<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 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 November 12, 1999: 4,999,142 shares of Common stock (as
adjusted for the 10% stock dividend to be issued on November 24, 1999), 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>
September 30, June 30,
1999 1999
------------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,858,988 $ 1,752,468
Accounts receivable, net of reserves of $401,323 2,463,924 2,458,855
Note receivable 206,107 206,107
Other receivables 297,029 212,928
Income tax receivable 154,112 155,872
Inventories, estimated (Notes 2 and 4) 4,393,444 4,373,256
Deferred income taxes 441,262 475,687
Prepaid expenses 89,873 31,056
----------- -----------
Total current assets 9,904,739 9,666,229
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 602,433
Buildings and improvements 4,624,245 4,624,245
Machinery and equipment 6,649,555 6,431,093
Furniture and fixtures 683,941 683,941
Automotive equipment 139,630 139,630
----------- -----------
12,699,804 12,481,342
Less- Accumulated depreciation and amortization (6,842,533) (6,656,644)
----------- -----------
Net property, plant and equipment 5,857,271 5,824,698
----------- -----------
OTHER ASSETS:
Goodwill, less accumulated amortization of
$99,119 and $91,242 373,501 381,378
Other 359,832 333,469
----------- -----------
Total other assets 733,333 714,847
----------- -----------
$16,495,343 $16,205,774
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 1,500,000 $ 1,200,000
Current portion of capital lease obligations 119,449 99,471
Current portion of long-term debt 618,431 614,553
Accounts payable 939,234 1,968,921
Income taxes payable 88,273 --
Accrued expenses 1,055,291 623,846
----------- -----------
Total current liabilities 4,320,678 4,506,791
----------- -----------
CAPITAL LEASE OBLIGATIONS 371,301 292,976
----------- -----------
LONG-TERM DEBT 5,733,814 5,436,092
----------- -----------
DEFERRED INCOME TAXES 218,884 225,797
----------- -----------
OTHER LONG-TERM LIABILITIES 220,000 317,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY (Note 3):
Preferred stock, $.005 par value, 2,500,000
shares authorized, none issued and outstanding -- --
Common stock, $.005 par value, 15,000,000
shares authorized, 5,726,102 shares issued 28,631 26,028
Additional paid-in capital 5,621,395 5,103,443
Retained earnings 131,088 448,095
Less - Treasury stock of 726,960 and 653,923 shares,
at cost (150,448) (150,448)
----------- -----------
Total shareholders' equity 5,630,666 5,427,118
----------- -----------
$16,495,343 $16,205,774
=========== ===========
</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
Three Months Ended
September 30
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
NET SALES $4,102,961 $3,539,927
COST OF GOODS SOLD 2,309,420 2,068,886
---------- ----------
Gross profit 1,793,541 1,471,041
OPERATING EXPENSES:
Sales and marketing 589,515 548,891
Research and development 1,892 15,114
General and administrative 889,065 616,002
---------- ----------
Income from operations 313,069 291,034
INTEREST EXPENSE, net (113,982) (156,149)
OTHER INCOME (EXPENSE), net 134,599 12,457
---------- ----------
Income before taxes 333,686 147,342
INCOME TAX EXPENSE (130,138) (55,396)
---------- ----------
NET INCOME $ 203,548 $ 91,946
========== ==========
BASIC EARNINGS PER COMMON SHARE (Notes 2 and 3) .04 .02
========== ==========
SHARES USED IN COMPUTING BASIC EARNINGS PER COMMON SHARE (Notes and 3) 4,999,142 5,005,608
========== ==========
DILUTED EARNINGS PER COMMON SHARE (Notes 2 and 3) $ .04 $ .02
========== ==========
SHARES USED IN COMPUTING DILUTED EARNINGS PER COMMON SHARE (Notes 2 and 4,999,142 5,012,091
========== ==========
</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
Three Months Ended
September 30
------------------------
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 203,548 $ 91,946
Adjustments to reconcile net income to net cash
used in operating activities-
Depreciation and amortization 200,560 191,949
Deferred income taxes 27,512 22,508
(Increase) decrease in-
Accounts receivable (5,069) 215,447
Other receivables (84,101) 55,946
Income tax receivable 1,760 --
Inventories (20,188) (234,001)
Prepaid expenses (58,817) (226,990)
Other assets (33,157) 37,218
Increase (decrease) in-
Accounts payable (1,029,687) (543,354)
Income taxes payable 88,273 (245,326)
Reserve for litigation settlements -- (95,000)
Other accrued expenses 334,445 160,799
---------- ----------
Net cash used in operating activities (374,921) (568,858)
----------- ----------
INVESTING ACTIVITIES:
Purchases of and deposits on property, plant and equipment (69,462) (65,321)
----------- ----------
Net cash used in investing activities (69,462) (65,321)
----------- ----------
FINANCING ACTIVITIES:
Net borrowings under lines of credit 800,000 900,000
Proceeds from long-term debt -- --
Payments on capital lease obligations (50,697)
Payments of long-term debt (198,400) (221,914)
Purchase of Common stock for treasury -- (9,062)
---------- ----------
