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 April 30, 1998
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)
554 North State Road, Briarcliff Manor, New York 10510
(Address of principal executive offices)
Issuer's telephone number, including area code: (914) 923-5000
-----------------
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 April 30, 1998
Common Stock, par value $.001
per share 20,042,500
<PAGE>
INDEX
Part I. Financial Information
Item 1. Condensed consolidated financial statements:
Balance sheet as of April 30, 1998 F-2
Statement of income for the three months ended
April 30, 1998 and 1997 F-3
Statement of cash flows for the three months ended
April 30, 1998 and 1997 F-4
Notes to condensed consolidated financial statements F-5 - F-13
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 - APRIL 30, 1998
(UNAUDITED)
ASSETS
Current assets:
Cash $ 435,307
Cash, fixed deposits with bank 921,053
Accounts receivable, less allowance
for doubtful accounts of $7,500 11,832,888
Inventory 6,001,319
Prepaid expenses and other assets 607,648
Deferred tax asset, current portion 64,693
-----------
Total current assets 19,862,908
----------
Property and equipment 12,666,912
----------
Other assets:
Security deposits 9,249
Goodwill, net of amortization 98,042
Deferred tax asset, net of current portion 129,386
-----------
236,677
-----------
$32,766,497
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,391,810
Notes payable, bank 6,061,251
Notes payable, other 9,939,944
Accounts payable 1,841,288
Accrued expense and payroll taxes payable 1,140,113
Income taxes payable 205,803
-----------
Total current liabilities 20,580,209
----------
Long-term debt, net of current portion 3,554,535
-----------
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 20,042,500 shares issued and
outstanding 20,043
Additional paid in capital 9,140,664
Currency translation adjustment ( 113,131)
Retained earnings (deficit) ( 415,823)
-----------
8,631,753
---------
$32,766,497
===========
See notes to condensed consolidated financial statements.
F-2
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Net sales $ 9,265,060 $ 422,603
Cost of sales 7,283,734 125,236
----------- -----------
Gross profit 1,981,326 297,367
Selling, general and
administrative expenses 421,206 241,720
----------- -----------
Income from operations 1,560,120 55,647
Other charge, interest expense 805,536 9,825
----------- -----------
Income before income taxes 754,584 45,822
Deferred income tax expense 20,171 12,495
----------- -----------
Net income $ 734,413 $ 33,327
=========== ===========
Income per common share $ .031 $ .003
=========== ============
Weighted average number of common shares
outstanding 23,279,000 11,367,500
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Operating activities:
Net income $ 734,413 $ 33,327
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and amortization 218,194 10,311
Changes in other operating assets and
liabilities:
Accounts receivable ( 2,594,412) ( 7,339)
Inventories 741,387 ( 13,390)
Prepaid expenses and other current assets 22,958 28,259
Accounts payable, accrued expenses and
payroll taxes payable ( 296,336) ( 9,413)
---------- --------
Net cash provided by (used in) operating
activities ( 1,173,796) 41,755
---------- --------
Investing activities:
Decrease in other assets 23,995 12,495
Purchase of property and equipment ( 538,268) ( 5,212)
---------- --------
Net cash provided by (used in) investing
activities ( 514,273) 7,283
---------- --------
Financing activities:
Proceeds from financing 1,985,001
Proceeds from issuance of common stock 8,750
Decrease in notes payable, shareholders' ( 84,668)
Payment of debt ( 713,657) ( 8,245)
---------- --------
Net cash provided by (used in) financing
activities 1,280,094 ( 92,913)
---------- --------
Effect of exchange rate changes on cash and
cash equivalents 471,869
Net increase (decrease) in cash 63,894 ( 43,875)
Cash, beginning of period 371,413 116,334
---------- --------
Cash, end of period $ 435,307 $ 72,459
========== ========
Supplemental disclosure:
Cash paid during the period for:
Interest $ 790,536 $ 0
========== ========
Income taxes $ 0 $ 0
========== ========
</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, 1998 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 and other
base material tools used to cut and separate electronic components and
devices. In addition, it has three subsidiaries with their own product
lines.
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 7) of the Company's $.001 par value common stock
(see also Note 5).
The Company's wholly-owned subsidiary, DTI Technology, SDN BHD is a
Malaysian corporation 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.
