<PAGE> 1
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, 2000
--------------
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, 2000
------------------------------ ----------------------------
Common Stock, par value $.001
per share 19,531,600
<PAGE> 2
INDEX
Part I. Financial Information
Item 1. Consolidated financial statements:
Balance sheet as of July 31, 2000 F-2
Statement of income for the six and three months
July 31, 2000 and 1999 F-3
Statement of comprehensive income for the six and
three months ended July 31, 2000 and 1999 F-4
Statement of cash flows for the six months ended
July 31, 2000 and 1999 F-5
Notes to consolidated financial statements F-6 - F-13
Item 2. Management's discussion and analysis of
financial condition
Part II. Other information
Signatures
<PAGE> 3
SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - JULY 31, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 558,845
Accounts receivable, less allowance
for doubtful accounts of $22,065 5,034,243
Inventory 2,655,532
Prepaid expenses and other assets 602,533
Deferred tax asset, current portion 114,209
-----------
Total current assets 8,965,362
-----------
Property and equipment, net of depreciation 4,902,846
-----------
Other assets:
Goodwill, net of amortization 2,345,145
Security deposits 173,673
Deferred tax asset, net of current portion 228,417
-----------
2,747,235
-----------
$16,615,443
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 796,342
Notes payable 2,058,909
Accounts payable 3,512,055
Accrued expenses 1,263,442
-----------
Total current liabilities 7,630,748
-----------
Long-term debt, net of current portion 974,674
-----------
Deferred lease liability 13,500
-----------
Deferred income taxes payable 130,823
-----------
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 19,561,000 shares issued 19,561
Additional paid in capital 9,095,920
Currency translation adjustment ( 243,503)
Retained earnings (deficit) ( 997,254)
-----------
7,874,724
Less common shares held in treasury, 29,400
shares at cost 9,026
-----------
Total shareholder's equity 7,865,698
-----------
$16,615,443
===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 4
SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
SIX AND THREE MONTHS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
Six Months Three Months
ended ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $13,089,849 $ 1,761,845 $ 7,800,427 $ 861,058
Cost of sales 11,281,397 871,065 6,953,414 377,810
----------- ----------- ----------- -----------
Gross profit 1,808,452 890,780 847,013 483,248
Selling, general and
administrative expenses 1,296,270 762,493 677,398 366,825
----------- ----------- ----------- -----------
Income from operations 512,182 128,287 169,615 116,423
----------- ----------- ----------- -----------
Other income (expenses):
Interest expense ( 201,097) ( 44,631) ( 141,063) ( 21,207)
Foreign currency
exchange 1,163 ( 796) 3,866 492
----------- ----------- ----------- -----------
( 199,934) ( 45,427) ( 137,197) ( 20,715)
----------- ----------- ----------- -----------
Income before income taxes
(benefit) 312,248 82,860 32,418 95,708
Income taxes (benefit) 16,971 ( 6,553) ( 1,362) 10,347
----------- ----------- ----------- -----------
Net income $ 295,277 $ 89,413 $ 33,780 $ 85,361
=========== =========== =========== ===========
Earnings per share
information:
Basic $ 0.02 $ 0.01 $ 0.00 $ 0.01
=========== =========== =========== ===========
Diluted: $ 0.01 $ 0.01 $ 0.00 $ 0.00
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 5
SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
SIX AND THREE MONTHS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
Six Months Three Months
ended ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $295,277 $ 89,413 $ 33,780 $ 85,361
Other comprehensive
income, net of tax:
Foreign currency
translation adjustment 1,163 3,866
-------- -------- -------- ---------
Comprehensive income $296,440 $ 89,413 $ 37,646 $ 85,361
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 6
SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net income $ 295,277 $ 89,413
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 241,305 35,408
Compensatory stock issued 43,300
Changes in other operating assets and
liabilities:
Accounts receivable (1,519,284) (120,264)
Inventories ( 252,739) ( 75,681)
Prepaid expenses and other current assets ( 172,334) 3,625
Deferred tax assets ( 7,500) ( 11,126)
Other assets ( 301,158) 4,513
Accounts payable and accrued expenses 1,800,513 121,691
Deferred lease liability 3,000 3,000
----------- -----------
Net cash provided by operating
activities 87,080 93,879
----------- -----------
Investing activities:
Purchase of property and equipment ( 852,863) ( 78,607)
Increase (decrease) in loan receivable, officer ( 34,934) 4,917
----------- -----------
Net cash used in investing activities ( 887,797) ( 73,690)
----------- -----------
Financing activities:
Proceeds from issuance of common stock 945,287 67,500
Proceeds from financing 750,000 240,000
Payment of debt ( 654,569) ( 302,175)
----------- -----------
Net cash provided by financing activities 1,040,718 5,325
----------- -----------
Effect of exchange rate changes on cash ( 44,528) ( 8,238)
----------- -----------
Net increase in cash 195,473 17,276
Cash, beginning of period 363,372 66,062
----------- -----------
Cash, end of period $ 558,845 $ 83,338
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 7
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. The
results of operations for the three months ended is not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report for the year
ended January 31, 2000 included in its Annual Report filed on Form 10-
KSB.
