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, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1939
For the transition period from to
Commission File Number: 33-5820-LA
SEMICON TOOLS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 77-0082545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
111 Business Park Drive, Armonk, New York 10504
(Address of principal executive offices)
Issuer's telephone number, including area code: (914) 273-1400
-----------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of Shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 4, 1997
Common Stock, par value $.001
per share 9,367,500
INDEX
Part I. Financial Information
Item 1. Condensed consolidated financial statements:
Balance sheet as of April 30, 1997 F-2
Consolidated statement of operations for three months
ended April 30, 1997 and 1996 F-3
Consolidated statement of cash flows for three months
ended April 30, 1997 and 1996 F-4
Notes to condensed consolidated financial statements F-5 - F-10
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - APRIL 30, 1997
(UNAUDITED)
ASSETS
Current assets:
Cash $ 72,459
Accounts receivable, less allowance
for doubtful accounts of $6,500 169,778
Note receivable, officer 59,688
Inventory 352,942
Prepaid expenses and other assets 78,031
Deferred tax asset, current portion 31,250
----------
Total current assets 764,148
-------
Property and equipment 373,836
-------
Other assets:
Security deposits 14,885
Goodwill, net of amortization 101,399
Deferred tax asset, net of current portion 50,007
----------
166,291
-------
$1,304,275
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 38,054
Accounts payable 90,806
Accrued interest 115,764
Payroll taxes payable 2,613
----------
Total current liabilities 247,237
-------
Long-term debt, net of current portion 277,794
----------
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 9,367,500 shares issued and
outstanding 9,368
Additional paid in capital 2,517,945
Retained earnings (deficit) ( 1,748,069)
----------
779,244
-------
$1,304,275
==========
See notes to condensed consolidated financial statements.
F-2
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
THREE MONTHS ENDED APRIL 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Net sales $ 422,603 $ 376,467
Cost of sales 125,236 103,577
----------- ----------
Gross profit 297,367 272,890
Selling, general and administrative expenses 241,720 211,404
----------- ----------
Income from operations 55,647 61,486
Other charge, interest expense 9,825 11,191
----------- ----------
Income before income taxes 45,822 50,295
Income taxes 12,495 0
----------- ----------
Income before extraordinary item $ 33,327 $ 50,295
=========== ==========
Earnings per common share:
Income before extraordinary item $ 0.003 $ 0.009
Extraordinary item 0.003 0
---------- ----------
Net income $ 0.006 $ 0.009
========== ==========
Weighted average number of common shares
outstanding 11,367,500 5,381,667
========== ==========
See notes to condensed consolidated financial statements.
F-3
SEMICON TOOLS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED APRIL 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 33,327 $ 50,295
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and amortization 10,311 3,373
Changes in operating assets and liabilities:
Accounts receivable ( 7,339) ( 17,608)
Inventories ( 13,390) ( 9,121)
Prepaid expenses and other current assets 28,259 31,300
Accounts payable, accrued expenses and
payroll taxes payable ( 9,413) ( 131,646)
Deferred tax asset 12,495
-------- ----------
Net cash provided from (used in) operating
activities 54,250 ( 73,407)
-------- --------
Investing activities:
Purchase of property and equipment ( 5,212)
Increase in note payable, officers ( 59,668)
--------
Net cash used in investing activities ( 64,880)
--------
Financing activities:
Proceeds from sale of stock 110,625
Decrease in notes payable
Decrease in notes payable, shareholders ( 25,000) ( 2,415)
Payment of debt ( 8,245) ( 11,565)
-------- --------
Net cash provided from (used in) financing
activities ( 36,245) 96,645
-------- --------
Net increase (decrease) in cash ( 43,875) 23,238
Cash, beginning of period 116,334 38,866
-------- --------
Cash, end of period $ 72,459 $ 62,104
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 2,712
======== ========
Income taxes $ 0 $ 0
======== ========
See notes to condensed consolidated financial statements.
F-4
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. The
results of operations for the three months ended is not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report for the year ended
January 31, 1997 included in its Annual Report filed on Form 10-KSB.
