<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
Commission File No. 0-4123
------
MOYCO TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1697233
- ------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation 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: -----------------------------------
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 December 31, 1999: 4,999,142 shares of Common stock, par
value $.005 per share.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,922,026 $ 1,752,468
Accounts receivable, net of reserves of $401,323 2,721,157 2,458,855
Note receivable 196,107 206,107
Other receivables 62,570 212,928
Income tax receivable 154,112 155,872
Inventories, estimated (Notes 2 and 4) 4,117,589 4,373,256
Deferred income taxes 441,262 475,687
Prepaid expenses 96,381 31,056
---------------- ----------------
Total current assets 9,711,204 9,666,229
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 602,433
Buildings and improvements 4,624,245 4,624,245
Machinery and equipment 6,670,398 6,431,093
Furniture and fixtures 683,941 683,941
Automotive equipment 139,630 139,630
---------------- ----------------
12,720,647 12,481,342
Less- Accumulated depreciation and amortization (7,034,861) (6,656,644)
----------------- ----------------
Net property, plant and equipment 5,685,786 5,824,698
---------------- ----------------
OTHER ASSETS:
Goodwill, less accumulated amortization of
$106,996 and $91,242 365,624 381,378
Other 361,962 333,469
---------------- ----------------
Total other assets 727,586 714,847
---------------- ----------------
$ 16,124,576 $ 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>
December 31, June 30,
1999 1999
----------------- ----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,500,000 $ 1,200,000
Current portion of capital lease obligations 97,049 99,471
Current portion of long-term debt 724,107 614,553
Accounts payable 1,169,962 1,968,921
Income taxes payable 122,790 --
Accrued expenses 598,833 623,846
---------------- ----------------
Total current liabilities 4,212,741 4,506,791
---------------- ----------------
CAPITAL LEASE OBLIGATIONS 350,818 292,976
---------------- ----------------
LONG-TERM DEBT 5,437,474 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 and 5,205,547 shares
issued and outstanding 28,631 26,028
Additional paid-in capital 5,781,111 5,103,443
Retained earnings 25,365 448,095
Less - Treasury stock of 726,960 and 660,873 shares,
at cost (150,448) (150,448)
----------------- ----------------
Total shareholders' equity 5,684,659 5,427,118
---------------- ----------------
$ 16,124,576 $ 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 For the
Three Months Ended Six Months Ended
December 31 December 31
------------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
NET SALES $ 4,537,773 $ 3,775,659 $ 8,640,734 $ 7,315,586
COST OF GOODS SOLD 2,731,259 2,220,449 5,040,679 4,289,335
----------------- ----------------- ----------------- -----------------
Gross profit 1,806,514 1,555,210 3,600,055 3,026,251
OPERATING EXPENSES:
Sales and marketing 621,582 687,801 1,211,097 1,236,692
Research and development 21,158 9,711 23,050 24,825
General and administrative 953,013 959,406 1,842,078 1,575,408
----------------- ----------------- ----------------- -----------------
Income (loss) from operations 210,761 (101,708) 523,830 189,326
INTEREST EXPENSE, net (131,643) (115,787) (245,625) (271,936)
OTHER INCOME, net 9,392 42,204 143,991 54,661
----------------- ----------------- ----------------- -----------------
Income (loss) before taxes 88,510 (175,291) 422,196 (27,949)
INCOME TAX (EXPENSE) BENEFIT (34,517) 52,189 (164,655) (3,207)
----------------- ----------------- ----------------- -----------------
NET INCOME (LOSS) $ 53,993 $ (123,102) $ 257,541 $ (31,156)
================= ================= ================= =================
BASIC EARNINGS
(LOSS) PER COMMON SHARE
(Note 2 and Note 3) $ .01 $ (.02) $ .05 $ (.01)
================= ================ ================= =================
SHARES USED IN COMPUTING BASIC EARNINGS
(LOSS) PER COMMON SHARE
(Note 2 and Note 3) 4,999,142 5,003,860 4,999,142 5,004,745
================= ================= ================= =================
DILUTED EARNINGS
(LOSS) PER COMMON SHARE
(Note 2 and Note 3) $ .01 $ (.02) $ .05 $ (.01)
================= ================= ================ =================
SHARES USED IN COMPUTING DILUTED EARNINGS
(LOSS) PER COMMON SHARE
(Note 2 and Note 3)
5,002,191 5,003,860 5,002,307 5,004,745
================= ================= ================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the
Six Months Ended
December 31
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 257,541 $ (31,156)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation and amortization 393,971 382,705
Deferred income taxes 27,512 11,969
(Increase) decrease in-
Accounts receivable (262,302) 26,288
Note receivable 10,000 --
Other receivables 150,358 71,531
Income tax receivable 1,760 --
Inventories 255,667 (370,169)
Prepaid taxes and expenses (65,325) (321,883)
Other assets (28,493) 93,012
