UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 1997
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
905 Industrial Drive, Murfreesboro, Tennessee 37129
(Former Address of principal executive offices)
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 - 5,669,003 shares as of
December 31, 1997.
Indicate Transitional Small Business Disclosure Format
YES [ ] NO [X]
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements.
SETECH, Inc. and Subsidiaries:
Consolidated Balance Sheets as of December 31, 1997
and June 30, 1997
Consolidated Statements of Income for the Three Months
Ended December 31, 1997 and 1996
Consolidated Statements of Income for the Six Months
Ended December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity for
the Six Months Ended December 31, 1997
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
SETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
December 31, June 30,
1997 1997
__________________ _________________
<S> <C> <C>
ASSETS
Currents Assets
Cash and Cash Equivalents $ 1,578,810 $ 1,633,559
Accounts Receivable 11,050,774 8,449,902
Inventory 22,324,246 17,305,262
Prepaid expenses
And Other Current Assets 498,008 504,621
Deferred Tax 551,526 520,328
Benefit _____________ ____________
Total Current Assets 36,003,364 28,413,672
Property and Equipment,net 2,201,777 1,746,551
Non-current Deferred Tax
Benefit - 31,197
Cost in Excess of net
Assets Acquired, net of
Accumulated Amortization
of $699,537 and $559,959 6,814,742 6,954,320
Other Assets 142,057 126,484
____________ ___________
Total Assets 45,161,940 37,272,224
____________ ___________
____________ ___________
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
Current Liabilities
Current Portion of Long-term $ 430,778 $ 411,620
Debt
Current portion of capital
lease obligations 127,039 95,129
Accounts Payable 8,410,908 5,975,425
Accrued Expenses 1,208,032 2,015,289
Income taxes payable 356,537 86,297
____________ ____________
Total Current Liabilities 10,533,294 8,583,760
____________ ____________
Long Term Debt 25,237,610 20,099,790
net of current portion
Capital Lease Obligations
net of current portion 852,154 411,562
____________ ____________
Total long term debt 26,089,764 20,511,352
____________ ____________
Commitments and Contigencies
Puttable Stock 510,204 510,204
____________ ____________
Stockholders' Equity
Common Stock, $.01 par 56,690 56,690
Value, 10,000,000 Shares
Authorized, 5,669,003
Issued
Additional Paid-in 11,916,583 11,916,583
Capital
Accumulated Deficit (3,736,396) (4,098,166)
Less treasury stock (208,199) (208,199)
_____________ ____________
Total Stockholders' Equity 8,028,678 7,666,908
_____________ ____________
TOTAL LIABILITIES AND $45,161,940 $37,272,224
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
(UNAUDITED)
<CAPTION>
For the three months ended
December 31 December 31
1997 1996
------------ ------------
<S> <C> <C>
REVENUES $22,351,484 $8,863,813
COST OF REVENUES 20,466,849 7,735,154
----------- ---------
Gross Profit 1,884,635 1,128,659
Selling, General & Administrative 1,099,780 609,999
Expenses ________ ________
Operating Income 784,855 518,660
OTHER INCOME (EXPENSE)
Interest Income 13,752 15,482
Interest Expense (512,203) (183,860)
Other (12,399) 10,993
__________ __________
Total Other (510,850) (157,385)
__________ __________
Net Income 274,005 361,275
before Income Taxes
Income Tax Provision 139,535 150,202
__________ __________
Income from continuing
operations 134,470 211,073
DISCONTINUED OPERATIONS:
Operating income, net of
income tax provision _ 47,578
___________ ___________
Net Income $134,470 $258,651
__________ __________
__________ __________
NET INCOME PER COMMON SHARE:
Basic
Income from continuing ops 0.02 0.04
Income from discontinued ops 0.01
______ _____
Net income per share 0.02 0.05
______ ______
______ ______
Diluted
Income from continuing ops 0.02 0.03
Income from discontinued ops 0.01
______ ______
Net income per share 0.02 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 STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
