<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 October 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 October 31, 2000
------------------------------ -------------------------------
Common Stock, par value $.001
per share 19,631,600
<PAGE> 2
INDEX
Part I. Financial Information
Item 1. Consolidated financial statements:
Balance sheet as of October 31, 2000 F-2
Statement of income for the nine and three months
October 31, 2000 and 1999 F-3
Statement of comprehensive income for the nine and
three months ended October 31, 2000 and 1999 F-4
Statement of cash flows for the nine months ended
October 31, 2000 and 1999 F-5
Notes to consolidated financial statements F-6 - F-12
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 - OCTOBER 31, 2000
ASSETS
Current assets:
Cash $ 634,233
Accounts receivable, less allowance
for doubtful accounts of $17,972 5,537,412
Inventory 2,596,552
Prepaid expenses and other assets 603,337
Deferred tax asset, current portion 114,209
-----------
Total current assets 9,485,743
-----------
Property and equipment 4,900,750
-----------
Other assets:
Goodwill, net of amortization 2,106,948
Security deposits 150,853
Deferred tax asset, net of current portion 228,417
-----------
2,486,218
-----------
$16,872,711
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 128,911
Notes payable 3,751,283
Accounts payable 2,974,689
Accrued expenses 1,428,937
-----------
Total current liabilities 8,283,820
-----------
Long-term debt, net of current portion 522,838
-----------
Deferred lease liability 15,000
-----------
Deferred income taxes payable 130,823
-----------
Commitments and contingencies
Shareholders' equity:
Common stock par value $.001; 100,000,000
shares authorized; 19,661,000 shares issued 19,661
Additional paid in capital 9,095,820
Currency translation adjustment ( 219,119)
Retained earnings (deficit) ( 967,106)
-----------
7,929,256
Less common shares held in treasury, 29,400
shares at cost ( 9,026)
-----------
Total shareholder's equity 7,920,230
-----------
$16,872,711
===========
See notes to consolidated financial statements.
F-2
<PAGE> 4
SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
NINE AND THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
<TABLE>
<CAPTION>
Nine Months ended Three Months Ended
October 31 October, 31
2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $22,796,000 $ 2,482,794 $9,706,151 $ 720,949
Cost of sales 20,092,285 1,268,536 8,810,888 397,471
----------- ----------- ---------- -----------
Gross profit 2,703,715 1,214,258 895,263 323,478
Selling, general and
administrative expenses 2,057,134 1,166,926 760,864 404,433
----------- ----------- ---------- ----------
Income from operations 646,581 47,332 134,399 ( 80,955)
---------- ----------- ---------- ----------
Other income (expenses):
Interest income 1,133 1,133
Interest expense ( 331,625) ( 79,557) ( 130,528) ( 34,926)
Loss on Foreign
currency exchange 2,079 ( 242) 916 554
----------- ----------- ---------- ----------
( 328,413) ( 79,799) ( 128,479) ( 34,372)
----------- ----------- ---------- ----------
Income before income taxes
(benefit) 318,168 ( 32,467) 5,920 ( 115,327)
Income taxes (benefit) ( 7,500) ( 6,553) ( 24,471)
----------- ----------- ---------- ----------
Net income (loss) $ 325,668 ($ 25,914) $ 30,391 ($ 115,327)
=========== =========== ========== ==========
Earnings per share
information:
Basic 0.02 $ 0.00 $ 0.00 ($ 0.01)
========== =========== ========== ==========
Diluted 0.01 $ 0.00 $ 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
NINE AND THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
<TABLE>
<CAPTION>
Nine Months Three Months
ended ended
October 31, October 31,
2000 1999 2000 1999
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Net income $325,668 ($25,914) $30,391 ($115,327)
Other comprehensive income, net of tax:
Foreign currency
translation adjustment 20,144 ( 24,384)
-------- ------- ------- --------
Comprehensive income $345,812 ($25,914) $ 6,007 ($115,327)
======== ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 6
SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $ 325,668 ($ 25,914)
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 490,813 58,414
Compensatory stock issued 43,300
Changes in other operating assets and
liabilities:
Accounts receivable ( 2,022,453) ( 122,165)
Inventories ( 193,759) ( 117,087)
Prepaid expenses and other current assets ( 173,138) 21,077
Deferred tax assets ( 7,500) ( 11,126)
Other assets ( 111,508) 4,512
Accounts payable and accrued expenses 1,428,642 209,947
Deferred lease liability 4,500 4,500
---------- --------
Net cash provided by (used in)
operating activities ( 258,735) 65,458
---------- --------
Investing activities:
Purchase of property and equipment ( 1,082,912) ( 94,350)
---------- --------
Net cash used in investing activities ( 1,082,912) ( 94,350)
---------- --------
Financing activities:
Proceeds from issuance of common stock 945,287 80,000
Proceeds from financing 1,385,234 281,890
Payment of debt ( 697,869) ( 337,801)
---------- --------
Net cash provided by financing activities 1,632,652 24,089
---------- --------
Effect of exchange rate changes on cash ( 20,144) ( 7,845)
---------- --------
Net increase (decrease) in cash 270,861 ( 12,648)
Cash, beginning of period 363,372 66,052
---------- --------
Cash, end of period $ 634,233 $ 53,404
========== ========
</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 83,934
Manufacturing equipment 6,033,045
Office equipment 643,942
Transportation equipment 194,343
----------
7,922,544
Less accumulated depreciation 3,021,794
----------
$4,900,750
==========
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:
October 31, 2001 $ 60,000
October 31, 2002 60,000
October 31, 2003 63,000
October 31, 2004 66,000
October 31, 2005 66,000
Thereafter 525,000
--------
$840,000
========
Rent expense amounted to $36,477 and $36,158 for the nine months ended
October 31, 2000 and 1999, respectively.