The Company's other wholly-owned subsidiary, Teik Tatt Holding Co., SDN
BHD, a Malaysian corporation, manufactures rubber bands, plastic ropes
and recycles plastic and metal from wire cable, electronic devices and
circuit broads. In November 1997, The Company issued 10,000,000 shares
of unregistered common shares in exchange for 100% of the outstanding
shares of Teik Tatt Holding Co., SDN BHD, the value of the shares being
the net book value of the acquired Company of $6,560,040 or
approximately $.66 per share. The acquisition was accounted for as a
purchase.
F-5
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of significant accounting policies:
Principles of consolidation:
The consolidated financial statements of Semicon Tools, Inc. and
subsidiaries include all the accounts of Semicon Tools, Inc., East
Coast Sales Company, DTI Technology, SDN BHD and Teik Tatt Holding
Co., SDN BHD after elimination of all significant intercompany
transactions and its subsidiaries accounts. The financial statements
give retroactive effect to the acquisition of DTI Technology, SDN BHD
which has been accounted for as an acquisition as if in a pooling of
interest method at historical cost of the assets acquired.
4. Property and equipment:
Major classifications of property and equipment are as follows:
April 30,
1998
----
Land $ 355,184
Buildings and improvements 2,523,300
Manufacturing equipment 12,236,860
Office equipment 565,348
Automotive equipment 177,662
-----------
15,858,354
Less accumulated depreciation 3,191,442
----------
$12,666,912
===========
5. 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
$36,239 as of April 30, 1998.
6. Commitments and contingencies:
In November 1995 the Company moved its operations and was obligated
under a lease agreement for office and manufacturing facilities. This
lease, which expired on May 31, 1998, required the following future
minimum rental payments:
April 30, 1998 $3,543
------
F-6
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and contingencies (continued):
Rental expense for the period ended April 30, 1998 and 1997 amounted to
$9,641.
In April 1998, the Company moved its New York operations and is
currently obligated under a lease agreement with a related party which
expires on April 30, 2013. Annual rent expense is as follows: $60,000
for each of the first five years, $66,000 for each of the second five
years and $72,000 for each of the final five years. The Company is also
obligated for insurance and the increase in real estate taxes over the
base year as stipulated in the lease. The Company also paid two months
rent at $3,000 per month to an outside party for the same premises
before the property was purchased by the related party. This lease
requires the following future minimum rental payments:
April 30, 1999 $ 60,000
April 30, 2000 60,000
April 30, 2001 60,000
April 30, 2002 60,000
April 30, 2003 60,000
Thereafter 690,000
--------
$990,000
========
The Company also leases three vehicles under operating leases with terms
expiring through 1998. Total lease expense was $8,133 and $7,838 for
the period ended April 30, 1998 and 1997, respectively.
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-7
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Common stock:
During the three months ended April 30, 1998, the Company issued 175,000
shares of its common shares with net proceeds of $8,750 upon the
exercise of certain common stock purchase options.
8. Long-term debt:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Long-term Current
Rate Portion Portion Maturity
Note payable, Bank of New York (a) Prime + 1% $ 19,767 $ 8,233 2001
Note payable, shareholder (b) 15% 100,000 2000
Note payable, shareholder (c) 10% 95,015 37,779 2002
Notes payable, bank (foreign) (d) 1.75% to 2%
above bankers
base lender's
rates 1,688,305 126,806 undetermined
Notes payable, capital leases,
bank, (foreign) (e) Approx 8% 1,651,448 1,218,992 1999
---------- ----------
$3,554,535 $1,391,810
========== ==========
</TABLE>
(a) Note payable, Bank of New York, is payable in monthly
installments of $686, excluding interest. Machinery and equipment
with a cost of $33,000 is pledged as collateral on this note.
(b) Note payable, shareholder, became due when the note to Citibank
was paid in full in 1997. The shareholder has waived his demand
right and the Company is currently negotiating terms for payment
of the note.
F-8
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Long-term debt (continued):
(c) On April 23, 1997, the Company renegotiated an existing loan
with a certain shareholder resulting in a new obligation
payable in monthly installments of $4,053 including interest at
10%.
(d) The term loans are secured by a mortgage on the leasehold land
and factory building of Teik Tatt Holding Co., SDN BHD,
machinery of one of its subsidiaries and its property owned by
a third party.
(e) Certain fixed assets are pledged as collateral for the capital
leases to the banks by both foreign subsidiaries.
