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, 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 July 31, 1998
Common Stock, par value $.001
per share 20,353,500
<PAGE>
INDEX
Part I. Financial Information
Item 1. Condensed consolidated financial statements:
Balance sheet as of July 31, 1998 F-2
Statement of income for the six and three months
ended July 31, 1998 and 1997 F-3
Statement of comprehensive income for the six and
three months ended July 31, 1998 and 1997 F-4
Statement of cash flows for the six months ended
July 31, 1998 and 1997 F-5
Notes to condensed consolidated financial statements F-6 - F-15
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, 1998
(UNAUDITED)
ASSETS
Current assets:
Cash $ 424,870
Cash, fixed deposits with bank 921,053
Accounts receivable, less allowance
for doubtful accounts of $7,350 14,531,641
Inventory 4,021,672
Prepaid expenses and other assets 665,698
Deferred tax asset, current portion 67,780
-----------
Total current assets 20,632,714
Property and equipment, net of depreciation 13,559,571
-----------
Other assets:
Security deposits 11,564
Goodwill, net of amortization 119,041
Deferred tax asset, net of current portion 135,561
-----------
266,166
-----------
$34,458,451
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,548,734
Notes payable, bank 5,612,591
Notes payable, other 10,508,357
Accounts payable 2,006,682
Accrued expense and payroll taxes payable 2,118,729
Income taxes payable 193,286
-----------
Total current liabilities 21,988,379
Long-term debt, net of current portion 3,584,223
-----------
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 20,353,500 shares issued and
outstanding 20,354
Additional paid in capital 9,334,713
Currency translation adjustment ( 551,072)
Retained earnings 81,854
-----------
8,885,849
-----------
$34,458,451
===========
See notes to condensed consolidated financial statements.
F-2
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX AND THREE MONTHS ENDED JULY 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Six Months Three Months
ended ended
July 31, July 31,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $20,106,575 $ 934,780 $10,841,515 $ 512,177
Cost of sales 15,804,434 313,080 8,520,700 187,844
----------- ---------- ----------- -----------
Gross profit 4,302,141 621,700 2,320,815 324,333
Selling, general and
administrative expenses 1,325,975 531,216 904,769 289,496
----------- ---------- ----------- -----------
Income from operations 2,976,166 90,484 1,416,046 34,837
Other charge, interest
expense 1,752,652 19,117 947,116 9,292
----------- ---------- ----------- -----------
Income before income taxes 1,223,514 71,367 468,930 25,545
Deferred income tax
expense (benefit) 10,909 26,564 ( 9,262) 14,069
----------- ---------- ----------- -----------
Net income $ 1,212,605 $ 44,803 $ 478,192 $ 11,476
=========== ========== =========== ===========
Income per common share $ .050 $ .003 $ .020 $ .001
=========== ========== =========== ===========
Weighted average number
of common shares
outstanding 22,720,753 13,167,500 22,782,000 13,867,500
=========== ========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
SIX AND THREE MONTHS ENDED JULY 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Six Months Three Months
ended ended
July 31, July 31,
1998 1997 1998 1997
---- ---- ---- ----
Net income $1,212,605 $44,803 $478,192 $11,476
Other comprehensive income, net of tax:
Foreign currency
translation adjustment 34,428 ( 437,941)
---------- ------- -------- --------
Comprehensive income $1,247,033 $44,803 $ 40,251 $11,476
========== ======= ======== =======
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Operating activities:
Net income $1,212,605 $ 44,803
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and amortization 454,519 21,131
Changes in other operating assets and
liabilities:
Accounts receivable ( 5,323,116) ( 94,065)
Inventories 2,770,351 ( 15,748)
Other assets 11,002 ( 800)
Prepaid expenses and other current assets ( 117,671) 25,234
Accounts payable, accrued expenses and
payroll taxes payable 909,632 76,780
---------- --------
Net cash provided by (used in) operating
activities ( 82,678) 57,335
---------- --------
Investing activities:
Purchase of property and equipment ( 1,645,531) ( 33,258)
---------- --------
Net cash used in investing activities ( 1,645,531) ( 33,258)
---------- --------
Financing activities:
Proceeds from financing 3,583,000
Proceeds from issuance of common stock 85,000 500
Decrease in notes payable, shareholders' ( 66,553) ( 38,204)
Payment of debt ( 1,854,214) ( 23,420)