Increase (decrease) in-
Accounts payable (798,959) (38,753)
Income taxes payable 122,790 (245,326)
Other accrued expenses (122,013) (253,601)
-------------- --------------
Net cash used in operating activities (57,493) (675,383)
-------------- --------------
INVESTING ACTIVITIES:
Purchases of and deposits on property, plant and equipment (90,305) (169,849)
--------------- --------------
Net cash provided by used in investing activities (90,305) (169,849)
--------------- --------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit 800,000 1,000,000
Proceeds from long-term debt -- 975,000
Payments on capital lease obligations (93,580) (8,066)
Payments of long-term debt (389,064) (1,357,902)
Purchase of Common stock for treasury -- (14,800)
-------------- --------------
Net cash provided by financing activities 317,356 594,232
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 169,558 (251,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,752,468 1,486,554
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,922,026 $ 1,235,554
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 295,613 $ 236,614
============== ==============
Income taxes paid $ -- $ 510,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December
31, 1999, the results of operations and the cash flows for the three and six
months ended December 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.
- 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 $10,784 and $20,596 for the three months ended
December 31, 1999 and 1998, respectively, and $32,825 and $35,681 for the six
months ended December 31, 1999 and 1998, respectively. The Company incurred
$149,000 of capital lease obligations during the six months ended December 31,
1999. There were no capital lease obligations incurred during the six months
ended December 31, 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 December 31, 1999 and
1998, respectively, and $15,754 for the six months ended December 31, 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 December 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.
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.
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.
- 3 -
<PAGE>
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 issued on
November 24, 1999 and September 30, 1998, respectively (see Note 3):
<TABLE>
<CAPTION>
For the Three Months Ended December 31
--------------------------------------------------------------------------------------
1999 1998
------------------------------------------ -------------------------------------------
Income Shares Per Share Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss) per
Common share
Net income (loss) $ 53,993 4,999,142 $ .01 $ (123,102) 5,003,860 $ (.02)
========== ============
Effect of dilutive securities
Stock options -- 3,049 -- --
----------- ----------- ----------- ------------
Diluted earnings (loss) per
Common share
Net income (loss) and
assumed conversions $ 53,993 5,002,191 $ .01 $ (123,102) 5,003,860 $ (.02)
=========== =========== ========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended December 31
--------------------------------------------------------------------------------------
1999 1998
------------------------------------------ -------------------------------------------
Income Shares Per Share Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss) per
Common share
Net income (loss) $ 257,541 4,999,142 $ .05 $ (31,156) 5,004,745 $ (.01)
========== ============
Effect of dilutive
securities
Stock options -- 3,165 -- --
----------- ----------- ----------- ------------
Diluted earnings (loss) per
Common share
Net income (loss) and
assumed conversions $ 257,541 5,002,307 $ .05 $ (31,156) 5,004,745 $ (.01)
=========== =========== ========== =========== ============ ============
</TABLE>
Options to purchase 27,649 shares of Common stock with an average exercise price
of $2.80 were outstanding during the three months and six months ended December
31, 1999. The majority of these options were not included in the computation of
diluted earnings per Common share because the exercise price of the options were
greater than the average market price of the Common shares during the period.
Options to purchase 27,649 shares of Common stock with an average exercise price
per share of $2.80 were outstanding during the three months and six months ended
December 31, 1998, respectively, but were not included in the computation of
diluted loss per Common share because the Company had a net loss for the period
and all outstanding options would have been anti-dilutive. The options, which
expire at various times through December 2006, were still outstanding as of
December 31, 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 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.
In October 1999, the Company declared a 10% stock dividend to shareholders of
record as of November 3, 1999. The new shares were distributed to shareholders
on November 24, 1999. 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
on the date such dividend was declared.
