1998, respectively. During
the three and nine months ended March 31, 1999, the Company incurred $268,210 of
capital lease obligations. There were no capital lease obligations incurred
during the nine months ended March 31, 1998.
-2-
<PAGE>
Marketable Securities
Investments in marketable securities are categorized as either trading,
available-for-sale or held-to-maturity. At March 31, 1999, 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 fiscal 1997
acquisition of Thompson Dental Manufacturing Co., Inc., one of the Company's
wholly owned subsidiaries, 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, 1999 and
1998, respectively, and $23,631 for the nine months ended March 31, 1999 and
1998, 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, 1999, 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 March 31
--------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ------------------------------------------
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) $(204,036) 4,547,774 $(.04) $20,802 4,552,180 $.03
===== ====
Effect of dilutive
securities
Stock options -- -- -- 9,248
--------- --------- ------- ---------
Diluted earnings (loss) per
Common share
Net income (loss) and
assumed conversions
$(204,036) 4,547,774 $(.04) $20,802 4,561,428 $.03
========== ========= ===== ======= ========= ====
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended March 31
--------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ------------------------------------------
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) $(235,192) 4,549,090 $(.05) $903,031 4,552,176 $.20
===== ====
Effect of dilutive
securities
Stock options -- -- -- 6,926
--------- --------- -------- ---------
Diluted earnings (loss) per
Common share
Net income (loss) and
assumed conversions
$(235,192) 4,549,090 $(.05) $903,031 4,559,102 $.20
========= ========= ===== ======== ========= ====
</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 nine months
ended March 31, 1999, but were not included in the computation of diluted loss
per Common share because the Company had a net loss for the periods and all
outstanding options would have been anti-dilutive. Options to purchase 7,123
shares of Common stock with an average exercise price per share of $5.55 were
outstanding during the three months ended March 31, 1998, but were not included
in the computation of diluted earnings per Common share because the options'
exercise prices were greater than the average market price of the Common shares
during the period. The options, which expire at various times through October
2006, were still outstanding as of March 31, 1999.
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 March 31,
1999, 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:
March 31, June 30,
1999 1998
---------- ----------
Raw materials and supplies $1,528,675 $1,638,030
Work-in-process 1,711,609 1,697,043
Finished goods 1,362,359 1,000,101
---------- ----------
$4,602,643 $4,335,174
========== ==========
5. ACCRUED EXPENSES:
March 31, June 30,
1999 1998
---------- ----------
Compensation and related benefits $ 212,772 $ 247,377
Reserve for litigation (Note 9 ) 171,000 171,000
Other 333,841 332,295
---------- ----------
$ 717,613 $ 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 $1,800,000
of borrowings outstanding at March 31, 1999. Borrowings under the line bear
interest at prime (7.75% at March 31, 1999) 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 (7.75% at March 31, 1999) and are secured by a note. There was
no outstanding balance on the convertible line at March 31, 1999.
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>
March 31, June 30,
1999 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%). $2,179,339 $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%). 1,272,905 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. 759,497 804,998
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%). 431,003 438,522
</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%). $ 963,152 $ --
Mortgage payable to municipal authority in monthly
installments of $1,952, including interest at 2%,
through April 1, 2010. 224,771 238,828
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%). 150,112 199,455
Mortgage payable to bank in monthly installments of
$2,543, including interest at prime plus 0.75%,
through December 1, 2011. 223,156 230,524
Capital lease obligation payable in monthly
installments of $3,522, including interest at 5.07%,
through December 2005. 242,075 --
Capital lease obligation payable in monthly
installments of $811, including interest at 6.50%,
through December 2000. 14,610 --
Capital lease obligation payable in monthly
installments of $1,148, including interest at prime
plus 2%, through March 2002. 19,692 28,432
Capital lease obligation payable in monthly
installments of $4,843, including interest at prime
plus 2%, through December 2001. 140,368 160,097
---------- ---------
6,620,680 6,934,769
Less- Current portion (984,136) (988,518)
---------- ---------
$5,636,544 $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 March 31, 1999, long-term debt matures as follows:
1999 $ 984,136
2000 988,366
2001 950,272
2002 936,449
2003 883,633
Thereafter 1,877,824
----------
$6,620,680
==========
-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 is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended March 31 Ended March 31
----------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales:
Domestic and U.S.
