SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
0
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended October 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 October 31, 1999
Common Stock, par value $.001
per share 11,299,100
<PAGE>
INDEX
Part I. Financial Information
Item 1. Consolidated financial statements:
Balance sheet as of October 31, 1999 F-2
Statement of income for the nine and three
months October 31, 1999 and 1998 F-3
Statement of comprehensive income for the nine
and three months ended October 31, 1999 and 1998 F-4
Statement of cash flows for the nine months ended
October 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 - OCTOBER 31, 1999
ASSETS
Current assets:
Cash $ 53,404
Accounts receivable, less allowance
for doubtful accounts of $10,500 506,447
Inventory 877,785
Prepaid expenses and other assets 180,488
Deferred tax asset, current portion 110,592
----------
Total current assets 1,728,716
---------
Property and Equipment 618,605
-------
Other assets:
Goodwill, net of amortization 113,305
Security deposits 11,037
Deferred tax asset, net of current portion 224,534
----------
348,876
-------
$2,696,197
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 167,376
Notes payable, bank 270,000
Accounts payable 464,588
Accrued expenses 45,735
----------
Total current liabilities 947,699
-------
Long-term debt, net of current portion 311,596
----------
Deferred lease liability 9,000
-----
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 11,328,500 shares issued 11,329
Additional paid in capital 2,957,505
Currency translation adjustment ( 154,897)
Retained earnings (deficit) ( 1,377,009)
----------
1,436,928
Less common shares held in treasury, 29,400
shares at cost ( 9,026)
----------
Total shareholders' equity 1,427,902
---------
$2,696,197
==========
See notes to consolidated financial statements.
F-2
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES)
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONSOLIDATED STATEMENT OF INCOME
NINE AND THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Three Months
ended ended
October 31, October 31,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 2,482,794 $1,903,149 $ 720,949 $ 705,867
Cost of sales 1,268,536 670,722 397,471 322,216
----------- ---------- ---------- ----------
Gross profit 1,214,258 1,232,427 323,478 383,651
Selling, general and
administrative expenses 1,166,926 997,961 404,433 322,765
----------- ---------- ---------- ----------
Income (loss) from
operations 47,332 234,466 ( 80,955) 60,886
----------- ---------- ---------- ----------
Other income (expenses):
Interest expense ( 79,557) ( 33,271) ( 34,926) ( 9,301)
Loss on foreign
currency exchange ( 242) 554
----------- ---------- ---------- ----------
( 79,799) ( 33,271) ( 34,372) ( 9,301)
----------- ---------- ---------- ----------
Income (loss) before
income taxes (benefit) ( 32,467) 201,195 ( 115,327) 51,585
Income taxes (benefit) ( 6,553) 6,302 ( 4,607)
----------- ---------- ---------- ----------
Income (loss) from
continuing operations ( 25,914) 194,893 ( 115,327) 56,192
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)
----------- ---------- ---------- ----------
Net loss ($ 25,914) ($ 234,860) ($ 115,327) ($1,391,098 )
=========== ========== ========== ==========
Earnings per share
information:
Basic:
Earnings per share
from continuing
operations $ 0.00 $ 0.02 ($ 0.01) $ 0.00
Earnings per share
from discontinued
operations 0.00 ( 0.04) 0.00 ( 0.11)
----------- ---------- ---------- ----------
Net income (loss)
per share $ 0.00 ($ 0.02) ($ 0.01) ($ 0.11)
=========== ========== ========= ==========
Diluted:
Earnings per share
from continuing
operations $ 0.00 $ 0.01 ($ 0.01) $ 0.01
Earnings per share
from discontinued
operations 0.00 ( 0.03) 0.00 ( 0.11)
----------- ---------- ---------- ----------
Net income (loss) per
share $ 0.00 ($ 0.02) ($ 0.01) ($ 0.10)
=========== ========== ========== ==========
</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
NINE AND THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Three Months
ended ended
October 31, October 31,
1999 1998 1999 1998
---- ---- ---- ----
Net loss ($25,914) ($234,860) ($137,825) ($1,447,464)
Other comprehensive income, net of tax:
Foreign currency
translation adjustment 34,428
Comprehensive income ($25,914) ($200,432) ($137,825) ($1,447,464)
======= ======== ======== ==========
NOTE: Net income includes
discontinued operations
