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 October 31, 1998
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
SETO HOLDINGS, INC.
(Formerly 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)
554 North State Road, Briarcliff Manor, New York 10510
(Address of principal executive offices)
Issuer's telephone number, including area code:(914) 923-5000
-------------------
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 October 31, 1998
Common Stock, par value $.001
per share 11,723,500
<PAGE>
INDEX
Part I. Financial Information
Item 1. Condensed consolidated financial statements:
Balance sheet as of October 31, 1998 F-2
Statement of income for the nine and three months
ended October 31, 1998 and 1997 F-3
Statement of comprehensive income for the nine and
three months ended October 31, 1998 and 1997 F-4
Statement of cash flows for the nine months ended
October 31, 1998 and 1997 F-5
Notes to condensed consolidated financial statements F-6 - F-15
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONDENSED CONSOLIDATED BALANCE SHEET - OCTOBER 31, 1998
(UNAUDITED)
ASSETS
Current assets:
Cash $ 69,764
Accounts receivable, less allowance
for doubtful accounts of $7,350 443,514
Inventory 700,908
Prepaid expenses and other assets 63,908
Deferred tax asset, current portion 69,316
----------
Total current assets 1,347,410
Property and equipment, net of depreciation 1,177,551
----------
Other assets:
Security deposits 13,222
Goodwill, net of amortization 117,231
Deferred tax asset, net of current portion 138,632
----------
269,085
-----------
$2,794,046
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 60,706
Notes payable, bank 275,000
Accounts payable 265,486
Accrued expense and payroll taxes payable 145,523
----------
Total current liabilities 746,715
-------
Long-term debt, net of current portion 199,973
----------
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 11,723,500 shares issued and
outstanding 11,723
Additional paid in capital 3,412,094
Currency translation adjustment ( 208,532)
Retained earnings ( 1,367,927)
----------
1,847,358
---------
$2,794,046
==========
See notes to condensed consolidated financial statements
F-2
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES)
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE AND THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Three Months
ended ended
October 31, October 31,
1998 1997 1998 1997
---- ---- ---- ----
Net sales $ 1,882,093 $1,491,823 $ 684,811 $ 557,043
Cost of sales 670,722 497,013 322,216 183,934
----------- ---------- ---------- -----------
Gross profit 1,211,371 994,810 362,595 373,109
Selling, general and
administrative expenses 997,961 817,536 322,765 286,320
----------- ---------- ---------- -----------
Income (loss) from
operations 213,410 177,274 39,830 86,789
----------- ---------- ---------- -----------
Other charges (credits):
Interest expense 33,271 27,667 9,301 8,548
Miscellaneous income ( 21,056) ( 21,056)
----------- ---------- ---------- -----------
12,215 27,667 ( 11,755) 8,548
----------- ---------- ---------- -----------
Income before income taxes 201,195 149,607 51,585 78,241
Deferred income tax
expense (benefit) 6,302 40,600 ( 4,607) 14,036
----------- ---------- ---------- -----------
Income from continuing
operations 194,893 109,007 56,192 64,205
----------- ---------- ---------- -----------
Discontinued operations:
Income (loss) from
operations of Teik Tatt
Holding Co., SDN BHD 1,017,537 ( 56,366)
Loss on disposal of Teik
Tatt Holding Co., SDN
BHD ( 1,447,290) ( 1,390,924)
----------- ---------- ---------- -----------
( 429,753) ( 1,447,290)
----------- ---------- ---------- -----------
Net income (loss) ($ 234,860) $ 109,007 ($1,391,098) $ 64,205
=========== ========== ========== ===========
Earnings per share:
Income from continuing
operations $ 0.01 $ 0.01 $ 0.00 $ 0.00
Income from
discontinued operations 0.05 0.01
Loss from discontinued
operations ( 0.07) ( 0.07) 0.00
----------- ---------- ---------- -----------
Net income (loss) per
share ($ 0.01) $ 0.01 ($ 0.06) $ 0.00
=========== ========== ========== ===========
Weighted average number
