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 July 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 September 3, 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 July 31, 1997 F-2
Statement of income (loss) for the six and three
months ended July 31, 1997 and 1996 F-3
Statement of cash flows for the six months ended
July 31, 1997 and 1996 F-4
Notes to condensed consolidated financial statements F-5 - F-10
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 - JULY 31, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash $ 79,287
Accounts receivable, less allowance
for doubtful accounts of $6,500 256,504
Inventory 355,300
Prepaid expenses and other assets 82,973
Deferred tax asset, current portion 47,000
----------
Total current assets 821,064
Property and equipment 391,902
Other assets:
Security deposits 15,685
Goodwill, net of amortization 100,559
Deferred tax asset, net of current portion 20,186
----------
136,430
-------
$1,349,396
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 30,874
Notes payable, officers 6,796
Accounts payable 145,622
Accrued interest 120,594
Payroll taxes payable 1,037
----------
Total current liabilities 304,923
Long-term debt, net of current portion 252,886
----------
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) ( 1,736,226)
----------
791,587
-------
$1,349,396
==========
See notes to condensed consolidated financial statements
F-2
</TABLE>
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
SIX AND THREE MONTHS ENDED JULY 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
Six months ended Three months ended
July 31, July 31,
1997 1996 1997 1996
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
Net sales $ 934,780 $ 747,002 $ 512,177 $ 370,535
Cost of sales 313,080 209,802 187,844 106,225
---------- --------- ---------- -----------
Gross profit 621,700 537,200 324,333 264,310
Selling, general and
administrative expenses 531,216 442,945 289,496 231,541
---------- --------- ---------- ----------
Income from operations 90,484 94,255 34,837 32,769
Other charge, interest
expense 19,117 ( 17,902) 9,292 ( 6,711)
---------- --------- ---------- ----------
Income before income
taxes 71,367 76,353 25,545 26,058
---------- --------- ---------- ----------
Income tax expense
(benefit):
Current 22,905 6,253
Deferred 26,564 ( 22,905) 14,069 ( 6,253)
---------- --------- ---------- ----------
26,564 14,069
---------- --------- ----------
Net income (loss) $ 44,803 $ 76,353 $ 11,476 $ 26,058
========== ========= ========== ==========
Income (loss) per
common share $ 0.003 $ 0.010 $ 0.001 $ 0.002
========== ========= ========== ==========
Weighted average number
of common shares
outstanding 13,617,500 7,685,749 13,867,500 11,497,388
========== ========= ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED JULY 31, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 44,803 $ 76,353
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and amortization 21,131 6,750
Compensatory stock issued 7,500
Changes in other operating assets and
liabilities:
Accounts receivable ( 94,065) ( 10,932)
Inventories ( 15,748) ( 23,723)
Prepaid expenses and other current assets 25,234 ( 41,147)
Accounts payable, accrued expenses and
payroll taxes payable 76,780 ( 151,801)
-------- --------
Net cash provided by (used in) operating
activities 58,135 ( 137,000)
-------- --------
Investing activities:
Increase in other assets ( 800) ( 550)
Purchase of property and equipment ( 33,258)
-------- ---------
Net cash used in investing activities ( 34,058) ( 550)
-------- --------
Financing activities:
Proceeds from sale of stock 500 268,125
Increase in notes payable, shareholders' 6,796
Decrease in notes payable, shareholders' ( 45,000) ( 17,487)
Payment of debt ( 23,420) ( 23,130)
-------- --------
Net cash provided by (used in) financing
activities ( 61,124) 227,508
-------- --------
Net increase (decrease) in cash ( 37,047) 89,958
Cash, beginning of period 116,334 38,866
-------- --------
Cash, end of period $ 79,287 $128,824
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,320
========
Income taxes $ 0
========
Supplemental schedule of non-cash investing and
financing activities:
Issuance of common stock for purchase of
subsidiary $274,338
Issuance of common stock for conversion of debt,
agreements, services and payment of interest 7,500
--------
$281,838
========
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 $601,150
Other equipment 277,984
Office equipment 20,535
--------
899,669
Less accumulated depreciation 507,767
-------
$391,902
========
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
$33,722 as of July 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 the following future minimum rental payments:
July 31, 1998 $32,140
Rent expense for the six months ended July 31, 1997 and 1996 amounted to
$19,282.