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:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---------------- ---------------
<S> <C> <C>
Raw materials and supplies $ 1,070,573 $ 1,194,084
Work-in-process 1,852,915 1,928,753
Finished goods 1,194,101 1,250,419
---------------- ---------------
$ 4,117,589 $ 4,373,256
================ ===============
</TABLE>
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---------------- ---------------
<S> <C> <C>
Compensation and related benefits $ 254,753 $ 303,234
Other 344,080 320,612
---------------- ---------------
$ 598,833 $ 623,846
================ ===============
</TABLE>
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, 2000, subject to renewal. There was $1,500,000
of borrowings outstanding on the line of credit at December 31, 1999. Borrowings
under the line bear interest at prime (8.5% at December 31, 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 six months ended
December 31, 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>
December 31, 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 December 31,
1999 was 8.45%. $ 1,854,218 $ 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 December 31,
1999 was 7.29%. 1,246,779 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
7.54% or be below 7.27%). Rate at December 31,
1999 was 7.52%. 932,199 954,012
Mortgage payable to municipal authority in monthly
installments of $6,371, including interest at 2.00%,
through July 1, 2010. 714,336 744,182
Convertible line of credit payable to bank in monthly
installments of principal and interest, through September
2003. Rate at December 31, 1999 was 8.5%. 466,667 --
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 December 31, 1999 was 7.29%. 422,329 427,599
</TABLE>
- 7 -
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
--------------- -----------------
<S> <C> <C>
Mortgage payable to municipal authority in monthly
installments of $1,952, ncluding 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 December 31,
1999 was 5.85%. 107,903 138,976
Mortgage payable to bank in monthly installments of
$2,543, including interest at prime plus 1.5%,
through December 1, 2011. Rate at December 31,
1999 was 9.75%. 212,505 218,646
--------------- ----------------
6,161,581 6,050,645
Less- Current portion (724,107) (614,553)
--------------- ----------------
$ 5,437,474 $ 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 $5,200,000. 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 December 31, 1999, long-term debt matures as follows:
2000 $ 724,107
2001 702,343
2002 854,358
2003 1,020,094
2004 947,612
Thereafter 1,913,067
-------------
$ 6,161,581
=============
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 a description of the
Company's business segments.
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.
- 8 -
<PAGE>
Financial information for each business segment for the three and six months
ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended December 31 Ended December 31
-------------------------------------- -----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales:
Domestic customers -
Dental supplies $ 2,574,925 $ 2,259,854 $ 4,840,716 $ 4,479,277
Precision abrasives 1,207,736 794,900 2,434,079 1,493,743
International customers -
Dental supplies 316,538 497,149 726,035 881,961
Precision abrasives 438,574 223,756 639,904 460,605
---------------- ---------------- ---------------- ----------------
$ 4,537,773 $ 3,775,659 $ 8,640,734 $ 7,315,586
================ ================ ================ ================
Gross profit:
Dental supplies $ 1,508,215 $ 1,188,044 $ 2,904,752 $ 2,366,144
Precision abrasives 298,299 367,166 695,303 660,137
---------------- ---------------- ---------------- ----------------
$ 1,806,514 $ 1,555,210 $ 3,600,055 $ 3,026,281
================ ================ ================ ================
Operating income (loss)
Dental supplies $ 190,841 $ 276,824 $ 511,947 $ 334,179
Precision abrasives 19,920 (378,532) 11,883 (144,853)
---------------- ---------------- ---------------- ----------------
$ 210,761 $ (101,708) $ 523,830 $ 189,326
================ ================ ================ ================
Depreciation and amortization:
Dental supplies $ 104,676 $ 111,182 $ 246,024 $ 238,989
Precision abrasives 72,981 79,574 147,947 143,716
---------------- ---------------- ---------------- ----------------
$ 177,657 $ 190,756 $ 393,971 $ 382,705
================ ================ ================ ================
Capital expenditures:
Dental supplies $ - $ 44,586 $ 40,182 $ 75,575
Precision abrasives 19,842 59,942 50,123 94,274
---------------- ---------------- ---------------- ----------------
$ 19,842 $ 104,528 $ 90,305 $ 169,849
================ ================ ================ ================
</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
are immune from the Company patent counter claim. Management 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, second
and third 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 $215,537 and $103,377, are included in property and equipment in
the accompanying consolidated balance sheets as of December 31, 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 December 31,
1999, are as follows:
- 10 -
<PAGE>
2000 $ 126,046
2001 126,323
2002 86,129
2003 63,161
2004 63,161
Thereafter 109,370
-------------
Total minimum lease payments 547,190
Less - Amount representing interest (99,323)
-------------
Present value of minimum capital
lease payments $ 447,867
=============
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 three months ended June 30,
1999 and $135,000 during the three months ended September 30, 1999, which was
used to replace a portion of the damaged equipment. In addition, the Company has
filed additional claims which if paid will be recognized as other income in the
period of receipt.
