<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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 March 31, 2000: 5,004,392 shares of Common stock, par value
$.005 per share.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,953,594 $ 1,752,468
Certificates of deposit 190,256 -
Accounts receivable, net of reserves of
$395,402 and $401,323 3,026,315 2,458,855
Note receivable, current portion 132,952 206,107
Other receivables 43,011 212,928
Income tax receivable - 155,872
Inventories, estimated 4,205,114 4,373,256
Deferred income taxes 441,262 475,687
Prepaid expenses 102,511 31,056
------------ ------------
Total current assets 10,095,015 9,666,229
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 602,433 602,433
Buildings and improvements 4,636,159 4,624,245
Machinery and equipment 6,682,655 6,431,093
Furniture and fixtures 685,140 683,941
Automotive equipment 139,630 139,630
------------ ------------
12,746,017 12,481,342
Less- Accumulated depreciation and amortization (7,100,722) (6,656,644)
------------ ------------
Net property, plant and equipment 5,645,295 5,824,698
------------ ------------
OTHER ASSETS:
Goodwill, less accumulated amortization of
$114,873 and $ 91,242 357,747 381,378
Note receivable, non-current portion 543,728 -
Other 365,867 333,469
------------ ------------
Total other assets 1,267,342 714,847
------------ ------------
$ 17,007,652 $ 16,205,774
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---------- ---------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,500,000 $ 1,200,000
Current portion of capital lease obligations 110,284 99,471
Current portion of long-term debt 715,522 614,553
Accounts payable 1,289,851 1,968,921
Income taxes payable 215,125 -
Accrued expenses 699,405 623,846
------------ ------------
Total current assets 4,530,187 4,506,791
------------ ------------
CAPITAL LEASE OBLIGATIONS 333,506 292,976
------------ ------------
LONG-TERM DEBT 5,574,295 5,436,092
------------ ------------
DEFERRED INCOME TAXES 218,884 225,797
------------ ------------
OTHER LONG-TERM LIABILITIES 220,000 317,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.005 par value, 2,500,000
shares authorized, none issued and outstanding - -
Common stock, $.005 par value, 15,000,000
shares authorized, 5,731,352 and 5,205,547
shares issued and outstanding 28,657 26,028
Additional paid-in capital $ 5,785,585 5,103,443
Retained earnings 466,986 448,095
Less- Treasury stock of 726,960 and 660,873
shares, at cost (150,448) (150,448)
------------ ------------
Total shareholders' equity 6,130,780 5,427,118
------------ ------------
17,007,652 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 Nine Months Ended
March 31 March 31
----------------------------- ----------------------------
2000 1999 2000 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 4,557,926 $ 3,821,678 $ 13,198,660 $ 11,137,264
COST OF GOODS SOLD 2,365,250 2,271,609 7,405,929 6,560,944
----------- ------------ ------------ ------------
Gross profit 2,192,676 1,550,069 5,792,731 4,576,320
OPERATING EXPENSES:
Sales and marketing 499,195 727,423 1,710,292 1,964,115
Research and development 53,467 2,862 76,517 27,687
General and administrative 931,176 1,025,309 2,773,254 2,600,717
----------- ------------ ------------ ------------
Income (loss) from operations 708,838 (205,525) 1,232,668 (16,199)
INTEREST EXPENSE, net (138,744) (232,550) (384,369) (504,486)
OTHER INCOME, net 153,876 137,899 297,867 192,560
----------- ------------ ------------ ------------
Income (loss) before taxes 723,970 (300,176) 1,146,166 (328,125)
INCOME TAX (EXPENSE) BENEFIT (282,349) 96,140 (447,004) 92,933
----------- ------------ ------------ ------------
NET INCOME (LOSS) $ 441,621 $ (204,036) $ 699,162 $ (235,192)
=========== ============ ============ ============
BASIC EARNINGS (LOSS) PER COMMON
SHARE $ 0.09 $ (0.04) $ 0.14 $ (0.05)
=========== ============ ============ ============
SHARES USED IN COMPUTING BASIC
EARNINGS (LOSS) PER COMMON SHARE 5,004,392 4,547,774 5,004,392 4,549,090
=========== ============ ============ ============
DILUTED EARNINGS (LOSS) PER COMMON
SHARE $ 0.09 $ (0.04) $ 0.14 $ (0.05)
=========== ============ ============ ============
SHARES USED IN COMPUTING DILUTED
EARNINGS (LOSS) PER COMMON SHARE 5,008,018 4,547,774 5,008,937 4,549,090
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the
Nine Months Ended
March 31,
-------------------------------
2000 1999
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 699,162 $ (235,192)
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Provision for accounts receivable reserves 5,921 -