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, Hong Kong Batteries Industries, Ltd. and Fimas, SDN BHD after
elimination of all significant intercompany transactions and accounts.
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:
Buildings $ 967,280
Leasehold improvements 79,673
Manufacturing equipment 5,917,793
Office equipment 533,406
Transportation equipment 194,343
----------
7,692,495
Less accumulated depreciation 2,789,649
----------
$4,902,846
==========
F-6
<PAGE> 8
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. 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:
July 31, 2001 $ 60,000
July 31, 2002 60,000
July 31, 2003 61,500
July 31, 2004 66,000
July 31, 2005 66,000
Thereafter 541,500
--------
$855,000
========
Rent expense amounted to $36,477 and $36,158 for the six months ended
July 31, 2000 and 1999, respectively.
6. Common stock:
During the three months ended July 31, 2000, the Company issued 95,500
shares of its 144 restricted private placement stock with net proceeds
of $113,687. In addition, the Company issued 122,000 shares of 144
restricted stock previously subscribed.
7. Notes payable and long-term debt:
The Company had an outstanding line of credit with a financial
institution in the amount of $1,000,000. The line of credit carries
interest at an annual rate of 2.9% plus the 30 day dealer commercial
paper rate with an initial expiration date of April 30, 2001. As of
July 31, 2000, the Company had utilized $659,154 of the line of credit.
The loan is secured by the personal guarantee of the Company's
president and the assets of Seto Holdings, Inc.
F-7
<PAGE> 9
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes payable and long-term debt (continued):
Long-term debt of the domestic companies consists of the following:
<TABLE>
<CAPTION>
Balance
July 31,
Rate 2000 Maturity
---- ---- --------
<S> <C> <C> <C>
Equipment loan (a) 15% $ 55,666 2004
Automobile loan (b) 13% 12,762 2004
Shareholder (c) 10% 35,005 2002
Shareholder (c) 15% 120,974 2004
Shareholder (c) 10% 60,492 2002
--------
284,899
Less current portion 130,011
--------
$154,888
========
</TABLE>
(a) The note is payable in monthly installments of $1,607, including
interest. Equipment which cost $57,426 is pledged as collateral.
(b) The note is payable in monthly installments of $355, including
interest. Automotive equipment which costs $26,085 is pledged as
collateral.
(c) The notes are payable to shareholders in monthly amounts
aggregating $12,417, including interest.
The maturities of these loans are as follows:
July 31, 2001 $130,011
July 31, 2002 85,802
July 31, 2003 50,743
July 31, 2004 18,343
--------
$284,899
========
F-8
<PAGE> 10
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes payable and long-term debt (continued):
Notes payable and long-term debt of the foreign subsidiaries consist of
the following:
Fimas:
Notes payable:
ECR $1,833,834
Factor 104,900
Capital leases, current portion 87,668
----------
$2,026,402
==========
Long-term debt:
Fixed loan $ 334,885
Capital lease 331,307
----------
$ 666,192
==========
The Company's land and buildings are pledged as collateral. The loans,
which are guaranteed jointly and severally by the Company's directors,
carry interest rates between 2% and 2.25% above the lender's base
lending rates. The directors of Fimas have made interest-free advances
to the Company which are unsecured and have no fixed repayment terms.