in prior year
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SETO HOLDINGS, INC. AND SUBSIDIARIES
(Formerly Semicon Tools, Inc. and Subsidiaries)
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1998
1999 Restated
Operating activities:
Income (loss) from continuing operations ($ 25,914) $194,893
Adjustments to reconcile net income to cash
provided by continuing operations:
Depreciation and amortization 58,414 44,079
Compensatory stock issued 43,300
Changes in other operating assets and
liabilities:
Accounts receivable ( 122,165) ( 124,532)
Inventories ( 117,087) ( 273,135)
Prepaid expenses and other current assets 21,077 ( 2,797)
Deferred tax assets ( 11,126)
Other assets 4,512 8,505
Accounts payable and accrued expenses 209,947 58,672
Deferred lease liability 4,500
-------- --------
Net cash provided by (used in) operating
activities 65,458 ( 94,315)
-------- --------
Investing activities:
Purchase of property and equipment ( 94,350) ( 251,971)
-------- --------
Net cash used in investing activities ( 94,350) ( 251,971)
-------- --------
Financing activities:
Proceeds from issuance of common stock 80,000 120,000
Proceeds from financing 281,890 299,352
Payment of debt ( 337,801) ( 97,814)
-------- --------
Net cash provided by financing activities 24,089 321,538
-------- --------
Effect of exchange rate changes on cash ( 7,845) ( 11,588)
-------- --------
Net decrease in cash ( 12,648) ( 36,336)
Cash, beginning of period 66,052 106,100
-------- --------
Cash, end of period $ 53,404 $ 69,764
======== ========
</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 1,000,220
Office equipment 73,685
----------
1,220,605
Less accumulated depreciation 602,000
-------
$ 618,605
==========
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 $41,275 at October 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 $700 at October 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:
October 31, 2000 $ 60,000
October 31, 2001 60,000
October 31, 2002 60,000
October 31, 2003 63,000
October 31, 2004 66,000
Thereafter 589,500
--------
$898,500
Rent expense amounted to $54,237 for the nine months ended October 31,
1999.
The Company also leases three vehicles under operating leases with terms
expiring through 1999. Total lease expense was $26,154 for the nine months ended
October 31, 1999.
7. Common stock:
During the nine months ended October 31, 1999, the Company issued 500,000
shares of its common shares with net proceeds of $80,000 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 October 31, 1999, the Company had utilized $270,000 of
this line.
Long-term debt consists of the following:
Balance
October 31,
Rate 1999 Maturity
Notes payable:
Bank (a) 8.45% $137,500 2002
Shareholder (b) 10% 74,668 2002
Shareholder (c) 15% 148,215 2004
Shareholder (d) 10% 87,513 2002
Shareholder (e) 8.5% 31,076 Indefinite
--------
478,972
Less current portion 167,376
-------
$311,596
========
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.
(e) The note payable is subordinated to the bank line of credit.
The maturities of these loans are as follows:
October 31, 2000 $167,371
October 31, 2001 164,080
October 31, 2002 98,098
October 31, 2003 18,347
Thereafter 31,076
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
======= =======
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 $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 October 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 October 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. 190,000 shares were issued
during the nine months ended October 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.
On August 17, 1999, the Company entered into a consulting agreement for a
one year period through August 2000 for investor public relations. In
consideration for the consulting agreement, the Company issued 300,000 shares of
unregistered Company common stock.
11. Computation of earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Three Months
ended ended
October 31, October 31,
1999 1998 1999 1998
---- ---- ---- ----
Weighted average number of
common shares outstanding -
basic 10,915,565 10,193,324 11,207,245 10,353,500
Assumed conversion of
stock options 6,238,025 2,835,000 6,260,000 2,835,000
---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding-
diluted 17,153,590 13,028,324 17,467,245 13,188,500
========== ========== ========== ==========
</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.
