SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended April 30, 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 April 30, 1999
Common Stock, par value $.001
per share 10,838,500
<PAGE>
INDEX
Part I. Financial Information
Item 1. Consolidated financial statements:
Balance sheet as of April 30, 1999 F-2
Statement of income for the three months
April 30, 1999 and 1998 F-3
Statement of comprehensive income for the three months
ended April 30, 1999 and 1998 F-4
Statement of cash flows for the three months ended
April 30, 1999 and 1998 F-5
Notes to 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)
CONSOLIDATED BALANCE SHEET - APRIL 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Current assets:
Cash $ 106,794
Accounts receivable, less allowance
for doubtful accounts of $10,500 435,229
Inventory 770,538
Prepaid expenses and other assets 137,315
Deferred tax asset, current portion 95,000
----------
Total current assets 1,544,876
---------
Property and Equipment 580,021
-------
Other assets:
Goodwill, net of amortization 115,247
Security deposits 20,425
Deferred tax asset, net of current portion 245,900
Loan receivable, officer 6,532
----------
388,104
-------
$2,513,001
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 146,024
Notes payable, bank 425,000
Accounts payable 259,620
Accrued expenses 41,046
----------
Total current liabilities 871,690
-------
Long-term debt, net of current portion 267,826
----------
Deferred lease liability 6,000
-----
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 10,838,500 shares issued 10,838
Additional paid in capital 2,871,835
Currency translation adjustment ( 152,981)
Retained earnings (deficit) ( 1,347,041)
----------
1,382,651
Less common shares held in treasury, 49,400
shares at cost 15,166
------
Total shareholder's equity 1,367,485
---------
$2,513,001
==========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES)
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONSOLIDATED STATEMENT OF INCOME (LOSS)
THREE MONTHS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1998
1999 Restated
Net sales $900,787 $580,825
Cost of sales 493,255 116,431
-------- --------
Gross profit 407,532 464,394
Selling, general and administrative
expenses 395,668 320,048
-------- --------
Income from operations 11,864 144,346
-------- --------
Other income (expenses):
Interest expense ( 23,424) ( 10,107)
Loss on foreign currency exchange ( 1,288)
-------- --------
( 24,712) ( 10,107)
-------- --------
Income (loss) before income taxes (benefit) ( 12,848) 134,239
Deferred income tax (benefit) ( 16,900) 3,600
-------- --------
Income from continuing operations 4,052 130,639
-------- --------
Discontinued operations:
Income from operations of subsidiary,
net of income tax of $16,571 603,774
-------- --------
Net income $ 4,052 $734,413
======== ========
Earnings per share information:
Income from continuing operations $ .00 $ .01
Discontinued operations:
Income from operations of subsidiary .02
-------- --------
Net income per share $ .00 $ .03
======== =======
</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
THREE MONTHS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Net income $ 4,052 $734,113
--------
Other comprehensive income, net of tax:
Foreign currency translation adjustment ( 472,369)
-------- -------
Comprehensive income $ 4,052 $261,744
======== ========
</TABLE>
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
THREE MONTHS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1998
1999 Restated
Operating activities:
Income from continuing operations $ 4,052 $130,639
Adjustments to reconcile net income to cash
provided by continuing operations:
Depreciation and amortization 16,394 13,861
Loss on foreign currency exchange
Changes in other operating assets and
liabilities:
Accounts receivable ( 46,765) ( 33,160)
Inventories ( 9,840) ( 101,181)
Prepaid expenses and other current assets 2,749 ( 47,971)
Deferred tax assets ( 16,900) 3,600
Other assets ( 4,875) ( 8,615)
Accounts payable, and accrued expenses ( 3,894) 58,879
Deferred lease liability 1,500
-------- --------
Net cash provided by (used in) operating
activities ( 57,579) 16,052
-------- --------
Investing activities:
Purchase of property and equipment ( 15,688) ( 92,963)
Decrease in loan receivable, officer 4,282
-------- --------
Net cash used in investing activities ( 11,406) ( 92,963)
-------- --------
Financing activities:
Proceeds from issuance of common stock 92,500 8,750
Proceeds from financing 90,000 175,000
Payment of debt ( 66,849) ( 91,673)
-------- --------
Net cash provided by financing activities 115,651 92,077
-------- --------
Effect of exchange rate changes on cash ( 5,924)
-------- --------
Net increase (decrease) in cash 40,742 ( 15,166)
Cash, beginning of period 66,052 106,573
-------- --------
Cash, end of period $106,794 $121,739
======== ========
</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 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. Summary of significant accounting policies:
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.
