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 July 31, 1999
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 July 31, 1999
Common Stock, par value $.001
per share 10,949,100
<PAGE>
INDEX
Part I. Financial Information
Item 1. Consolidated financial statements:
Balance sheet as of July 31, 1999 F-2
Statement of income for the six and three
months July 31, 1999 and 1998 F-3
Statement of comprehensive income for the six
and three months ended July 31, 1999 and 1998 F-4
Statement of cash flows for the six months ended
July 31, 1999 and 1998 F-5
Notes to consolidated financial statements F-6 - F-14
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)
CONSOLIDATED BALANCE SHEET - JULY 31, 1999
ASSETS
Current assets:
Cash $ 83,338
Accounts receivable, less allowance
for doubtful accounts of $10,500 508,728
Inventory 836,379
Prepaid expenses and other assets 166,439
Deferred tax asset, current portion 110,592
----------
Total current assets 1,705,476
---------
Property and Equipment 624,898
-------
Other assets:
Goodwill, net of amortization 114,275
Security deposits 11,037
Deferred tax asset, net of current portion 224,534
Loan receivable, officer 5,897
----------
355,743
-------
$2,686,117
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 164,041
Notes payable, bank 270,000
Accounts payable 391,690
Accrued expenses 34,568
---------
Total current liabilities 860,299
---------
Long-term debt, net of current portion 319,481
----------
Deferred lease liability 7,500
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 10,978,500 shares issued 10,979
Additional paid in capital 2,913,855
Currency translation adjustment ( 155,290)
Retained earnings (deficit) ( 1,261,681)
----------
1,507,863
---------
Less common shares held in treasury, 29,400
shares at cost 9,026
-----
Total shareholder's equity 1,498,837
---------
$2,686,117
==========
See notes to consolidated financial statements.
F-2
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES)
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONSOLIDATED STATEMENT OF INCOME
SIX AND THREE MONTHS ENDED JULY 31, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Six Months Three Months
ended ended
July 31, July 31,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 1,761,845 $1,197,282 $ 861,058 $ 616,457
Cost of sales 871,065 348,506 377,810 232,075
----------- ---------- ---------- -----------
Gross profit 890,780 848,776 483,248 384,382
Selling, general and
administrative expenses 762,493 675,196 366,825 355,148
----------- ---------- ---------- -----------
Income from operations 128,287 173,580 116,423 29,234
----------- ---------- ---------- -----------
Other income (expenses):
Interest expense ( 44,631) ( 23,970) ( 21,207) ( 13,863)
Loss on foreign
currency exchange ( 796) 492
----------- ---------- ---------- -----------
( 45,427) ( 23,970) ( 20,715) ( 13,863)
----------- ---------- ---------- -----------
Income before income taxes
(benefit) 82,860 149,610 95,708 15,371
Income taxes (benefit) ( 6,553) 10,909 10,347 7,309
----------- ---------- ---------- -----------
Income from continuing
operations 89,413 138,701 85,361 8,062
Discontinued operations:
Income from operations
of subsidiary 1,073,904 470,130
----------- ---------- ---------- -----------
Net income $ 89,413 $1,212,605 $ 85,361 $ 478,192
=========== ========== ========== ===========
Earnings per share
information:
Basic:
Earnings per share
from continuing
operations $ 0.01 $ 0.01 $ 0.01 $ 0.00
Earnings per share
from discontinued
operations 0.00 0.04 0.00 0.02
-------------- ----------- -------- ----------
Net income per share $ 0.01 $ 0.05 $ 0.01 $ 0.02
============== =========== ======= ===========
Diluted:
Earnings per share
from continuing
operations $ 0.01 $ 0.01 $ 0.00 $ 0.00
Earnings per share
from discontinued
operations 0.00 0.04 0.00 0.02
------------- ----------- ---------- ------------
Net income per share $ 0.01 $ 0.05 $ 0.00 $ 0.02
============== =========== ========== ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES)
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
SIX AND THREE MONTHS ENDED JULY 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Six Months Three Months
ended ended
July 31, July 31,
1999 1998 1999 1998
---- ---- ---- ----
Net income $89,413 $1,212,605 $85,361 $478,192
Other comprehensive income, net of tax:
Foreign currency
translation adjustment 34,428 ( 437,941)
------- ---------- ------- --------
Comprehensive income $89,413 $1,247,033 $85,361 $ 40,251
======= ========== ======= ========
</TABLE>
NOTE: Net income includes
discontinued operations
in prior year
See notes to consolidated financial statements.