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 06/19/98 110,000 .25 06/09/00
Consultant 03/10/99 150,000 .75-2.00 03/12/00
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> <C>
October 31,
October 31, 1998
1999 Restated
Sales to customers:
Industry A:
Ceramics $ 934,300 $1,124,021
Industry B:
Diamond tools 509,715 397,275
Industry C:
Cellular batteries 872,174 168,758
Miscellaneous 166,605 213,095
---------- ----------
$2,482,794 $1,903,149
========== ==========
Operating profit or loss:
Industry A $ 225,439 $ 358,707
Industry B ( 189,332) ( 104,010)
Industry C 65,649 21,638
Miscellaneous ( 54,424) ( 41,869)
---------- -----------
$ 47,332 $ 234,466
========== ===========
Identifiable assets:
Industry A $ 422,080 $ 387,203
Industry B 1,308,180 1,671,191
Industry C 558,073 309,337
Miscellaneous 407,864 426,315
---------- ----------
$2,696,197 $2,794,046
========== ==========
Two customers each accounted for more than 10% of total sales and
together accounted for approximately 34% of total sales for the nine
months ended October 31, 1999.
Foreign and domestic operations and export sales:
October 31, October 31,
1999 1998
Sales to customers:
United States $1,505,070 $1,153,689
Far East 447,399 342,947
Canada 530,325 406,513
---------- ----------
$2,482,794 $1,903,149
========== ==========
Operating profit:
United States $ 28,693 $ 142,133
Far East 8,529 42,251
Canada 10,110 50,082
---------- ----------
$ 47,332 $ 234,466
========== ==========
Identifiable assets:
United States $1,634,435 $1,693,751
Far East 485,855 503,487
Canada 575,907 596,808
---------- ----------
$2,696,197 $2,794,046
========== ==========
</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.
<TABLE>
<CAPTION>
<S> <C> <C>
15. Supplemental cash flow information:
1998
1999 Restated
Interest paid during period $ 79,557 $ 34,926
======== ==========
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 265,313
---------
Cash at beginning of period, as restated $ 106,100
=========
</TABLE>
16. Subsequent events:
On November 19, 1999, the Company announced the acquisition of Hong Kong
Batteries Industries, Ltd. based in Hong Kong. The purchase price is 2,000,000
restricted shares of the Company's common stock with 1,500,000 shares to be
issued immediately and an additional 500,000 restricted shares after the profit
guarantee is met for the fiscal year ending in 2001. The acquisition will be
accounted for as a purchase at the time of closing.
On December 1, 1999, the Company announced the acquisition of Fimas SDN BHD
Malaysia and its subsidiaries based in Malaysia with a manufacturing facility in
Taichang, China. The purchase price is 6,000,000 restricted shares of the
Company's common stock with 5,000,000 to be issued immediately and an additional
1,000,000 restricted shares after the profit guarantee is met for the fiscal
year ending in 2001. The acquisition will be accounted for as a purchase at the
time of closing.
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 July 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 interests of both
parties. The latter transaction is reflected in the consolidated Statement of
Income in the 1998 figures as "discontinued operation".
After this current quarter closed, several significant subsequent events
occurred, all consistent with the new plans and objectives:
a. In the Consumer Products Grouping area, two acquisitions were made:
1) On November 19, 1999, the Company acquired Hong Kong Batteries
Industries, Ltd ("HK Batteries") located in Hong Kong with a
manufacturing facility in Main Land China. With sales of $2.5
million and $130,000 in profit forecast for the current year,
HK Batteries product line complements and supplements the
cellular phone product line of the Company's Fuji subsidiary.