- 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, status of litigation 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 (loss) of $53,993 and ($123,102) for the three
months ended December 31, 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 to have a material adverse effect on the Company's consolidated
financial position and results of operations for the foreseeable future.
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 six months ended December 31, 1999,
which resulted in little or no impact on overall production capacity.
- 12 -
<PAGE>
Summary
The following table sets forth for the periods indicated the Company's key
financial information by segment.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended December 31 Ended December 31
-------------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales:
Dental Supplies $ 2,891,463 $ 2,757,003 $ 5,566,751 $ 5,361,238
Precision Abrasives 1,646,310 1,018,656 3,073,983 1,954,348
----------- ----------- ----------- -----------
$ 4,537,773 $ 3,775,659 $ 8,640,734 $ 7,315,586
=========== =========== =========== ===========
Gross profit:
Dental Supplies $ 1,508,215 $ 1,188,044 $ 2,904,752 $ 2,366,114
Precision Abrasives 298,299 367,166 695,303 660,137
----------- ----------- ----------- -----------
$ 1,806,514 $ 1,555,210 $ 3,600,055 $ 3,026,251
=========== =========== =========== ===========
Operating income (loss):
Dental Supplies $ 190,841 $ 276,824 $ 511,947 $ 334,179
Precision Abrasives 19,920 (378,532) 11,883 (144,853)
----------- ----------- ----------- -----------
$ 210,761 $ (101,708) $ 523,830 $ 189,326
=========== =========== =========== ===========
</TABLE>
Results of Operations
Three Months Ended December 31, 1999 Compared to Three Months Ended
December 31, 1998
Net sales for the three months ended December 31, 1999 increased $762,114 from
the three months ended December 31, 1998. Net sales in the Dental Supplies
segment increased $134,460 primarily due to increased sales of the Company's
propriety and patented endodontic (root canal) instruments. Net sales in the
Precision Abrasives segment increased $627,654 from $1,018,656 for the three
months ended December 31, 1998 to $1,646,310 for the three months ended December
31, 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 December 31, 1999 increased $251,304
from the three months ended December 31, 1998. Gross profit in the Dental
Supplies segment increased $320,171 from $1,188,044 (43.1% of Dental Supplies
net sales) for the three months ended December 31, 1998 to $1,508,215 (52.2% of
Dental Supplies net sales) for the three months ended December 31, 1999. Gross
profit in the Precision Abrasives segment decreased from $367,166 (36.0% of
Precision Abrasives net sales) for the three months ended December 31, 1998 to
$298,299 (18.1% of Precision Abrasives net sales) for the three months ended
December 31, 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.
- 13 -
<PAGE>
Sales and marketing expenses decreased $66,219 from $687,801 (18.2% of net
sales) for the three months ended December 31, 1998 to $621,582 (13.7% of net
sales) for the three months ended December 31, 1999 primarily as a result of
decreased advertising charges, coupled with expenses incurred for new Company
sales catalogs in the prior year. General and administrative expenses decreased
$6,393 from $959,406 (25.4% of net sales) for the three months ended December
31, 1998 to $953,013 (21.0% of net sales) for the three months ended December
31, 1999. 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 increased due to an increase in the average interest rate on
the Company's outstanding debt and higher levels of outstanding debt.
Research and development expenses and interest income remained relatively
constant between periods.
Six Months Ended December 31, 1999 Compared to Six Months Ended December 31,
1998
Net sales for the six months ended December 31, 1999 increased $1,325,148 from
the six months ended December 31, 1998. Net sales in the Dental Supplies segment
increased $205,513 due to an increase in sale of endodontic instruments. Net
sales in the Precision Abrasives increased $1,119,635 from $1,954,348 for the
six months ended December 31, 1998 to $3,073,983 for the six months ended
December 31, 1999 primarily as a result of a new sales effort.