of common shares
outstanding 19,400,645 13,472,500 19,103,391 13,867,500
=========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
NINE AND THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Three Months
ended ended
October 31, October 31,
1998 1997 1998 1997
---- ---- ---- ----
Net income (loss) ($234,860) $109,007 ($1,447,464) $64,205
Other comprehensive income, net of tax:
Foreign currency
translation adjustment 34,428
------
Comprehensive income ($200,432) $109,007 ($1,447,464) $64,205
======== ======== ========== =======
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Operating activities:
Net income (loss) ($ 234,860) $109,007
Loss from discontinued operations 429,753
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and amortization 44,079 31,949
Changes in other operating assets and
liabilities:
Accounts receivable ( 124,532) ( 108,931)
Inventories ( 273,135) ( 70,246)
Other assets 8,505 ( 800)
Prepaid expenses and other current assets ( 2,797) 40,768
Accounts payable, accrued expenses and
payroll taxes payable 58,672 ( 40,756)
---------- ---------
Net cash used in operating activities ( 94,315) ( 39,009)
---------- --------
Investing activities:
Purchase of property and equipment ( 251,971) ( 50,646)
---------- --------
Net cash used in investing activities ( 251,971) ( 50,646)
---------- --------
Financing activities:
Proceeds from financing 299,352 217,349
Proceeds from issuance of common stock 120,000 500
Decrease in notes payable, shareholders' ( 84,462)
Payment of debt ( 97,814) ( 102,094)
---------- --------
Net cash provided by financing activities 321,538 31,293
---------- --------
Effect of exchange rate changes on cash and
cash equivalents ( 11,588)
---------- --------
Net decrease in cash ( 36,336) ( 58,362)
Cash, beginning of period 106,100 116,334
---------- --------
Cash, end of period $ 69,764 $ 57,972
========== ========
Supplemental disclosure:
Cash paid during the period for:
Interest $2,193,281 $ 22,761
========== ========
Income taxes $ 0 $ 0
========== ========
Supplementary schedule of non-cash investing and financing activities:
Issuance of common stock for purchase of
subsidiary $ 757,894 $ 0
========== ========
Issuance of common stock for consulting fees
and services $ 18,110 $ 0
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly 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, 1998 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 and other
base material tools used to cut and separate electronic components and
devices. In addition, it has four subsidiaries with their own product
lines.
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 7) of the Company's $.001 par value common stock
(see also Note 5).
The Company's wholly-owned subsidiary, DTI Technology, SDN BHD is a
Malaysian corporation 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.
The Company's wholly-owned subsidiary, Teik Tatt Holding Co., SDN BHD, a
Malaysian corporation, manufactures rubber bands, plastic ropes and
recycles plastic and metal from wire cable, electronic devices and
circuit broads. In November 1997, the Company issued 10,000,000 shares
of unregistered common shares in exchange for 100% of the outstanding
shares of Teik Tatt Holding Co., SDN BHD, the value of the shares being
the net book value of the acquired Company of $6,560,040 or
approximately $.66 per share. The acquisition was accounted for as a
purchase. This transaction was reversed effective September 15, 1998
F-6
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Organization of the Company (continued):
when the Company returned all shares that it owned of Teik Tatt Holding
Co. in exchange for the 10,000,000 shares of its common stock, which
were immediately cancelled.
The Company's other wholly-owned subsidiary, Fuji Fabrication, SDN BHD,
a Malaysian corporation, manufactures cellular phone replacement
batteries. On June 30, 1998, the Company issued 100,000 shares of its
unregistered common shares in exchange for 100% of the outstanding
shares of Fuji Fabrication, SDN BHD, the value of the shares being
$1.00 per share. The acquisition was accounted for as a purchase.
