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 December 31, 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
December 31, 1998.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements.
SETECH, Inc. and Subsidiaries:
Consolidated Balance Sheets as of December 31, 1998
and June 30, 1998
Consolidated Statements of Operations for the Three Months
Ended December 31, 1998 and 1997
Consolidated Statements of Operations for the Six Months
Ended December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for
the Six Months Ended December 31, 1998
Consolidated Statements of Cash Flows for the Six
Months Ended December 31,1998 and 1997
Notes to Consolidated Financial Statements
SETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
December 31, June 30,
1998 1998
__________________ _________________
ASSETS
Currents Assets
Cash and Cash Equivalents $ 755 $ 796
Accounts Receivable, net 17,801 10,856
Inventories 29,544 26,079
Prepaid Expenses
And Other Current Assets 893 204
Deferred Tax
Asset 440 440
___________ ____________
Total Current Assets 49,433 38,375
Property and Equipment, net 3,066 2,584
Cost in Excess of net
Assets Acquired, net of
Accumulated Amortization
of $982 and $842 6,652 6,792
Other Assets 65 85
____________ ___________
Total Assets $ 59,216 $ 47,836
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 14,888 $ 9,851
Accrued Expenses 1,118 1,928
Current Portion of Long-term
Debt 394 413
Current portion of capital
lease obligations 208 208
____________ ___________
Total Current Liabilities 16,608 12,400
____________ ___________
Long Term Debt
net of current portion 33,174 26,609
Capital Lease Obligations
net of current portion 458 559
____________ ___________
Total long term debt 33,632 27,168
____________ ___________
Commitments and Contingencies
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 (3,335) (4,043)
Less treasury stock (208) (208)
____________ ___________
Total Stockholders' Equity 8,446 7,738
____________ ___________
TOTAL LIABILITIES AND $ 59,216 $ 47,836
STOCKHOLDERS' EQUITY ============ ===========
<FN>
The Accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements
SETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the three months ended For the Six Months ended
December 31 December 31 December 31 December 31
1998 1997 1998 1997
_____________ ___________ __________ ___________
REVENUES $ 24,941 $ 22,351 $ 49,775 $42,716
COST OF REVENUES 22,057 20,466 44,697 38,763
__________ __________ _________ ________
Gross Profit 2,884 1,885 5,078 3,953
Selling, General &
Administrative Expenses 1,508 1,100 2,554 2,251
__________ __________ _________ _________
Operating Income 1,376 785 2,524 1,702
__________ __________ _________ ________
OTHER INCOME (EXPENSE)
Interest Income 97 14 104 29
Interest Expense (580) (512) (1,204) (985)
Other 4 (13) 0 6
_________ __________ ___________ _________
Total Other (479) (511) (1,100) (950)
__________ __________ ___________ __________
Income
before Income Taxes 897 274 1,424 752
Income Tax Provision 457 140 716 390
__________ __________ ___________ __________
Net Income $ 440 $ 134 $ 708 $ 362
========= ========= ========= ========
NET INCOME PER COMMON SHARE:
Basic $ 0.08 $ 0.02 $ 0.13 $ 0.07
Diluted $ 0.07 $ 0.02 $ 0.12 $ 0.06
[FN]
The Accompanying Notes to Condensed Consolidated Financial
Statements are an Integral Part of these Statements.
SETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Common Stock
Treasury $.01 Par
Stock Value Additional Accumulated
_________________________________________ Paid-in (Deficit) Total
Shares Amount Shares Amount Capital
_______ _______ __________ _________ ________ ________ _________
Balances 164 $(208) 5,679 $57 $11,932 ($4,043) $ 7,738
June 30,
1998
Net Income
for the
6 Months
Ended
December 708 708
31,1998 _______ _______ __________ _________ ________ ________ _________
Balances 164 $(208) 5,679 $57 $11,932 ($3,335) $ 8,446
====== ====== ======= ========= ======= ======= =========
at December 31,1998
<FN>
The Accompanying Notes to Condensed Consolidated Financial
Statements are an Integral Part of these Statements.
SETECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the six months ended
December 31 December 31
1998 1997
________ ________
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 708 $ 362
Adjustments to
reconcile net income
to net cash used in
operations:
Depreciation and
amortization 487 377
Gain on sale of
fixed assets 0 (7)
Changes in operating assets
and liabilities:
Increase in accounts receivable (6,945) (2,601)
Increase in inventory (3,465) (5,019)
Increase in
other assets (669) (9)
Increase in accounts payable 5,037 2,435
Decrease in accrued expenses (810) (537)
__________ _________
Net cash used in operations (5,657) (4,999)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment (829) (286)
Proceeds from sale of
fixed 0 7
__________ _________
Net cash used in investing (829) (279)
activities __________ _________
CASH FLOWS FROM FINANCING
ACTIVITES:
(Payments)/Proceeds on short-term (19) 51
debt
(Payments)/Proceeds on 6,464 5,172
long-term debt __________ _________
Net cash provided by 6,445 5,223
financing activities __________ _________
Decrease in cash (41) (55)
and cash equivalents
Cash and cash equivalents 796 1,634
at beginning of period ___________ ___________
Cash and cash equivalents $ 755 $ 1,579
at end of period =========== ===========
[FN]
The Accompanying Notes to Condensed Consolidated Financial
Statements are an Integral Part of these Statements.
SETECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANACIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
December 31, 1998
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of December 31, 1998 and
June 30, 1998, and the consolidated statements of operations and cash
flows for the six month periods ended December 31, 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 December
31, 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 December 31, 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. Certain contract revenues include fixed fee
and reimbursed expenses only. As a result of the terms of certain contracts,
products purchased and sold to those customers cannot be recognized as the
Company's revenue or related costs. These sales, "product pass through",
totaled approximately $3.1 million for the three and six months ending
December 31, 1998.
