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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, 2001 | ||||
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
(Formerly Semicon Tools, Inc)
(Exact name of small business issuer as specified in its charter)
Nevada | 77-0082545 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(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, 2001 | |||
Common Stock, par value $.001 per share | 14,241,600 |
Table of Contents
INDEX
Part I. Financial Information | ||||||
Item 1. Consolidated financial statements: | ||||||
Balance sheet as of July 31, 2001 | F-2 | |||||
Statement of income for the six and three months ended July 31, 2001 and 2000 | F-3 | |||||
Statement of comprehensive income for the six and three months ended July 31, 2001 and 2000 | F-4 | |||||
Statement of cash flows for the six and three months ended July 31, 2001 and 2000 | F-5 | |||||
Notes to consolidated financial statements | F-6 - F-11 | |||||
Item 2. Management’s discussion and analysis of financial condition | ||||||
Part II. Other information | ||||||
Signatures |
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SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — JULY 31, 2001
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 763,184 | ||||||
Accounts receivable, less allowance for doubtful accounts of $10,350 | 661,479 | |||||||
Inventory | 883,282 | |||||||
Prepaid expenses and other assets | 89,561 | |||||||
Deferred tax asset, current portion | 114,209 | |||||||
Total current assets | 2,511,715 | |||||||
Property and equipment | 684,533 | |||||||
Other assets: | ||||||||
Goodwill, net of amortization | 822,717 | |||||||
Security deposits | 53,929 | |||||||
Deferred tax asset, net of current portion | 220,917 | |||||||
Net assets of discontinued operations | 277 779 | |||||||
1,375,342 | ||||||||
$ | 4,571,590 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 82,679 | ||||||
Notes payable | 1,000,000 | |||||||
Accounts payable | 665,650 | |||||||
Accrued expenses | 199,884 | |||||||
Total current liabilities | 1,948,213 | |||||||
Long-term debt, net of current portion | 62,186 | |||||||
Deferred lease liability | 19,500 | |||||||
Deferred income taxes payable | 41,189 | |||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Common stock par value $.001; 100,000,000 shares authorized; 14,271,000 shares issued | 14,271 | |||||||
Additional paid in capital | 4,364,035 | |||||||
Currency translation adjustment | (219,119 | ) | ||||||
Retained earnings (deficit) | (1,649,659 | ) | ||||||
2,509,528 | ||||||||
Less common shares held in treasury, 29,400 shares at cost | (9,026 | ) | ||||||
2,500,502 | ||||||||
$ | 4,571,590 | |||||||
See notes to consolidated financial statements.
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SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
SIX AND THREE MONTHS ENDED JULY 31, 2001 AND 2000
Six Months Ended | Three Months Ended | |||||||||||||||||
July 31, | July 31, | |||||||||||||||||
2000 | 2000 | |||||||||||||||||
2001 | Restated | 2001 | Restated | |||||||||||||||
Net sales | $ | 2,641,362 | $ | 2,321,025 | $ | 1,238,522 | $ | 1,208,738 | ||||||||||
Cost of sales | 1,432,123 | 1,230,660 | 644,751 | 723,704 | ||||||||||||||
Gross profit | 1,209,239 | 1,090,365 | 593,771 | 485,034 | ||||||||||||||
Selling, general and administrative expenses | 862,052 | 845,593 | 393,596 | 394,291 | ||||||||||||||
Income from operations | 347,187 | 244,772 | 200,175 | 90,743 | ||||||||||||||
Other income (expenses): | ||||||||||||||||||
Interest income | 7,830 | 5,968 | 3,991 | 5,673 | ||||||||||||||
Interest expense | (44,767 | ) | (63,133 | ) | (15,864 | ) | (35,004 | ) | ||||||||||
Foreign currency exchange | (188 | ) | (23 | ) | (190 | ) | 2,378 | |||||||||||
(37,125 | ) | (57,188 | ) | (12,063 | ) | (26,953 | ) | |||||||||||
Income before income taxes | 310,062 | 187,584 | 188,112 | 63,790 | ||||||||||||||
Income tax | 3,279 | 2,639 | 1,979 | 14,976 | ||||||||||||||
Income from continuing operations | 306,783 | 184,945 | 186,133 | 48,814 | ||||||||||||||
Discontinued operations: | ||||||||||||||||||
Income (loss) from operations of subsidiaries | 27,102 | 110,333 | 48,482 | (26,407 | ) | |||||||||||||
Net income | $ | 333,885 | $ | 295,278 | $ | 234,615 | $ | 22,407 | ||||||||||
Earnings per share information: | ||||||||||||||||||
Income from continuing operations | ||||||||||||||||||
Basic | $ | 0.02 | $ | 0.01 | $ | 0.01 | $ | 0.00 | ||||||||||
Diluted | $ | 0.02 | $ | 0.01 | $ | 0.01 | $ | 0.00 | ||||||||||
Discontinued operations: | ||||||||||||||||||
Basic | $ | 0.00 | $ | 0.01 | $ | 0.00 | $ | (0.00 | ) | |||||||||
Diluted | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | (0.00 | ) | |||||||||
See notes to consolidated financial statements.