DTI:
Capitalized lease $32,507
=======
Due to directors $44,363
=======
Hong Kong Batteries Industries, Ltd.:
The directors of Hong Kong Batteries have made interest-free advances
to the Company in the amount of $72,776 which are unsecured and have no
fixed repayment terms.
8. Income taxes:
Provision for income taxes (benefit) for the six months ended July 31:
2000 1999
---- ----
Domestic:
Current $19,200 $ 4,573
Deferred (26,700) (11,126)
------- --------
Total (benefit) expense ($ 7,500) ($ 6,553)
======= ========
Foreign:
Current $18,333
Deferred 6,138
-------
$24,471
=======
F-9
<PAGE> 11
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Income taxes (continued):
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:
2000 1999
---- ----
Income tax computed at the domestic
federal statutory rates $14,200 $12,047
State tax (net of federal benefit) 5,000 7,000
Foreign income tax 24,471 ( 8,700)
Reduction in valuation allowance ( 26,700) ($16,900)
------- --------
Net income tax expense (benefit) $16,971 ($ 6,553)
======= ========
The components of deferred tax assets and liabilities consist of the
following:
Deferred tax asset:
Net operating loss carryforward $475,000
--------
Total deferred tax asset 475,000
Valuation allowance 132,374
--------
$342,626
========
The Company has a net operating loss carry forward of approximately
$1,600,000 for federal and state purposes which will expire in 2008.
9. 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, 2000, none of these options had been exercised.
F-10
<PAGE> 12
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Employment and consulting agreements (continued):
Employment 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
July 31, 2000. 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.
All options under this agreement were exercised as of July 31, 2000.
The shares underlying these options were issued pursuant to the
Company's 1997 non-statutory Stock Option Plan.
During the three months ended July 31, 2000, the Company granted
options to three individuals who agreed to serve as officers of the
Company's foreign holding company. The options are exercisable at a
price of $1.50 per share with expiration dates extending through May
2003.
10. Computation of earnings per share:
<TABLE>
<CAPTION>
Six months ended Three months ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number
of common shares
outstanding 19,090,069 10,828,575 19,467,165 10,948,774
Assumed conversion of
stock options 6,063,000 6,277,500 6,126,000 6,310,000
---------- ---------- ---------- ----------
Weighted average number
of common shares
outstanding 25,153,069 17,106,075 25,593,165 17,258,774
========== ========== ========== ==========
</TABLE>
F-11
<PAGE> 13
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Principal products and segmentation of sales:
The Company's principal products are industrial ceramics, diamond
cutting tools, cellular phone batteries and consumer electronics. 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.
Financial information relating to the principal industry segments and
classes of products:
July 31, July 31,
2000 1999
---- ----
Sales to customers:
Industry A:
Ceramics $ 622,758 $ 730,563
Industry B:
Diamond tools 348,239 337,583
Industry C:
Cellular batteries 450,627 575,254
Industry D:
Rechargeable batteries 1,173,683
Industry E:
Consumer electronics 10,391,619
Miscellaneous 102,923 118,445
----------- -----------
$13,089,849 $ 1,761,845
=========== ===========
Operating profit or loss:
Industry A $ 96,491 $ 226,249
Industry B ( 87,871) ( 103,823)
Industry C 22,669 44,553
Industry D 191,398
Industry E 341,639
Miscellaneous ( 58,306) ( 38,692)
----------- -----------
$ 506,020 $ 128,287
=========== ===========
Identifiable assets:
Industry A $ 435,994 $ 483,495
Industry B 1,387,909 1,274,724
Industry C 679,031 520,034
Industry D 775,609
Industry E 7,235,196
Miscellaneous 317,400 407,864
----------- -----------
$10,831,139 $ 2,686,117
=========== ===========
F-12
<PAGE> 14
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Principal products and segmentation of sales (continued):
Foreign and domestic operations and export sales:
<TABLE>
<CAPTION>
July 31, July 31,
2000 1999
---- ----
<S> <C> <C>
Sales to customers:
United States $ 1,308,985 $1,068,030
Far East 11,519,067 317,485
Canada 261,797 376,330
----------- ----------
$13,089,849 $1,761,845
=========== ==========
Operating profit:
United States $ 50,602 $ 77,768
Far East 445,298 23,117
Canada 10,120 27,402
----------- ----------
$ 506,020 $ 128,287
=========== ==========
Identifiable assets:
United States $ 974,803 $1,403,328
Far East 9,748,025 1,146,774
Canada 108,311 136,015
----------- ----------
$10,831,139 $2,686,117
=========== ==========
</TABLE>