---------- --------
Net cash provided by (used in) financing
activities 1,747,233 ( 61,124)
---------- --------
Effect of exchange rate changes on cash and
cash equivalents 34,428
Net increase (decrease) in cash 53,452 ( 37,047)
Cash, beginning of period 1,292,471 116,334
---------- --------
Cash, end of period $1,345,923 $ 79,287
========== ========
Supplemental disclosure:
Cash paid during the period for:
Interest $1,752,652 $ 9,292
========== ========
Income taxes $ 0 $ 0
========== ========
Supplementary schedule of non-cash investing and financing activities:
Issuance of common stock for purchase of
subsidiary $ 100,000 $ 0
========== ========
Issuance of common stock for consulting fees
and services $ 18,110 $ 0
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<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 four 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 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-6
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Organization of the Company (continued):
The Company's other wholly-owned subsidiary, Fuji Fabrication, SDN BHD,
a Malaysian corporation, manufactures cellular phone replacement
batteries. On June 30, 1998, the Company issued 100,000 shares of its
unregistered common shares in exchange for 100% of the outstanding
shares of Fuji Fabrication, SDN BHD, the value of the shares being
$1.00 per share. The acquisition was accounted for as a purchase.
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 and Fuji Fabrication, 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:
Land $ 355,184
Buildings and improvements 2,364,234
Manufacturing equipment 13,520,911
Office equipment 570,346
Automotive equipment 177,862
-----------
16,988,537
Less accumulated depreciation 3,428,966
---------
$13,559,571
===========
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
$37,078 as of July 31, 1998.
OnJune 30, 1998, the Company acquired Fuji Fabrication, SDN BHD for a
cost of $100,000. The purchase price exceeded fair value of the assets
by $20,999, which amount was assigned to goodwill and will be amortized
over a forty year period beginning August 1, 1998.
F-7
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 expired on May 31, 1998. Rent expense amounted to $9,641 for the
six months ended July 31, 1998 and $19,282 for the six months ended
July 31, 1997.
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:
July 31, 1999 $ 60,000
July 31, 2000 60,000
July 31, 2001 60,000
July 31, 2002 60,000
July 31, 2003 60,000
Thereafter 675,000
--------
$975,000
========
Rent expense amounted to $30,000 for the six months ended July 31, 1998.
The Company also leases three vehicles under operating leases with terms
expiring through 1998. Total lease expense was $17,717 and $17,776 for
the period ended July 31, 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-8
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Common stock:
During the six months ended July 31, 1998, the Company issued 350,000
shares of its common shares with net proceeds of $85,000 upon the
exercise of certain common stock purchase options.
The Company issued 100,000 shares of its common shares to acquire Fuji
Fabrication, SDN BHD. It also issued 36,000 shares for certain
consulting and professional services rendered.
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% $ 17,601 $ 8,333 2001
Note payable, shareholder (b) 15% 100,000 2000
Note payable, shareholder (c) 10% 75,797 47,898 2002
Notes payable, bank (foreign) (d) 1.75% to 2%
above bankers
base lender's
rates 1,658,373 126,806 undetermined
Notes payable, capital leases,
bank, (foreign) (e) Approx 8% 1,732,452 1,365,697 1999
---------- ----------
$3,584,223 $1,548,734
========== ==========
</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-9
<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:
July 31, 1999 $1,548,734
July 31, 2000 1,311,602
July 31, 2001 1,174,764
July 31, 2002 1,097,857
----------
$5,132,957
==========
9. Notes payable, banks:
Bank overdrafts and borrowings for the foreign subsidiary, Teik Tatt
Holding Co., in the amount of $5,612,591 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 $300,000 at July 31, 1998. The loan is secured by the personal
guarantee of one of the Company's major shareholders and the assets of
Semicon Tools, Inc. At July 31, 1998, the Company had utilized $250,000
of this line.
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-10
<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
July 31, 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.