For the six months ended
December 31 December 31
1997 1996
------------ ------------
<S> <C> <C>
REVENUES $42,715,838 $18,815,827
COST OF REVENUES 38,762,686 16,774,034
---------- ---------
Gross Profit 3,953,152 2,041,793
Selling, General & Administrative 2,251,601 1,184,390
Expenses ________ ________
Operating Income 1,701,551 857,403
OTHER INCOME (EXPENSE)
Interest Income 29,383 32,408
Interest Expense (985,240) (389,000)
Other 6,121 23,696
__________ __________
Total Other (949,736) (332,896)
__________ __________
Net Income 751,815 524,507
before Income Taxes
Income Tax Provision 390,045 233,107
__________ __________
Income from continuing 361,770 291,400
operations
DISCONTINUED OPERATIONS:
Operating income, net of
income tax provision _ 135,442
___________ ___________
Net Income $361,770 $426,842
__________ __________
__________ __________
NET INCOME PER COMMON SHARE:
Basic
Income from continuing ops 0.07 0.05
Income from discontinued ops 0.03
______ ______
Net income per share 0.07 0.08
______ ______
______ ______
Diluted
Income from continuing ops 0.06 0.05
Income from discontinued ops 0.03
______ ______
Net income per share 0.06 0.08
______ ______
______ ______
</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 SIX MONTHS ENDED DECEMBER 31, 1997
(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 163,695 $(208,199) 5,669,003 $56,690 $11,916,583 ($4,098,166)
June 30,
1997
Net Income
for the
6 Months
Ended
December $361,770
31,1997 _________ ________ ____________ _______ ____________ _____________
Balances at163,695 $(208,199) 5,669,003 $56,690 $11,916,583 ($3,736,396)
December
31,1997
<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
(UNAUDITED)
<CAPTION>
For the six months ended
December 31 December 31
1997 1996
________ ________
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Income from continuing
operations $361,770 $291,400
Adjustments to
reconcile net income
to net cash used in
continuing operations:
Depreciation and 376,770 188,122
amortization
Deferred Income Tax 278,120
Gain on sale of (7,225) (30,000)
fixed assets
Changes in operating assets
and liabilities:
(Increase) decrease in (2,600,872) 1,023,036
accounts receivable
(Increase) decrease in
inventory (5,018,984) 111,315
(Increase) decrease in (8,960) 340,288
other assets
(Decrease) increase in 2,435,483 (975,430)
accounts payable
(Decrease) increase in (537,018) (371,091)
accrued expense __________ _________
Net cash provided by (used in) $(4,999,036) $855,760
operations
DISCONTINUED OPERATIONS:
Income from discontinued
operations - 135,442
Changes in net assets of
discontinued operations - (135,442)
__________ _________
Net cash used in discontinued
operations - -
__________ _________
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment (286,060) (255,824)
Proceeds from sale of 7,225 30,000
fixed assets __________ _________
Net cash used in investing (278,835) (225,824)
activities
CASH FLOWS FROM FINANCING
ACTIVITES:
(Payments)/Proceeds on short-term 51,068 (436,292)
debt
(Payments)/Proceeds on long-term 5,172,054 (451,370)
debt
Proceeds from issuance
of stock 171,101
___________ _________
Net cash provided by (used in) 5,223,122 (716,561)
financing activities
Increase (Decrease) in cash (54,749) ( 86,625)
and cash equivalents
Cash and cash equivalents 1,633,559 1,328,854
at beginning of period ___________ ___________
Cash and cash equivalents $1,578,810 $1,242,229
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
(Unaudited)
December 31, 1997
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of December 31, 1997 and
June 30, 1997, and the consolidated statements of operations and cash
flows for the six month periods ended December 31, 1997 and 1996,
have been prepared by the Company in accordance with the accounting
policies described in its 10-KSB for the fiscal year ended June 30,
1997 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 December 31,
1997 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 December 31, 1997, are not necessarily
indicative of the operating results for the full year.