The Company also leases five vehicles under operating leases with terms
expiring through 2000. Total lease expense was $17,776 and $7,938 for
the six months ended July 31, 1997 and 1996, respectively.
Future minimum rentals are as follows:
July 31, 1998 $ 35,567
July 31, 1999 35,567
July 31, 2000 29,062
--------
$100,196
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. The books at April 30, 1996 have been adjusted to
reflect this settlement.
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 July 31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
6. Long-term debt:
Long-term Current
Rate Portion Portion Maturity
Note payable, shareholder (a) 10% $127,886 $30,874 2001
Note payable, shareholders (b) 13.5%-15% 125,000 1998
-------- -------
$252,886 $30,874
======== =======
</TABLE>
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:
July 31, 1998 $167,236
July 31, 1999 38,731
July 31, 2000 42,777
July 31, 2001 35,015
--------
$283,759
========
7. Income taxes:
Asof July 31, 1997 the Company had net operating loss carryovers of
approximately $1,730,000 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 $22,905
Deferred $26,564 ( 22,905)
------- -------
Total benefit $26,564 $ 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 $24,874 0
Foreign (income) loss 1,690
------- ------
Income tax expense $26,564 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 $512,186 $570,000
-------- --------
Total deferred tax asset 512,186 570,000
Valuation allowance ( 445,000) ( 570,000)
-------- --------
$ 67,186 $ 0
======== ========
8. Computation of earnings per share:
Six months Three months
ended ended
July 31, July 31,
1997 1996
---- ----
Weighted average number of common
shares outstanding 9,617,500 9,867,500
Assumed conversion stock options 4,000,000 4,000,000
---------- ----------
Weighted average number of common
shares outstanding 13,617,500 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
I. Financial Condition
The Company's financial condition has continued to improve so that its
latest Dun and Bradstreet rating of 1A2 now reflects a more than adequate
"Good". Dun and Bradstreet, in addition, in its August 20, 1997 Business Scope
Report states that "Semicon Tools, Inc. demonstrated a satisfactory financial
condition as of the consolidated fiscal statement dated January 31, 1997. This
assessment is supported by a satisfactory liquidity position and a fair ratio of
debt to equity relative to other companies in this line of business..."
Reflecting its successful and profitable operating results, a
comparison of the Balance Sheet at July 31, 1997 to April 30, 1997 indicates:
1. Total assets increased by 3.4% to $1,349,396 and current assets
increased by 7.4% to $821,064, generally due to higher sales
volume and the profitable operation.
2. Current liabilities increased by 23.3% almost entirely due to a
60.4% increase in accounts payable. This increase follows
naturally from a 38.2% increase in sales volume.
Other Balance Sheet comparisons for the same two periods are:
1. The Company's net worth continued to rise. At July 31, it stood at
$791,587, up to 1.60%.
2. Cash increased by 9.4% reflecting the Company's balanced
approach to handling its accounts receivable (up 51.1%),
inventory (up a nominal 1.0%) and the aforementioned 60.4%
accounts payable increase.
3. The property and equipment increase includes approximately
$12,000 of equipment to expand resin blade capacity and office
machine purchases for the Malaysian facility.
<PAGE>
II. Results of Operations
Net sales for the quarter ended July 31, 1997 were $512,177 as compared
to $370,535 for the comparable period ending July 31, 1996, an increase of
approximately 38.2%. During the quarter, the Company experienced a 14.6%
increase in the sales of its ceramic lines and a 14.4% increase in its scribes
line as the main contributors to this improvement.
The quarter's net sales results was its highest quarter in its history.
Management believes this continues to portend a record annual sales for the
current fiscal year. This belief is supported by the current bookings of
$497,000, slightly higher than the last quarter's $468,430 at a comparable point
in time.
The Company's gross profit margin for the second quarter of 1997 was
63.3%, a reduction of 11.2% as compared to the first quarter of 1996 when it was
71.3%. On the other hand, the selling, general and administrative expense as a
percentage of sales decreased by 9.6% to 56.5%.
The gross profit margin impact due, Management believes primarily to
the satisfaction of certain one time obligations and the greater volume of low
profit margin products, however, had a greater affect so that, in spite of the
higher sales level, income from operations for the two quarters were
approximately the same, $34,837 for the 1997 quarter as compared to $32,769 for
the 1996 quarter, or only 6.3% higher. Management believes that income from
operations is the key statistic in evaluating the Company's profitability since
the utilization of a non-cash income tax deferred benefit distorts net income.