Net cash provided by financing activities 550,903 669,024
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 106,520 34,845
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,752,468 1,486,554
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,858,988 $1,521,399
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 156,620 $ 94,791
========== ==========
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
------------------------------------------
SEPTEMBER 30, 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 and distributing of
other dental products for the professional dental market primarily in the United
States with additional sales in Canada, Mexico, South America, Europe and Asia.
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. The Precision
Abrasives segment sells primarily in the United States with additional sales in
Canada, Mexico, Europe and Asia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Quarterly Financial Information and Results of Operations
In the opinion of management, the accompanying unaudited Consolidated Financial
Statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of September
30, 1999, the results of operations and the cash flows for the three months
ended September 30, 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.
-1-
<PAGE>
Management's Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
The consolidated financial statements for prior periods have been reclassified
to conform with the current-period presentation.
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 consist of certificates
of deposit and investments in money market accounts. Interest income earned on
the investment of cash was $22,541 and $15,085 for the three months ended
September 30, 1999 and 1998, respectively. The Company incurred $149,000 of
capital lease obligations during the three months ended September 30, 1999.
There were no capital lease obligations incurred during the three months ended
September 30, 1998.
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 expense 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.
-2-
<PAGE>
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 September 30, 1999
and 1998, respectively.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company records impairment losses on long-lived assets used
in operations whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable. An impairment is recognized to the extent
that the sum of undiscounted estimated future cash flows expected to result from
use of the assets is less than the carrying value. As of September 30, 1999,
management has evaluated the Company's asset base, under the guidelines
established by SFAS No. 121, and believes that no impairment has occurred.
Revenue Recognition
The Company recognizes revenue upon the shipment of its products.
Research and Development
Research and development costs are charged to expense as incurred.
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.
Income Taxes
The Company accounts for income taxes in accordance with 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.
-3-
<PAGE>
Earnings per Common Share
The Company has provided basic and diluted earnings per Common share pursuant to
SFAS No. 128, "Earnings per Share." SFAS No. 128 requires dual presentation of
basic and diluted earnings per share for complex capital structures on the face
of the statements of operations. According to SFAS No. 128, basic earnings per
share is calculated by dividing net income available to Common shareholders by
the weighted average number of Common shares outstanding for the period. Diluted
earnings per share 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 per Common share computations. All share, per share,
options to purchase shares and option exercise prices per share have been
adjusted to give retroactive effect to the 10% stock dividends to be issued on
November 24, 1999 and the 10% stock dividend issued on September 30, 1998 (see
Note 3):
<TABLE>
<CAPTION>
For the Three Months Ended September 30
--------------------------------------------------------------------------------------
1999 1998
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per Common
share
Net income $203,548 4,999,142 $.04 $91,946 5,005,608 $.02
==== ====
Effect of dilutive
securities
Stock options -- -- -- 6,483
-------- --------- ------- --------
Diluted earnings per Common
share
Net income and assumed
conversions
$203,548 4,999,142 $.04 $91,946 5,012,091 $.02
======== ========= ==== ======= ========= ====
</TABLE>
Options to purchase 27,649 and 7,834 shares of Common stock with an average
exercise price per share of $2.80 and $5.05 were outstanding during the three
months ended September 30, 1999 and 1998, respectively, but were not included in
the computation of diluted earnings per Common share because the options'
exercise price of the options was greater than the average market price of the
Common shares during the period. The options, which expire at various times
through December 2006, were still outstanding as of September 30, 1999.