F-4
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1998
1999 Restated
Operating activities:
Income from continuing operations $ 89,413 $ 85,361
Adjustments to reconcile net income to cash
provided by continuing operations:
Depreciation and amortization 35,408 26,415
Compensatory stock issued 43,300
Changes in other operating assets and
liabilities:
Accounts receivable ( 120,264) ( 75,740)
Inventories ( 75,681) ( 261,725)
Prepaid expenses and other current assets 3,625 ( 36,820)
Deferred tax assets ( 11,126)
Other assets 4,513 ( 7,847)
Accounts payable, and accrued expenses 121,691 144,983
Deferred lease liability 3,000
-------- --------
Net cash provided by (used in) operating
activities 93,879 ( 125,373)
-------- --------
Investing activities:
Purchase of property and equipment ( 78,607) ( 129,427)
Increase (decrease) in loan receivable, officer 4,917 ( 48,128)
-------- --------
Net cash used in investing activities ( 73,690) ( 177,555)
-------- --------
Financing activities:
Proceeds from issuance of common stock 67,500 85,000
Proceeds from financing 240,000 250,000
Payment of debt ( 302,175) ( 84,512)
-------- --------
Net cash provided by financing activities 5,325 250,488
-------- --------
Effect of exchange rate changes on cash ( 8,238) 106,666
-------- --------
Net increase in cash 17,276 54,226
Cash, beginning of period 66,062 106,573
-------- --------
Cash, end of period $ 83,338 $160,799
======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization of the Company:
Seto Holdings, Inc. (the "Company"), a Nevada corporation, is primarily in
the business of manufacturing and selling small precision disposable diamond and
other base material tools used to cut and separate electronic components and
devices and cellular phone batteries. 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 60,000 shares of the Company's
$.001 par value common stock.
The Company's wholly-owned subsidiary, DTI Technology, SDN BHD is a
Malaysian company which manufactures a product line similar to that of Seto
Holdings, Inc. Seto Holdings, 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 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.
2. Principles of consolidation:
The consolidated financial statements of Seto Holdings, Inc. and
subsidiaries include all the accounts of Seto Holdings, Inc., East Coast Sales
Company, DTI Technology, SDN BHD, Fuji Fabrication, SDN BHD after elimination of
all significant intercompany transactions and accounts. The financial statements
give retroactive effect to the disposition of Teik Tatt Holding Co., SDN BHD.
F-6
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Nature of operation, risks and uncertainties:
The Company currently has a minuscule share of the dicing blade, ceramics
and cellular phone battery markets. There can be no assurance that the Company
will be able to increase its market share or that the market will increase.
Furthermore, the Company faces the possibility of adverse market conditions from
technological changes, shifting product emphasis among competitors and the entry
of new competitors into the market.
4. Property and equipment:
Major classifications of property and equipment are as follows:
Leasehold improvements $ 146,700
Manufacturing equipment 995,229
Office equipment 62,934
----------
1,204,863
Less accumulated depreciation 579,965
-------
$ 624,898
==========
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 $40,435 at July 31, 1999.
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 $568 at July 31, 1999.
6. Commitments and contingencies:
The Company is obligated under a lease agreement with an entity owned by an
officer of the Company 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
F-7
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and contingencies (continued):
years. The Company is also obligated for insurance and the increase in
real estate taxes over the base year as stipulated in the lease. This
lease requires the following future minimum rental payments:
July 31, 2000 $ 60,000
July 31, 2001 60,000
July 31, 2002 60,000
July 31, 2003 60,000
July 31, 2004 64,500
Thereafter 609,000
--------
$913,500
========
Rent expense amounted to $36,158 for the six months ended July 31, 1999.
The Company also leases three vehicles under operating leases with terms
expiring through 1999. Total lease expense was $16,683 for the six months ended
July 31, 1999.
7. Common stock:
During the six months ended July 31, 1999, the Company issued 450,000
shares of its common shares with net proceeds of $92,500 upon the exercise of
certain common stock purchase options.
8. Notes payable and long-term debt:
The Company has an outstanding line of credit with the a bank for $500,000.
Interest is payable monthly at a rate of 1% per year over prime. The loan is
secured by the personal guarantee of the Company's president and the assets of
Seto Holdings, Inc. At July 31, 1999, the Company had utilized $270,000 of this
line.