Cash and cash equivalents:
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less.
Inventories:
Inventories, which consist solely of finished goods, are stated at the
lower of cost or market. Market is considered at net realizable value.
Per share amounts:
Net earnings per share are calculated by dividing net earnings by the
weighted average shares of common stock of the Company and weighted average of
common stock equivalents outstanding for the period. Common stock equivalents
represent the dilutive effect of the assumed exercise of certain outstanding
stock options. The Company uses the treasury stock method in its treatment of
stock options.
F-6
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY SEMICON TOOLS, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
Foreign currency translation policy:
For foreign subsidiaries whose functional currency is the local foreign
currency, balance sheet accounts are translated at exchange rates in effect at
the end of the year and income statement accounts are translated at average
exchange rates for the year . Translation gains or losses are included as a
separate component of shareholders' equity. Exchange differences arising from
foreign currency translation are included in the profit and loss account.
Property and equipment:
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the following useful
lives:
Years
Manufacturing 5-20
Furniture and fixtures 7-20
Other equipment 5-14
Buildings and improvements 10-50
Automotive equipment 5
Expenditures for major renewals and betterment that extend the useful lives
of property and equipment are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred.
Income taxes:
The Company has elected to file a consolidated corporate income tax return
with its subsidiaries. For tax reporting purposes, the Company uses certain
accelerated depreciation methods which may create timing differences between
book and tax income. Deferred income taxes will be reflected for these timing
differences.
Deferred taxation:
Provision is made by the liability method for taxation deferred in respect
of all timing differences. Deferred tax benefit is recognized only when there is
reasonable assurance of realization.
Post retirement benefits:
On December 31, 1990, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Post Retirement Benefits Other Than Pensions." SFAS No. 106
requires that companies recognize the cost of providing post retirement health
care and other non-pension benefits over the employees' service periods, rather
than as the benefits are paid. The Company does not provide any non-pension post
retirement benefits at the present time.
Allowance for doubtful accounts:
An allowance for doubtful accounts has been established based on
management's review of the outstanding accounts receivable balance and their
determination of possible uncollectible accounts.
F-7
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY SEMICON TOOLS, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of significant accounting policies (continued):
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Hire purchase obligations:
Assets acquired under an installment plan are capitalized as fixed assets
and the corresponding obligations are treated as a long-term liability.
Financing charges are allocated to the profit and loss account over the purchase
periods using the "sum of the years digits" method to give a constant periodical
rate of interest on the remaining liabilities.
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 $ 95,659
Manufacturing equipment 989,325
Office equipment 56,959
----------
1,141,943
Less accumulated depreciation 561,922
---------
$ 580,021
==========
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 $39,596 at April 30, 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 $437 at April 30, 1999.
F-8
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY SEMICON TOOLS, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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:
April 30, 2000 $ 60,000
April 30, 2001 60,000
April 30, 2002 60,000
April 30, 2003 60,000
April 30, 2004 64,500
Thereafter 624,000
--------
$928,500
========
Rent expense amounted to $18,079 for the three months ended April 30,
1999.
The Company also leases three vehicles under operating leases with terms
expiring through 1999. Total lease expense was $9,044 for the three
months ended April 30, 1999.
7. Common stock:
During the current period, the Company issued 290,000 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 April 30, 1999, the Company had utilized $425,000 of this
line.
Long-term debt consists of the following:
Balance
April 30,
Rate 1999 Maturity
Notes payable:
Bank (a) Prime + 1% $ 36,141 2001
Shareholder (b) 10% 95,015 2002
Shareholder (c) 15% 178,255 2004
Shareholder (d) 10% 104,439 2002
--------
413,850
Less current portion 146,024
-------
$267,826
========
F-9
<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 $1,989 including
interest. Machinery and equipment with a cost of $57,000 is
pledged as collateral.
(b) The note is payable in monthly installments of $4,053 including
interest.
(c) The note is payable as follows:
May 15, 1999 $13,500
The remaining balance is payable in monthly installments of
$4,731, March 15, 1999 through February 2003.
(d) The note is payable in monthly installments of $3,633 including
interest.
The maturities of these loans are as follows:
April 30, 2000 $146,024
April 30, 2001 145,940
April 30, 2002 77,670
April 30, 2003 44,216
9. Income taxes:
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), the cumulative effect of which was not material to the
consolidated financial statements and is therefore not presented
separately. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the year in which those
temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date; this effect was immaterial for the years ending
January 31, 1999 and 1998. The deferred tax asset less the deferred tax
liabilities has been reduced by a valuation allowance equal to the net
tax benefit in excess of the estimated taxable profits over the next
three years.
