UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file Number 1-10310
SETECH, INC.
(Exact name of registrant as specified in its charter.)
Delaware 11-2809189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
903 Industrial Drive, Murfreesboro, Tennessee 37129
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(615) 890-1700
Indicate by check mark whether the registrant(1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date:
Common Stock, $.01 Par Value - 5,679,207 shares as of
October 31, 1998.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements.
SETECH, Inc. and Subsidiaries:
Consolidated Balance Sheets as of September 30, 1998
and June 30, 1998
Consolidated Statements of Operations for the Three Months
Ended September 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity for
the Three Months Ended September 30, 1998
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
SETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<CAPTION>
September 30, June 30,
1998 1998
__________________ _________________
<S> <C> <C>
ASSETS
Currents Assets
Cash and Cash Equivalents $ 683 $ 796
Accounts Receivable, net 14,438 10,856
Inventories 26,926 26,079
Prepaid Expenses
And Other Current Assets 229 204
Deferred Tax
Asset 440 440
___________ ____________
Total Current Assets 42,716 38,375
Property and Equipment,net 2,886 2,584
Cost in Excess of net
Assets Acquired, net of
Accumulated Amortization
of $912 and $842 6,722 6,792
Other Assets 75 85
____________ ___________
Total Assets $ 52,399 $ 47,836
============ ==========
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
Current Liabilities
Accounts Payable $ 10,368 $ 9,851
Accrued Expenses 1,313 1,928
Current Portion of Long-term
Debt 399 413
Current portion of capital
lease obligations 208 208
____________ ___________
Total Current Liabilities 12,288 12,400
____________ ___________
Long Term Debt
net of current portion 31,066 26,609
Capital Lease Obligations
net of current portion 509 559
____________ ___________
Total long term debt 31,575 27,168
____________ ___________
Commitments and Contigencies
Puttable Stock 530 530
____________ ___________
Stockholders' Equity
Common Stock, $.01 par
Value, 10,000 Shares
Authorized, 5,679
Issued 57 57
Additional Paid-in
Capital 11,932 11,932
Accumulated Deficit (3,775) (4,043)
Less treasury stock (208) (208)
____________ ___________
Total Stockholders' Equity 8,006 7,738
____________ ___________
TOTAL LIABILITIES AND $ 52,399 $ 47,836
STOCKHOLDERS' EQUITY ============ ===========
<FN>
The Accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
SETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
For the three months ended
September 30 September 30
1998 1997
_____________ ___________
<S> <C> <C>
REVENUES $ 24,834 $ 20,364
COST OF REVENUES 22,640 18,296
__________ _________
Gross Profit 2,194 2,068
Selling, General & Administrative
Expenses 1,046 1,152
__________ _________
Operating Income 1,148 916
OTHER INCOME (EXPENSE)
Interest Income 7 16
Interest Expense (624) (473)
Other (4) 19
__________ __________
Total Other (621) (438)
__________ __________
Income
before Income Taxes 527 478
Income Tax Provision 259 251
__________ __________
Net Income $ 268 $ 227
========= =========
NET INCOME PER COMMON SHARE:
Basic $ .05 $ 0.04
Diluted $ .05 $ 0.04
</TABLE>
[FN]
The Accompanying Notes to Condensed Consolidated Financial
Statements are an Integral Part of these Statements.
<PAGE>
<TABLE>
SETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
Common Stock
Treasury $.01 Par
Stock Value Additional Accumulated
_________________________________________ Paid-in (Deficit)
Shares Amount Shares Amount Capital
_______ ___________ ___________ ____________ __________ __________
<S> <C> <C> <C> <C> <C> <C>
Balances 164 $(208) 5,679 $57 $11,932 ($4,043)
June 30,
1998
Net Income
for the
3 Months
Ended
September 268
30,1998 _________ ________ ____________ _______ ____________ _____________
Balances at 164 $(208) 5,679 $57 $11,932 ($3,775)
September
30,1998
<FN>
The Accompanying Notes to Condensed Consolidated Financial
Statements are an Integral Part of these Statements.
