SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 31, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1939
For the transition period from to
Commission File Number: 33-5820-LA
SEMICON TOOLS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 77-0082545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
111 Business Park Drive, Armonk, New York 10504
(Address of principal executive offices)
Issuer's telephone number, including area code: (914) 273-1400
-----------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
Common Stock, par value $.001
per share 9,867,500
<PAGE>
INDEX
Part I. Financial Information
Item 1. Condensed consolidated financial statements:
Balance sheet as of October 31, 1997 F-2
Statement of income for the nine and three
months ended October 31, 1997 and 1996 F-3
Statement of cash flows for the nine months ended
October 31, 1997 and 1996 F-4
Notes to condensed consolidated financial statements F-5 - F-11
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - OCTOBER 31, 1997
(UNAUDITED)
ASSETS
Current assets:
Cash $ 57,972
Accounts receivable, less allowance
for doubtful accounts of $6,500 271,370
Inventory 409,798
Prepaid expenses and other assets 81,475
Deferred tax asset, current portion 32,964
----------
Total current assets 853,579
-------
Property and equipment 399,311
Other assets:
Security deposits 15,685
Goodwill, net of amortization 99,720
Deferred tax asset, net of current portion 20,186
----------
135,591
-----------
$1,388,481
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 35,944
Notes payable, bank 50,000
Accounts payable 94,605
Accrued interest 125,086
Accrued expense and payroll taxes payable 12,691
----------
Total current liabilities 318,326
-------
Long-term debt, net of current portion 214,374
----------
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 9,867,500 shares issued and
outstanding 9,868
Additional paid in capital 2,517,945
Retained earnings (deficit) ( 1,672,032)
----------
855,781
----------
$1,388,481
==========
See notes to condensed consolidated financial statements.
F-2
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE AND THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
(UNAUDITED)
Nine months ended Three months ended
October 31, October 31,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $1,491,823 $1,111,072 $ 557,043 $ 364,070
Cost of sales 497,013 287,396 183,934 77,594
---------- ---------- ---------- ----------
Gross profit 994,810 823,676 373,109 286,476
Selling, general and
administrative expenses 817,536 700,938 286,320 257,993
---------- ---------- ---------- ----------
Income from operations 177,274 122,738 86,789 28,483
Other charge, interest
expense 27,667 26,078 8,548 8,176
---------- ---------- ---------- ----------
Income before income
taxes 149,607 96,660 78,241 20,307
---------- ---------- ---------- ----------
Income tax expense
(benefit):
Current 32,864 6,904
Deferred 40,600 ( 32,864) 14,036 ( 6,904)
---------- --------- ---------- ----------
40,600 0 14,036
---------- --------- ---------- ---------
Net income $ 109,007 $ 96,660 $ 64,205 $ 20,307
========== ========= ========== =======
Income per common share $ 0.01 $ 0.01 $ 0.00 $ 0.00
========== ========= ========== =======
Weighted average number
of common shares
outstanding 13,742,500 7,026,898 13,867,500 8,570,489
========== ========= ========== ==========
See notes to condensed consolidated financial statements
F-3
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
NINE MONTHS ENDED OCTOBER 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Operating activities:
Net income $109,007 $ 96,660
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and amortization 31,949 11,012
Compensatory stock issued 30,000
Changes in other operating assets and
liabilities:
Accounts receivable ( 108,931) ( 75,465)
Inventories ( 70,246) ( 42,485)
Prepaid expenses and other current assets 40,768 ( 28,327)
Accounts payable, accrued expenses and
payroll taxes payable ( 40,756) ( 187,225)
-------- --------
Net cash used in operating activities ( 38,209) ( 195,830)
-------- --------
Investing activities:
Increase in other assets ( 800)
Purchase of property and equipment ( 50,646) ( 10,503)
-------- --------
Net cash used in investing activities ( 51,446) ( 10,503)
-------- --------
Financing activities:
Proceeds from financing 217,349
Proceeds from issuance of common stock 500 328,125
Decrease in notes payable, shareholders' ( 84,462) ( 31,649)
Payment of debt ( 102,094) ( 34,695)
-------- --------
Net cash provided by financing activities 31,293 261,781
-------- --------
Net increase (decrease) in cash ( 58,362) 55,448
Cash, beginning of period 116,334 38,866
-------- --------
Cash, end of period $ 57,972 $ 94,314
======== ========
Supplemental disclosure:
Cash paid during the period for:
Interest $ 22,761 $ 2,597
======== ========
Income taxes $ 0 $ 0
======== ========
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for purchase of
subsidiary $125,048
Issuance of common stock for conversion of debt,
agreements, services and payment of interest 36,000
--------
$161,048
========
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. The
results of operations for the three months ended is not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report for the year ended
January 31, 1997 included in its Annual Report filed on Form 10-KSB.