Provision for income taxes (benefit):
1998 1997
---- ----
Current $ 0 $ 0
Deferred 10,909 26,564
------- -------
Total expense $10,909 $26,564
======= =======
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:
1998 1997
---- ----
Computed tax at the expected statutory rate $469,303 $24,874
Surtax exemption ( 12,424)
State income taxes 2,651 1,690
Foreign income ( 448,621)
--------- --------
Income tax expense $ 10,909 $26,564
======== =======
The components of deferred tax assets and liabilities consist of the
following:
July 31,
1998
----
Deferred tax asset:
Net operating loss carryforward $480,000
Total deferred tax asset 480,000
Valuation allowance 276,659
-------
$203,341
========
F-11
<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 $1,509,942 at July 31, 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, 2003. 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,
1,000,000 stock options at $.10 and 500,000 stock options at $.50. The
options were not part of the 1997 Non-statutory Stock Option Plan
effectuated March 25, 1997. As of July 31, 1998, none of these options
had been exercised.
On July 15, 1998, the Company entered into an employment agreement with
the acting secretary of the Company. The term of the agreement covers a
five year period expiring July 15, 2003. Compensation is set at a base
of $55,000 with a bonus of 2% of any 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. The
employee also received 500,000 stock options exercisable at $.50 per
share, none of which have been exercised as of July 31, 1998. These
options were not part of the 1997 non-statutory stock option Plan
effectuated March 25, 1997.
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.
F-12
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Consulting agreements (continued):
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 600,000 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.
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.
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 July 1, 1998, the Company entered into a consulting agreement for the
period July 1, 1998 to June 30, 1999. The consultant will assist
Semicon Tools, Inc. in strategic planning, corporate planning, mergers
and acquisitions and divestiture advise. In consideration for the
consulting agreement the Company granted an option to purchase
1,000,000 shares of its common stock at a price of $.50 per share for
one year from the date of signing this agreement.
Also on July 1, 1998, the Company entered into an agreement with a
consultant for investor relations counsel for a three month period. In
consideration for these services, the consultant will be paid $6,500
and granted an option to purchase 50,000 common shares at $.87 per
share, with the option expiring July 1, 2000.
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.
F-13
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
13. Computation of earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C>
Six months Six months
ended ended
July 31, July 31,
1998 1997
---- ----
Weighted average number of
common shares outstanding 20,075,753 9,167,500
Assumed conversion of
stock options 2,645,000 4,000,000
---------- ----------
Weighted average number of
common shares outstanding 22,720,753 13,167,500
========== ==========
</TABLE>
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 05/01/96 $1,000,000 $.25 05/01/01
Eugene Pian 02/13/97 1,000,000 .10 05/01/01
Eugene Pian 07/15/98 500,000 .50 07/15/03
Craig Pian 05/01/96 1,000,000 .25 05/01/01
Craig Pian 02/13/97 1,000,000 .10 05/01/01
Craig Pian 07/15/98 500,000 .50 07/15/03
Francine Pian 07/15/98 500,000 .50 07/15/03
Employees 11/05/97 50,000 .05 11/05/99
Consultant 07/01/98 1,000,000 .50 07/01/99
Consultant 07/01/98 50,000 .87 07/01/00
</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, 900,000 options had been issued under the Plan, of
which 350,000 had been exercised by July 31, 1998.
F-14
<PAGE>
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. Common stock options outstanding (continued):
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.
15. Acquisition of subsidiary, Fuji Fabrication, SDN BHD:
On June 30, 1998, the Company purchased 100% of the outstanding common
shares of Fuji Fabrication, SDN BHD in a transaction to be accounted
for as a purchase. The Company issued 100,000 shares of its common
stock valued at $.50 per share.