Organization
SETECH, Inc.(formerly Aviation Education Systems, Inc., a Delaware,
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.
Prior to January of 1997, the Company was also a provider of air traffic
control, weather observing and forecasting services under contracts with
the FAA and other federal, state and local governments and agencies through
its former subsidiaries BARTON ATC, Inc. and BARTON ATC International, Inc.
In January of 1997, the Company sold its stock in these subsidiaries.
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, Southeastern Technology, Inc. ("Southeastern"), and
Titan Services, Inc. ("Titan") both Tennessee corporations. As of February
5, 1998, Titan was merged with and into the Company with the Company acting
as the surviving corporation. References to the Company in these notes
include SETECH, Inc. and its subsidiaries on a consolidated basis. All
significant intercompany 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 28% of the
Company's total revenues for the quarter, were to a customer in the
automobile industry. Trade accounts receivable at December 31, 1997
include approximately $2.7 million due from the same customer.
Reclassification of Financial Statement Presentation
Amounts received from customers for the cost of inventory acquired and
sold under inventory procurement and management contracts, which were
previously recorded as a reduction in cost of revenues, have been
reclassified as revenues in the accompanying consolidated statements of
operations. This reclassification conforms the Company's presentation
to industry practice.
Certain additional reclassifications have been made to the 1996
financial statements to conform with the 1997 presentation.
New Accounting Pronouncements
In February, 1997, 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 has 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.
2. ACQUISITION
Effective June 26, 1997, the Company acquired Lewis in a purchase
transaction. The acquisition was consummated by the exchange of 255,102
shares of the Company's common stock, a commitment to issue an additional
30,612 shares of the Company's common stock, $5,952,500 cash and notes
payable totaling $750,000 for 100% of the outstanding shares of Lewis's
common stock. The principal shareholder and three employees of Lewis
also entered into an employment agreement and an agreement not to compete
with the Company.
The 30,612 additional shares of the Company's common stock will be
issued in increments of 10,204 shares per year on June 1, 1998, 1999
and 2000, respectivly. These shares have been valued as of the date of
the acquisition and recorded in the accompanying consolidated balance
sheets as an accrued expense.
3. NET INCOME PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), has been issued effective for fiscal periods ending after
December 15, 1997, and establishes standards for computing and presenting
earnings per share. The Company adopted the provisions of
SFAS 128 in the second quarter of fiscal 1998 and has restated earnings per
share for all periods presented. Adoption of SFAS 128 at June 30, 1997
did not have a material effect on the Company's financial statements,
taken as a whole.
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 dilutive 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.
The following table presents information necessary to calculate
diluted net income per share for the quarters ended December 31, 1997
and 1996.
1997 1996
Income from continuing operations $134,470 $211,073
Plus interest on convertible debentures
net of associated tax provision 23,639 13,937
Adjusted income from continuing ___________ __________
operations $158,109 $225,010
___________ __________
___________ __________
Weighted average shares outstanding 5,505,308 5,204,491
Plus additional shares issuable upon
conversion of convertible debentures 850,998 1,152,527
Adjusted weighted average shares ___________ __________
outstanding 6,356,306 6,357,018
The following table presents information necessary to calculate
diluted net income per share for the six months ended December 31, 1997
and 1996.
1997 1996
Income from continuing operations $361,770 $291,400
Plus interest on convertible debentures
net of associated tax provision 47,076 31,796
Adjusted income from continuing ___________ __________
operations $408,846 $323,196
___________ __________
___________ __________
Weighted average shares outstanding 5,505,308 5,196,404
Plus additional shares issuable upon
conversion of convertible debentures 850,998 1,183,869
Adjusted weighted average shares ___________ __________
outstanding 6,356,306 6,380,273
4. DISCONTINUED OPERATIONS
On January 31, 1997, the Company sold the net assets of BARTON ATC, Inc.
and BARTON ATC International, Inc., which represented its government
services industry segment in prior years, to Serco, Inc. for $2,150,000.