2. Organization of the Company:
Semicon Tools, Inc. (the "Company"), a Nevada corporation, is primarily in
the business of selling small precision disposable diamond tools used to
manufacture electronic components and devices.
One of the Company's wholly-owned subsidiaries, East Coast Sales Company,
Inc. ("ECS") is a Connecticut corporation which distributes and
fabricates technical ceramic products and distributes clean room
supplies and tools. This Company, which was acquired on January 26,
1990, was accounted for in a manner similar to the pooling of interests
method of accounting. The total cost of the acquisition, $309,000, was
paid for by the issuance of a $300,000 note, bearing interest at 10% per
annum, and the issuance of 9,000,000 shares (60,000 shares, as restated
- see Note 10) of the Company's $.001 par value common stock (see also
Note 5).
The Company's other wholly-owned subsidiary, DTI Technology, SDN BHD is a
Malaysian company which manufactures a product line similar to that of
Semicon Tools, Inc. Semicon Tools, Inc. acquired the assets of DTI
Technology, SDN BHD on June 22, 1996. The total cost of the acquisition,
$125,048, was paid for by the issuance of 300,000 shares of the
Company's $.001 par value common stock with a negotiated fair value of
$.42 per share.
3. Property and equipment:
Major classifications of property and equipment are as follows:
Manufacturing equipment $618,538
Other equipment 277,984
Office equipment 20,535
--------
917,057
Less accumulated depreciation 517,746
-------
$399,311
========
F-5
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Goodwill:
On January 26, 1990, the Company acquired East Coast Sales Company (its
wholly-owned subsidiary) for a cost of $309,000. The purchase price
exceeded the fair value of the assets by $134,281 which amount was
assigned to goodwill, and is being amortized on a straight-line basis
over forty years. Accumulated amortization of goodwill aggregated
$34,561 as of October 31, 1997.
5. Commitments and contingencies:
The Company is currently obligated under a lease agreement for office and
manufacturing facilities. This lease, which expires on May 31, 1998,
requires future minimum rental payments of $22,498.
Rent expense for the nine months ended October 31, 1997 and 1996 amounted
to $28,923.
The Company also leases five vehicles under operating leases with terms
expiring through 2000. Total lease expense was $27,538 and $11,895 for
the nine months ended October 31, 1997 and 1996, respectively.
Future minimum rentals are as follows:
October 31, 1998 $35,567
October 31, 1999 35,567
October 31, 2000 21,796
-------
$92,930
=======
The Company has entered into written sales agreements with two employees.
The agreements are on a year to year basis and call for the payment of
commissions, varying from 1 to 4 percent, on the sale of selected
products.
F-6
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Commitments and contingencies (continued):
On March 6, 1996, the Company entered into an investment agreement for a
three year term. The consultant shall assist management in broadening
the Company's exposure to the financial community and securing necessary
funding to meet its needs according to the terms of the agreement. The
consultant shall be compensated by having the option to purchase up to
6,000,000 of the Company's common shares at prices varying from $.10 to
$1.75 during the period commencing on March 6, 1996 and ending September
30, 1996. Either party may terminate this agreement upon notice to the
other. As of April 30, 1996, $825,000 shares had been issued for
$82,500. On September 30, 1996, after 2,550,000 shares had been issued
for $240,000, this agreement was cancelled.
On April 8, 1996, the Company reached a settlement with their prior
accountants of fees due from the Company. The agreement calls for
monthly installments of $4,000 commencing April 1, 1996 and ending on
September 1, 1996 for a total $24,000. The balance reflected at January
31, 1996 on the Company's accounts payable was $28,068.
On May 1, 1996, the Company entered into employment agreements with its
President and Vice President. The terms of the agreements covers one
five year period expiring on January 31, 2001. Compensation is set at a
base of $100,000 and $75,000 for the President and Vice President,
respectively, with each getting a bonus of 5% of the increase in
consolidated income from the previous year. Each employee also received
2,000,000 stock options at $.10. None of these options had been
exercised as of October 31, 1997.
6. Long-term debt:
Long-term Current
Rate Portion Portion Maturity
Note payable, shareholder (a) 10% $114,374 $35,944 2001
Note payable, shareholders (b) 13.5%-15% 100,000 1998
-------- -------
$214,374 $35,944
======== =======
F-7
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Long-term debt (continued):
(a) On April 23, 1997, the Company renegotiated an existing loan
with a certain shareholder resulting in a new obligation
payable in monthly installments of $2,648 including interest at
10%.
(b) Notes payable to two shareholders in the aggregate amount of
$125,000. These notes are subordinate to the borrowing from
Citibank and will become due when the bank is paid in full.