On September 1, 1998, the Company issued 1,270,000 shares of its common
stock to acquire a Malaysian company, Southsonic Corporation, Inc., SDN
BHD. Southsonic's only asset consists of four buildings which the
Company intends to occupy. The value of the purchase amounted to
$657,894 or approximated $.51 per share. The acquisition was accounted
for as a purchase.
3. Summary of significant accounting policies:
Principles of consolidation:
The consolidated financial statements of Semicon Tools, Inc. and
subsidiaries include all the accounts of Semicon Tools, Inc., East
Coast Sales Company, DTI Technology, SDN BHD, Fuji Fabrication, SDN
BHD and Southsonic Corporation, Inc., SDN BHD after elimination of
all significant intercompany transactions and its subsidiaries
accounts. The financial statements give retroactive effect to the
acquisition of DTI Technology, SDN BHD which has been accounted for
as an acquisition as if in a pooling of interest method at historical
cost of the assets acquired.
4. Property and equipment:
Major classifications of property and equipment are as follows:
Buildings and improvements $ 682,387
Manufacturing equipment 1,015,318
Office equipment 20,770
----------
1,718,475
Less accumulated depreciation 540,924
----------
$1,177,551
==========
F-7
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. 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
$37,917 as of October 31, 1998.
On June 30, 1998, the Company acquired Fuji Fabrication, SDN BHD for a
cost of $100,000. The purchase price exceeded fair value of the assets
by $20,999, which amount was assigned to goodwill and is being
amortized over a forty year period. Accumulated amortization of
goodwill aggregated $131 as of October 31, 1998.
6. Commitments and contingencies:
In November 1995 the Company moved its operations and was obligated
under a lease agreement for office and manufacturing facilities. This
lease expired on May 31, 1998. Rent expense amounted to $9,641 for the
nine months ended October 31, 1998 and $28,923 for the nine months
ended October 31, 1997.
In April 1998, the Company moved its New York operations and is
currently obligated under a lease agreement with a related party which
expires on April 30, 2013. Annual rent expense is as follows: $60,000
for each of the first five years, $66,000 for each of the second five
years and $72,000 for each of the final five years. The Company is also
obligated for insurance and the increase in real estate taxes over the
base year as stipulated in the lease. The Company also paid two months
rent at $3,000 per month to an outside party for the same premises
before the property was purchased by the related party. This lease
requires the following future minimum rental payments:
October 31, 1999 $ 60,000
October 31, 2000 60,000
October 31, 2001 60,000
October 31, 2002 60,000
October 31, 2003 60,000
Thereafter 660,000
--------
$960,000
========
Rent expense amounted to $45,000 for the nine months ended October 31,
1998.
F-8
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and contingencies (continued)
The Company also leases three vehicles under operating leases with terms
expiring through 1998. Total lease expense was $26,576 and $27,538 for
the period ended October 31, 1998 and 1997, respectively.
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 by one of the employees.
7. Common stock:
During the nine months ended October 31, 1998, the Company issued
450,000 shares of its common shares with net proceeds of $120,000 upon
the exercise of certain common stock purchase options.
The Company issued 100,000 shares of its common shares to acquire Fuji
Fabrication, SDN BHD and 1,270,000 shares to acquire Southsonic
Corporation, Inc., SDN BHD. It also issued 36,000 shares for certain
consulting and professional services rendered.
8. Long-term debt:
Long-term Current
Rate Portion Portion Maturity
Note payable, Bank of New York (a) Prime + 1% $ 25,305 $21,000 2001
Note payable, shareholder (b) 15% 100,000 2000
Note payable, shareholder (c) 10% 74,668 39,706 2002
-------- -------
$199,973 $60,706
(a) Note payable, Bank of New York, is payable in monthly
installments of $1,386, excluding interest. Machinery and
equipment with a cost of $57,000 is pledged as collateral on this
note.
(b) Note payable, shareholder, became due when the note to Citibank
was paid in full in 1997. The shareholder has waived his demand
right and the Company is currently negotiating terms for payment
of the note.