-4-
<PAGE>
Recent Accounting Pronouncements
Effective with the year ended June 30, 1999, the Company was subject to the
provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The adoption of this pronouncement did affect certain
financial statement disclosures (see Note 8).
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
amendment of FASB Statement No. 133," which must be adopted by the Company in
the year ending June 30, 2001, provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. As
the Company does not currently hold derivative instruments or engage in hedging
activities, the adoption of this pronouncement is expected to have no impact on
the Company's financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software, and is
effective for fiscal years beginning after December 15, 1998. The statement also
requires that costs related to the preliminary project stage and post
implementation/operations stage in an internal-use computer software development
project be charged to expense as incurred. As the Company's current policy falls
within the guidelines of SOP 98-1, the adoption of this pronouncement is
expected to have no impact on the Company's financial position or results of
operations.
3. STOCK DIVIDENDS:
In September 1998, the Company, prior to the filing of its annual report on Form
10-K for the fiscal year ended June 30, 1998, declared a 10% stock dividend to
shareholders of record as of September 30, 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.
Subsequent to September 30, 1999, the Company declared a 10% stock dividend to
shareholders of record as of November 3, 1999. The dividend will be distributed
to shareholders on November 24, 1999. Accordingly, amounts equal to the fair
market value (based on the quoted market price) of the additional shares to be
issued have been charged to retained earnings and credited to Common stock and
additional paid-in capital in the accompanying consolidated balance sheet
effective September 30, 1999.
Earnings per Common share, shares used in computing earnings per Common share
and all share and option balances and prices were restated to give retroactive
effect to these 10% stock dividends.
-5-
<PAGE>
4. INVENTORIES:
September 30, June 30,
1999 1999
------------- ----------
Raw materials and supplies $1,090,980 $1,194,084
Work-in-process 2,397,080 1,928,753
Finished goods 905,384 1,250,419
---------- ----------
$4,393,444 $4,373,256
========== ==========
5. ACCRUED EXPENSES:
September 30, June 30,
1999 1999
------------- ----------
Compensation and related benefits $ 254,996 $ 303,234
Other 800,295 320,612
---------- ----------
$1,055,291 $ 623,846
========== ==========
6. LINES 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 $1,500,000
of borrowings outstanding on the line of credit at September 30, 1999.
Borrowings under the line bear interest at prime (8.25% at September 30, 1999)
and are secured by all assets of the Company. In addition, the Company had an
additional convertible line of credit with the same bank under which it could
borrow up to $500,000 to finance legal fees and related expenses. During the
three months ended September 30, 1999, the Company borrowed the maximum amount
available under the convertible line of credit and has included these amounts in
long-term debt on the accompanying consolidated balance sheet based upon the
scheduled repayment terms. The lines of credit are subject to certain financial
and non-financial covenants, which include, among others, a ratio of EBITDA to
fixed charges, as defined, and a level of tangible net worth.
Thompson Dental Manufacturing Co., Inc., a subsidiary of the Company, is a
guarantor and surety of borrowings under these credit facilities.
-6-
<PAGE>
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
<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%).
Rate at September 30, 1999 was 8.20%. $1,933,511 $2,084,339
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%).