Both shareholders have waived their demand rights on the notes.
The maturities of these loans are as follows:
October 31, 1998 $ 35,944
October 31, 1999 139,707
October 31, 2000 43,866
October 31, 2001 30,801
--------
$250,318
========
7. Income taxes:
As of October 31, 1997 the Company had net operating loss carryovers of
approximately $620,000 expiring in various years through 2008.
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), the cumulative effect of which was not material to the
consolidated financial statements and is therefore not presented
separately. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
F-8
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Income taxes (continued):
consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the year in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date; this effect was immaterial during
the year ended January 31, 1997 and 1996. The deferred tax asset less the
deferred tax liabilities has been reduced by a valuation allowance equal to the
net tax benefit in excess of the estimated taxable profits over the next three
years.
Provision for income taxes (benefit):
1997 1996
---- ----
Current $32,864
Deferred $40,600 ( 32,864)
------- -------
Total benefit $40,600 $ 0
======= =======
A reconciliation of the income tax provision at the federal statutory rate
to the income tax provision at the effective tax rate is as follows
1997 1996
---- ----
Computed tax at the expected
statutory rate $40,770 0
Foreign (income) loss ( 170)
-------
Income tax expense $40,600 0
======= =
F-9
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Income taxes (continued):
The components of deferred tax assets and liabilities consist of the
following:
Deferred tax asset:
Net operating loss carryforward $498,150 $570,000
-------- --------
Total deferred tax asset 498,150 570,000
Valuation allowance ( 445,000) ( 570,000)
-------- --------
$ 53,150 $ 0
======== ========
8. Computation of earnings per share:
Nine months Three months
ended ended
October 31, October 31,
1997 1996
Weighted average number of common
shares outstanding 9,742,500 9,867,500
Assumed conversion stock options 4,000,000 4,000,000
---------- ----------
Weighted average number of common
shares outstanding 13,742,500 13,867,500
========== ==========
9. Modification of shareholders' loans:
On April 23, 1997, the Company modified the terms of two notes payable to
a certain shareholder. The shareholder has agreed to reduce the interest
rates from 14% to 10%. The new note balance includes previously unpaid
principal and interest with the new payments beginning May 1, 1997.
F-10
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Subsequent events:
Acquisition of Teik Tatt Holding Co. Sdn Bhd:
On November 6, 1997, the Company purchased 100% of the outstanding
common shares of Teik Tatt Holding Co. Sdn Bhd as a transaction to be
accounted for as a purchase. The Company issued 10,000,000 shares of
its common shares pursuant to the acquisition. The stock will be valued
at the net book value of assets acquired at historical cost.
Teik Tatt Holding Co. Sdn Bhd, founded in 1979, is a manufacturer of
rope, yarn, twine and high quality rubber bands. Teik Tatt Holding Co.
Sdn Bhd recently expanded its business into the recycling of plastics
and non ferrous metals from cable and precious metals from electronic
components and circuit boards obtained from obsolete computers.
As a result of this acquisition, the shareholders of Teik Tatt Holding
Co. Sdn Bhd will own approximately 50% of the outstanding shares of the
Company.
The assets acquired and the liabilities assumed (unaudited) as of
October 31, 1997, the date of the financial statements, are as follows:
Current assets $16,004,758
Noncurrent assets 13,045,992
----------
$29,050,750
===========
Current liabilities $15,633,130
Long-term debt 6,408,952
---------
22,042,082
==========
Common stock 2,673,438
Retained earnings 4,335,230
---------
7,008,668
=========
$29,050,750
===========
F-11
<PAGE>
- - Management's Discussion and Analysis of
Financial Condition and Results of Operations
1. Financial Condition
The Company's financial condition continues to improve following its
third quarter 1997 successful and profitable operating results. A
comparison of the Balance Sheet at October 31, 1997 to July 31, 1997
indicates:
1. Total assets increased by 2.9% to $1,388,481 and current
assets increased by 4.0% to $853,579, following instep
with higher sales volume and a profitable operation.
2. Current liabilities increased by 4.4% mostly due to an
increase in a bank notes payable with the funds used for
working capital.
Other Balance Sheet comparisons for the same periods are:
1. The Company's net worth continued to rise. At October 31,
it stood at $855,781 ($.062 per share) up 8.1% or $.005
per share.
2. Cash decreased by $21,315 or 26.9% but remains
satisfactory reflecting the Company's balanced approach,
in view of the increase in sales volume, to handling its
accounts receivable (up 5.8%), inventory (up 15.3%) and
the aforementioned notes payable increase (see III,
Liquidity and Capital Resources Cash for liquidity
comments).