F-9
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Long-term debt (continued):
(c) On April 23, 1997, the Company renegotiated an existing loan
with a certain shareholder resulting in a new obligation
payable in monthly installments of $4,053 including interest at
10%.
The maturities of these loans are as follows:
October 31, 1999 $ 60,706
October 31, 2000 60,488
October 31, 2001 39,485
October 31, 2002 100,000
--------
$260,679
========
9. Notes payable, banks:
The Company also has an outstanding line of credit with the Bank of New
York for $350,000 at October 31, 1998. The loan is secured by the
personal guarantee of one of the Company's major shareholders and the
assets of Semicon Tools, Inc. At October 31, 1998, the Company had
utilized $275,000 of this line.
10. Income taxes:
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 for the periods ending
October 31, 1998 and 1997. 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.
F-10
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Income taxes (continued):
Provision for income taxes (benefit):
1998 1997
---- ----
Current $ 0 $ 0
Deferred 6,302 40,600
------ -------
Total expense $6,302 $40,600
====== =======
Areconciliation of the income tax expense provision at the federal
statutory rate to the income tax provision at the effective tax rate is
as follows:
1998 1997
---- ----
Computed tax at the expected statutory rate $58,508 $40,770
Surtax exemption ( 6,875)
State income taxes 2,005
Foreign income ( 47,336) ( 170)
------- -------
Income tax expense $ 6,302 $40,600
======= =======
The components of deferred tax assets and liabilities consist of the
following:
1998 1997
---- ----
Deferred tax asset:
Net operating loss carryforward $480,000 $498,150
-------- --------
Total deferred tax asset 498,150
Valuation allowance 272,052 445,000
-------- --------
$207,948 $ 53,150
======== ========
F-11
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Income taxes (continued):
The Company has made adjustments to eliminate the tax provisions for
foreign earnings since said earnings are undistributed and will be
permanently invested. The cumulative amounts of foreign undistributed
earnings are $1,509,942 at October 31, 1998.
11. Employment agreements:
On May 1, 1996, the Company entered into employment agreements with its
President and Vice President. The term of the agreements covers a five
year period expiring April 30, 2003. 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 the increase in
Semicon Tools/East Coast Sales consolidated net income over the net
income from the previous years exclusive of Teik Tatt Holding Co. Sdn
Bhd. Each employee also received 1,000,000 stock options at $.25,
1,000,000 stock options at $.10 and 500,000 stock options at $.50. The
options were not part of the 1997 Non-statutory Stock Option Plan
effectuated March 25, 1997. As of October 31, 1998, none of these
options had been exercised.
On July 15, 1998, the Company entered into an employment agreement with
the acting secretary of the Company. The term of the agreement covers a
five year period expiring July 15, 2003. Compensation is set at a base
of $55,000 with a bonus of 2% of any increase in Semicon Tools/East
Coast Sales consolidated net income over the net income from the
previous years exclusive of Teik Tatt Holding Co, SDN, BHD. The
employee also received 500,000 stock options exercisable at $.50 per
share, none of which have been exercised as of October 31, 1998. These
options were not part of the 1997 non-statutory stock option Plan
effectuated March 25, 1997.
12. Consulting agreements:
On January 1, 1998, the Company granted a consultant an option to
purchase 100,000 shares of common stock of Semicon Tools, Inc. at a
price of $.05 per share for a period of three years from the date of
signing. This option was issued for services the consultant provided
which were related to the Teik Tatt acquisition. The shares underlying
these options were issued pursuant to the Company's 1997 Non-Statutory
Stock Option Plan. The option was exercised February 6, 1998.
F-12
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Consulting agreements (continued):
On February 9, 1998, the Company entered into a consulting agreement for
the period February 9, 1998 to December 31, 1998. The consultant will
assist Semicon Tools, Inc. in strategic planning, corporate planning,
merger and acquisition and divestitive advice. In consideration for the
consulting services, Semicon granted an option to the consultant to
purchase 600,000 shares of common stock of Semicon Tools, Inc. at a
price of $.50 per share for a period of two years commencing four
months from the date of signing. This option was reduced to 300,000
shares at $.25 per share.