6. 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 October 31, 2000, the
Company had utilized $958,477 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.
Long-term debt of the domestic companies consists of the following:
Balance
October 31,
Rate 2000 Maturity
---- ----------- --------
Equipment loan (a) 15% $ 52,940 2004
Automobile loan (b) 13% 12,111 2004
Shareholder (c) 10% 30,803 2002
Shareholder (c) 15% 111,196 2004
Shareholder (c) 10% 51,027 2002
--------
258,077
Less current portion 128,911
--------
$129,166
========
(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:
October 31, 2001 $128,911
October 31, 2002 77,796
October 31, 2003 38,294
October 31, 2004 13,076
--------
$258,077
========
F-7
<PAGE> 9
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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 $1,865,318
Capital leases, current portion 87,668
----------
$1,952,986
==========
Long-term debt:
Fixed loan $ 325,585
Capital lease 309,389
----------
$ 634,974
==========
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 $ 40,226
=======
Due to directors $ 54,350
=======
7. Income taxes:
Provision for income taxes (benefit) for the nine months ended October 31:
2000 1999
---- ----
Domestic:
Current $ 8,500 $ 4,573
Deferred ( 16,000) ( 11,126)
------- --------
Total (benefit) expense ($ 7,500) ($ 6,553)
======= ========
F-8
<PAGE> 10
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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 $ 4,500 $12,047
State tax (net of federal benefit) 4,000 7,000
Foreign income tax ( 8,700)
Reduction in valuation allowance ( 16,000) ( 16,900)
------- -------
Net income tax expense (benefit) ($ 7,500) ($ 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.
8. 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, 2000, none of these options had been exercised.
F-9
<PAGE> 11
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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 October 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 October 31, 2000. The shares underlying
these options were issued pursuant to the Company's 1997 non- statutory
Stock Option Plan.
9. Computation of earnings per share:
<TABLE>
<CAPTION>
Nine months ended Three months ended
October 31, October 31,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number
of common shares
outstanding 19,305,105 10,915,565 19,631,600 11,207,245
Assumed conversion of
stock options 6,092,428 6,238,025 6,150,000 6,260,000
---------- ---------- ---------- ----------
Weighted average number
of common shares
outstanding 25,397,533 17,153,590 25,781,600 17,467,245
========== ========== ========== ==========
</TABLE>
F-10
<PAGE> 12
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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:
October 31, October 31,
2000 1999
---- ----
Sales to customers:
Industry A:
Ceramics $ 1,001,338 $ 934,300
Industry B:
Diamond tools 537,962 509,715
Industry C:
Cellular batteries 623,887 872,174
Industry D:
Rechargeable batteries 2,048,244
Industry E:
Consumer electronics 18,414,032
Miscellaneous 170,537 166,605
----------- ----------
$22,796,000 $2,482,794
=========== ==========
Operating profit or loss:
Industry A $ 212,282 $ 225,439
Industry B ( 168,973) ( 189,332)
Industry C ( 36,837) 65,649
Industry D 254,662
Industry E 513,180
Miscellaneous ( 127,733) ( 54,424)
----------- ----------
$ 646,581 $ 47,332
=========== ==========
Identifiable assets:
Industry A $ 611,805 $ 422,080
Industry B 1,831,854 1,308,180
Industry C 551,856 558,073
Industry D 982,154
Industry E 10,403,974
Miscellaneous 232,240 407,864
----------- ----------
$14,613,883 $2,696,197
=========== ==========
F-11
<PAGE> 13
SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Principal products and segmentation of sales (continued):
Foreign and domestic operations and export sales:
<TABLE>
<CAPTION>
October 31, October31,
2000 1999
---- ----
<S> <C> <C>
Sales to customers:
United States $ 2,279,600 $1,505,070
Far East 20,060,480 447,399
Canada 455,920 530,325
----------- ----------
$22,796,000 $2,482,794
=========== ==========
Operating profit:
United States $ 64,658 $ 28,693
Far East 568,991 8,529
Canada 12,932 10,110
----------- ----------
$ 646,581 $ 47,332
=========== ==========
Identifiable assets:
United States $ 1,315,249 $1,634,435
Far East 13,152,495 485,855
Canada 146,139 575,908
----------- ----------
$14,613,883 $2,696,198
=========== ==========
</TABLE>
11. Supplemental cash flow information:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Interest paid during the period $ 420,441 $ 79,557
=========== ==========
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-12
<PAGE> 14
MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
--------------------------------------------------------
GENERAL
-------
During the quarter ended October 31, 2000 and for the nine months ended October
31, 2000, as has been the case following the Company's acquisitions of Fimas Sdn
Bhd and Hong Kong Batteries Industries, Ltd. in November 1999, the Company's net
sales were primarily derived from its Far East operations (Malaysia and China),
95.3% and 94.1% 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 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 contributed 7.3% of the Company's net
sales in the quarter ended October 31, 2000 and 8.5% for the nine months ended
October 31, 2000. These products were major contributors in the past to the
total revenue stream, but will now play a reduced role from the standpoint of
sales value 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 and the
nine months ended October 31, 2000, the Company experienced its highest
quarterly and nine month net sales of $9,706,151 and $22,796,000 respectively.
For the nine month period the income from operations of $646,581 and net income
of $325,668 were the highest compared to comparable periods. As of October 31,
2000, the Company achieved its greatest net worth at $7,920,230.
With so much of its revenue derived from the Far East/Pacific Rim, more
specifically Malaysia and China, economic and political conditions in that
geographic area 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. The Asia Pacific Economic Cooperation (APEC) regional group
launched an Information Technology Agreement which will eliminate
tariffs on computers, semiconductors and related equipment. The
Company's emphasis in that part of the world is now in the
telecommunications industry so that the latter step is helpful.
2. The Association of Southeast Asian Nations (ASEAN) is set to sign
a free trade pact that aims to eliminate duties on information
technology goods which the Company believes will positively impact
Malaysia and China.
3. Asia-Pacific alone has 155 million mobile phone subscribers, more
than any other region in the world. China has a fast growing
market of 62 million mobile phone users. East Asia is betting on
wireless internet appliances. As a result, Management feels it is
in the right place at the right time.
4. The Chinese Government has initiated a number of significant
privatization and foreign ownership steps very recently which may
be beneficial to the Company.
<PAGE> 15
5. Malaysia's economy continues to grow and attract renewed foreign
investments. China anticipates becoming a member of the World
Trade Organization (WTO) and, thus, a leveling of the playing
field in that country will result.
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.
Management believes its financial condition remains healthy. As of October 31,
2000, both total assets at $16,872,711 and total current assets at $9,485,743
increased over the previous quarter ended July 31, 2000 by 1.5% and 5.8%
respectively. The cash position increased by 13.5% to $634,233 while the
combination of accounts receivable and inventory increased by 5.8% over the
previous quarter. At the same time, total current liabilities increased by 8.6%
as a partial offsetting factor to the latter. Long-term debt decreased by 46.4%
to $522,838 substituted by an increase in notes payable of 82.2%. Management
stated that it was very comfortable with all of these factors noting that the
aforementioned quarterly and nine month net sales records were the prime
explanation for the specific financial ratio results.
As of December 2000, the Company had a backlog of about $8 million approximating
the current quarter's total net sales. Management projects that the net sales
trend will continue as a result and that net sales for the fiscal year ending
January 31, 2001 will exceed a record level in excess of $30 million.