2) On November 27, 1999, the Company acquired Fimas Sdn Bhd
("Fimas") located in Malaysia with a factory in Main Land
China. Fimas manufactures and markets high quality electronic
consumer products including DVD players, CD ROM drives, CD
players and home theater systems. With a very impressive
customer base already in place, the Company also anticipates
selling most products in the U.S.A. utilizing its E-Commerce
approach and other marketing methods. Projected sales for
current year is $17.5 million and projected profit is
$500,000.
b. In the Technical Products Grouping area, on December 6, 1999 the
Company signed a joint venture with International Bearing Networks, LLC
("IBN") for the fabrication of diamond dicing blades utilizing IBN's
proprietary application process. The latter will multiply a blades
usable life and make such product the dicing blade of choice in the
marketplace, completely altering the acceptability and, thus, reception
of the Company's dicing blade product line.
Had the two above mentioned acquisitions been in place for the entire fiscal
year, annual operational results are projected to have been $24 million in sales
with profit in excess of $500,000.
The Company's financial condition remains healthy. As of October 31, 1999, both
total assets at $2,696,197 and total current assets at $1,728,716 increased over
last quarter's report, the former only nominally and the latter by 1.4%. At
October 31, 1999, Inventory and Prepaid expenses and other assets rose 5.0% and
1.7% to $877,785 and $180,488 respectively over July 31, 1999 offsetting an
equivalent decrease in cash. The Accounts payable increase of 18.6% to $464,588
primarily accounted for the total current liabilities increase, part of
Management's controlled reallocation to accommodate its growth mode. Total
Shareholder's equity decreased by 4.7% to $1,427,902 over July 31, 1999
reflecting some of the non-recurring expenses experienced due to the acquisition
process.
The Company has conducted a substantial portion of its manufacturing and
assembly operations in Malaysia and will now also be fabricating in Main Land
China. Accordingly, economic and political conditions there, and in East Asia as
a whole, will remain of importance to the Company. Management believes that
although risks exist, there are signs that the foundations of a new Asian
economy are strengthening and improving from where they were immediately
following the problems sparked in Thailand in July 1997. In Malaysia, in
particular, real Gross National Product continues to grow and balances of
payments are healthy. In China, the Company is entering its economy at a
propitious time. China's imminent entry into the World Trade Organization
portends more of an open market and favorable foreign investment climate. In any
event, although no assurance can be given, the Company believes that regional
circumstances will have no material adverse effect on its operations or
financial condition during the foreseeable future.
<PAGE>
Results of Operations
Excluding any consideration given to the discontinued operations of TTH, the
Company experienced its highest sales level for both the nine month period ended
October 31 and for a third fiscal quarter. In addition, the quarter ending
October 31, 1999 realized its third best quarterly sales. Further, it appears
that its cost of sales is leveling at 55%. All of this is attributed to the Fuji
cellular phone product line which began July 1, 1998 with the acquisition of
that Malaysian company. Fuji's nine (9) month sales of $868,778 represented 35%
of total sales and its cost of sales was approximately 77%, substantially
influencing the average ratio for the Company's new mix of product lines.
For the third quarter ended October 31, 1999 compared to the previous year's
quarter ended October 31, 1998, the Company's sales increased 2.1% to $720,949
from $705,867. Income from continuing operations went from a profit of $56,192
for the previous quarter ended October 31, 1998 to a loss of $115,327 for the
current quarter.
For the nine(9) months ended October 31, 1999 compared to the (9) months ended
October 31, 1998, sales increased by 30.5% to $2,482,794 from $1,903,149.
However, income from continuing operations went from a profit of $194,893 for
the period ended October 31, 1998 to a loss of $25,914 for the current nine (9)
months.
With an emphasis on its high sales levels and a backlog for the Company, prior
to the closing on the acquisitions, exceeding $1 million to be shipped within
the next 3 to 4 months, Management believes the next quarter and the fiscal
year's results will be more than satisfactory. Reasons for this are:
a. The current quarter's operating results were strongly influenced by the
acquisition process leading to the transaction closing on Fimas and HK
Batteries. There were costs associated with the search for candidates,
the due diligence, negotiation and legal activities.
b. Approximately two month's worth of operating results from Fimas and HK
Batteries, the payback for the acquisition process costs, will be added
to the Company in the Fourth (4th) quarter and, it is projected, will
result in profitable fiscal year sales of approximately $7.0 million.