The assets acquired and liabilities assumed as of June 30, 1998, the
date of the acquisition, are as follows:
Current assets $ 72,511
Non-current assets 23,795
------
96,306
Current liabilities 17,305
------
Net assets acquired 79,001
Purchase price 100,000
-------
Excess of purchase price over
net assets acquired $ 20,999
========
F-15
<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. ("Teik Tatt"), a Malaysian corporation. For the
quarter ended July 31, 1998, Teik Tatt and its subsidiaries (collectively,
"TTH") generated approximately 83% of the Company's net sales and 52% 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 July 31, 1998, the
second complete quarter incorporating the results of TTH, are as follows:
For the Three Months Ended
July 31, 1998
Percentage of
Product Line Net Sales Net Income
Metal scrap recycling 45% 31%
Plastic rope 32 14
Industrial ceramic products 8 35
Rubber bands 6 7
Plastic recycling 3 13
Diamond cutting tools 3 ( 1)
Clean room materials and supplies and
miscellaneous products 2 1
Batteries * *
* Less than 1%
In recent months, the economic conditions in Malaysia have worsened and that
country has been officially declared to be in recession. Malaysian banks also
have suffered and they have been reducing the credit facilities available to
their customers. Consequently, as discussed below, in the quarter ended July 31,
1998, despite a 17% increase in net sales, the Company's net income decreased
35% to $.02 from $.03 per share in the quarter ended April 31, 1998. In
addition, TTH's credit facilities have not been renewed whenever TTH has
satisfied its outstanding bank debt, and therefore TTH's borrowing ability has
been substantially reduced. As a result of the Malaysian recession, high
Malaysian interest rates and TTH's diminished credit lines, TTH incurred an
operating loss for the month of August and, if such conditions were to continue,
the Company could incur a sizable loss for the quarter ending October 30, 1998.
As a result of the foregoing, the Company is reevaluating with TTH's former
owner the Company's decision to acquire TTH. The Company currently intends to
negotiate with such former TTH owner for his repurchase of TTH, but no assurance
can be given that any such negotiations will be successful.
Second Quarter 1998 Results of Operations
During the three months ended July 31, 1998, the Company's net sales increased
to $10,841,515 from $512,177, and the Company had net income of $478,192 ($.02
per share), compared to $11,476 ($.001 per share), in the prior year's
comparable period. The Company's net sales in the second quarter increased by
$1,576,455, or 17%, over the first quarter as a result of TTH's increased metal
scrap recycling, but net income decreased by $256,221 or 35%, from $.03 to $.02.
The quarterly decline in net income was attributable to increased investor
relations costs and TTH's interest expense on Malaysian debt.
<PAGE>
For the three months ended July 31, 1998 gross profit was $2,320,815 or 21.4% of
net sales, as compared to $324,333 or 63% of net sales in the prior year's
second quarter and $1,981,326 or 21% of net sales in the first quarter of 1998.
Although in the quarter ended July 31, 1998 gross profit increased due to higher
sales, gross profit as a percentage of net sales remain flat due to the low
profit margins in TTH's operations, especially in its metal scrap recycling and
plastic rope businesses. For the six months ended July 31, 1998 gross profit was
$4,302,141 or 21.4% of net sales.
Liquidity and Capital Resources
At July 31, 1998 the Company had current assets of $20,632,714, including
$1,345,923 of cash (of which $921,053 is a fixed deposit), and current
liabilities of $21,988,379. Accordingly, the Company had a working capital
deficit of $1,355,665. In addition, at July 31, 1998 the Company had long-term
debt, net of current portion, of $3,584,223, and for the six months ended July
31, 1998 interest expense totaled $1,752,652 principally attributable to TTH.
The Company's liquidity has been adversely effected by the debt burden of TTH
and the continuing economic crisis in Southeast Asia in general and Malaysia in
particular. Although no assurances can be given, the Company expects that
internally generated funds and existing credit facilities will continue to
enable it to meet its obligations as they come due and finance its operations.
However, primarily in order to reduce its debt and the related interest expense,
which would improve profitability, and secondarily to purchase recycling
equipment which the Company believes would improve its product mix by generating
additional sales with higher margins, the Company has been seeking additional
equity capital. The Company's efforts to date have not been successful and it
has received no funding commitments, and no assurance can be given that any such
financing will be obtained on reasonable terms, if at all. Consequently, TTH's
growth has been adversely effected and TTH's interest expense has reduced the
Company's profitability. Accordingly, the Company currently intends to negotiate
with the former owner of TTH for his repurchase of TTH, but no assurance can be
given that any such negotiations will be successful.
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.
Disclosure 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.
<PAGE>
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.
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
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