Long-term debt consists of the following:
Balance
July 31,
Rate 1999 Maturity
Notes payable:
Bank (a) 8.45% $145,833 2002
Shareholder (b) 10% 84,969 2002
Shareholder (c) 15% 156,639 2004
Shareholder (d) 10% 96,081 2002
--------
483,522
Less current portion 164,041
-------
$319,481
========
F-8
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Notes payable and long-term debt (continued):
(a) The note is payable in monthly installments of $4,164 plus
interest.
(b) The note is payable in monthly installments of $4,053 including
interest.
(c) The note is payable in monthly installments of $4,731,
including interest.
(d) The note is payable in monthly installments of $3,633 including
interest.
The maturities of these loans are as follows:
July 31, 2000 $164,042
July 31, 2001 172,895
July 31, 2002 115,062
July 31, 2003 31,523
9. Income taxes:
Provision for income taxes (benefit):
1999 1998
---- ----
Current $ 4,573 $ 0
Deferred ( 11,126) 10,909
------- -------
Total (benefit) expense ($ 6,553) $10,909
======= =======
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
1999 1998
---- ----
Income tax computed at the
federal statutory rates $12,047 $456,879
State taxes (net of federal benefit) 7,000 2,651
Foreign income ( 8,700) ( 448,621)
Reduction in valuation allowance ( 16,900) 0
------- --------
Net income tax expense (benefit) ($ 6,553) $ 10,909
======= ========
F-9
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income taxes (continued):
The components of deferred tax assets and liabilities consist of the
following:
Deferred tax asset:
Net operating loss carryforward $474,226
Total deferred tax asset 474,226
Valuation allowance 139,100
-------
$335,126
========
The Company has a net operating loss carry forward of approximately
$1,600,000 for federal and state purposes which will expire in 2008.
10. Employment and consulting agreements:
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 Seto Holdings, Inc./East Coast Sales consolidated
net income over the net income from the previous years. 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 July 31, 1999,
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 Seto Holdings, Inc./East Coast Sales consolidated
net income over the net income from the previous years. The employee also
received 500,000 stock options exercisable at $.50 per share, none of which have
been exercised as of July 31, 1999. These options were not part of the 1997
non-statutory stock option Plan effectuated March 25, 1997.
Consulting agreements:
On February 9, 1998, the Company entered into a consulting agreement for
the period February 9, 1998 to December 31, 1998, subsequently extended to
December 2000 for strategic planning, corporate planning, merger and acquisition
and divestiture advice. In consideration for the consulting services, the
Company granted an option to the consultant to purchase
F-10
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employment and consulting agreements (continued):
Consulting agreements (continued):
600,000 shares of common stock at a price of $.50 per share for a period of
two years commencing four months from the date of signing. This option was
reduced to 300,000 shares at $.25 per share. The options were issued pursuant to
the Company's 1997 non-statutory Stock Option Plan. 140,000 shares were issued
during the six months ended July 31, 1999.
Also on February 9, 1998, the Company entered into a consulting agreement
for the period February 9, 1998 to December 31, 1998 and subsequently extended
to December 2000 for 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. 50,000 options have been
exercised.
On March 10, 1999, the Company entered into a consulting agreement for a
one year period through March 2000 for investor public relations. In
consideration for the consulting agreement, the Company paid $5,000 and issued
150,000 shares of unregistered Company common stock. In addition, the Company
granted options to purchase 50,000 shares of common stock at $.75 per share,
50,000 shares at $1.50 per share and $2.00 per share for a period of one year
from the date of signing the agreement. None of these options have been
exercised as of July 31, 1999.
On April 19, 1999, the Company entered into a consulting agreement for the
six month period May 1, 1999 through October 31, 1999, with an option to renew
for an additional six months. The consultant received 10,000 shares of
unregistered Company common stock.
11. Computation of earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Six Months Three Months
ended ended
July 31, July 31,
1999 1998 1999 1998
---- ---- ---- ----
Weighted average number of
common shares outstanding -
basic 10,828,575 10,075,753 10,948,774 10,137,000
Assumed conversion of
stock options 6,277,500 2,645,000 6,310,000 2,645,000
---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding-
diluted 17,106,075 12,720,753 17,258,774 12,782,000
========== ========== ========== ==========
</TABLE>
F-11
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Common stock options outstanding:
On March 25, 1997, the Company effectuated a Non-statutory Stock Option
Plan for the purpose of advancing the interests of the Company and its
stockholders by helping the Company obtain and retain the services of key
management employees, officers, directors and consultants. The Plan is
administered by the Non-statutory Stock Option Committee of the Board of
Directors of the Company. The committee has full authority and discretion to
determine the eligible participants to be granted the options, the date of
issuance, exercise price and expiration date. The total number of shares set
aside for the Plan is 6,500,000.