The consultant is also entitled to a finders fee in the event the
consultant first introduces a potential acquisition to the Company and
such acquisition is ultimately consummated. The agreement calls for a
payout based on the amounts expended for such acquisition. On March 12,
1998, the Company and the consultant extended the agreement dated
February 9, 1998 for a period of twelve months.
Also on February 9, 1998, the Company entered into a consulting
agreement for the period February 9, 1998 to December 31, 1998. The
consultant will assist the Company in strategic planning, corporate
planning, merger and acquisition and divestiture advice. In
consideration for the consulting agreement The Company granted an
option to purchase 100,000 shares of common stock at a price of $.50
per share for a period of two years commencing four months from the
date of the signing of this agreement. The shares underlying these
options will be registered under the Securities Act of 1933. The
consultant is also entitled to a finders fee in the event the
consultant first introduces a potential acquisition to the Company and
such acquisition is ultimately consummated. The agreement calls for a
payout based on the amounts expended for such acquisition.
On July 1, 1998, the Company entered into a consulting agreement for the
period July 1, 1998 to June 30, 1999. The consultant will assist
Semicon Tools, Inc. in strategic planning, corporate planning, mergers
and acquisitions and divestiture advise. In consideration for the
consulting agreement the Company granted an option to purchase
1,000,000 shares of its common stock at a price of $.50 per share for
one year from the date of signing this agreement. This option was
reduced to 100,000 shares at $.30 per share.
Also on July 1, 1998, the Company entered into an agreement with a
consultant for investor relations counsel for a three month period. In
consideration for these services, the consultant will be paid $6,500
and granted an option to purchase 50,000 common shares at $.87 per
share, with the option expiring July 1, 2000.
F-13
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Consulting agreements (continued):
On February 18, 1998, the Company entered into an agreement with a
consultant to provide the Company with a public relations program. The
term of the agreement is from February 19, 1998 to August 18, 1998, a
six month period. The agreement can be cancelled anytime after the
first 90 days and calls for a monthly fee of $2,500 plus out of pocket
costs not to exceed $2,000. This agreement was not extended and expired
August 18, 1998.
13. Computation of earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C>
Nine months Nine months
ended ended
October 31, October 31,
1998 1997
Weighted average number of
common shares outstanding 16,565,649 9,742,500
Assumed conversion of
stock options 2,835,000 4,000,000
---------- ----------
Weighted average number of
common shares outstanding 19,400,649 13,742,500
========== ==========
</TABLE>
14. Acquisition of subsidiary, Fuji Fabrication, SDN BHD:
On June 30, 1998, the Company purchased 100% of the outstanding common
shares of Fuji Fabrication, SDN BHD in a transaction to be accounted
for as a purchase. The Company issued 100,000 shares of its common
stock valued at $.50 per share.
The assets acquired and liabilities assumed as of June 30, 1998, the
date of the acquisition, are as follows:
Current assets $ 72,511
Non-current assets 23,795
------
96,306
Current liabilities 17,305
------
Net assets acquired 79,001
Purchase price 100,000
-------
Excess of purchase price over
net assets acquired $ 20,999
========
F-14
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
15. Acquisition of subsidiary, Southsonic Corporation, Inc., SDN BHD:
On September 1, 1998, the Company purchased 100% of common shares of
Southsonic Corporation, Inc., SDN BHD in a transaction to be accounted
for as a purchase. The Company issued 1,270,000 shares of its common
stock valued at $.51 per share.
The assets acquired consisted of four buildings, with a value of
$657,894.
16. Disposition of subsidiary, Teik Tatt Holding Co., SDN BHD:
As described in Note 2, the acquisition of 100% of the outstanding
shares of Teik Tatt Holding Co., SDN BHD was reversed effective
September 15, 1998. The operating results of Teik Tatt Holding Co., SDN
BHD for the nine and three months ended October 31, 1998 are shown
separately in the accompanying statement of income. The net sales of
Teik Tatt Holding Co., SDN BHD for the nine and three months ended
October 31, 1998 were $22,297,199 and $3,505,431, respectively.