Rate at September 30, 1999 was 7.04%. 1,257,758 1,262,853
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%).
Rate at September 30, 1999 was 7.52%. 944,698 954,012
Mortgage payable to municipal authority in monthly installments
of $6,371, including interest at 2.00%, through July 1,
2010. 741,965 744,182
Convertible line of credit payable to bank payable in monthly installments
of principle and interest, through September 2003.
Rate at September 30, 1999 was 8.25%. 500,000 --
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%).
Rate at September 30, 1999 was 7.04%. 425,864 427,599
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------- --------
<S> <C> <C>
Mortgage payable to municipal authority in monthly installments
of $1,952, including interest at 2.00%, through April 1,
2010 $ 204,645 $ 220,038
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%.) Rate at June 30, 1999 was 5.69% 128,618 138,976
Mortgage payable to bank in monthly installments of $2,543,
including interest at prime plus 1.5%, through December 1,
2011. Rate at September 30, 1999 was 9.75% 215,186 218,646
---------- ----------
6,352,245 6,050,645
Less- Current portion (618,431) (614,553)
---------- ----------
$5,733,814 $5,436,092
========== ==========
</TABLE>
Substantially all of the Company's assets are pledged as collateral for the
long-term debt. In addition, a mortgage payable to a municipal authority is
collateralized by a $150,000 standby letter of credit and the two mortgages
payable to municipal authorities are subordinate to certain other debt
obligations in the aggregate amount of approximately $5,300,000. The Company's
long-term debt payable to commercial banks is subject to the same covenants as
the lines of credit (see Note 6).
As of September 30, 1999, long-term debt matures as follows:
2000 $ 618,431
2001 620,176
2002 571,689
2003 1,002,721
2004 933,995
Thereafter 2,605,233
----------
$6,352,245
==========
8. BUSINESS SEGMENTS:
The Company operates in two business segments: Dental Supplies and Precision
Abrasives. The reportable segments have been identified as they have separate
management teams and infrastructures. See Note 1 for description of the
Company's business segments.
-8-
<PAGE>
The accounting policies of the reportable segments are the same as those of the
consolidated Company. The Company evaluates the performance of its operating
segments based on operating income (loss). Intersegment sales and transfers are
not significant and all property is located in the United States.
Financial information for each business segment as of September 30, 1999 and
1998 and for the three months then ended is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net sales:
Domestic customers -
Dental supplies $ 2,265,791 $ 2,219,423
Precision abrasives 1,226,343 698,843
International customers-
Dental supplies 409,497 384,812
Precision abrasives 201,330 236,849
----------- -----------
$ 4,102,961 $ 3,539,927
=========== ===========
Gross profit:
Dental supplies $ 1,396,537 $ 1,178,070
Precision abrasives 397,004 292,971
----------- -----------
$ 1,793,541 $ 1,471,041
=========== ===========
Operating income (loss):
Dental supplies $ 321,106 $ 57,355
Precision abrasives (8,037) 233,679
----------- -----------
$ 313,069 $ 291,034
=========== ===========
Total Assets
Dental Supplies $12,131,489 $11,344,994
Precision abrasives 4,363,854 4,420,066
----------- -----------
$16,495,343 $15,765,060
=========== ===========
Depreciation and amortization:
Dental supplies $ 127,579 $ 127,807
Precision abrasives 72,981 64,142
----------- -----------
$ 200,560 $ 191,949
=========== ===========
Capital expenditures:
Dental supplies $ 59,591 $ 30,989
Precision abrasives 9,871 34,332
----------- -----------
$ 69,462 $ 65,321
=========== ===========
</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.
One of the Company's counterclaims in the Dentsply litigation involves patents
covering an endodontic (root canal) instrument design. An arbitrator appointed
by the American Arbitration Association issued a ruling in October 1999 allowing
Dentsply a specific tolerance related to an important angle of the tip of
certain endodontic instruments, finding that instruments within this tolerance
did not violate the Company's patents. The Company believes that this ruling
permits it to proceed with its patent infringement counterclaim against Dentsply
with respect to Dentsply's instruments that fall below the allowed tolerance.