Depreciation and amortization 455,867 612,806
Deferred income taxes 27,512 24,538
(Increase) decrease in-
Accounts receivable (561,539) 15,925
Note receivable (470,573) -
Other receivables 169,917 (56,860)
Income tax receivable 155,872 -
Inventories 168,142 (267,469)
Prepaid taxes and expenses (71,455) (381,495)
Other assets (32,398) 68,731
(Increase) decrease in-
Accounts payable (679,070) (87,263)
Income taxes payable 215,125 (245,326)
Other accrued expenses (21,441) (187,059)
---------- -----------
Net cash provided by/(used in) operating activities 61,042 (738,664)
---------- -----------
INVESTING ACTIVITIES:
Purchases of marketable securities (190,256) -
Purchases of and deposits on property, plant and equipment (115,675) (221,194)
---------- -----------
Net cash used in investment activities (305,931) (221,194)
---------- -----------
FINANCING ACTIVITIES:
Net borrowings under lines of credit 800,000 1,800,000
Proceeds from long-term debt 257,000 975,000
Payments on capital lease obligations (97,657) -
Payments of long-term debt (517,828) (1,557,299)
Issuances of Common Stock 4,500
Purchase of Common Stock for treasury - (14,800)
---------- -----------
Net cash provided by financing activities 446,015 1,202,901
---------- -----------
NET INCREASE (DECREASE) IN CAS$ AND CASH EQUIVALENTS $ 201,126 $ 243,043
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,752,468 1,486,554
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD 1,953,594 1,729,597
========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid 445,936 567,222
========== ===========
Income taxes paid 76,007 510,000
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MOYCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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 March 31,
2000, the results of operations and the cash flows for the three and nine months
ended March 31, 2000 and 1999. Results of operations and cash flows for the
periods ended March 31, 2000 are not necessarily indicative of the results that
may be expected for the year ended June 30, 2000. 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 in consolidation.
- 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 at March 31, 2000
consist of certificates of deposit and an investment in a money market account.
Interest income earned on the investment of cash was $33,883 and $17,459 for the
three months ended March 31, 2000 and 1999, respectively, and $66,708 and
$53,140 for the nine months ended March 31, 2000 and 1999, respectively. During
the three months ended March 31, 2000 and 1999, the Company incurred capital
lease obligations of $0 and $268,210, respectively, and $149,000 and $268,210
during the nine months ended March 31, 2000 and 1999, respectively.
Inventories
Inventories are valued at the lower of cost, determined on the first-in,
first-out method, or market. Ending inventories at interim periods are primarily
estimated using the gross profit method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Significant additions or
improvements are capitalized, while repairs and maintenance are charged to
expense as incurred. Depreciation and amortization 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 March 31, 2000 and
1999, respectively, and $15,754 for the nine months ended March 31, 2000 and
1999, 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 March 31, 2000,
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.
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. 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. A total of $1,123,926, representing the fair market value
(based on the quoted market price) of the additional shares issued were charged
to retained earnings, with $2,366 and $1,121,560 credited to Common stock and
additional paid-in capital, respectively, 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. A total of $680,271, representing the fair market value
(based on the quoted market price) of the additional shares issued were charged
to retained earnings, with $2,603 and $677,668 credited to Common stock and
additional paid-in capital, respectively, 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.
- 3 -
<PAGE>
4. NOTE RECEIVABLE:
Note receivable at June 30, 1999 consisted of a single promissory note due from
a customer. In January, 2000, the remaining balance due was rolled over along
with additional receivable balances into a new promissory note. The January 2000
promissory note provides for monthly payments of $18,797 including interest
calculated at an annual rate of 15%, with any remaining balance due with the
final payment in March, 2003.
