SEMICON TOOLS INC - SETO
Filed on Sep 12, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
I. Financial Condition The Company's financial condition has continued to improve so that its latest Dun and Bradstreet rating of 1A2 now reflects a more than adequate "Good". Dun and Bradstreet, in addition, in its August 20, 1997 Business Scope Report states that "Semicon Tools, Inc. demonstrated a satisfactory financial condition as of the consolidated fiscal statement dated January 31, 1997. This assessment is supported by a satisfactory liquidity position and a fair ratio of debt to equity relative to other companies in this line of business..."
Reflecting its successful and profitable operating results, a comparison of the Balance Sheet at July 31, 1997 to April 30, 1997 indicates:
1. Total assets increased by 3.4% to $1,349,396 and current assets increased by 7.4% to $821,064, generally due to higher sales volume and the profitable operation.
2. Current liabilities increased by 23.3% almost entirely due to a 60.4% increase in accounts payable. This increase follows naturally from a 38.2% increase in sales volume.
Other Balance Sheet comparisons for the same two periods are:
1. The Company's net worth continued to rise. At July 31, it stood at $791,587, up to 1.60%.
2. Cash increased by 9.4% reflecting the Company's balanced approach to handling its accounts receivable (up 51.1%), inventory (up a nominal 1.0%) and the aforementioned 60.4% accounts payable increase.
3. The property and equipment increase includes approximately $12,000 of equipment to expand resin blade capacity and office machine purchases for the Malaysian facility.
II. Results of Operations
Net sales for the quarter ended July 31, 1997 were $512,177 as compared to $370,535 for the comparable period ending July 31, 1996, an increase of approximately 38.2%. During the quarter, the Company experienced a 14.6% increase in the sales of its ceramic lines and a 14.4% increase in its scribes line as the main contributors to this improvement. The quarter's net sales results was its highest quarter in its history.
Management believes this continues to portend a record annual sales for the current fiscal year. This belief is supported by the current bookings of $497,000, slightly higher than the last quarter's $468,430 at a comparable point in time. The Company's gross profit margin for the second quarter of 1997 was 63.3%, a reduction of 11.2% as compared to the first quarter of 1996 when it was 71.3%. On the other hand, the selling, general and administrative expense as a percentage of sales decreased by 9.6% to 56.5%. The gross profit margin impact due, Management believes primarily to the satisfaction of certain one time obligations and the greater volume of low profit margin products, however, had a greater affect so that, in spite of the higher sales level, income from operations for the two quarters were approximately the same, $34,837 for the 1997 quarter as compared to $32,769 for the 1996 quarter, or only 6.3% higher. Management believes that income from operations is the key statistic in evaluating the Company's profitability since the utilization of a non-cash income tax deferred benefit distorts net income.
For the six months ended July 31, 1997 compared to the six months ended July 31, 1996, net sales increased to $934,780 from $747,002 or 25.1%, gross profit margins dipped a little while selling, general and administrative expenses improved somewhat. The impact of these offsetting cost factors left income from operations at approximately the same level; namely: $90,484 for the six months ended July 31, 1997 and $94,255 for the six months ended July 31, 1996 or 4.0% lower in 1997. Again, the $44,803 net income in the 1997 half year was lessened by a non-cash deferred income tax benefit of $26,564, while the $76,353 net income in the 1996 half year was not. For the remainder of fiscal year 1997, Management anticipates that net sales will continue at the same high levels so that they believe net sales can reach an annual record high of approximately $2.0 million.
Additionally, Management feels that income from operations will also reach a record high of approximately $200,000. It bases this projection on:
1. The current level of bookings and the strong indications of follow-on orders noted by its customers.
2. Whereas during the second quarter of 1997 DTI Technology, SDN, BHD, its Malaysian subsidiary, reflected six month sales of only $23,753 and a loss of $6,760, it will shortly begin to fill its $106,000 backlog, part of the Company's aforementioned $497,000 total, mostly consisting of dressers and resin blades.
3. The essentially completed satisfaction of the one-time obligations.
4. The anticipated growth of the higher gross profit product lines.
III. Liquidity and Capital Resources
At July 31, 1997, the Company's current ratio (i.e. current assets divided by current liabilities) stood at 2.69:1, as compared to 1.96:1 at January 31, 1997 and 1.84:1 in the comparable quarter ended July 31, 1996. This more than satisfactory classical measure of a company's ability to meet current obligations and any possible reduction of current assets reflects positively on the Company's liquidity and resources for its level of business and will contribute to more than satisfying its suppliers of goods and services.
During the second quarter of fiscal 1997, the Company made a final payment on a long term bank loan. At the same time, it began an effort to effect a new relationship with another bank more applicable to its size and type of business operation. It believes that it is about to enter into a suitable arrangement with a new bank offering it a line of credit of approximately $200,000 and, possibly, a term loan. The Company feels that this will be most timely considering its anticipated growth needs.
As regards investment financing, 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 a search program for opportunities both in Malaysia (tied into operation of DTI) and locally. 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 ended July 31, 1997, the Company purchased $12,000 of equipment and office machines as previously explained. As at the end of the quarter, there were no immediate 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 in the past had a significant effect in the economy in general, and, therefore, could effect the operating results of the Company in the future.
Company contact for Investor Information
Parrex Associates, Inc. Attn: Paul B. Alper
201-492-2208
FAX 201-492-2550 |