</TABLE>
<PAGE>
<TABLE>
SETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<CAPTION>
For the three months ended
September 30 September 30
1998 1997
________ ________
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 268 $ 227
Adjustments to
reconcile net income
to net cash used in
operations:
Depreciation and
amortization 236 185
Gain on sale of
fixed assets - (6)
Changes in operating assets
and liabilities:
Increase in accounts receivable (3,582) (113)
Increase in inventory (847) (1,924)
(Increase) decrease in
other assets (15) 33
Increase in accounts payable 517 63
Decrease in accrued expenses (615) (118)
__________ _________
Net cash used in operations (4,038) (1,653)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment (468) (77)
Proceeds from sale of
fixed - 6
__________ _________
Net cash used in investing (468) (71)
activities __________ _________
CASH FLOWS FROM FINANCING
ACTIVITES:
(Payments)/Proceeds on short-term (14) 50
debt
(Payments)/Proceeds on 4,407 1,379
long-term debt __________ _________
Net cash provided by 4,393 1,429
financing activities __________ _________
Decrease in cash (113) (295)
and cash equivalents
Cash and cash equivalents 796 1,634
at beginning of period ___________ ___________
Cash and cash equivalents $ 683 $ 1,339
at end of period =========== ===========
</TABLE>
[FN]
The Accompanying Notes to Condensed Consolidated Financial
Statements are an Integral Part of these Statements.
<PAGE>
SETECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANACIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
September 30, 1998
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of September 30, 1998 and
June 30, 1998, and the consolidated statements of operations and cash
flows for the three month periods ended September 30, 1998 and 1997,
have been prepared by the Company in accordance with the accounting
policies described in its 10-K for the fiscal year ended June 30,
1998 and should be read in conjunction with the notes thereto.
In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and changes in cash flows at September
30, 1998 and for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The results of
operations for the period ended September 30, 1998, are not necessarily
indicative of the operating results for the full year.
Organization
SETECH, Inc.(a Delaware corporation, and the "Company") is a
provider of integrated supply/inventory management services, general
line industrial distribution services, as well as job shop machining,
engineering products and services, to a variety of industries including
automotive, aviation, and medical.
Principles of Consolidation
The consolidated financial statements include the accounts of
SETECH, Inc. and its wholly-owned subsidiaries Lewis Supply Company,
Inc. ("Lewis"), a Delaware corporation, S.E.T.C. DE Mexico, CETECH de
Mexico, and Southeastern Technology, Inc. ("Southeastern")a Tennessee
corporation. References to the Company in these notes include SETECH,
Inc. and its subsidiaries on a consolidated basis. All significant
inter-company balances and transactions have been eliminated in
consolidation.
Revenue and Expense Recognition
The Company maintains contracts with its customers to procure and
manage tooling, supply and proprietary spare parts inventories under
various terms. The Company's contracts are generally from three to five
years in length with renewal provisions for subsequent periods.
Management expects to renew the Company's existing contracts for periods
consistent with the remaining renewal options allowed by the contracts
or other reasonable extensions.
Credit Risk and Concentration of Activities
A significant number of the Company's customers are in the aviation,
automobile and medical instrument industries. Approximately 25% of the
Company's total revenues for the quarter ended September 30, 1998, were
to a customer in the automobile industry. Trade accounts receivable at
September 30, 1998 include approximately $3.6 million due from the same
customer.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS
129 establishes standards for disclosing information about an entity's
capital structure. The Company adopted SFAS 129 in the second quarter
of fiscal 1998. Such adoption did not have a material impact on the
Company's financial position, results of operations or cash flows.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 establishes standards of reporting for comprehensive income and its
components in a full set of financial statements. SFAS 130 is effective
for fiscal years beginning after December 15, 1997. The Company adopted
SFAS 130 in the first quarter of fiscal 1999. Such adoption did not have
a material impact on the Company's financial position, results of
operations or cash flows.
In June 1997, the FASB issued statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires public companies
to report financial and descriptive information about its reportable
operating segments in annual financial statements and in interim
financial reports issued to shareholders. The Company will be required
to adopt the provisions of this statement in the fourth quarter of
fiscal 1999. Management is evaluating this standard and determining if
the Company will be required to revise its current methods of reporting
financial data.
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 requires the costs of start-up
activities and organizational costs, as defined, to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. Management does not expect the adoption to have a
material impact on the Company's results of operations, financial
condition or cash flows.
2. NET INCOME PER SHARE
The following table presents information necessary to calculate
diluted net income per share for the quarters ended September 30,
1998 and 1997.