government customers-
Dental Supplies $2,158,370 $1,673,497 $ 6,637,647 $ 5,871,540
Precision Abrasives 882,498 747,536 2,376,241 2,826,674
International customers-
Dental Supplies 286,975 855,828 1,168,936 1,980,389
Precision Abrasives 493,835 190,243 954,440 582,419
---------- ---------- ----------- -----------
$3,821,678 $3,467,104 $11,137,264 $11,261,022
========== ========== =========== ===========
Operating income (loss):
Dental Supplies $ 153,510 $ 218,598 $ 487,689 $ 802,255
Precision Abrasives (359,035) 51,827 (503,888) (943,720)
---------- ---------- ----------- -----------
$ (205,525) $ 270,425 $ (16,199) $ (141,465)
========== ========== =========== ===========
Depreciation and amortization:
Dental Supplies $ 124,504 $ 134,382 $ 363,493 $ 378,897
Precision Abrasives $ 105,597 65,693 249,313 213,435
---------- ---------- ----------- -----------
$ 230,101 $ 200,075 $ 612,806 $ 592,332
========== =========== =========== ===========
Capital expenditures:
Dental Supplies $ 9,779 $ 56,947 $ 85,354 $ 149,537
Precision Abrasives 41,566 15,182 135,840 104,228
Corporate -- 110,000 -- 110,000
---------- ---------- ----------- -----------
$ 51,345 $ 182,129 $ 221,194 $ 363,765
========== ========== =========== ===========
March 31
------------------------
1999 1998
----------- ------------
Total assets:
Dental Supplies $ 9,535,511 $10,468,896
Precision Abrasives 4,367,127 4,897,781
Corporate 2,515,132 1,224,104
----------- -----------
$16,417,770 $16,590,781
=========== ===========
</TABLE>
-9-
<PAGE>
9. COMMITMENTS AND CONTINGENCIES:
Dentsply Litigation
On April 22, 1998, the Company was served with a complaint in the United States
District Court for the Middle District of Pennsylvania by DENTSPLY
International, Inc. ("Dentsply") claiming infringement of a Dentsply patent by
the Company's manufacturing process to fabricate nickel titanium endodontic
(root canal) instruments. 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
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. SUBSEQUENT CASUALTY LOSS:
On April 16, 1999, certain coating equipment, utilized in the manufacture of
abrasive materials in the Precision Abrasives segment, was damaged at the
Company's Montgomeryville facility. The damage was caused by water seeping
through a section of the facility's roof which was being repaired, and was left
unprotected, by an outside contractor during a rainfall. Minor amounts of raw
material inventory were also damaged.
The Company's production capacity of abrasive material has been reduced until
such time as the coating equipment can be repaired or replaced. The production
capacity reduction will continue until at least June of 1999. The Company cannot
exactly estimate the capacity reduction at this time, however, the damage could
have a material impact on production and, subsequently, on sales and operating
income of the Precision Abrasives segment. The Company is exploring all
practical initiatives to reduce the impact of the damaged equipment. A more
-10-
<PAGE>
detailed evaluation of the damage and its impact is in the process of being
completed.
The Company believes it has adequate insurance coverage for the repair of the
damaged equipment as well as for compensation for the resulting business
interruption. The Company has notified its insurer of the damage and is in the
process of filing claims.
-11-
<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; (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.); and (vii) the effects of the casualty loss at one of the Company's
manufacturing facilities. (See discussion of casualty loss in Part I, Item 1,
Footnote No. 10, to the Consolidated Financial Statements of this Form 10-Q.)
Overview
The Company recorded a loss of $204,036 for the three months ended March 31,
1999 due to a decrease in net revenues from international customers in the
Dental Supplies segment and expenses incurred for 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.
-12-
<PAGE>
These same factors have resulted in a loss of $235,192 for the nine months ended
March 31, 1999.
On April 16, 1999, certain coating equipment, utilized in the manufacture of
abrasive materials in the Precision Abrasives segment, was damaged at the
Company's Montgomeryville facility. The damage was caused by water seeping
through a section of the facility's roof which was being repaired, and was left
unprotected, by an outside contractor during a rainfall. Minor amounts of raw
material inventory were also damaged.