12. Supplemental cash flow information:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Interest paid during the period $ 289,913 $ 44,631
=========== ==========
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
==========
Issuance of common shares for consulting
contract $ 220,600
===========
Purchase of property and equipment
on installment financing $ 70,611
===========
</TABLE>
F-13
<PAGE> 15
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
--------------------------------------------------------
GENERAL
-------
During the quarter ended July 31, 2000 and for the six months ended July 31,
2000, as has been the case following the Company's acquisitions in November
1999, the Company's net sales were primarily derived from its Far East
operations (Malaysia and China), 94.6% and 92.1% respectively. Essentially all
of the Far East revenues were from Subsidiaries with sales in the Consumer
Products Sector. With Management's current decision to emphasize
telecommunications, internet and electronic products manufacturing and the
recently concluded Joint Ventures and Alliances in that part of the world
involving the same product sector, this regional trend is established, firm and
will continue.
High Tech Industrial Products to Industry, 5.4% of the Company's net sales in
the quarter ended July 31, 2000 and 7.9% for the six months ended July 31, 2000,
were previously major contributors to the total revenue stream. These products
will now play a reduced role while still progressively increasing their sales
volumes, in particular resin dicing blades and ceramic manufacturing services.
Comparing the results of continuing operations only during the quarter ended
July 31, 2000 and the six months ended July 31, 2000, the company experienced
its highest quarterly and six-month net sales of $7,800,427 and $13,089,849
respectively. For the six-month period, the Company realized its highest income
from operations and net income of $512,182 and $295,277; for the quarter, the
income from operations of $169,615 was exceeded only by the last two preceding
quarters. As of July 31, 2000, the Company achieved its greatest net worth at
$7,865,698.
With so much of its revenue derived from Malaysia and China, economic and
political conditions in those countries are of a major interest to the Company.
Management believes that regional conditions and circumstances will have no
material adverse effect on its operations during the current fiscal year. Along
these lines, the Company points out:
1. Malaysia's economy is again growing and attracting renewed foreign
investments.
2. As for China, there are a number of positive indicators:
a. Management notes that Permanent Normal Trading Relations (PNTR)
with the U.S. stands an excellent chance of being finalized before
our Presidential elections. This should be followed by procedural
steps leading to membership in the World Trade Organization (WTO).
The Company is confident that it will see a leveling of the
economic playing field and an opening of new opportunities for
which it is itself, now well positioned.
b. Regulations have recently been drafted to open up
telecommunications services to foreign investors, a hint of the
Government's disposition for the near future.
c. The Chinese Government has initiated a number of significant
privatization steps very recently.
Addressing conditions in both China and Malaysia, Management reports that
another currency crises in Southeast Asia similar to that in 1997 is not
anticipated. In addition, there are no signs of political uncertainty, a very
stabilizing factor. Also, the Company's operations and facilities are in
compliance with all material environmental laws and applicable governmental
regulations. However, no assurance can be given that adverse changes will not
occur and that the anticipated expansion of its business and any further
investments in the region will occur.
<PAGE> 16
Management believes its financial condition remains healthy. As of July 31,
2000, both total assets at $16,615,443 and total current assets at $8,965,362
increased over the previous quarter ended April 30, 2000 by 10.2% and 10.4%
respectively. Although its cash position decreased by 29.2%, it was more than
offset by an 18.2% increase in a combination of accounts receivable and
inventory and an increase of 11.5% in property and equipment (net of
depreciation). Total current liabilities at $7,630,748 as of July 31, 2000
increased by 26.8% over that at the end of the last quarter, with accounts
receivable increasing by 65.2% and the current portion of long-term debt
increasing by 65.2%. Management stated that it was very comfortable with all of
these factors noting that the aforementioned quarterly and six month net sales
records called for mandated operational steps that impacted the specific
financial ratios.