The maturities of these loans are as follows:
April 30, 1999 $1,391,810
April 30, 2000 1,311,602
April 30, 2001 1,174,764
April 30, 2002 1,068,169
----------
$4,946,345
==========
9. Notes payable, banks:
Bank overdrafts and borrowings for the foreign subsidiary, Teik Tatt
Holding Co., in the amount of $6,061,251 are secured in the amount of
$5,479,578 by leasehold land and factory building of the Company,
freehold land and buildings of one of its subsidiaries and a property
owned by a third party and the guarantee of all the directors. Interest
is payable at 1% to 2% above the banks' base lending rates.
The Company also has an outstanding line of credit with the Bank of New
York for $175,000 at April 30, 1998. The loan is secured by the
personal guarantee of one of the Company's major shareholders and the
assets of Semicon Tools, Inc.
10. Income taxes:
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-9
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. 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 for the periods ending
April 30, 1998 and 1997. 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Provision for income taxes (benefit):
1998 1997
---- ----
Current $ 0 $ 0
Deferred 20,171 12,495
------- -------
Total expense $20,171 $12,495
======= =======
</TABLE>
Areconciliation of the income tax expense provision at the federal
statutory rate to the income tax provision at the effective tax rate is
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Computed tax at the expected statutory rate $294,288 $17,871
Surtax exemption ( 16,750) ( 3,678)
State income taxes 4,247 1,838
Foreign income ( 261,614) ( 3,536)
-------- -------
Income tax expense $ 20,171 $12,495
======== =======
</TABLE>
The components of deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
<S> <C>
April 30,
1998
Deferred tax asset:
Net operating loss carryforward $480,000
Total deferred tax asset 480,000
Valuation allowance 285,921
-------
$194,079
========
</TABLE>
F-10
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Income taxes (continued):
The foreign subsidiary, Teik Tatt Holding Co., SDN BHD, is required to
maintain a statutory reserve of 5% of the profit after taxation in
accordance with the Foreign Investment Law until such reserve equals
10% of the legal capital. The reserve is non-distributable under
Malaysian law.
The Company has made adjustments to eliminate the tax provisions for
foreign earnings since said earnings are undistributed and will be
permanently invested. The cumulative amounts of foreign undistributed
earnings are $1,049,384 at April 30, 1998.
11. Employment agreements:
On May 1, 1996, the Company entered into employment agreements with its
President and Vice President. The term of the agreements covers a five
year period expiring April 30, 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
Semicon Tools/East Coast Sales consolidated net income over the net
income from the previous years exclusive of Teik Tatt Holding Co. Sdn
Bhd. Each employee also received 1,000,000 stock options at $.25 and
1,000,000 stock options at $.10. The options were not part of the 1997
Non-statutory Stock Option Plan effectuated March 25, 1997. As of April
30, 1998, none of these options had been exercised.
12. Consulting agreements:
On January 1, 1998, the Company granted a consultant an option to
purchase 100,000 shares of common stock of Semicon Tools, Inc. at a
price of $.05 per share for a period of three years from the date of
signing. This option was issued for services the consultant provided
which were related to the Teik Tatt acquisition. The shares underlying
these options were issued pursuant to the Company's 1997 Non-Statutory
Stock Option Plan. The option was exercised February 6, 1998.
On February 9, 1998, the Company entered into a consulting agreement for
the period February 9, 1998 to December 31, 1998. The consultant will
assist Semicon Tools, Inc. in strategic planning, corporate planning,
merger and acquisition and divestitive advice. In consideration for the
consulting services, Semicon granted an option to the consultant to
purchase 1,200,000 shares of common stock of Semicon Tools, Inc. at a
price of $.50 per share for a period of two years commencing four
months from the date of signing.
F-11
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Consulting agreements (continued):
The consultant is also entitled to a finders fee in the event the
consultant first introduces a potential acquisition to the Company and
such acquisition is ultimately consummated. The agreement calls for a
payout based on the amounts expended for such acquisition. On March 12,
1998, the Company and the consultant extended the agreement dated
February 9, 1998 for a period of twelve months. In consideration for
extending the term of the agreement, the Company granted an option to
purchase an additional 1,200,000 shares under the same terms and
conditions as the previous agreement except these options cannot be
exercised before September 30, 1998.