Credit Risk and Concentration of Activities
A significant number of the Company's customers are in the aviation,
automobile and medical instrument industries. Approximately 27% of the
Company's total revenues for the six months ended December 31, 1998,
were to customers in the automobile industry. Trade accounts receivable
at December 31, 1998 include approximately $7.5 million due from these same
automotive customers.
New Accounting Pronouncements
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 three month period ended December
31,1998 and 1997.
1998 1997
Net Income $ 440 $ 134
Plus interest on convertible debentures
net of associated tax provision 22 24
__________ _________
Adjusted net income $ 462 $ 158
========== =========
Weighted average shares outstanding 5,515 5,505
Plus additional shares issuable upon
conversion of convertible debentures 740 851
Adjusted weighted average shares __________ _________
outstanding 6,255 6,356
The following table presents information necessary to calculate
diluted net income per share for the six month period ended December 31,
1998 and 1997.
1998 1997
Net Income $ 708 $ 362
Plus interest on convertible debentures
net of associated tax provision 44 47
__________ _________
Adjusted net income $ 752 $ 409
========== =========
Weighted average shares outstanding 5,515 5,505
Plus additional shares issuable upon
conversion of convertible debentures 740 851
Adjusted weighted average shares __________ _________
outstanding 6,255 6,356
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.
3. PUTTABLE STOCK AND SHAREHOLDER AGREEMENT
A. All of the Company's common stock issued and to be issued in
connection with the acquisition of Lewis is subject to a Shareholders' Agreement
the "Agreement"). Under the terms of the Agreement, the shareholder has the
option to require the Company to repurchase the shares at a price of $2.00 per
share if the Company has not effected a public offering of the company's common
stock on a major stock exchange prior to April 30, 2000, or in the event of a
change in control of the Company (as defined in the Agreement). In conjunction
with the resignation of this shareholder as an employee, the Agreement was
amended to expire 180 days after employment cessation which occurred on
September 7, 1998. On February 10, 1999, the Company received notice from the
shareholder of his intention to exercise this option as soon as possible with
respect to all shares so issued and to be issued.
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 December 31, 1998 was $24.9
million, versus $22.3 million in the three months ending December
31,1997, an increase of $2.6 million, or 11.5%. The increase in revenues
primarily resulted from new contracts in the integrated supply
activities of the Company. In addition, approximately $3.1 million of products
were delivered to customers which due to the terms of those contracts cannot be
included in the company's revenues of related costs. The contracts resulting
in this "product pass through" initiated in the three months ending December 31,
1998. (See footnote 1, Revenue and Expenses Recognition, of the financial
statements in this Form 10-Q)
Revenue for the six months ending December 31, 1998 was $49.8
million, versus $42.7 million in the three months ending December
31,1997, an increase of $7.1 million, or 16.6%. 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 December 31, 1998 was
$2.9 million (11.6% of revenue), while the same period in the prior
year was $1.9 million (8.5% of revenue). The increase in gross profit as a
percentage of revenues is primarily driven by the revenue recognition, of
excluding the product pass through involved with the new contracts. As the
percentage of revenues derived from the new contracts increases, this trend
should continue.
Gross profit for the six months ending December 31, 1998 was
$5.1 million (10.2% of revenue), while the same period in the prior
year was $4.0 million (9.3% of revenue).
General and administrative expenses for the three months ending
December 31, 1998 were $1.5 million (6.0% of revenues), versus $1.2
million (4.9% of revenues) in the same period in 1997. The increase as a
percentage of revenue is driven by the handling of revenue recognition for the
new contracts. General and administrative expenses for the six months ending
December 31, 1998 were $2.6 million (5.2% of revenues), versus $2.3 million
(5.3% 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 Technology 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 December 31, 1998
was $580,000, versus $512,000 in the same period in 1997 and $1,204,000
versus 985,000 for the six month period. 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 December 31,
1998 was $457,000 versus $140,000 in the same period in 1997. The
effective rate for fiscal 1998 was 51.0% the same as the
same period in 1997.
Income tax provision for the six months ending December 31,
1998 was $716,000 versus $390,000 in the same period in 1997. The
effective rate for fiscal 1998 was 50.2% as compared to 51.0% in the
same period in 1997.
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 $5.7 million in the six months ending
December 31, 1998, due to the significant growth in accounts receivable for
the integrated supply operations, as compared to net cash used in operating
activities of $5.0 million in the same period in 1997. Net cash used in
investing activities in the six months ending December 31, 1998 was
$829,000, as compared to $279,000 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
$6.5 million, versus $5.2 million in the same six months of the prior fiscal
year. This increase was primarily driven by utilization of the facility for
financing of receivables for integrated supply operations. At December 31, 1998,
the Company's current assets exceeded its current liabilities by
approximately $32.7 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. At December 31, 1998, the Company
had approximately $2 million of availability on this line of credit.
The current and potential expansion of operations with a current customer,
previously noted 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. The costs of these updates are not material and
the activities have been completed as of 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.
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.
EX-10.1 Amendment and Modification to Incentive Stock
Option Plan of SETECH, Inc.
(b) Reports on Form 8-K. None
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 12, 1999 By_/s/ Thomas N. Eisenman______________
Thomas N. Eisenman President
Date: February 12, 1999 By_/s/ Richard M. Eddinger______________
Richard M. Eddinger Vice President Finance, CFO
Date: February 12, 1999 By_/s/ Cindy L. Rollins__________________
Cindy L. Rollins, Secretary-Treasurer