As of August 2000, the Company had a backlog of approximately $12 million or
1-1/2 times the current quarter's net sales which it is believed will be shipped
by November, the beginning of the next fiscal quarter. Management projects that
this trend will continue and that net sales and net income may exceed $25
million and $700,000 respectively for fiscal year 2000.
RESULTS OF OPERATIONS
---------------------
It should be kept in mind that two of the Company's acquisitions, Hong Kong
Batteries Industries, Ltd ("HKBI") and Fimas Sdn Bhd ("Fimas") were not part of
SETO in the comparative periods of the quarter and the six months ending July
31, 1999. For those two time periods, during the quarter and six months ending
July 31, 2000, the two Subsidiaries operating results were as follows:
<TABLE>
<CAPTION>
Quarter Ending Six Months Ending
7/31/00 7/31/00
------- -------
<S> <C> <C>
FIMAS
Net Sales $6,533,372 $10,391,618
% of Total SETO Sales 83.7% 78.4%
Gross Profit Margin 5.1% 6.2%
Income from Operations $ 363,521 $ 341,642
Net Income 92,700 69,718
HKBIL
Net Sales $ 739,758 $ 1,173,683
% of Total SETO Sales 9.5% 8.9%
Gross Profit Margin 23.2% 25.5%
Income from Operations $ 127,505 $ 191,398
Net Income 102,479 162,072
</TABLE>
The table above reveals that Fimas and HKBI together contributed 93.2% of the
total SETO net sales in the quarter ending July 31, 2000 and 87.3% of the total
SETO net sales in the six months ending July 31, 2000. Their contributions and
their financial factors, therefore, significantly affected operating results.
SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999
---------------------------------------------------
For the second quarter ended July 31, 2000 compared to the corresponding quarter
in the previous year, the Company's net sales increased over 800% (or over 8
times) from $861,058 to $7,800,427, as previously stated the highest quarterly
sales from continuing operations; and income from operations increased from
$116,423 to $169,615 or 45.7%. Net income for the second quarter ended July 31,
2000 was $33,780 compared to $85,361 for the second quarter ended July 31, 1999
for a reduction of 60.5% a measure management considers atypical as explained
below.
<PAGE> 17
SIX MONTHS ENDED JULY 31, 2000 COMPARED TO
------------------------------------------
SIX MONTHS ENDED JULY 31, 1999
------------------------------
For the six months ended July 31, 2000 compared to the six months ended July 31,
1999 net sales of $13,089,849, as previously indicated the highest from
continuing operations for that fiscal time period, increased over 600% (or 6
times) over sales of $1,761,845 for the previous year's comparable period. Net
income for the six months ended July 31, 2000 was $295,777, the highest from
continuing operations for that fiscal time period, compared to $89,413 for the
six months ended July 31, 1999 or an increase of 276% (or over 2-1/2 times), a
measure which Management believes will be improved in the next two fiscal
quarters.
ANALYSIS
--------
With Fimas and HKBI and their product lines now an integral and substantial part
of SETO, their operating ratios are critical to overall Company results. In
particular, they have affected the overall gross profit margin; in the second
quarter ended July 31, 2000 compared to the comparable quarter in 1999, gross
profit margins decreased to 10.9% from 42.6%. For the six months ended July 31,
2000 compared to the previous year's comparable period, gross profit margins
decreased to 9.9% from 43.3%. Management stated that this change is not a
surprise and reflects the new array of subsidiaries and their product lines.
However, Management explained that the Company has gone through a corporate
transition and has now concluded the satisfactory absorption of the new
subsidiaries into the Company's fold. The Company has put in place certain
administrative and cost reduction controls and anticipates very noticeable
improvements in cost of sales for the remainder of the fiscal year.
With selling, general and administrative expense stabilized at less than 10% of
net sales compared to the approximately 40% to 43% of the comparable period in
1999, Management is evaluating ways to reduce interest expense, the remaining
major cost item. For the six months ended July 31, 2000 compared to the six
months ended July 31, 1999 net interest expense increased to $201,097 from
$44,631. Although no assurance can be given that such steps will be successful,
as explained in the Liquidity and Capital Resource section, the Company is
hoping to continue the sale of restricted stock to investors and exploring
various other equity sales opportunities as a means of paying down debt.