As previously pointed out in the General section, proforma sales for
the year is anticipated to be $24 million with an associated profit in
excess of $500,000.
c. The fact that most major U.S. companies in the cellular phone business
are strategically retreating from the manufacturing business and
concentrating on Research and Development and Marketing. Coupled with
continuing increasing customer demand for cellular phones, Fuji and HK
Batteries should benefit significantly.
d. One time non-cash charges associated with stock option exercises
($25,000 this past quarter) and certain public relations and initial
marketing expenses for cellular phones should disappear or be greatly
diminished.
<PAGE>
Liquidity and Capital Resources
At July 31, 1999, the Company had current assets of $1,728,716 and current
liabilities of $947,699 yielding a positive working capital position of $781,017
and a current ratio of 1.82:1. Although this is 8.1% less than the 1.98:1 ratio
that existed at July 31, 1999, Management is very confident with that result
because it falls into the high end of its historical experience. Thus, these
routine measures of a company's ability to meet 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 with its credit-worthiness.
As for growth capital for its existing product lines and those of the
acquisitions made post-October 31, the Company is in the process of seeking ways
to improve its bank loans and lines of credit. Beside ceilings being raised,
Management stated that certain restructuring, for example more use of term loans
and non-asset based arrangements, can yield greater flexibility and value.
Further, Management believes that equity infusions in the late part of the next
fiscal year which begins February 1, 2000 will be extremely helpful. Although
the Company has had some discussion for both types of funding and has several
third parties alerted to assist it, no 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.
Management continues to believe that other extraordinary growth potential
exists via acquisitions in the Far East and hopes to close another transaction
in the next year.Although no such assurance can be given along these lines. Such
acquisition objectives will be concentrated in companies in or aligned with
existing product lines. Although Management further commented that such
acquisition purchases can be made with an exchange of stock only, as was the
case with HK Batteries and Fimas, 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 buy-back program continues while the
priority for its capital is for growth purposes. For all intents and purposes,
there are no near term plans to resurrect it. On the other hand, during the
quarter ended October 31, 1999, one outstanding stock option was exercised and
the Company realized $12,500 in cash.
During the quarter ended October 31, 1999 the Company purchased some
miscellaneous equipment. Within the next six (6) months, the Company anticipates
purchasing two (2) dicing saws costing $75,000 for its fabrication facility in
Malaysia. Management believes that it will have no trouble financing these
purchases with Malaysian institutions although no assurance can be given that
such will be the case.
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.
<PAGE>
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.
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.
As for suppliers and contractors, the Company has not investigated their
circumstances but has no reason to believe that dealing with the year 2000
will be a problem.
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 of Operation" contains statements
which are not historical facts and are forward-looking statements and
expressions such as "expect", "believe", "anticipate", 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 East 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. DOLLARA
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1
<CASH> 53,404
<SECURITIES> 0
<RECEIVABLES> 506,447
<ALLOWANCES> 10,500
<INVENTORY> 180,488
<CURRENT-ASSETS> 1,728,716
<PP&E> 1,220,605
<DEPRECIATION> 602,000
<TOTAL-ASSETS> 2,696,197
<CURRENT-LIABILITIES> 947,699
<BONDS> 0
0
0
<COMMON> 11,329
<OTHER-SE> 2,957,505
<TOTAL-LIABILITY-AND-EQUITY> 2,696,197
<SALES> 2,482,794
<TOTAL-REVENUES> 2,482,794
<CGS> 1,268,536
<TOTAL-COSTS> 1,166,926
<OTHER-EXPENSES> 242
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,557
<INCOME-PRETAX> (32,467)
<INCOME-TAX> (6,553)
<INCOME-CONTINUING> (25,914)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,914)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