Provision for income taxes (benefit):
1999 1998
---- ----
Current 0 0
Deferred ($ 16,900) 20,171
-------- --------
Total (benefit) expense ($ 16,900) $ 20,171
======== ========
F-10
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY SEMICON TOOLS, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income taxes (continued):
Areconciliation 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 0 $277,538
State tax (net of federal benefit) 0 4,247
Foreign income 0 ( 261,614)
Reduction in valuation allowance ($16,900)
------- --------
Net income tax expense (benefit) ($16,900) ($20,171)
======= =======
The components of deferred tax assets and liabilities consist of the
following:
Deferred tax asset:
Net operating loss carryforward $480,000
--------
Total deferred tax asset 480,000
Valuation allowance 139,100
-------
$340,900
========
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 April
30, 1999, none of these options had been exercised.
F-11
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY SEMICON TOOLS, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employment and consulting agreements (continued):
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
April 30, 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
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 shares
underlying these options were issued pursuant to the Company's 1997
non-statutory Stock Option Plan, 140,000 shares were issued during the
quarter ended April 30, 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. The shares underlying these options will be registered under
the Securities Act of 1933.
On July 1, 1998, the Company entered into a consulting agreement for the
period July 1, 1998 to June 30, 1999 for strategic planning, corporate
planning, mergers and acquisitions and divestiture advice. 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 and was
exercised during the quarter ended April 30, 1999.
11. Computation of earnings per share:
1999 1998
---- ----
Weighted average number of
common shares outstanding 10,693,500 10,011,500
Assumed conversion of
stock options 3,267,500
---------- ---------
Weighted average number of
common shares outstanding 10,693,500 13,279,000
========== ==========
The conversion of stock options was not assumed for the period ended
April 30, 1999 as the effect would be immaterial.
F-12
<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. As of January 31, 1999, 950,000 options had
been issued under the Plan, of which 250,000 had been exercised by April 1999.
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.
Summary of options are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
</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.
F-13
<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> <C>
April 30,
April 30, 1998
1999 Restated
Sales to customers:
Industry A:
Ceramics $ 379,830 $ 370,144
Industry B:
Diamond tools 109,673 128,625
Industry C:
Cellular batteries 312,110 0
Miscellaneous 99,174 82,056
---------- ----------
$ 900,787 $ 580,825
========== ==========
Operating profit or loss:
Industry A $ 5,621 $ 107,121
Industry B 1,623 37,225
Industry C 4,620 0
---------- -----------
$ 11,864 $ 144,346
========== ===========
Identifiable assets:
Industry A $ 463,065 $ 438,387
Industry B 996,815 722,420
Industry C 438,926 0
---------- ----------
$1,898,806 $1,160,807
========== ==========
Two customers each accounted for more than 10% of total sales and
together accounted for approximately 44% of total sales for the period
ended April 30, 1999.
Foreign and domestic operations and export sales:
April 30, April 30,
1999 1998
Sales to customers:
United States $546,023 $352,075
Far East 162,337 104,675
Canada 192,427 124,075
-------- --------
$900,787 $580,825
======== ========
April 30,
April 30, 1998
1999 Restated
Operating profit:
United States $ 7,192 $ 87,497
Far East 2,138 26,014
Canada 2,534 30,835
---------- ----------
$ 11,864 $ 144,346
========== ==========
Identifiable assets:
United States $1,150,986 $ 703,638
Far East 342,197 209,197
Canada 405,623 247,972
---------- ----------
$1,898,806 $1,160,807
========== ==========
</TABLE>
F-14
<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> <C>
1998
1999 Restated
Interest paid during period $ 23,424 $ 10,107
======== ==========
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-15
<PAGE>
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
GENERAL
In fiscal year 1998, ending 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 its former
owner.
During the quarter ended April 30, 1999, excluding the results of discontinued
operations, the Company experienced the highest quarterly net sales of its
history, attributable principally to continued growth in fabricated industrial
ceramics at $375,389 and the growth of the Company's cellular telephone battery
product line, which was launched in July 1998 (sales of $398,589).
The Company's financial condition remains healthy. At April 30, 1999, the
Company had total assets of $2,513,000 and current assets of $1,544,876,
increases over January 31, 1999 of 9.5% and 13.8% respectively. Stockholders'
equity rose 7.1% over January 31, 1999, to $1,367,485.