Management is confident that its net sales will continue to grow for the
remainder of the fiscal year. In particular, Management points to the predicted
doubling in the next three years in Asia of wireless users; the expansion to
$5.2 billion for the portable products' battery market, a demand which suppliers
will find hard to fill; and its entry into the burgeoning telecommunications
product area. This is coupled with the Company's staple ceramics and contract
electronic manufacturing sales.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At July 31, 2000, the Company had current assets of $8,965,362, including
$558,845 of unrestricted cash, and current liabilities of $7,630,748 yielding a
current ratio of 1.17;1 or a decrease over that of the previous quarter ended
April 30, 2000 of 13.3%. Management believes this measure of a Company's ability
to meet its current obligations still reflects positively on the Company's
financial standing and points to its recent successful financing as indicative
of that (see below).
<PAGE> 18
During the quarter just ended, the Company received additional financing for its
short-term growth plans in the amount of $1,663,000 which allowed it to service
Southeast Asian Subsidiaries' needs; a second surface mounted technology
assembly line; facility and office upgrading; new product molds; and
across-the-board working capital. The financing emanated from an increase in the
existing line of credit from Merrill Lynch Business Financial Services, the sale
of restricted stock to investors and from Malaysian banking and leasing company
sources. Lending limitations from Malaysian institutions has suddenly eased and
Company believes more such financing can be forthcoming. However, no assurance
can be given that such financing will be successfully obtained on acceptable
terms.
The Company continues with its additional plans for further internal
manufacturing expansion to meet customer demand, new strategic acquisition and
joint venture investments and the provision of associated working capital. As
one of its steps to meet such cash needs and to minimize debt obligations, the
Company is exploring various equity sales and private placements routes.
Although discussions are in process for such sales, no assurance that such funds
will become available and if so, that it will be sufficient and on acceptable
terms to satisfy andy specific requirements.
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 Malaysian
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 fluctuations in
foreign currency exchange rates. During this quarter, the foreign currency
exchange gain was $38,661, considered nominal, and thus, in effect did not
impact operational results.
Management believes that for fiscal year 2000, two factors will continue to keep
its foreign currency exchange losses extremely low; Malaysian and Chinese
exchange rates are fixed relative to the U.S. Dollar and, outside of these prime
Company operating areas, the Company deals in U.S. Dollars almost exclusively.
As a by-product, a number of economists believe that such predictable policies
such as pegging exchange rates yields a key element of financial stability.
While future fluctuations in currency rates could impact results of operations
or financial conditions, foreign operations are expected to continue to provide
strong financial results and earnings growth.
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 rates fluctuations results from
wholly-owned subsidiary operations in Malaysia and China and from the Company's
share of the earnings of these operations, which are denominated in other
currencies.
<PAGE> 19
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 during fiscal year 2000.
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
which reflect management's 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 and achievements of the company to differ significantly from
projected results. Factors that could cause actual future results to differ
materially include among others, the risks of doing business in Malaysia, China
and Southeast Asia in general, including, without limitation, economic and
political conditions, foreign currency translation risks, tariffs and other
foreign trade policies and dependence on inexpensive labor in such countries,
partial dependence on the semiconductor and telecommunication manufacturing
industries, availability of raw materials intense competition and technological
obsolescence. The Company assumes no obligation to update such forward-looking
statements, if any, at any time.
<PAGE> 20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SETO HOLDINGS, INC.
-----------------------------
(Registrant)
By /s/ Eugene J. Pian
-----------------------------
Eugene J. Pian, President
Date: September 14, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Eugene J. Pian
-----------------------------
Eugene J. Pian
Director
Date: September 14, 2000
/s/ Craig A. Pian
-----------------------------
Craig A. Pian
Director
Date: September 14, 2000
/s/ Francine Pian
-----------------------------
Francine Pian
Director
Date: September 14, 2000
/s/ Tan Hun Chin
-----------------------------
Tan Hun Chin
Director
Date: September 14, 2000