RESULTS OF OPERATIONS
---------------------
It should be pointed out that two of the Company's acquisitions, Hong Kong
Batteries Industries, Ltd ("HKBIL") and Fimas Sdn Bhd ("Fimas") were not part of
SETO during the quarter and the nine months ending October 31, 1999. For those
two comparative time periods during the quarter and nine months ending October
31, 2000, the two Subsidiaries operating results were as follows:
Quarter Ending Nine Months Ending
10/31/00 10/31/00
--------------- -------------------
FIMAS
Net Sales $8,022,414 $18,414,032
% of Total SETO Sales 82.7% 80.7%
Gross Profit Margin 4.1% 5.3%
Income from Operations $166,771 $513,180
HKBIL
Net Sales $874,561 $2,048,244
% of Total SETO Sales 9.0% 9.0%
Gross Profit Margin 17.3% 22.0%
Income from Operations $63,264 $254,662
<PAGE> 16
The table above reveals that Fimas and HKBIL together contributed 91.7% of the
total SETO net sales in the quarter ending October 31, 2000 and 89.7% of the
total SETO net sales in the nine months ending October 31, 2000. Their
contributions and their financial factors, therefore, significantly affected
operating results.
In comparing the third quarter ending October 31, 2000 to the previous quarter
ending July 31, 2000, sales increased by 24.4%, gross profit increased by 6.2%
and net income increased by 15.6%.
THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999
-------------------------------------------------
For the Third Quarter ended October 31, 2000 compared to the corresponding
quarter in the previous year, the Company's net sales increased over 12 times
from $720,949 to $9,706,151, as previously stated the highest quarterly sales
from continuing operations; and income from operations increased from a loss to
$134,399. Net income for the third quarter ended October 31, 2000 was $30,391
compared to a loss for the third quarter ended October 31, 1999.
NINE MONTHS ENDED OCTOBER 31, 2000 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
----------------------------------------------------------------------------
1999
----
For the nine months ended October 31, 2000 compared to the nine months ended
October 31, 1999 sales of $22,796,000, as previously indicated the highest from
continuing operations for that fiscal time period, increased over 8 times. Net
income for the nine months ended October 31, 2000 was $325,668, also previously
indicated to be the highest from continuing operations for that fiscal time
period, compared to a loss for the nine months ended October 31, 1999.
ANALYSIS
--------
With Fimas and HKBIL 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 third
quarter ended October 31, 2000 compared to the comparable quarter in 1999, gross
profit margins decreased to 9.2% from 44.9%; and for the nine months ended
October 31, 2000 compared to the previous year's comparable period, gross profit
margins decreased to 11.9% from 48.9%. 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 transition and
has now concluded the satisfactory absorption of the new subsidiaries into the
Company's corporate structure. The Company has put in place certain
administrative and cost reduction controls and anticipates noticeable
improvements in cost of sales no later that next year's first fiscal quarter.
With selling, general and administrative expense stabilized at less that 10% of
net sales compared to the approximately 50% of the comparable period in 1999,
Management is evaluating ways to reduce the remaining major cost item, interest
expense. For the nine months ended October 31, 2000 compared to the nine months
ended July 31, 1999 net interest expense increased to $331,625 from $77,557.
Although no assurance can be given that such steps will be
<PAGE> 17
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.
For the remainder of this fiscal year, Management anticipates improvements in
its ceramics and telecommunication products lines which will contribute
significantly to the earlier mentioned fiscal year-end sales record level in
excess of $30 million.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At October 31, 2000, the Company had current assets of $9,485,743, inclusive of
$634,233 of unrestricted cash, and current liabilities of $8,283,820 yielding a
current ratio of 1.15; 1 or approximately the same as that of the previous
quarter ended July 31, 2000. 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 increase in
financing as indicative of that (see below).
During the quarter just ended, the Company was permitted to draw down further on
its line of credit with Merrill Lynch Business Financial Services. On the other
hand, lending limitations from Malaysian institutions which had eased to a
degree have now become more restrictive. Therefore, Management feels that its
current need for additional dicing saws and associated inspection equipment with
an estimated value of $150,000 will either be lease financed, internally
financed or require a new credit arrangement from the U.S. Further, the Company
continues to believe it will make other strategic acquisitions over time
requiring financing. For these purposes, Management continues to seek equity
sales and private placements. Although discussions are in process for such sales
and additional sources will be explored, there is no assurance that such funds
will become available and if so, that it will be sufficient and on acceptable
terms to satisfy 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 $916 and the nine month gain was $2079, both very nominal, and
thus in effect neither impacted operational results.
Management believes that for fiscal year 2000, two factors will continue to keep
its foreign currency exchange losses, if any, 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
<PAGE> 18
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.
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> 19
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: December 15, 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: December 15, 2000
/s/ Craig A. Pian
-------------------------------
Craig A. Pian
Director
Date: December 15, 2000
/s/ Francine Pian
-------------------------------
Francine Pian
Director
Date: December 15, 2000
/s/ Tan Hun Chin
-------------------------------
Tan Hun Chin
Director
Date: December 15, 2000