Also on February 9, 1998, the Company entered into a consulting
agreement for the period February 9, 1998 to December 31, 1998. The
consultant will assist the Company in strategic planning, corporate
planning, merger and acquisition and divestiture advice. In
consideration for the consulting agreement The Company granted an
option to purchase 100,000 shares of common stock at a price of $.50
per share for a period of two years commencing four months from the
date of the signing of this agreement. The shares underlying these
options will be registered under the Securities Act of 1933. The
consultant is also entitled to a finders fee in the event the
consultant first introduces a potential acquisition to the Company and
such acquisition is ultimately consummated. The agreement calls for a
payout based on the amounts expended for such acquisition.
On February 18, 1998, the Company entered into an agreement with a
consultant to provide the Company with a public relations program. The
term of the agreement is from February 19, 1998 to August 18, 1998, a
six month period. The agreement can be cancelled anytime after the
first 90 days and calls for a monthly fee of $2,500 plus out of pocket
costs not to exceed $2,000.
13. Computation of earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Weighted average number of
common shares outstanding 20,011,500 9,367,500
Assumed conversion of
stock options 3,267,500 2,000,000
---------- ----------
Weighted average number of
common shares outstanding 23,279,000 11,367,500
========== ==========
</TABLE>
F-12
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. Common stock options outstanding:
Summary of options outstanding are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Exercise Expiration
Date Amount Price Date
Eugene Pian, Officer 05/01/96 $1,000,000 $.25 05/01/01
Craig Pian, Officer 05/01/96 1,000,000 .25 05/01/01
Eugene Pian, Officer 02/13/97 1,000,000 .10 05/01/01
Craig Pian, Officer 02/13/97 1,000,000 .10 05/01/01
Consultant 11/10/97 25,000 .05 11/10/99
Consultant 11/27/97 500,000 .10 11/27/98
Employee 11/05/97 25,000 .05 11/05/99
Employee 11/05/97 25,000 .05 11/05/99
</TABLE>
On March 25, 1997, the Company effectuated a Non-statutory Stock Option
Plan for the purpose of advancing the interests of the Company and its
stockholders by helping the Company obtain and retain the services of
key management employees, officers, directors and consultants. The Plan
will be administered by the Non-statutory Stock Option Committee of the
Board of Directors of the Company. The committee has full authority and
discretion to determine the eligible participants to be granted the
options, the date of issuance, exercise price and expiration date. The
total number of shares set aside for the Plan is 6,500,000. As of
January 31, 1998, 750,000 options had been issued under the Plan, of
which 175,000 had been exercised by April 30, 1998.
The Company has elected to continue use of the methods of accounting
described by APB-25 "Accounting for Stock Issued to Employees" which is
based on the intrinsic value of equity instruments and has not adopted
the principles of SFAS-123 "Accounting for Stock Based Compensation"
effective for fiscal year beginning after December 15, 1995, which is
based on fair value. There is no significant difference between
compensation cost recognized by APB-25 and the fair value method of
SFAS-123. The Company has not recognized compensation on the granting
of options or warrants to employees and consultants since the fair
value of warrants or options is the same as or less than the exercise
price.
F-13
<PAGE>
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
General
On November 26, 1997, the Company acquired all of the capital stock of Teik Tatt
Holding Co. (1979) Sdn. Bhd. ("TTH"), a Malaysian corporation. For the quarter
ended April 30, 1998, TTH and its subsidiaries generated approximately 93% of
the Company's net sales and 84% of the Company's net income. The percentage
contributions to the Company's net sales and net income by product line for the
three months ended April 30, 1998, the first complete quarter incorporating the
results of TTH and its subsidiaries, are as follows:
For the three months ended April 30, 1998
Percentage of
Product Line Net Sales Net Income
Scrap metal recycling 59% 46%
Plastic rope 29% 27%
Industrial ceramic products 4% 20%
Rubber bands 3% 2%
Plastic recycling 3% 9%
Diamond cutting tools 2% ( 3%)
Clean room materials and supplies and
miscellaneous products * ( 1%)
------
100%
====
* Less than 1%
First Quarter 1998 Results of Operations
During the three months ended April 30, 1998, the Company's net sales increased
by 2,092% to $9,265,060 from $422,603, and net income of $734,413, or $.031 per
share, represented a 2,104% increase over the $33,327, or $.003 per share, in
the prior year's period. The acquisition of TTH contributed $8,684,235 to net
sales, $620,345 to net income and $795,430 interest expense. Gross profit was
$1,981,326, or 21% of net sales, as compared to $297,367, or 70% of net sales,
in the prior year's period. Although gross profit increased due to higher sales,
gross profit as a percentage of net sales decreased principally due to low
profit margins on TTH's operations, especially on its recycling business
revenues of $5,449,077.