The Company has elected to continue use of the methods of accounting
described by APB-25 "Accounting for Stock Issued to Employees" which is based on
the intrinsic value of equity instruments and has not adopted the principles of
SFAS-123 "Accounting for Stock Based Compensation" effective for fiscal year
beginning after December 15, 1995, which is based on fair value. There is no
significant difference between compensation cost recognized by APB-25 and the
fair value method of SFAS-123. The Company has not recognized compensation on
the granting of options or warrants to employees and consultants since the fair
value of warrants or options is the same as or less than the exercise price.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Summary of options are as follows:
Exercise Expiration
Date Amount Price Date
Eugene Pian, Officer 05/01/96 1,000,000 $.25 05/01/01
Eugene Pian, Officer 02/13/97 1,000,000 .10 05/01/01
Eugene Pian, Officer 07/15/98 500,000 .50 06/30/03
Craig Pian, Officer 05/01/96 1,000,000 .10 05/01/01
Craig Pian, Officer 02/13/97 1,000,000 .10 05/01/01
Craig Pian, Officer 07/15/98 500,000 .50 06/30/03
Francine Pian, Officer 07/15/98 500,000 .50 06/30/03
Tan Hun Chin, Director 11/27/97 500,000 .10 11/27/00
Consultant 06/19/98 160,000 .25 06/09/00
Consultant 03/10/99 150,000 .75-2.00 03/12/00
</TABLE>
13. Principal products and segmentation of sales:
The Company's principal products are industrial ceramics, diamond cutting
tools and cellular phone batteries. The tools include dicing blades which are
components of precision electronic saws, scribes which are used to cut silicon
wafers, porcelain and ceramic molds and dressers which are used for the shading
and forming of grinding wheels in the machine tool industry and replacement
batteries for cellular phones.
F-12
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Principal products and segmentation of sales (continued):
Financial information relating to the principal industry segments and
classes of products:
<TABLE>
<CAPTION>
<S> <C>
July 31,
July 31, 1998
1999 Restated
Sales to customers:
Industry A:
Ceramics $ 730,563 $ 741,740
Industry B:
Diamond tools 337,583 257,799
Industry C:
Cellular batteries 575,254 33,403
Miscellaneous 118,445 164,340
---------- ----------
$1,761,845 $1,197,282
========== ==========
Operating profit or loss:
Industry A $ 226,249 $ 287,863
Industry B ( 103,823) ( 93,823)
Industry C 44,553 5,880
Miscellaneous ( 38,692) ( 26,340)
---------- -----------
$ 128,287 $ 173,580
========== ===========
Identifiable assets:
Industry A $ 483,495 $ 512,888
Industry B 1,274,724 1,143,656
Industry C 520,034 24,180
Miscellaneous 407,864 265,225
---------- ----------
$2,686,117 $1,945,949
========== ==========
Two customers each accounted for more than 10% of total sales and
together accounted for approximately 38% of total sales for the six
months ended July 31, 1999.
Foreign and domestic operations and export sales:
July 31, July 31,
1999 1998
Sales to customers:
United States $1,068,030 $ 725,792
Far East 317,485 215,751
Canada 376,330 255,739
---------- ----------
$1,761,845 $1,197,282
========== ==========
Operating profit:
United States $ 77,768 $ 105,224
Far East 23,117 31,279
Canada 27,402 37,077
---------- ----------
$ 128,287 $ 173,580
========== ==========
Identifiable assets:
United States $1,403,328 $1,244,361
Far East 1,146,774 595,126
Canada 136,015 106,462
---------- ----------
$2,686,117 $1,945,949
========== ==========
</TABLE>
F-13
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Year 2000 compliance:
The Company operates date sensitive computer equipment in its operations in
the United States and Malaysia. The accounting and bookkeeping computer programs
have been upgraded to be year 2000 compliant at a cost of less then $1,000 in
the United States. The Company's domestic manufacturing equipment is not
date-sensitive. The Company purchased all-new manufacturing and computer
equipment in Malaysia, which is year 2000 compliant, at a cost of approximately
$200,000, during the previous fiscal year.