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SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
SIX AND THREE MONTHS ENDED JULY 31, 2001 AND 2000
Six Months Ended | Three Months Ended | ||||||||||||||||
July 31, | July 31, | ||||||||||||||||
2000 | 2000 | ||||||||||||||||
2001 | Restated | 2001 | Restated | ||||||||||||||
Net income | $ | 333,885 | $ | 295,278 | $ | 234,615 | $ | 22,407 | |||||||||
Other comprehensive loss, net of tax: | |||||||||||||||||
Foreign currency translation adjustment | (53,300 | ) | 8,772 | ||||||||||||||
Comprehensive income | $ | 333,885 | $ | 241,978 | $ | 234,615 | $ | 31,179 | |||||||||
See notes to consolidated financial statements.
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SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JULY 31, 2001 AND 2000
2000 | |||||||||||
2001 | Restated | ||||||||||
Operating activities: | |||||||||||
Income from continuing operations | $ | 306,783 | $ | 184,945 | |||||||
Adjustments to reconcile net income to cash provided by continuing operations: | |||||||||||
Depreciation and amortization | 55,151 | 57,996 | |||||||||
Compensatory stock surrendered | (25,200 | ) | |||||||||
Changes in other operating assets and liabilities: | |||||||||||
Accounts receivable | 28,560 | (185,901 | ) | ||||||||
Inventories | (74,630 | ) | (59,268 | ) | |||||||
Prepaid expenses and other current assets | 32,546 | 57,760 | |||||||||
Deferred tax assets | (7,500 | ) | |||||||||
Other assets | (46,982 | ) | (159,516 | ) | |||||||
Accounts payable, and accrued expenses | 80,985 | (256,137 | ) | ||||||||
Deferred lease liability | 3,000 | 3,000 | |||||||||
Net cash used in continuing operations | 360,213 | (364,621 | ) | ||||||||
Net cash provided by (used in) discontinued operations | (26,678 | ) | 322,048 | ||||||||
Net cash provided by (used in) operating activities | 333,535 | (42,573 | ) | ||||||||
Investing activities: | |||||||||||
Purchase of property and equipment | (108 405 | (153,659 | ) | ||||||||
Net cash used in investing activities | (108,405 | ) | (153,659 | ) | |||||||
Financing activities: | |||||||||||
Proceeds from issuance of common stock | 945,287 | ||||||||||
Proceeds from financing | 18,847 | 750,000 | |||||||||
Payment of debt | (80,022 | ) | (654,569 | ) | |||||||
Net cash provided by (used in) financing activities | (61,175 | ) | 1,040,718 | ||||||||
Effect of exchange rate changes on cash | 40,473 | ||||||||||
Net increase in cash | 163,955 | 884,959 | |||||||||
Cash, beginning of period | 599,229 | 349,547 | |||||||||
Cash, end of period | $ | 763,184 | $ | 1,234,506 | |||||||
See notes to consolidated financial statements.