Liquidity and Capital Resources
At April 30, 1998, the Company had current assets of $19,862,908, including
$1,356,360 of cash, and current liabilities of $20,580,209. Accordingly, the
Company had a working capital deficit of $717,301. In addition, the Company had
long-term debt of $3,554,535 and interest expense of $805,536, principally
attributable to TTH. Although no assurances can be given, the Company expects
that internally generated funds and existing credit facilities will enable it to
meet its obligations as they come due and finance its operations. However, in
order to reduce its debt and the related interest expense, which would improve
profitability, and to purchase recycling equipment which the Company believes
would improve its product mix by generating additional sales with higher
margins, the Company is seeking additional equity capital. The Company has
received no funding commitments, and no assurances can be given that any such
financing will be obtained on reasonable terms, if at all.
<PAGE>
Under Malaysian law, TTH is required to maintain a statutory reserve of five
percent (5%) of profit after taxation in accordance with the Foreign Investment
Law until such reserve equals ten percent (10%) of legal capital.
Such reserve is non-distributable.
Effects of Foreign Currency Fluctuations
The Company's foreign operations are subject to certain risks related to
fluctuation in foreign currency exchange rates. Due to a strengthening U.S.
dollar and a weaker Malaysian ringgit, in the year ended January 31, 1998 the
Company recognized $37,719 in foreign currency exchange losses, which did not
have a material adverse effect on net income. While future fluctuations in
currency exchange rates could impact results of operations or financial
position, the Company does not expect they will be material.
Disclosures about Market Risk
The Company is exposed to market risks primarily from changes in interest rates
and foreign currency exchange rates. To manage exposure to these fluctuations,
the Company occasionally enters into various hedging transactions. The Company
does not use derivatives for trading purposes or to generate income or to engage
in speculative activity, and the Company never uses leveraged derivatives. The
Company does not use derivatives to hedge the value of its net investments in
these foreign operations.
The Company's exposure to foreign exchange rate fluctuations results from
investment in foreign ventures in Malaysia and from the Company's share of the
earnings of these operations, which are denominated in the Malaysian ringgit.
Year 2000 Costs
The Company currently operates numerous date-sensitive computer applications and
network systems throughout its business. As the century change approaches, it is
essential for the Company to ensure that these systems properly recognize the
year 2000 and continue to process operational and financial information. The
Company recently upgraded its computer systems and does not expect complications
related to year 2000 issues to arise.
Impact of Inflation
Although it is difficult to predict the impact of inflation on costs and
revenues of the Company in connection with the Company's products, the Company
does not anticipate that inflation will materially impact its costs of operation
or the profitability of its products.
Forward-Looking Statements
THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION", CONTAINS
STATEMENTS WHICH ARE NOT HISTORICAL FACTS AND ARE FORWARD-LOOKING STATEMENTS
WHICH REFLECT MANAGEMENT'S EXPECTATIONS, ESTIMATES AND ASSUMPTIONS. SUCH
STATEMENTS ARE BASED ON INFORMATION AVAILABLE AT THE TIME THIS FORM 10-QSB WAS
PREPARED AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER SIGNIFICANTLY FROM
PROJECTED RESULTS. FACTORS THAT COULD CAUSE ACTUAL FUTURE RESULTS TO DIFFER
MATERIALLY INCLUDE, AMONG OTHERS, THE RISKS OF DOING BUSINESS IN MALAYSIA AND
SOUTHEAST ASIA, INCLUDING; WITHOUT LIMITATION, ECONOMIC AND POLITICAL
CONDITIONS, FOREIGN CURRENCY TRANSLATION RISKS, TARIFFS AND OTHER FOREIGN TRADE
POLICIES AND DEPENDENCE ON INEXPENSIVE LABOR IN SUCH COUNTRIES, PARTIAL
DEPENDENCE ON THE SEMICONDUCTOR MANUFACTURING INDUSTRY, AVAILABILITY OF RAW
MATERIALS, INTENSE COMPETITION AND TECHNOLOGICAL OBSOLESCENCE.
<PAGE>
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<PERIOD-START> FEB-01-1998
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0
0
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