2. Organization of the Company:
Semicon Tools, Inc. (the "Company"), a Nevada corporation, is primarily in
the business of selling small precision disposable diamond tools used to
manufacture electronic components and devices.
One of the Company's wholly-owned subsidiaries, East Coast Sales Company,
Inc. ("ECS") is a Connecticut corporation which distributes and
fabricates technical ceramic products and distributes clean room
supplies and tools. This Company, which was acquired on January 26,
1990, was accounted for in a manner similar to the pooling of interests
method of accounting. The total cost of the acquisition, $309,000, was
paid for by the issuance of a $300,000 note, bearing interest at 10% per
annum, and the issuance of 9,000,000 shares (60,000 shares, as restated
- see Note 10) of the Company's $.001 par value common stock (see also
Note 5).
The Company's other wholly-owned subsidiary, DTI Technology, SDN BHD is a
Malaysian company which manufactures a product line similar to that of
Semicon Tools, Inc. Semicon Tools, Inc. acquired the assets of DTI
Technology, SDN BHD on June 22, 1996. The total cost of the acquisition,
$125,048, was paid for by the issuance of 300,000 shares of the
Company's $.001 par value common stock with a negotiated fair value of
$.42 per share.
3. Property and equipment:
Major classifications of property and equipment are as follows:
Manufacturing equipment $580,104
Other equipment 270,984
Office equipment 20,535
--------
871,623
Less accumulated depreciation 497,787
-------
$373,836
========
F-5
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Goodwill:
On January 26, 1990, the Company acquired East Coast Sales Company (its
wholly-owned subsidiary) for a cost of $309,000. The purchase price
exceeded the fair value of the assets by $134,281 which amount was
assigned to goodwill, and is being amortized on a straight-line basis
over forty years. Accumulated amortization of goodwill aggregated
$32,882 as of April 30, 1997.
5. Commitments and contingencies:
The Company is currently obligated under a lease agreement for office and
manufacturing facilities. This lease, which expires on May 31, 1998,
requires the following future minimum rental payments:
April 30, 1998 $38,568
April 30, 1999 3,214
-------
$41,782
=======
Rent expense for the three months ended April 30, 1997 and 1996 amounted
to $9,642.
The Company also leases three vehicles under operating leases with terms
expiring through 1998. Total lease expense was $7,838 and $3,969 for the
three months ended April 30, 1997 and 1996, respectively.
Future minimum rentals are as follows:
April 30, 1998 $24,425
April 30, 1999 13,696
-------
$38,121
=======
The Company has entered into written sales agreements with two employees.
The agreements are on a year to year basis and call for the payment of
commissions, varying from 1 to 4 percent, on the sale of selected
products.
F-6
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Commitments and contingencies (continued):
On March 6, 1996, the Company entered into an investment agreement for a
three year term. The consultant shall assist management in broadening
the Company's exposure to the financial community and securing necessary
funding to meet its needs according to the terms of the agreement. The
consultant shall be compensated by having the option to purchase up to
6,000,000 of the Company's common shares at prices varying from $.10 to
$1.75 during the period commencing on March 6, 1996 and ending September
30, 1996. Either party may terminate this agreement upon notice to the
other. As of April 30, 1996, $825,000 shares had been issued for
$82,500. On September 30, 1996, after 2,550,000 shares had been issued
for $240,000, this agreement was cancelled.
On April 8, 1996, the Company reached a settlement with their prior
accountants of fees due from the Company. The agreement calls for
monthly installments of $4,000 commencing April 1, 1996 and ending on
September 1, 1996 for a total $24,000. The balance reflected at January
31, 1996 on the Company's accounts payable was $28,068. The books at
April 30, 1996 have been adjusted to reflect this settlement.
On February 27, 1997, the Company entered into an investment banking with
Russo Securities for a three year period. The consultant shall assist
management in broadening the Company's exposure to the financial
community and in securing necessary funding to meet its needs according
to the terms of the agreement. The consultant shall be compensated by
having the option to purchase up to 6,000,000 shares of the Company's
common shares at prices varying from $.075 to $.10 during the period
commencing of February 27, 1997 and ending July 31, 1997. After July
30, 1997 the option price will be $.10 until the agreement expires.