5. ACCRUED EXPENSES:
March 31, June 30,
2000 1999
--------- --------
Compensation and related benefits 276,734 303,234
Other 422,671 320,612
--------- ---------
699,405 623,846
========= =========
6. LINE OF CREDIT:
The Company has a line of credit with a bank under which it may borrow up to
$3,000,000 through December 31, 2000, subject to renewal. There was $1,500,000
of borrowings outstanding at March 31, 2000. Borrowings under the line bear
interest at prime (8.75% at March 31, 2000) and are secured by all assets of the
Company. In addition, the Company has an additional 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 nine months ended March 31, 2000, the Company
borrowed the maximum amount available under the additional 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.
- 4 -
<PAGE>
7. LONG-TERM DEBT:
March 31, June 30,
2000 1999
---------- ----------
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 March 31,
2000 was 8.45%. $ 1,799,339 $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 March 31, 2000
was 7.29% 1,239,292 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 March 31,
2000 was 7.54% 922,529 954,012
Mortgage payable to municipal authority in monthly
installments of $6,371, including interest at
2.00%, through July 1, 2010. 702,676 744,182
Convertible line of credit payable to bank in
monthly installments of principal and interest,
through August 2004. Rate at March 31, 2000 was
8.75% 441,667 -
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 March 31, 2000
was 7.29% 419,616 427,599
Note payable to officer with annual interest
payments payable at a 10% interest rate, and
principal due in full in December, 2002. 257,000 -
- 5 -
<PAGE>
Mortgage payable to municipal authority in monthly
installments of $1,952, including interest at
2.00%, through April 1, 2010. 205,617 220,038
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 March 31,
2000 was 5.85% 92,366 138,976
Mortgage payable to bank in monthly installments
of $2,543, including interest at prime plus 1.5%,
through December 1, 2011. Rate at March 31, 2000
was 9.5% 209,715 218,646
---------- ----------
6,289,817 6,050,645
Less- Current portion (715,522) (614,553)
---------- ----------
$5,574,295 $5,436,092
========== ==========
Substantially all of the Companys assets are pledged as collateral for the
long-term debt. In addition, the two mortgages payable to municipal authorities
are collateralized by an aggregate of $150,000 in standby letters of credit.
As of March 31, 2000, long-term debt matures as follows:
2000 595,343
2001 702,343
2002 1,111,358
2003 1,020,094
2004 947,612
Thereafter 1,913,067
---------
6,289,817
=========
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.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
March 31 March 31
(unaudited) (unaudited)
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales:
Domestic Customers -
Dental supplies $ 2,290,987 $ 2,158,370 $ 7,131,703 $ 6,637,647
Precision abrasives 1,101,282 882,498 3,535,361 2,376,241
International customers -
Dental supplies 404,837 286,975 1,130,872 1,168,936
Precision abrasives 760,820 493,835 1,400,724 954,440
------------ ------------ ------------ -------------
$ 4,557,926 $ 3,821,678 $ 13,198,660 $ 11,137,264
============ ============ ============ =============
Gross profit
Dental supplies $ 1,549,403 $ 1,108,967 $ 4,454,155 $ 3,475,081
Precision abrasives 643,273 441,102 1,338,576 1,101,239
------------ ------------ ------------ -------------
$ 2,192,676 $ 1,550,069 $ 5,792,731 $ 4,576,320
============ ============ ============ =============
Operating income (loss)
Dental supplies $ 822,593 $ 153,510 $ 1,334,540 $ 487,689
Precision abrasives (113,755) (359,035) (101,872) (503,888)
------------ ------------ ------------ -------------
$ 708,838 $ (205,525) $ 1,232,668 $ (16,199)
============ ============ ============ =============
Depreciation and amortization:
Dental supplies 19,614 124,504 265,638 363,493
Precision abrasives 42,282 105,597 190,229 249,313
------------ ------------ ------------ -------------
61,896 230,101 455,867 612,806
============ ============ ============ =============
Capital expenditures:
Dental supplies 11,289 9,779 51,471 85,354
Precision abrasives 14,081 41,566 64,204 135,840
------------ ------------ ------------ -------------
25,370 51,345 115,675 221,194
============ ============ ============ =============
</TABLE>
- 7 -
<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's patent counterclaim. The Company believes that
this ruling permits it to proceed with its patent infringement counterclaim
against Dentsply with respect to Dentsply instruments that fall below the
allowed tolerance.