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, the
second payment of $101,250 in August 1998 and the third payment of $101,250 in
August 1999, and will make two similar 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 installments. Interest is payable at 5.42% per year and is due at the end
of the fiscal year payout.
Capital Leases
The Company has entered into capital leases for property and equipment which
expire at various dates through December 2005. Property and equipment acquired
under capital leases at a cost of $641,685 and $492,685, less accumulated
amortization of $159,457 and $103,377, are included in property and equipment in
the accompanying consolidated balance sheets as of September 30, 1999 and June
30, 1999, respectively. Interest rates on these capital leases range from 5.1%
to 11.1%. Future minimum lease payments under capital leases as of September 30,
1999, are as follows:
2000 $ 146,510
2001 136,341
2002 96,001
2003 66,943
2004 66,943
Thereafter 114,843
---------
Total minimum lease payments 627,581
Less - Amount representing interest (136,831)
----------
Present value of minimum capital
lease payments $ 490,750
=========
-10-
<PAGE>
Royalties
The Company has entered into a number of license agreements with third parties.
Generally, the agreements require the Company to pay a royalty on sales of
certain products that are derived under these licensing agreements. The royalty
expense is accrued in the same period in which the revenues incorporating the
technology are recognized.
10. OTHER INCOME, NET:
In April 1999, certain coating equipment, utilized in the manufacture of
abrasive materials in the Precision Abrasives segment, was damaged at the
Company's Montgomeryville facility. As a result, the Company received proceeds
under its insurance coverage of $200,000 during the twelve months ended June 30,
1999 and $135,000 during the three months ended September 30, 1999, which was
used to replace a poriton of the damaged equipment. In addition, the Company has
filed additional claims which it paid and will be recognized as other income in
the period of receipt.
ITEM 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations
Safe Harbor for Forward-Looking Statements
From time to time, the Company may publish statements which are not historical
fact, but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new
products, research and development activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical and
anticipated results or other expectations expressed in the Company's
forward-looking statements. Such forward-looking statements may be identified by
the use of certain forward-looking terminology such as, "may," "will," "expect,"
"anticipate," "intend," "plan," "project," "estimate," "believe," "goal," or
"continue," or comparable terminology that involves risks or uncertainties.
Actual future results and trends may differ materially from historical results
or those anticipated depending on a variety of factors, including, but not
limited to (i) competition within the Company's industries; (ii) changes in the
economics of dentistry, including consolidation, reduced growth in expenditures
by private dental insurance plans, and the effects of healthcare reform, which
may affect future per capita expenditures for dental services and the ability of
dentists to invest in or obtain reimbursement for the use of dental products;
(iii) the effect of economic conditions; (iv) supply risks, including shortages
and increases in the costs of key raw materials; (v) dependence on the services
of the Company's executive officers, and other key operations and technical
personnel; and (vi) legal proceedings. (See discussion of legal proceedings in
Part I, Item 1, Footnote No. 9, to the Consolidated Financial Statements of this
Form 10-Q).
Overview
The Company recorded net income of $203,548 and $91,946 for the three months
ended September 30, 1999 and 1998, respectively. The improved operating results
were due to increased net sales offset by increased professional and legal fees
incurred by the Company related to the Dentsply litigation, which will continue
-11-
<PAGE>
to have a material adverse effect on the Company's consolidated financial
position and results of operations for the foreseeable future. In addition,
during the three months ended September 30, 1999, the Company recorded other
income of $135,000 related to casualty insurance proceeds (see below).
As previously noted by the Company, in April 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 received insurance proceeds to replace a portion of the damaged
equipment and additional funds for repairs on the remaining equipment. In
addition, the Company has filed additional claims for the resulting business
interruption which are being reviewed by Moyco's insurance provider. The Company
replaced the affected equipment during the three months ended September 30,
1999, which resulted in little or no impact on overall production capacity.