F-15
<PAGE>
Item 2. Managements Discussion and Analysis or Plan of Operation
General
1. On September 15, 1998, the Company reversed its acquisition of Teik Tatt
Holding (1979) Sdn Bhd ("TTH") because of the unsuspected disappearance and
reduction of credit facilities in Malaysia. This turn of events mitigated
against TTH's growth and dimmed its future. Nevertheless, the transaction was
mutually deemed acceptable and in the best interests of both parties.
The discontinuance of the TTH subsidiary and its operations reflects on the
Company's Statement of Income as a non-cash, accounting transaction except for
approximately $50,000 under the 1998 nine months column. The latter amount was
expended for purposes of public relations, financing searches and miscellaneous
expenses directly associated with TTH's business and presence in the corporate
structure. These transactions are one time events and for this reason,
Management feels it will address the portion of the Statement of Income above
the Discontinued Operations line for the remainder of the discussion.
2. In spite of the dissociation from TTH, the Company still has a presence in
Malaysia which it expects will become more significant in time, especially Fuji
Fabrication Sdn Bhd. Accordingly, economic and political conditions there, and
in Southeast Asia as a whole, will remain of importance to the Company.
Management believes that steps taken by the Malaysian Government since the
outset of the areas downturn, have had a calming and stabilizing effect. In any
event, although no assurance can be given, the Company believes that there will
be no adverse effect on its operations or financial condition during 1999.
FINANCIAL CONDITION
The Company's financial condition remains healthy. Reflecting its highest
level of sales for a quarter from its long existing business and the advent of
the revenues beginning to be derived from its cellular phone battery product
line, a comparison of the Balance Sheet at October 31, 1998 to July 31, 1998
follows:
1. Total assets increased by 1.5% to $2,794,046 and current assets
increased by 2.8% to $1,137,410.
2. Mainly because accounts receivable increased by 50.6% to match the
sales growth, current liabilities increased by 3.1% to $746,715.
3. Other Balance Sheet comparisons which Management views as also
consistent with increased revenues are:
a. Long term debt, net of current portions,
increased by 3.4%
b. Current debt items increased by 9.6% c. Cash decreased by 56.5%
RESULTS OF OPERATIONS
Discounting the TTH results while it was a part of the Company, for the nine
months ended October 31, 1998, SETO experienced its highest sales in the history
of the Company. In addition, for the nine month period ending October 31, 1998,
its income for the continuing operations is also its highest. These results are
attributable to most of the present product lines, especially ceramics, dicing
blades and scribes and the start of the sales for the cellular phone batteries.
The Company anticipates this trend to continue for the balance of the fiscal
year and into next year. Management reports that the annual sales will be its
highest for the continuing business product lines.
In the nine months ended October 31, 1998 compared to the nine months ended
October 31, 1997, sales increased from $1,491,823 to $1,882,093 or 26%; gross
profit margins continued in the 65% range and income from continuing operations
was $194,893, compared to 1997's $109,007 or an increase of 78.8% ($85,886).
Sales for the quarter ended October 31, 1998 for the continuing operations
was the highest quarter in the Company's history. Net sales for the quarter
ended October 31, 1998 were $684,811 as compared to $559,043 for the comparable
period ending October 31, 1997, an increase of 23%. Income from continuing
operations for the quarter ended October 31, 1998 were $56,192, 8.2% of sales,
compared to a slightly higher $64,205, or 11.5% for the comparable period ended
October 31, 1997. An out of normal cost of sales of 47.1 % due to a unique mix
of products was the cause of the anomaly.
With regard to cost of sales, as the cellular phone battery business grows
it will impact the average gross profit historical figure of 65%. The material
cost of manufacturing the batteries will be the reason whereas the labor costs
remain in line. As volume grows cost of materials will decrease considerably.