Foot Powder Settlement
During calendar year 1997, 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 final year payout.
- 8 -
<PAGE>
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 March 31, 2000 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 March 31, 2000
are as follows:
2000 $ 113,544
2001 125,064
2002 86,129
2003 66,948
2004 66,948
Thereafter 154,792
----------
Total minimum lease payments 613,425
Less- Amount representing interest (169,635)
----------
Present value of minumum capital
lease payments $ 443,790
==========
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, $135,000 during the three months ended September 30, 1999, and $180,000
during the three months ended March 31, 2000, which was used to replace a
portion of the damaged equipment and resolve a business interruption claim.
11. RELATED PARTY TRANSACTION:
In January, 2000, an officer of the Company transferred 181,500 shares of the
Company's common stock in payment of certain legal fees owing to the Company's
counsel in the Dentsply litigation, which had been incurred and recorded by the
Company in the prior fiscal year. The Company issued its promissory note in the
principal amount of $257,000, the stipulated value of the shares transferred by
the officer. The note is payable in full on December 31, 2002. Interest at the
annual rate of 10% is payable on December 31 of each year, but the Company may
elect to defer payment of interest and add it to the principal amount due.
- 9 -
<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 $441,621 and (204,036) for the three
months ended March 31, 2000 and 1999, 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 and/or repair the damaged
equipment and funds to resolve a business interruption claim. The Company
replaced the affected equipment during the nine months ended March 31, 2000,
which resulted in little or no impact on overall production capacity. This
matter is closed.
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<PAGE>
Summary
The following unaudited table sets forth for the periods indicated the Company's
key financial information by segment.
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
March 31 March 31
---------------------------- ------------------------------
2000 1999 2000 1999
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales:
Dental supplies 2,695,824 2,445,345 8,262,575 7,806,583
Precision abrasives 1,862,102 1,376,333 4,936,085 3,330,681
----------- ----------- ----------- -----------
4,557,926 3,821,678 13,198,660 11,137,264
=========== =========== =========== ===========
Gross profit
Dental supplies $ 1,549,403 $ 1,108,967 $ 4,454,155 $ 3,475,081
Precision abrasives 643,273 441,102 1,338,576 1,101,239
----------- ----------- ----------- -----------
$ 2,192,676 $ 1,550,069 $ 5,792,731 $ 4,576,320
=========== =========== =========== ===========
Operating income (loss)
Dental supplies $ 822,593 $ 153,510 $ 1,334,540 $ 487,689
Precision abrasives (113,755) (359,035) (101,872) (503,888)
----------- ----------- ----------- -----------
$ 708,838 $ (205,525) $ 1,232,668 $ (16,119)
=========== =========== =========== ===========
</TABLE>
Results of Operations
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Net sales for the three months ended March 31, 2000 increased $736,248 from the
three months ended March 31, 1999. Net sales in the Dental Supplies segment
increased $250,479 primarily due to increased sales of the Company's propriety
and patented endodontic (root canal) instruments. Net sales in the Precision
Abrasives segment increased $485,769 from $1,376,333 for the three months ended
March 31, 1999 to $1,862,102 for the three months ended March 31, 2000 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 March 31, 2000 increased $642,607 from
the three months ended March 31, 1999. Gross profit in the Dental Supplies
segment increased $440,436 from $1,108,967 (45.4% of Dental Supplies net sales)
for the three months ended March 31, 1999 to $1,549,403 (57.5% of Dental
Supplies net sales) for the three months ended March 31, 2000. Gross profit in
the Precision Abrasives segment increased from $441,102 (32.0% of Precision
Abrasives net sales) for the three months ended March 31, 1999 to $643,273
(34.5% of Precision Abrasives net sales) for the three months ended March 31,
2000. As the Company continues to primarily use the gross profit method to
estimate ending inventories at interim periods, changes in gross profit as a
percentage of net sales are due to changes in the product mix offered by the
Company.