Like many other businesses, the Company is at risk from year 2000 failures
on the part of its suppliers.
15. Supplemental cash flow information:
<TABLE>
<CAPTION>
<S> <C>
1998
1999 Restated
Interest paid during period $ 44,631 $ 23,970
======== ==========
Income taxes paid during the period $ 0 $ 0
======== ==========
Supplemental schedule of non-cash investing and financing activities:
Conversion of accrued interest to
term loans $234,590
Reconciliation of increase in cash:
Cash at beginning of period, as originally
reported $ 371,413
Decrease in cash resulting from disposition
of foreign subsidiary 264,840
---------
Cash at beginning of period, as restated $ 106,573
=========
</TABLE>
F-14
<PAGE>
ITEM 2. Management's Discussion and Analysis of Operation.
GENERAL
In fiscal year 1998 which ended January 31, 1999, the Company altered its
business plans and objectives and reorganized its product lines for faster
growth into two major groupings: Technical Products to Industry and Consumer
Products. This decision followed the Company's June 1998 acquisition of Fuji
Fabrication SDN BHD ("Fuji") and its cellular telephone battery line; and its
September, 1998 sale of Teik Tatt Holding Co. (1979) SDN BHD ("TTH") to the
former owner deemed mutually acceptable and in the best interest of both
parties.
During the quarter ended July 31, 1999, the Company continued to benefit
from a product line that did not exist in the comparable 1998 quarter; namely:
Fuji's cellular telephone batteries which was launched in July 1998 and had
sales of $571,708 in the first six months ended July 31, 1999.
The Company's financial condition remains healthy, reported by Dun &
Bradstreet as a satisfactory liquidity position and a satisfactory debt to
equity ratio. At July 31, 1999, the Company has total assets of $2,686,117 and
current assets of $1,705,476, increases over April 30, 1999 of 6.9% and 10.4%
respectively. Stockholders' equity rose 9.6% over April 30, 1999, to $1,498,837.
In addition, whereas current assets increased by 10.4%, total current
liabilities decreased by 1.3% from $871,690 to $860,299, accompanied by an
increase in the Company's long term debt, a controlled reallocation by
Management to better accommodate its growth.
The Company conducts a substantial portion of its manufacturing and
assembly operations in Malaysia. 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 area's downturn in mid-1977 involving financial uncertainties
have had a calming and stabilizing affect. Further, as of the beginning of
September, year old controls on capital movements have been lifted so as to
enable foreign investors and banks to repatriate their monies. This coupled with
a 1.4% economic growth during the first six months of the year and a general
recovery in the area appears to bode well for the industry. In any event,
although no assurance can be given, the Company believes that regional
circumstances will have no material adverse effect on the operations or
financial condition during the fiscal year which began February 1, 1999.
Results of Operations
Excluding discontinued operations, for the second quarter ended July 31,
1999 compared to the corresponding quarter in the previous year, the Company's
net sales increased 39.7% from $616,457 to $861,058, and income from continuing
operations increased $76,299, or in excess of nine times from $8,062 to $85,361,
the Company's highest quarterly income from operations. The quarterly sales of
$861,058 is virtually equal to the Company's highest result which was realized
just in the previous quarter of this year. These increases are attributable to
the cellular phone battery product line which the Company acquired one year ago.
Otherwise, within other product lines there were small sales volume variations
where one customer closed for vacation and another initiated its delivery from a
blanket order.
<PAGE>
The Company's combined gross profit margin is now at a 50% level. This is a
result of the new mix of products and is typified by East Coast Sales Co.'s
gross profit of 67.5% and Fuji's 24.2% reflecting the products themselves and
their make/buy breakdown.
For the six months ended July 31, 1999, compared to the six months ended
July 31, 1998, sales of $1,761,845 were the highest (excluding discontinued
operations) for that fiscal time period, increasing 47.2% over sales of
$1,197,282 for the previous year's comparable period. However, income from
operations decreased 35.5% from $138,701 to $89,413. This change was primarily
due to a decrease in gross profit from 70.9% to 50.6% or 28.6% (explained
above); first quarter non-cash one-time charges related to stock options and
additional expenses; and initial marketing expenses for the cellular phone
product line. Management stated that the first quarter 1999 impact on the six
months results ended July 31, 1999 was an anomaly and that its second quarter
results reflect more of the normal operations of the Company as now constituted.