1998 1997
Net Income $ 268 $ 227
Plus interest on convertible debentures
net of associated tax provision 22 23
__________ _________
Adjusted net income $ 290 $ 250
========== =========
Weighted average shares outstanding 5,516 5,505
Plus additional shares issuable upon
conversion of convertible debentures 736 848
Adjusted weighted average shares __________ _________
outstanding 6,252 6,353
Basic net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during the
year.
Diluted net income per share reflects the effect of common
shares contingently issuable upon conversion of convertible debt
securities in periods in which such conversion would cause dilution and
the effect on net income of converting the debt securities.
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
CAUTIONARY STATEMENTS
This quarterly report on Form 10-Q contains statements relating to
the future of SETECH, Inc and its subsidiaries,(the "Company") (including
certain projections and business trends) that are "forward looking
statements" as defined by Section 27A of the Securities Act of 1933, as
amended, Section 21E of the Securities Exchange Act of 1934, as amended,
and the Private Securities Litigation Reform Act of 1995, as amended.
These forward looking statements include statements regarding the intent,
belief or current expectations of the Company and its management and involve
risks and uncertainties that may cause the Company's actual results to
differ materially from the results discussed in the forward looking
statements. When used in this Form 10-Q with respect to the Company, the
words "estimate", "project", "intend", "anticipate", "expect", "foresee",
"believe", "potential", and similar expressions are intended to identify
forward looking statements. Readers are cautioned not to place undue
reliance on these forward looking statements, which speak only as of the
date hereof. The risks and uncertainties relating to the forward looking
statements include, but are not limited to, changes in political,
economic and/or labor conditions; changes in the regulatory environment;
the Company's ability to integrate its acquisitions; competitive
production and pricing pressures; as well as other risks and
uncertainties.
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of
the operations and financial conditions of the Company. This discussion
and analysis should be read in conjunction with the financial statements
and related notes presented in the Company's annual report on Form 10-K
for the fiscal year ending June 30, 1998, and the condensed consolidated
financial statements and related notes included in the Form 10-Q.
Revenue for the three months ending September 30, 1998 was $24.8
million, versus $20.3 million in the three months ending September
30,1997, an increase of $4.5 million, or 21.9%. The increase in revenues
primarily resulted from new contracts in the integrated supply
activities of the Company.
As discussed in the Annual Report on Form 10-K for the period ending
June 30, 1998, contracts were signed in the fourth quarter to establish
numerous additional integrated supply sites, with potential annual product
revenues of up to $150 million, on an annual basis, when fully implemented.
Implementation of these sites began in the first quarter, and will continue
through fiscal 1999 and 2000. However, no guarantee of future revenues is
certain, and this increase in operations will require a substantial increase
in working capital (see Liquidity and Capital Resources section of this item).
Please refer to the "Cautionary Statements" presented previously in this
quarterly report on Form 10-Q, regarding the risks and uncertainties related
to these forward looking statements.
Gross profit for the three months ending September 30, 1998 was
$2.2 million (8.6% of revenue), while the same period in the prior
year was $2.1 million (10.2% of revenue). Gross profit as a
percentage of revenue declined due to an increasing percentage of
revenues being from integrated supply operations. As the nature of the
consolidated business shifts from traditional distribution and machine
shop operations to more industrial supply, the gross profit as a
percentage of revenues will continue to decline as profit from product
sales which are sold at cost, is replaced with profit from fees. The
site expenses incurred in the inordinate number of new sites being
implemented also impacted gross profit in the current period.
General and administrative expenses for the three months ending
September 30, 1998 were $1.1 million (4.2% of revenues), versus $1.2
million (5.7% of revenues) in the same period in 1997. General and
administrative expenses are from the Company's corporate overhead,
operation of the Lewis Supply distribution centers and operation of
Southeastern Technologies machine shop. (See Item 1: Business, in the
Annual report on Form 10-K for the fiscal year ended June 30, 1998.)
Interest expense for the three months ending September 30, 1998
was $624,000, versus $473,000 in the same period in 1997. The increase
is attributable to increased borrowing for inventories and receivables,
as a result of the new contracts.
Income tax provision for the three months ending September 30,
1998 was $259,000, versus $251,000 in the same period in 1997. The
effective rate for fiscal 1998 was 54.3% as compared to 52.4% in the
same period in 1997. The difference in the rate is due to the impact of
goodwill amortization and travel and entertainment expenses, which are
not deductible for taxes.