Sales and marketing expenses decreased $228,228 from $727,423 (19.0% of net
sales) for the three months ended March 31, 1999 to $499,195 (11.0% of net
sales) for the three months ended March 31, 2000 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
$94,133 from $1,025,309 (26.8% of net sales) for the three months ended March
31, 1999 to $ 931,176 (20.4% of net sales) for the three months ended March 31,
2000. 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.)
- 11 -
<PAGE>
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.
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999
Net sales for the nine months ended March 31, 2000 increased $ 2,061,396 from
the nine months ended March 31, 1999. Net sales in the Dental Supplies segment
increased $455,992 due to an increase in sale of endodontic instruments. Net
sales in the Precision Abrasives increased $1,605,404 from $3,330,681 for the
nine months ended March 31, 1999 to $4,936,085 for the nine months ended March
31, 2000 primarily as a result of a new sales effort and increased volume of
fiber optic polishing films.
Gross profit for the nine months ended March 31, 2000 increased $1,216,411 from
the nine months ended March 31, 1999. Gross profit in the Dental Supplies
segment increased $979,074 from $3,475,081 (44.5% of Dental Supplies net sales)
for the nine months ended March 31, 1999 to $ 4,454,155 (53.9% of Dental
Supplies net sales) for the nine months ended March 31, 2000. Gross profit in
the Precision Abrasives segment increased $237,337 from $1,101,239 (33.1% of
Precision Abrasives net sales) for the nine months ended March 31, 1999 to
$1,338,576 (27.1% of Precision Abrasives net sales) for the nine months ended
March 31, 2000. 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 $253,823 from $1,964,115 (17.6% of net
sales) for the nine months ended March 31, 1999 to $1,710,292 (13.0% of net
sales) for the nine months ended March 31, 2000 primarily as a result of lower
sales commissions and reduced trade magazine advertising, offset by increased
marketing expenses related to the Company's seminar program. General and
administrative expenses increased $172,537 from $2,600,717 (23.4% of net sales)
to $2,773,254 (21.0% 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 $105,307 between periods due to the
receipt of $315,000 in casualty insurance proceeds during the nine months ended
March 31, 2000.
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
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 $61,042 and $ (738,664) was provided by/(used in) operating
activities in the nine months ended March 31, 2000 and 1999, respectively. The
improvement in net cash from operating activities between periods was primarily
a result of a higher level of net income to date in fiscal 2000 versus 1999.
Expenditures for property, plant and equipment totaled $115,675 for the nine
months ended March 31, 2000 and $221,194 for the nine months ended March 31,
1999.
Proceeds received from long-term debt were $257,000 and $975,000 for the nine
months ended March 31, 2000 and 1999, respectively. For the nine months ended
March 31, 2000 and 1999, the Company made payments on long-term debt of $517,828
and $1,557,299 respectively, which includes payments of $975,000 related to a
separate refinancing of certain long-term debt during the nine months ended
March 31, 1999.
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<PAGE>
During the three months ended March 31, 1999, 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 nine months ended March 31, 2000, 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 nine months ended March
31, 2000, the Company borrowed the maximum amount available under the
convertible line of credit.
The Company expects to spend approximately $150,000 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 $337,500 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.
- 13 -
<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.
2. The Company filed a form 8-K on April 7, 2000, announcing
the retention of BDO Seidman, LLP as its Independent
Auditor and the termination of its prior Independent
Auditor. There were no disagreements with the prior
Independent Auditor.
- 14 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MOYCO TECHNOLOGIES, INC.
Dated: May 15, 2000 BY: /s/Marvin E. Sternberg
--------------------------------------
Marvin E. Sternberg
Chairman of the Board, President
and Chief Executive Officer (Principal
Executive Officer) and Director
Dated: May 15, 2000 BY: /s/William G. Woodhead
----------------------------------------
William G. Woodhead
Secretary/Treasurer, Principal Financial
Officer and Principal Accounting Officer
and Director
- 15 -