Upon the signing of the agreement, the Company issued another 200,000
shares of its common stock to other consultants related to Russo, with
a possible additional 400,000 shares being issued to these consultants
if the entire 6,000,000 options are exercised. The agreement can be
terminated by either party upon sixty days notice. As of April 30, 1997
no options had yet been issued under this contract.
On May 1, 1996, the Company entered into employment agreements with its
President and Vice President. The term of the agreements covers two one
year periods expiring on January 31, 1998. 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 consolidated gross
sales. Each employee also received 1,000,000 stock options at $.10.
None of these options had been exercised as of April 30, 1997.
F-7
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Long-term debt:
Long-term Current
Rate Portion Portion Maturity
Note payable, Citibank (a) 10% $ 3,856 1997
Note payable, shareholder (b) 10% $132,794 34,198 2001
Note payable, shareholders (c) 13.5%-15% 145,000 1998
-------- -------
$277,794 $38,054
======== =======
(a) Note payable to Citibank is payable in monthly installments of
$3,855 including interest. The note is collateralized by all
assets of the Company and guaranteed by its principle
shareholder.
(b) On April 23, 1997, the Company renegotiated an existing loan
with a certain shareholder resulting in a new obligation
payable in monthly installments of $2,648 including interest at
10%.
(c) Notes payable to two shareholders in the aggregate amount of
$145,000. These notes are subordinate to the borrowing from
Citibank and will become due when the bank is paid in full.
The maturities of these loans are as follows:
April 30, 1998 $190,229
April 30, 1999 37,779
April 30, 2000 41,735
April 30, 2001 46,105
--------
$315,848
========
F-8
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Income taxes:
As of April 30, 1997 the Company had net operating loss carryovers of
approximately $1,730,000 expiring in various years through 2008.
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), the cumulative effect of which was not material to the
consolidated financial statements and is therefore not presented
separately. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109,
the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date; this effect was immaterial during the year ended January 31, 1997
and 1996. The deferred tax asset less the deferred tax liabilities has
been reduced by a valuation allowance equal to the net tax benefit in
excess of the estimated taxable profits over the next three years.
Provision for income taxes (benefit):
1997 1996
---- ----
Current $ 0 $ 0
Deferred 12,495 0
------- --------
Total benefit $12,495 $ 0
======= ========
A reconciliation of the income tax provision at the federal statutory rate
to the income tax provision at the effective tax rate is as follows
1997 1996
---- ----
Computed tax at the expected
statutory rate $15,578 0
Foreign income ( 3,083)
------- ------
Income tax expense $12,495 0
======= ====
F-9
SEMICON TOOLS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Income taxes (continued):
The components of deferred tax assets and liabilities consist of the
following:
Deferred tax asset:
Net operating loss carryforward $526,255 $570,000
-------- --------
Total deferred tax asset 526,255 570,000
Valuation allowance ( 445,000) ( 570,000)
-------- --------
$ 81,255 $ 0
======== ========
8. Computation of earnings per share:
1997 1996
---- ----
Weighted average number of common
shares outstanding 9,367,500 5,381,667
Assumed conversion stock options 2,000,000
--------- ----------
Weighted average number of common
shares outstanding 11,367,500 5,381,667
========== =========
9. Modification of shareholders' loans:
On April 23, 1997, the Company modified the terms of two notes payable to
a certain shareholder. The shareholder has agreed to reduce the interest
rates from 14% to 10%. The new note balance includes previously unpaid
principal and interest with the new payments beginning May 1, 1997.
F-10
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
I. Financial Condition
The Company's financial condition has steadily and
significantly continued to improve so that its latest Dun and Bradstreet rating
of 1A2 now reflects a more than adequate "Good".
Reflecting its successful and profitable operating results, a
comparison of the Balance Sheet at April 30, 1997 to January 31, 1997 indicates:
1. Total assets increased by 1.2% to $1,304,275 and
current assets increased by 4.5% to $764.148,
generally due to higher sales volume and the
profitable operation.