Seasonality And Quarterly Information
Historically, the Company has not been impacted by any significant
seasonality issues in earnings, profits, or statement of financial position.
Liquidity And Capital Resources
The Company's primary source of liquidity in the recent past has
been borrowings under its revolving credit facility. Net cash used in
operating activities was $4.0 million in the three months ending
September 30, 1998, due to the significant growth in accounts receivable for
the integrated supply operations, as compared to net cash used in operating
activities $1.6 million in the same period in 1997. Net cash used in
investing activities in three months ending September 30, 1998 was
$468,000, as compared to $70,000 used in the same period of the prior
fiscal year. This increase is due to investments in computer equipment to
support the installation of new integrated supply sites. Net cash from financing
activities in the quarter, primarily the revolving credit facility, was
$4.4 million, versus $1.4 million in the same quarter of the prior fiscal year.
This increase was primarily driven by utilization of the facility for financing
of receivables for integrated supply operations. At September 30, 1998, the
Company's current assets exceeded its current liabilities by
approximately $30.4 million.
The Company maintains a secured revolving line of credit with a
banking institution in the maximum amount of the lesser of $35 million
or the total of eligible accounts receivable and inventory as defined in
the revolving line of credit agreement.
The potential expansion of operations with a current customer,
noted above, has created a requirement for significant investment in
inventories, up to $150 million, to support that customer. Discussions
are currently underway for the expansion of the revolving credit line
and potential acquisition of subordinated debt. Management believes, but
can give no assurance, that these infusions of debt and equity capital
will result in sufficient capital to support the Company's existing and
future operations, but the Company will be required to seek external
financing sources to support this expansion of its existing lines of
business. There can be no assurance that the Company would be able to
obtain such financing on reasonable or attractive terms, if at all.
Year 2000 Issue
The Company's primary information systems, are currently compliant
with year 2000 issues, or are being updated with new releases that are
compliant with year 2000. The costs of these updates are not material and
the activities should be completed by December 31, 1998. Any and all future
releases of software will be tested for year 2000 compliance. The key
customers of the Company are performing their own year 2000 reviews and, to
the knowledge of Company management, are committed to timely completion of
those efforts. Vendors from which the Company purchases products are diverse
and varied, providing numerous alternatives. Key vendors of the Company are
performing their own year 2000 reviews and, to the knowledge of Company
management, are committed to timely completion of those efforts. Due to the
complexity and pervasiveness of the year 2000 issues and the uncertainty
regarding the compliance of third parties, no assurance can be given that
successful transition will be achieved by the year 2000 deadline by these
parties, or that the Company would not suffer material adverse effects on
its business, financial position or the results of operation if such changes
are not completed.
Impacts Of Inflation
Due to the nature of the operations of the Company, management
believes the impacts of inflation are not material.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits. The Company hereby incorporates by
reference the Exhibits and Exhibit table provided
in Item 13 of its Form 10-K for the fiscal year
ended June 30, 1998.
(b) Reports on Form 8-K. None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SETECH, INC.
Date: November 16, 1998 By_/s/ Thomas N. Eisenman______________
Thomas N. Eisenman President
Date: November 16, 1998 By_/s/ Richard M. Eddinger______________
Richard M. Eddinger Vice President Finance, CFO
Date: November 16, 1998 By_/s/ Cindy L. Rollins__________________
Cindy L. Rollins, Secretary-Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 683
<SECURITIES> 0
<RECEIVABLES> 14,581
<ALLOWANCES> 143
<INVENTORY> 26,926
<CURRENT-ASSETS> 42,716
<PP&E> 5,543
<DEPRECIATION> 2,657
<TOTAL-ASSETS> 52,399
<CURRENT-LIABILITIES> 12,288
<BONDS> 1,719
<COMMON> 57
0
0
<OTHER-SE> 7,949
<TOTAL-LIABILITY-AND-EQUITY> 52,399
<SALES> 0
<TOTAL-REVENUES> 24,834
<CGS> 0
<TOTAL-COSTS> 22,640
<OTHER-EXPENSES> 1,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 624
<INCOME-PRETAX> 527
<INCOME-TAX> 259
<INCOME-CONTINUING> 268
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 268
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