The Company's production capacity of abrasive material has been reduced until
such time as the coating equipment can be repaired or replaced. The production
capacity reduction will continue until at least June of 1999. The Company cannot
exactly estimate the capacity reduction at this time, however, the damage could
have a material impact on production and, subsequently, on sales and operating
income of the Precision Abrasives Segment. The Company is exploring all
practical initiatives to reduce the impact of the damaged equipment. A more
detailed evaluation of the damage and its impact is in the process of being
completed.
The Company believes it has adequate insurance coverage for the repair of the
damaged equipment as well as for compensation for the resulting business
interruption. The Company has notified its insurer of the damage and is in the
process of filing claims.
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
------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales:
Dental Supplies $2,445,345 $2,529,325 $ 7,806,583 $ 7,851,929
Precision Abrasives 1,376,333 937,779 3,330,681 3,409,093
---------- ---------- ----------- -----------
$3,821,678 $3,467,104 $11,137,264 $11,261,022
========== ========== =========== ===========
Gross Profit:
Dental Supplies $1,108,967 $1,185,046 $ 3,475,081 $ 3,588,159
Precision Abrasives 441,102 366,413 1,101,239 1,317,066
---------- ---------- ----------- -----------
$1,550,069 $1,551,459 $ 4,576,320 $ 4,905,225
========== ========== =========== ===========
Operating Income (Loss):
Dental Supplies $ 276,510 $ 218,598 $ 610,689 $ 802,255
Precision Abrasives (482,035) 51,827 (626,888) (943,720)
---------- ---------- ----------- -----------
$ (205,525) $ 270,425 $ (16,199) $ (141,465)
========== ========== =========== ===========
</TABLE>
-13-
<PAGE>
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended
March 31, 1998
Net sales for the three months ended March 31, 1999 increased $354,574 from the
three months ended March 31, 1998. Net sales in the Dental Supplies segment
decreased $83,980 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 increased
$438,554 from $937,779 for the three months ended March 31, 1998 to $1,376,333
for the three months ended March 31, 1999 primarily as a result of a shift in
product mix to the segment's higher end products.
Gross profit for the three months ended March 31, 1999 decreased $1,390 from the
three months ended March 31, 1998. Gross profit in the Dental Supplies segment
decreased $76,079 from $1,185,046 (46.9% of Dental Supplies net sales) for the
three months ended March 31, 1998 to $1,108,967 (45.4% of Dental Supplies net
sales) for the three months ended March 31, 1999. Gross profit in the Precision
Abrasives segment increased from $366,413 (39.1% of Precision Abrasives net
sales) for the three months ended March 31, 1998 to $441,102 (32.0% of Precision
Abrasives net sales) for the three months ended March 31, 1999. 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.
Sales and marketing expenses increased $104,358 from $623,065 (17.9% of net
sales) for the three months ended March 31, 1998 to $727,423 (19.0% of net
sales) for the three months ended March 31, 1999 primarily as a result of
additional cooperative advertising and education seminars sponsored by the
Company. General and administrative expenses increased $368,918 from $656,391
(18.9% of net sales) to $1,025,309 (26.8% of net sales) due to higher
professional and legal fees incurred in the three months ended March 31, 1999
compared to the three months ended March 31, 1998. 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
remained relatively constant between periods.
Interest expense increased $80,462 due to increased borrowings related to
funding of the Company's current operations. Other income increased $71,251 due
to an increase in miscellaneous income earned at seminars and trade shows.
-14-
<PAGE>
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998
Net sales for the nine months ended March 31, 1999 decreased $123,758 from the
nine months ended March 31, 1998. Net sales in the Dental Supplies segment
decreased $45,346 due to the previously noted decrease in international sales
offset by an increase in the sales of endodontic instruments. Net sales in the
Precision Abrasives segment decreased $78,412 from $3,409,093 for the nine
months ended March 31, 1998 to $3,330,681 for the nine months ended March 31,
1999 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 nine months ended March 31, 1999 decreased $328,905 from
the nine months ended March 31, 1998. Gross profit in the Dental Supplies
segment decreased $113,078 from $3,588,159 (45.7% of Dental Supplies net sales)
for the nine months ended March 31, 1998 to $3,475,081 (44.5% of Dental Supplies
net sales) for the nine months ended March 31, 1999. Gross profit in the
Precision Abrasives segment decreased $215,827 from $1,317,066 (38.6% of
Precision Abrasives net sales) for the nine months ended March 31, 1998 to
$1,101,239 (33.1% of Precision Abrasives net sales) for the nine months ended
March 31, 1999. 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 increased $41,478 from $1,922,637 (17.1% of net
sales) for the nine months ended March 31, 1998 to $1,964,115 (17.6% of net
sales) for the nine months ended March 31, 1999 primarily as a result of
additional cooperative advertising and education seminars sponsored by the
Company offset by lower sales commissions. General and administrative expenses
increased $456,996 from $2,143,721 (19.0% of net sales) to $2,600,717 (23.4% of
net sales) due to higher legal and professional fees in connection with the
Dentsply litigation. Research and development expenses decreased $952,645 as a
result of costs incurred in the nine months ended March 31, 1998 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. The Company believes the additional deferred payment to be received for
the period through June 30, 1999 will not be significant.