Management continues to take steps to hold expenses at its current favorable
level and to identify new and more economical sources of supply.
Liquidity and Capital Resources
At October 31, 1998, the Company had current assets of $1,347,410 and
current liabilities of $746,715 yielding a positive working capital position of
$600,695 and a current ratio of 1.8:1. These routine measures of a company's
ability to meet current obligations reflects positively on the Company's
liquidity and internal resources for the current level of business and will
contribute to satisfying its suppliers of goods and services concerned about
credit-worthiness.
As for growth capital, to some extent it should be satisfied by the recent
increase received from the Company's Bank in its outstanding line of credit
which rose to $500,000 from $350,000. However because of the anticipated
increase in sales, especially in its cellular phone battery products line
manufactured in Malaysia by its wholly-owned subsidiary, Fuji Fabrication Sdn
Bhd, the Company has been seeking additional capital, a combination of debt and
equity. However, no definite funding source has yet been identified and no
assurance can be given that such financing will be obtained on commercially
reasonable terms, or at all.
During the quarter, certain stock options were exercised in the amount of
$35,000 and the Company initiated its stock buyback program by purchasing 29,400
shares in October 1998 and 20,000 in December 1998. Although the Company still
feels that the market price of the its shares are undervalued, it has decided to
delay its buyback program for a while and utilize the capital for the growth of
the Company.
During the quarter ending October 31, 1998, the Company purchased a computer
precision saw for $33,000 in conjunction with the increase of its ceramic value
added fabrication product line, of which $24,000 was financed. As at the end of
the quarter, there were no material commitments for like capital expenditures.
Effects of Foreign Currency Fluctuations
The Company's foreign operations are subject to certain risks related to
fluctuations in foreign currency exchange rates. As of now, the fixing of the
Malaysian ringgit at 3.8 to the US dollar has stabilized matters and mitigated
any material adverse effect on net income. However in the future, that exchange
rate could float and fluctuate and could impact results of operations or
financial position. If it does, the Company does not expect results will be
materially changed.
Disclosure about Market Risk
The Company is exposed to market risks primarily from changes in interest rates
and foreign currency exchange rates. To manage exposure to these fluctuations,
the Company occasionally enters into various hedging transactions. The Company
does not use derivatives for trading purposes, or to generate income or to
engage in speculative activity, and the Company never uses leveraged
derivatives. The Company does not use derivatives to hedge the value of its net
investments in these foreign operations. The Company exposure to foreign
exchange rate fluctuations results from investment in foreign ventures in
Malaysia and from the Company's share of the earnings of these operations, which
are denominated in the Malaysian ringgit.
Year 2000 costs
The Company currently operates numerous date-sensitive computer application and
network systems throughout its business. As the century change approaches, it is
essential for the Company to ensure that these systems properly recognize the
year 2000 and continue to process operations and financial information. The
Company recently upgraded its computer system and is year 2000 compliant.
Impact of Inflation
Although it is difficult to predict the impact of inflation on costs and
revenues of the Company in connection with the Company's products, the Company
does not anticipate that inflation will materially impact its costs of
operations or the profitability of its products.
Forward-Looking Statements
This "Managements Discussion and Analysis or Plan of Operation", contains
statements which are not historical facts and are forward- looking statements
which reflect managements expectations, estimates and assumptions. Such
statements are based on information available at the time this form 10QSB was
prepared and involved risks and uncertainties that could cause future results,
performance or achievements of the Company to differ significantly from
projected results. Factors that could cause actual future results to differ
materially include, among others, the risks of doing business in Malaysia and
southeast Asia, including, without limitation: economic and political
conditions, foreign currency translation risks, tariffs and other foreign trade
policies and dependance on inexpensive labor in such countries, partial
dependence on the semiconductor manufacturing industry, availability of raw
materials, intense competition and technological obsolescence.
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<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
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