2. Current liabilities decreased by 5.1% due to the following:
a. Accounts payable increased by 9.1% because of cumulative
effect of the higher sales volume.
b. Completion of repayment of bank debt eliminated debt
payments due.
c. Restructuring of notes payable to shareholders, as
negotiated, altered interest and payable elements (see
Financial Note 6).
Other Balance Sheet Comparisons for the same two periods are:
1. Long term debt, net of current position, increased by 63.4%
as part of the aforementioned notes payable restructuring.
2. Cash decreased by $43,875 or 60.6%. This was primarily due
to a $59,668 note receivable from a Company officer.
This amount will be repaid during the second quarter
of 1997.
II. Results of Operations
Net sales for the quarter ended April 30, 1997 were $422,603 as
compared to $376,467 for the comparable period ending April 30, 1996, an
increase of approximately 12.1%. The Company experienced a 13.3% increase in its
ceramic lines and a 10.1% increase in its dicing blade lines as the main
contributor to this improvement.
-2-
The quarter's net sales results was its highest first quarter
in its history, second only to the preceding quarter. Management believes this
portends a record annual sales for the current fiscal year. This belief is
supported by the first quarter bookings record of $468,430, 31.9% higher than
the comparable period of the preceding year and 6.5% higher than the previous
quarter.
The Company's gross profit margin for the first quarter of 1997
remained approximately at the same high level as compared to the first quarter
of 1996 (2.8% lower). Similarly, the selling, general and administrative expense
as a percentage of sales increased by only 2.0%, a nominal change. However, as
compared to the record high preceding quarter for sales and profit, the first
quarter ended April 30, 1997 yielded a slightly higher gross profit margin and a
slightly lower S, G & A expense percentage of sales, both improvements.
Nevertheless, when comparing the quarter ended April 30, 1997
to that ended April 30, 1996, the latter mentioned slight changes in Gross
Margin and S, G & A expense as a percentage of sales saw income from operations
at $55,647 compared to $61,486 or a 9.5% decrease. Management does not believe
this to be significant on the face of it, especially in view of its bookings
experience and its plans for product expansion by its Malaysian subsidiary. DTI
Technology, SDN, BHD, which experienced a small operating profit during the
quarter, has plans for the manufacture of tools for the jewelry industry and a
full line of dressers, both of which should be marketed in the Far East.
Management feels that a net income comparison between the
first quarters of 1997 and 1996 is not as significant as that of the comparison
of income from operations above. The net income of $33,327 in 1997's first
quarter was impacted by a non-cash provision for taxes of $12,495 and, although
33.7% decreased from 1996's first quarter's net income of $50,295, such
comparison could be misleading.
-3-
III. Liquidity and Capital Resources
At April 30, 1997, the Company's current ratio (i.e. current
assets divided by current liabilities) stood at 3.09:1, as compared to 1.96:1 at
January 31, 1997 and 1.08:1 in the comparable quarter ending April 30, 1997.
This classical measure of a company's ability to meet current obligations
reflects positively on the Company's liquidity and resources for the current
level of business and will contribute to more than satisfying its suppliers of
goods and services.
On the other hand, the Company believes that a part of its
growth will come from substantial acquisitions made both in the United States
and overseas. It has instituted an aggressive program in Malaysia which is tied
into the operation of DTI. Locally, the Company is also seeking opportunities.
In the two instances, both funding and the acceptance of its common stock by
sellers of candidate companies, are not certain and could be mitigating factors.
During the quarter ending April 30, 1997, property and
equipment expenditures amounted to a nominal $5,222. As at the end of the
quarter, there were no material commitments for capital expenditures, except in
connection with potential acquisitions.
IV. Inflationary Impact
Since the inception of operations, inflation has not
significantly affected the operating results of the Company. However, inflation
and changing interest rates have had a significant effect in the economy in
general and therefore could affect the operating results of the Company in the
future.
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.
SEMICON TOOLS, INC.
(Registrant)
Date: June 12,1997
By_/s/Eugene J. Pian
---------------------
Eugene J. Pian, President and Princiapl
Executive Officer
By_/s/Craig Pian
-------------------
Craig Pian, Vice President,Treasurer,
Principal Finanical and
Accounting Officer