As sales increase, an increase in debt is expected to pay for the expenditures
for larger volumes of material and some labor to manufacture product. In
addition, current liabilities increased by 10.1% to $871,690 and long term debt,
net of current portions, increased by 20.2% over January 31, 1999.
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 effect. In any event, although no assurance can ge
given, the Company believes that regional circumstances will have no material
adverse effect on its operations or financial condition during the fiscal year
which began February 1, 1999.
FIRST QUARTER 1999 COMPARED TO 1998
Excluding discontinued operations, the Company's net sales increased 55% from
$500,825 to $900,787, and income from continuing operations declined $132,482,
or 92%, from $144,346 to $11,864. The decrease in income from continuing
operations principally resulted from increased selling, general and
administrative expenses due to a $25,000 non-cash charge related to exercising
of stock options; additional expenses for public relations; initial marketing
expenses for the cellular phone product line inclusive of a new internet
e-commerce site (although it is too soon to report, it is believed the latter
expenses will realize significant sales results); and the Company's relocation
from Armonk, New York to its new headquarters and manufacturing/warehouse
facilities in Briarcliff Manor, New York.
The Company's combined gross profit margin is now at the level of 45% to 50%.
This is a result of the new mix of products and is typified by East Coast Sales
Co.'s gross profit of 62.4% and Fuji Fabrication's 21.9%. With sales volume
increasing, it is expected that the latter number will improve. Nevertheless,
the products themselves and their make/buy breakdown will limit the degree of
improvement. This is to be expected and is normal.
With a backlog of orders on hand amounting to $1.25 million to be shipped within
the next 4 to 6 months and the elimination of a number of one time and anomalous
factors mentioned above which did occur in the first quarter just ended,
Management believes that sales will continue to increase for the remainder of
the year and that the Company 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, both
together impacting essentially all of the Company's product lines, that sales
will rise significantly in 1999.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, the Company had current assets of $1,544,876 and current
liabilities of $871,690 yielding a positive working capital position of $673,186
and a current ratio of 1.77:1, both improvements over comparable figures at
January 31, 1999 of $526,575 and 1.6:1, respectively. These standard measures of
a company's ability to meet its current obligations reflect 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 a large extent it should be satisfied by the recent
consolidation of the outstanding line of credit and standby letters of credit in
the amount of $1,000,000 from the Company's bank. However because of the
anticipated increase in sales, especially in its cellular phone battery product
line, the Company has been seeking additional lines of credit from Malaysian
financial sources. Also, the Memorandum of Understanding with a Hong Kong
manufacturer of cellular phone accessories (e.g. hands free kit, traveling
charger, auto cord charger etc.) to form a marketing joint venture aimed at the
U.S. market place, besides the finalization of certain legal and organizational
details, requires working capital of approximately $200,000 to $250,000.
Although the Company is talking to a firm for loans in the amount of $500,000 to
$1,000,000 on what it considers favorable terms, no definite funding source for
these purposes has yet been identified and no assurance can be given that such
financing will be obtained on commercially reasonable terms, or at all.
As at the end of the quarter, there were no plans or material commitments for
capital expenditures for assets of any significant value.
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 a nominal $1,298 loss in
foreign currency exchanges were incurred in effect not impacting 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 predictable policies (e.g., pegging exchange
rates, which Malaysia did in 1998, and is sticking to that policy) yields a key
element of financial stability. That is a course which Malaysia has chosen to
follow. At the moment, the perception is that the financial crises which began
in mid-1997 in Southeast Asia has eased and probably has ended e.g., in the
first quarter of 1999, container traffic from the West Coast to East Asia ran
10% ahead of projections. This appears to bode well for Malaysia.
DISCLOSURES 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'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
ringgit.
<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 industry, 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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1
<CASH> 106,794
<SECURITIES> 0
<RECEIVABLES> 435,229
<ALLOWANCES> 10,500
<INVENTORY> 770,538
<CURRENT-ASSETS> 1,544,876
<PP&E> 1,141,943
<DEPRECIATION> 561,922
<TOTAL-ASSETS> 2,513,001
<CURRENT-LIABILITIES> 871,690
<BONDS> 0
0
0
<COMMON> 10,838
<OTHER-SE> 2,871,835
<TOTAL-LIABILITY-AND-EQUITY> 2,513,001
<SALES> 900,787
<TOTAL-REVENUES> 900,787
<CGS> 493,255
<TOTAL-COSTS> 395,668
<OTHER-EXPENSES> 1,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,424
<INCOME-PRETAX> (12,848)
<INCOME-TAX> (16,900)
<INCOME-CONTINUING> 4,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,052
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