II. Results of Operations
Net sales for the quarter ended October 31, 1997 were $557,043 as
compared to $364,070 for the comparable period ended October 31, 1996,
an increase of approximately 53.0%. During the quarter, the Company
experienced a 5.6% increase in the sales of its ceramic lines and a
38.2% increase in its scribes line as the main contributor to this
improvement.
The quarter's net sales results was its highest quarter in its history.
Management believes, although no assurance can be given, that this
trend will produce a record annual sales for the current fiscal year.
This belief is supported by the current relatively high bookings level
of $500,000, approximately equal to that of last quarter at a
comparable point in time.
The Company's gross profit margin for the third quarter of 1997 was
70.0%, a reduction of 11.1% as compared to the third quarter of 1996
when it was 78.7%. Management believes the higher 1996 ratio was the
result of an unusual product line sales mix and that the current 1997
ratio is in line with normal operational expectations. Selling, general
and administrative expense as a percentage of sales decreased for the
third quarter of 1997 by 27.5% to 51.4%, also now in line with normal
expectations.
Income from operations during the quarter ended October 31, 1997 was
$86,789, about 200% greater than the 1996 quarter's of $28,483.
Management believes that income from operations is the key statistic in
evaluating the Company's profitability since the utilization of
non-cash income tax deferred benefit distorts net income form time to
time.
<PAGE>
For the nine months ended October 31, 1997 compared to the nine months
ended October 31, 1996, net sales increased to $1,491,823 from
$1,111,072 or 34.3%, gross profit margins dipped by 11.2% while the
selling, general and administrative expense ratio improved by 13.2% The
impact of these offsetting cost factors increased income from
operations by approximately 14.4%; namely: $177,274 for the nine months
ended October 31, 1997 and $122,738 for the nine months ended October
31, 1996. As explained, the $149,607 income before taxes in the 1997
nine month period was lessened by a non-cash deferred income tax
benefit of $40,600 while the $96,660 net income before taxes in the
1996 nine month period was not. Nevertheless, the current years net
income at 7.3% of net sales exceeded last years by 12.8%.
For the remainder of fiscal year 1997, and based on the aforementioned
bookings level, Management anticipates that net sales and income from
operations will continue to increase and reach record levels.
III. Liquidity and Capital Resources
At October 31, 1997, the Company's current ratio (i.e. current assets
divided by current liabilities) stood at 2.68:1, virtually unchanged
from the favorable level existing at the end of the last quarter. To
enable the Company to have the ability and flexibility to purchase
larger, more economical quantities of material stocks and, more
importantly, to boost its production capability the Company obtained a
$200,000 line of credit from a major New York City bank.
On November 26, 1997, the Company acquired all of the issued and
outstanding capital stock of Teik Tatt Holding Co. (1979) Sdn Bhd
("TTH"), a privately held Malaysian manufacturing entity, in exchange
for 10,000,000 shares of the Company's common stock. The Company
believes that TTH internally generates the working capital it requires
for its on-going operations. However, substantial funding is required
in order to meet TTH's growth plans. The Company intends to seek
sources of additional capital for such purposes although it has not yet
identified any financing sources and there are no assurances that such
funding will be obtained.
During the quarter ended October 31, 1997, the Company made no
purchases of equipment. As at the end of the quarter, there were no
immediate material comments for capital expenditures.
IV. Inflationary Impact
Since the inception of operations, inflation has not significantly
affected the operating results of the Company. However, inflation and
changing interest rates have in the past had a significant effect in
the economy in general and, therefore, could affect the operating
results of the Company in the future.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995.
Statements contained in this Form 10-QSB/A Report which are not
historical facts are forward looking statements that involve risks and
uncertainties that could cause actual results to differ materially
include, among others, economic and political events in or effecting
Malaysia, the Company's dependence on the semiconductor industry and
other risk factors detailed in the Company's Securities and Exchange
Commission filings.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 57,972
<SECURITIES> 0
<RECEIVABLES> 271,370
<ALLOWANCES> 6,500
<INVENTORY> 409,798
<CURRENT-ASSETS> 853,579
<PP&E> 917,057
<DEPRECIATION> 517,746
<TOTAL-ASSETS> 1,388,481
<CURRENT-LIABILITIES> 318,326
<BONDS> 0
0
0
<COMMON> 9,868
<OTHER-SE> 2,517,945
<TOTAL-LIABILITY-AND-EQUITY> 1,388,481
<SALES> 1,491,823
<TOTAL-REVENUES> 1,491,823
<CGS> 497,013
<TOTAL-COSTS> 817,536
<OTHER-EXPENSES> 27,667
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 149,607
<INCOME-TAX> 40,600
<INCOME-CONTINUING> 109,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,007
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0
</TABLE>