Gross profit for the six months ended December 31, 1999 increased $573,804 from
the six months ended December 31, 1998. Gross profit in the Dental Supplies
segment increased $538,638 from $2,366,114 (44.1% of Dental Supplies net sales)
for the six months ended December 31, 1998 to $2,904,752 (52.2% of Dental
Supplies net sales) for the six months ended December 31, 1999. Gross profit in
the Precision Abrasives segment increased $35,166 from $660,137 (33.8% of
Precision Abrasives net sales) for the six months ended December 31, 1998 to
$695,303 (22.6% of Precision Abrasives net sales) for the six months ended
December 31, 1999. The increases in gross profit are due to the aforementioned
increases 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 percentage of net sales are due to changes in the product mix
offered by the Company.
Sales and marketing expenses decreased $25,595 from $1,236,692 (16.9% of net
sales) for the six months ended December 31, 1998 to $1,211,097 (14.0% of net
sales) for the six months ended December 31, 1999 primarily as a result of lower
sales commissions. General and administrative expenses increased $266,670 from
$1,575,408 (21.5% of net sales) to $1,842,078 (21.3% of net sales) due to higher
legal and professional fees in connection with the Dentsply litigation.
Interest expense increased due to an increase in the average variable interest
rate on the Company's outstanding debt obligations and higher levels of
outstanding debt. Other income increased $89,330 between periods due to the
receipt of $135,000 in casualty insurance proceeds during the three months ended
September 30, 1999.
Research and development expenses and interest income remained relatively
constant between periods.
- 14 -
<PAGE>
Liquidity and Capital Resources
Historically, the Company's primary source of liquidity has been cash flow from
operations. These funds, combined with borrowings under long-term debt
obligations with both banks and municipal authorities, have provided the
liquidity to finance the Company's capital expenditures. Substantially all of
the Company's assets are pledged as collateral for its long-term debt.
Net cash of $122,013 and $675,383 was used in operating activities in the six
months ended December 31, 1999 and 1998, respectively. The decreased use of cash
between periods was primarily a result of a higher level of net income to date
in fiscal 1999 versus 1998 and a decreased level of inventory in fiscal 1999
versus an increased level in 1998.
Expenditures for property, plant and equipment totaled $90,305 for the six
months ended December 31, 1999 and $169,849 for the six months ended December
31, 1998.
Proceeds received from long-term debt were $0 and $975,000 for the six months
ended December 31, 1999 and 1998, respectively. For the six months ended
December 31, 1999 and 1998, the Company made payments on long-term debt of
$389,064 and $1,357,902, respectively, which includes payments of $975,000
related to a separate refinancing of certain long-term debt during the six
months ended December 31, 1998.
During the three months ended December 31, 1998, the Company renegotiated
certain of its mortgages and loans to secure more favorable terms and interest
rates.
The Company has a commitment for a $3,000,000 line of credit with a bank which
expires on December 31, 2000, subject to renewal. The line of credit bears
interest at the prime rate and is secured by substantially all of the Company's
assets. During the six months ended December 31, 1999, the Company borrowed
$800,000 under this line of credit. In addition, the Company had an additional
convertible line of credit with the same bank which it may borrow up to $500,000
to finance legal fees and related expenses. During the six months ended December
31, 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 believes that inflation has not, and will not, have a material
impact on the Company's financial condition and results of operations.
- 15 -
<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.
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 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.
Year 2000
The Company has completed implementation of its year 2000 remediation plan on a
timely basis and such remediation plan as implemented addressed all mission
critical systems. The Company is not aware of any adverse effects of year 2000
issues on the Company, including its systems and operations. The Company has no
information that indicates that a significant vendor may be unable to sell to
the Company; a significant customer may be unable to purchase from the Company;
or a significant service provider may be unable to provide services to the
Company, because of year 2000 compliance problems.
- 16 -
<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.
- 17 -
<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: February 14, 2000 BY: /s/Marvin E. Sternberg
--------------------------------------
Marvin E. Sternberg
Chairman of the Board, President
and Chief Executive Officer (Principal
Executive Officer) and Director
Dated: February 14, 2000 BY: /s/William G. Woodhead
----------------------------------------
William G. Woodhead
Secretary/Treasurer, Principal Financial
Officer and Principal Accounting Officer
and Director
- 18 -