Summary
The following table sets forth for the periods indicated the Company's key
financial information by segment.
For the Three Months
Ended September 30
----------------------------
1999 1998
---------- ----------
Net sales:
Dental Supplies $2,675,288 $2,604,235
Precision Abrasives 1,427,673 935,692
---------- ----------
$4,102,961 $3,539,927
========== ==========
Gross profit:
Dental Supplies $1,396,537 $1,178,070
Precision Abrasives 397,004 292,971
---------- ----------
$1,793,541 $1,471,041
========== ==========
Operating income (loss):
Dental Supplies $ 321,106 $ 57,355
Precision Abrasives (8,037) 233,679
---------- ----------
$ 313,069 $ 291,034
========== ==========
-12-
<PAGE>
Results of Operations
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Net sales for the three months ended September 30, 1999 increased $563,034 from
the three months ended September 30, 1998. Net sales in the Dental Supplies
segment increased $71,053 primarily due to increased sales of the Company's
propriety and patented endodontic (root canal) instruments. Net sales in the
Precision Abrasives segment increased $491,981 from $935,692 for the three
months ended September 30, 1998 to $1,427,673 for the three months ended
September 30, 1999 primarily as a result of sales of newly developed, higher
priced abrasive films for fiber-optic polishing applications.
Gross profit for the three months ended September 30, 1999 increased $322,500
from the three months ended September 30, 1998. Gross profit in the Dental
Supplies segment increased $218,467 from $1,178,070 (45.2% of Dental Supplies
net sales) for the three months ended September 30, 1998 to $1,396,537 (52.2% of
Dental Supplies net sales) for the three months ended September 30, 1999. Gross
profit in the Precision Abrasives segment increased from $292,971 (31.3% of
Precision Abrasives net sales) for the three months ended September 30, 1998 to
$397,004 (27.8% of Precision Abrasives net sales) for the three months ended
September 30, 1999. 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 $40,624 from $548,891 (15.5% of net
sales) for the three months ended September 30, 1998 to $589,515 (14.4% of net
sales) for the three months ended September 30, 1999 primarily as a result of
increased advertising charges, coupled with expenses incurred for new Company
sales catalogs. General and administrative expenses increased $273,063 from
$616,002 (17.4% of net sales) to $889,065 (21.7% of net sales) due to higher
professional and legal fees incurred in the three months ended September 30,
1999 compared to the three months ended September 30, 1998. The Company believes
it will incur significant costs, which the Company is unable to estimate due to
the nature of litigation, related to the Dentsply litigation for the foreseeable
future that will have a material adverse effect on the Company's consolidated
financial position and results of operations. (See discussion of legal
proceedings in Part I, Item 1, Footnote No. 9, to the Consolidated Financial
Statements of this Form 10-Q.)
Interest expense decreased due to a decrease in the average interest rate on the
Company's outstanding debt obligations from the renegotiation of the rates on
certain mortgages and long-term debt in fiscal 1999. Other income (expense)
increased $122,142 between periods due to the receipt of $135,000 in casualty
insurance proceeds to replace equipment damanged as a result of the
aforementioned casualty loss at the Montgomeryville facility.
Research and development expenses and interest 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
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<PAGE>
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 $374,921 was used in operating activities in the three months ended
September 30, 1999. Net cash of $568,858 was used in operating activities in the
three months ended September 30, 1998. The decreasing use of cash between
periods was a result of increased net income and the timing of payments to
vendors and taxing authorities and changes in the level of inventory maintained
by the Company, offset by the timing of receivable collections.
Expenditures for property, plant and equipment totaled $69,462 for the three
months ended September 30, 1999 and $65,321 for the three months ended September
30, 1998.
For the three months ended September 30, 1999 and 1998, the Company made
payments on long-term debt of $198,400 and $221,914, 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. In addition, the Company had an additional convertible line of
credit with the same bank under which it could borrow up to $500,000 to finance
legal fees and related expenses. During the three months ended September 30,
1999, the Company borrowed the maximum amount available under the convertible
line of credit.