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.
-15-
<PAGE>
Interest expense increased $36,060 due to increased borrowings related to
funding of the Company's current operations. Other income increased $105,285 due
to an increase in miscellaneous income earned at seminars and trade shows.
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 and continued
operations. Substantially all of the Company's assets are pledged as collateral
for its long-term debt.
Net cash of $738,664 and $2,301,336 was used in operating activities in the nine
months ended March 31, 1999 and 1998, respectively. The decreasing use of cash
between periods was a result of a decrease in the loss from operations, the
timing of receivable collections from customers and changes in the level of
inventory maintained by the Company, offset by the timing of payments to taxing
authorities.
Expenditures for property, plant and equipment totaled $221,194 for the nine
months ended March 31, 1999 and $363,765 for the nine months ended March 31,
1998.
Proceeds received from long-term debt were $975,000 and $4,260,000 for the nine
months ended March 31, 1999 and 1998, 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, 1999 and 1998,
the Company made payments on long-term debt of $1,557,299 and $3,449,223,
respectively, which includes payments of $975,000 and $2,562,921 related to
refinancing of certain long-term debt during the nine months ended March 31,
1999 and 1998, respectively.
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 nine months ended March 31, 1999, the Company
borrowed $1,800,000 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 $250,000 in fiscal 1999 on capital
expenditures, primarily for abrasive and dental instrument manufacturing
equipment. The Company also may be required to make expenditures to repair
and/or replace certain of its coating equipment damaged in April 1999. (See
discussion of casualty loss in Part I, Item 1, Footnote No. 10, to the
Consolidated Financial Statements of this Form 10-Q.) The possible amount
related to this loss is not known at this time. In addition, the Company is
obligated to pay $513,750 over three 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
-16-
<PAGE>
No. 9, to the Consolidated Financial Statements of this Form 10-Q.) The Company
anticipates that sufficient cash will be generated from operations to fund these
payments and expenditures and, to the extent they are not, they will be funded
using the Company's credit facilities.
The Company believes that inflation has not, and will not, have a material
impact on the Company's financial condition and results of operations.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is required to be adopted for the Company's fiscal 1999 financial
statements. The adoption of this pronouncement should not have any impact on the
Company's existing disclosures.
Risks Associated with the Year 2000
I. Background
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions and information, send invoices, or engage in
similar normal business activities.
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.
-17-
<PAGE>
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.
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.
-18-
<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
None.
-19-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MOYCO TECHNOLOGIES, INC.
Dated: May 14, 1999 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, 1999 BY: /s/William G. Woodhead
-----------------------------------------
William G. Woodhead
Secretary/Treasurer (Principal Financial
Officer and Principal Accounting Officer)
and Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,729,597
<SECURITIES> 185,904
<RECEIVABLES> 2,730,461
<ALLOWANCES> 241,741
<INVENTORY> 4,602,643
<CURRENT-ASSETS> 9,753,130
<PP&E> 12,410,698
<DEPRECIATION> 6,463,091
<TOTAL-ASSETS> 16,417,770
<CURRENT-LIABILITIES> 4,737,656
<BONDS> 0
0
0
<COMMON> 26,028
<OTHER-SE> 5,603,949
<TOTAL-LIABILITY-AND-EQUITY> 16,417,770
<SALES> 11,137,264
<TOTAL-REVENUES> 11,137,264
<CGS> 6,560,994
<TOTAL-COSTS> 6,560,944
<OTHER-EXPENSES> 4,592,519
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 504,846
<INCOME-PRETAX> (328,125)
<INCOME-TAX> (92,933)
<INCOME-CONTINUING> (235,192)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (235,192)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