Accordingly, these operations are accounted for as discontinued operations
and their results of operations are segregated in the accompanying
consolidated statements of operations and statements of cash flows.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
CAUTIONARY STATEMENTS
This quarterly report on Form 10-QSB contains statements relating to
the future of 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-QSB with
respect to the Company, the words "estimate," "project," "intend," "anticipate,"
"expect," "foresee," "believe," "plan," and similar expressions are intended
to identify 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; the ability of customers to remediate any Year 2000
problems; as well as other risks and uncertainties.
Plan of Operation
With the acquisition of Lewis (the "Acquisition") and the disposition
of its Government Services Group, the Company is increasing its focus on
integrated supply and is undertaking an internal restructuring to
accomplish such focus. As of February 5, 1998, the Company took over the
integrated supply operations of its Titan subsidiary through a merger of
Titan into the Company. While no assurance can be made as to the ultimate
synergies that will be realized through the Lewis acquisition, management
believes that the capabilities of Lewis have had a positive effect on the
Company's consolidated operations, and will do so in the future.
Results of Operations
The Company realized a net income for the three months ended
December 31, 1997 of $134,470, compared to a net income of $258,651 for the
three months ended December 31, 1996. The increase in revenues, cost of
sales, SG&A and interest expense are primarily due to the acquisition of
Lewis in June, 1997, as well as the start up of three new integrated supply
operations during the quarter.
The Company realized a net income for the six months ended December
31, 1997 of $361,770 compared to a net income of $426,842 for the six months
ended December 31, 1996. This increase in revenues, cost of
sales, SG&A and interest expense are also primarily due to the acquisition of
Lewis in June, 1997, as well as the start up of four new integrated supply
operations during the six month period.
Liquidity and Capital Resources
At June 30, 1997, the Company's current assets exceeded its
current liabilities by approximately $19,829,912. Working capital
increased to $25,470,070 at December 31, 1997. This is primarily
due to the increase in accounts receivable and inventory and the
ability to borrow from our revolving line of credit to cover these
accounts on a long term basis.
The Company maintains a secured line of credit with a banking
institution with a maximum availability of the lessor of $25 million
or the total of eligible accounts receivable and inventory as defined
in the revolving line of credit agreement. Total debt outstanding at
December 31, 1997 for this line of credit was approximately $23,000,000.
<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-KSB for the fiscal year
ended June 30, 1997.
(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: February 13, 1998 By_/s/ Thomas N. Eisenman______________
Thomas N. Eisenman President
Date: February 13, 1998 By_/s/ Cindy L. Rollins__________________
Cindy L. Rollins, Secretary-Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 1,578,810
<SECURITIES> 0
<RECEIVABLES> 11,050,774
<ALLOWANCES> 0
<INVENTORY> 22,324,246
<CURRENT-ASSETS> 36,003,364
<PP&E> 4,613,261
<DEPRECIATION> 2,411,484
<TOTAL-ASSETS> 45,161,940
<CURRENT-LIABILITIES> 10,533,294
<BONDS> 0
<COMMON> 56,690
0
0
<OTHER-SE> 7,971,988
<TOTAL-LIABILITY-AND-EQUITY> 45,161,940
<SALES> 0
<TOTAL-REVENUES> 42,715,838
<CGS> 0
<TOTAL-COSTS> 38,762,686
<OTHER-EXPENSES> 2,251,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 985,240
<INCOME-PRETAX> 751,815
<INCOME-TAX> 390,045
<INCOME-CONTINUING> 361,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 361,770
<EPS-PRIMARY> .07
<EPS-DILUTED> .06
</TABLE>