The Company expects to spend approximately $100,000 in fiscal 2000 on capital
expenditures, primarily for abrasive and dental instrument manufacturing
equipment. The Company also may be required to make additional expenditures to
repair and/or replace certain of its coating equipment damaged in April 1999. In
addition, the Company is obligated to pay $412,500 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 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 is constantly evaluating its capital structure and considering
opportunities for strategic alliances, mergers, acquisitions, secondary
offerings, private placements or other transactions. The Company continually
evaluates and considers possible acquisition and/or merger opportunities. Among
other items, the Company would consider the following factors in determining
whether or not to pursue an acquisition or alliance including: (i) synergy with
the Company's current lines of business products, (ii) growth potential, (iii)
return on investment and (iv) technologies. However, at this time, none of the
above opportunities are planned or in process.
The Company believes that inflation has not, and will not, have a material
impact on the Company's financial condition and results of operations.
-14-
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133," which
must be adopted by the Company in the year ending June 30, 2001, provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. As the Company does not currently hold
derivative instruments or engage in hedging activities, the adoption of this
pronouncement is expected to have no impact on the Company's financial position
or results of operations.
-15-
<PAGE>
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software, and is
effective for fiscal years beginning after December 15, 1998. The statement also
requires that costs related to the preliminary project stage and post
implementation/operations stage in an internal-use computer software development
project be expensed as incurred. As the Company's current policy falls within
the guidelines of SOP 98-1, the adoption of this pronouncement is expected to
have no impact on the Company's financial position or results of operations.
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 conducted an analysis to determine the extent to which
its major vendors' systems (insofar as they relate to the Company's business)
posed Year 2000 issues. Based upon this analysis the Company does not believe it
has material exposure to Year 2000 issues with respect to its major vendors'
systems; however, the failure of major vendor to satisfactorily complete the
conversion of its systems or a final conversion that is ultimately 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 conducting a review of its customers
but 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 Company is continuing to review customer systems for Year 2000 compliance.
All of its material customers have responded that their systems are or will be
in compliance, but the Company is awaiting responses from smaller customers and
has recirculated its request for information to customers that have not
responded.
-16-
<PAGE>
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 continues developing 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
1. The Company filed a Form 8-K on October 26, 1999, announcing a ten
percent (10%) stock dividend on all shares of Common stock outstanding of
record November 3, 1999.
-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.
MOYCO TECHNOLOGIES, INC.
Dated: November 15, 1999 BY: /s/Marvin E. Sternberg
--------------------------------------------
Marvin E. Sternberg
Chairman of the Board, President
and Chief Executive Officer (Principal
Executive Officer) and Director
Dated: November 15, 1999 BY: /s/William G. Woodhead
--------------------------------------------
William G. Woodhead
Secretary/Treasurer, Principal Financial
Officer and Principal Accounting Officer and
Director
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,858,988
<SECURITIES> 0
<RECEIVABLES> 2,865,247
<ALLOWANCES> 401,323
<INVENTORY> 4,393,444
<CURRENT-ASSETS> 9,904,739
<PP&E> 12,699,804
<DEPRECIATION> 6,842,533
<TOTAL-ASSETS> 16,495,343
<CURRENT-LIABILITIES> 4,320,678
<BONDS> 0
0
0
<COMMON> 26,028
<OTHER-SE> 5,602,035
<TOTAL-LIABILITY-AND-EQUITY> 16,495,343
<SALES> 4,102,961
<TOTAL-REVENUES> 4,102,961
<CGS> 2,309,420
<TOTAL-COSTS> 2,309,420
<OTHER-EXPENSES> 1,480,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 113,982
<INCOME-PRETAX> 333,686
<INCOME-TAX> (77,487)
<INCOME-CONTINUING> 203,548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203,548
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