For the six months ended July 31, 1997 compared to the six months ended
July 31, 1996, net sales increased to $934,780 from $747,002 or 25.1%, gross
profit margins dipped a little while selling, general and administrative
expenses improved somewhat. The impact of these offsetting cost factors left
income from operations at approximately the same level; namely: $90,484 for
<PAGE>
the six months ended July 31, 1997 and $94,255 for the six months ended July 31,
1996 or 4.0% lower in 1997. Again, the $44,803 net income in the 1997 half year
was lessened by a non-cash deferred income tax benefit of $26,564, while the
$76,353 net income in the 1996 half year was not.
For the remainder of fiscal year 1997, Management anticipates that net
sales will continue at the same high levels so that they believe net sales can
reach an annual record high of approximately $2.0 million. Additionally,
Management feels that income from operations will also reach a record high of
approximately $200,000. It bases this projection on:
1. The current level of bookings and the strong indications of
follow-on orders noted by its customers.
2. Whereas during the second quarter of 1997 DTI Technology, SDN,
BHD, its Malaysian subsidiary, reflected six month sales of
only $23,753 and a loss of $6,760, it will shortly begin to
fill its $106,000 backlog, part of the Company's aforementioned
$497,000 total, mostly consisting of dressers and resin blades.
3. The essentially completed satisfaction of the one-time
obligations. 4. The anticipated growth of the higher gross profit
product lines.
III. Liquidity and Capital Resources
At July 31, 1997, the Company's current ratio (i.e. current assets
divided by current liabilities) stood at 2.69:1, as compared to 1.96:1 at
January 31, 1997 and 1.84:1 in the comparable quarter ended July 31, 1996. This
more than satisfactory classical measure of a company's ability to meet current
obligations and any possible reduction of current assets reflects positively on
the Company's liquidity and resources for its level of business and will
contribute to more than satisfying its suppliers of goods and services.
During the second quarter of fiscal 1997, the Company made a final
payment on a long term bank loan. At the same time, it began an effort to
<PAGE>
effect a new relationship with another bank more applicable to its size and type
of business operation. It believes that it is about to enter into a suitable
arrangement with a new bank offering it a line of credit of approximately
$200,000 and, possibly, a term loan. The Company feels that this will be most
timely considering its anticipated growth needs.
As regards investment financing, on the other hand, the Company
believes that a part of its growth will come from substantial acquisitions made
both in the United States and overseas. It has instituted a search program for
opportunities both in Malaysia (tied into operation of DTI) and locally. In the
two instances, both funding and the acceptance of its common stock by sellers of
candidate companies are not certain and could be mitigating factors.
During the quarter ended July 31, 1997, the Company purchased $12,000 of
equipment and office machines as previously explained. As at the end of the
quarter, there were no immediate material commitments for capital
expenditures, except in connection with potential acquisitions.
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 effect the operating results of the Company in
the future.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on it behalf by the undersign, thereunto duly
authorized.
SEMICON TOOLS, INC.
Date: September 8,1997 (Registrant)
By_/s/Eugene J. Pian
--------------------
Eugene J. Pian, President and Principal
Executive Officer
By_/s/Craig Pian
-----------------
Craig Pian, Vice President,Treasurer,
Principal Finanical and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 79,287
<SECURITIES> 0
<RECEIVABLES> 256,504
<ALLOWANCES> 6,500
<INVENTORY> 355,300
<CURRENT-ASSETS> 821,064
<PP&E> 391,902
<DEPRECIATION> 507,767
<TOTAL-ASSETS> 1,349,396
<CURRENT-LIABILITIES> 304,923
<BONDS> 0
0
0
<COMMON> 9,868
<OTHER-SE> 2,517,945
<TOTAL-LIABILITY-AND-EQUITY> 1,349,396
<SALES> 934,780
<TOTAL-REVENUES> 934,780
<CGS> 313,080
<TOTAL-COSTS> 531,216
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,119
<INCOME-PRETAX> 71,367
<INCOME-TAX> 26,564
<INCOME-CONTINUING> 44,803
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,803
<EPS-PRIMARY> .003
<EPS-DILUTED> .003
</TABLE>