With a backlog of orders on-hand amounting to $1.2 million to be shipped
within the next 3 to 4 months and the completion of the loan transfer process
allowing for a loan application in Malaysia, Management believes that sales will
continue to increase in almost all product lines for the remainder of the year
that the Company, as reflected in the previous From 10-QSB, should report an
annual profit of approximately $400,000 or 4 cents per share. Supporting this
projection are reports from major industry sources relative to semi-conductor
chips and cellular phones that industry-wide sales will rise significantly in
1999.
Liquidity and Capital Resources
At July 31, 1999, the Company had current assets of $1,705,476 and current
liabilities of $860,299 yielding a positive working capital position of $845,
177 and a current ratio of 1.98:1, an improvement of 12.4% over the 1.77:1 that
existed at April 30, 1999. 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 for existing product lines, to some extent it has
been satisfied by the line of credit with the Company's U.S. bank which stands
at $500,000. However, because of the capability which Management believes exists
to further increase its sales, especially in its cellular phone battery product
line manufactured in Malaysia by its wholly owned subsidiary, the Company is
seeking additional capital infusions of $300,000 to $500,000. Although the
Company currently is in discussions with two separate entities for such funding,
no new definite source has yet been identified and no assurance can be given
that such financing will be obtained on commercially reasonable terms, or at
all.
<PAGE>
Management believes that extraordinary growth potential exists via
acquisitions in the Far East in general. Such Company acquisition objectives
would be concentrated in companies in or aligned with the cellular phone battery
and associated accessory product lines. Although Management further believes
that such acquisition purchases can be made with an exchange of stock only,
significant working capital requirements may be needed following a completed
transaction. When such is required, no assurance can be given that such
financing will be successfully obtained even with due consideration given to the
resulting expanded operation.
The Company's moratorium on its stock buyback program continues while the
priority for its capital is for growth purposes. However, when the economic
conditions appear appropriate, including its stock price in the open market,
this program may be resumed.
During the quarter ended July 31, 1999 the Company purchased some
miscellaneous computer equipment increasing its net property and equipment to
$624,898 from $580,021. As of the end of this fiscal quarter, there were no
anticipated material requirements for capital expenditures.
A small percentage of the Company's profits may not be distributable to the
Company's other subsidiaries or as dividends. Under Malaysian law a Malaysia
corporation is required to maintain a statutory reserve of five percent (5%) of
profit after taxation in accordance with the Foreign Investment Law until such
reserve equals ten percent (10%) of legal capital. Such reserve is
non-distributable.
EFFECTS OF FOREIGN CURRENCY FLUCTUATIONS
The Company's foreign operations are subject to risks related to
fluctuation in foreign currency exchange rates. During this quarter, the foreign
currency exchange adjustment was nil, and thus, in effect did not impact
operational results.
While future fluctuations in currency exchange rates could impact results
of operations or financial conditions, foreign operations are expected to
continue to provide strong financial results and earnings growth.
A number of economists, including some high in United States Government's
financial circles, believe that the financial crisis which began in mid-1997 in
Southeast Asia has eased and probably has ended.
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks primarily from exchanges 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 the foreign operations.
The Company's exposure to foreign exchange rate fluctuations results from
wholly-owned subsidiary operations in Malaysia, and from the Company's share of
the earnings of these operations, which are denominated in the Malaysian ringit.
<PAGE>
YEAR 2000 COSTS
The Company currently operates numerous date-sensitive computer
applications 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 operational and
financial information. The Company recently upgraded its computer systems 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 operation
or the profitability of its products.
FORWARD-LOOKING STATEMENTS
This "Management's Discussion and Analysis or Plan of Operation" contains
statements which are not historical facts and are forward-looking statements and
expressions such as "expect", "believe", "anticipate", "many" or similar
variations of such terms which reflect management's confidence, expectations,
estimates and assumptions. Such statements are based on information available at
the time this Form 10-QSB was prepared and involve 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, partial dependence on the
semiconductor and cellular phone battery industries availability of raw
materials, intense competition, ecological obsolescence, continued relationship
with major customers and the risks of doing business in Malaysia and Southeast
Asia, including, without limitations, economic and political conditions, foreign
currency translation risks, tariffs and other foreign trade policies and
dependence on inexpensive labor in such countries. SETO assumes no obligation
for updating any such forward-looking statement, if any, at any time.
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