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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, 2001 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 and SDN BHD, Hong Kong Batteries Industries, Ltd. after elimination of all significant intercompany transactions and accounts. | ||
The financial statements for the six and three months ended July 31, 2000 have been restated to give effect to the disposition of Fimas SDN BHD and the discontinuation of Fuji Fabrication, SDN BHD. (See Note 12) | ||
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 | $ | 150,961 | ||
Manufacturing equipment | 701,115 | |||
Office equipment | 128,486 | |||
980,562 | ||||
Less accumulated depreciation | 296,029 | |||
$ | 684,533 | |||
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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, 2002 | $ | 61,500 | ||
July 31, 2003 | 66,000 | |||
July 31, 2004 | 66,000 | |||
July 31, 2005 | 66,000 | |||
July 31, 2006 | 66,000 | |||
Thereafter | 469,500 | |||
$ | 795,000 | |||
Rent expense amounted to $34,561 and $36,477 for the six months ended July 30, 2001 and 2000, 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 expiration date of October 31, 2001. As of July 31, 2001, the Company had utilized $1,000,000 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 | ||||||||||||||||
July 31, | ||||||||||||||||
Rate | 2000 | Maturity | ||||||||||||||
Equipment loan | (a | ) | 15 | % | $ | 44,114 | 2004 | |||||||||
Shareholder | (b | ) | 15 | % | 79,575 | 2003 | ||||||||||
Shareholder | (b | ) | 10 | % | 21,176 | 2002 | ||||||||||
144,865 | ||||||||||||||||
Less current portion | 82,679 | |||||||||||||||
$ | 621,863 | |||||||||||||||
(a) | The note is payable in monthly installments of $1,607, including interest. Equipment which cost $57,426 is pledged as collateral. | |
(b) | The notes are payable to shareholders in monthly amounts aggregating $8,364, including interest. | |
The maturities of these loans are as follows: |
July 31, 2002 | $ | 82,679 | ||||||
July 31, 2003 | 47,185 | |||||||
July 31, 2004 | 15,001 | |||||||
$ | 144,865 | |||||||
DTI: | ||||||||
Capitalized lease | $ | 24,227 | ||||||
Due to directors | $ | 69,527 | ||||||
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SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. | Income taxes: | |
Provision for income taxes (benefit) for the six months ended July 31: |
2001 | 2000 | ||||||||
Domestic: | |||||||||
Current | $ | 3,279 | $ | 2,639 | |||||
Deferred | |||||||||
Total (benefit) expense | $ | 3,279 | $ | 2,639 | |||||
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: |
2001 | 2000 | ||||||||
Income tax computed at the domestic federal statutory rates | $ | 28,594 | $ | 22,026 | |||||
State tax (net of federal benefit) | 3,279 | 2,639 | |||||||
Reduction in valuation allowance | (28,594 | ) | (22,026 | ) | |||||
Net income tax expense (benefit) | $ | 3,279 | $ | 2,639 | |||||
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 | 139,874 | ||||
$ | 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 2009. | ||
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, 2006. Compensation is set at a base of $125,000 and $110,000 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 Vice President also received 50,000 stock options at $.50 in February 2000. The options were not part of the 1997 Non-statutory Stock Option Plan effectuated March 25, 1997. As of July 31, 2001, none of these options had been exercised. |
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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 April 30, 2006. Compensation is set at a base of $60,000 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 550,000 stock options exercisable at $.50 per share, none of which have been exercised as of April 30, 2001. These options were not part of the 1997 non-statutory stock option Plan effectuated March 25, 1997. | ||
9. | Computation of earnings per share: |
Six Months | Three months | |||||||||||||||
ended | ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||||
Weighted average number of common shares outstanding | 14,315,254 | 19,090,069 | 14,271,000 | 19,467,165 | ||||||||||||
Assumed conversion of stock options | 5,525,000 | 6,063,000 | 5,525,000 | 6,126,000 | ||||||||||||
Weighted average number of common shares outstanding | 19,840,254 | 25,153,069 | 19,796,000 | 25,593,165 | ||||||||||||
10. | 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. | ||
Financial information relating to the principal industry segments and classes of products: |
July 31, | July 31, | |||||||||
2001 | 2000 | |||||||||
Sales to customers: | ||||||||||
Industry A: | ||||||||||
Ceramics | $ | 809,262 | $ | 661,663 | ||||||
Industry B: | ||||||||||
Diamond tools | 419,303 | 419,699 | ||||||||
Industry C: | ||||||||||
Rechargeable batteries | 1,166,950 | 1,173,683 | ||||||||
Miscellaneous | 245,847 | 65,980 | ||||||||
$ | 2,641,362 | $ | 2,321,025 | |||||||
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SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. | Principal products and segmentation of sales (continued): | |
Financial information relating to the principal industry segments and classes of products (continued): |
July 31, | July 31, | ||||||||
2001 | 2000 | ||||||||
Operating profit or loss: | |||||||||
Industry A | $ | 282,277 | $ | 102,021 | |||||
Industry B | (133,600 | ) | (133,444 | ) | |||||
Industry C | 127,460 | 191,398 | |||||||
Miscellaneous | 71,050 | 40,200 | |||||||
$ | 347,187 | $ | 200,175 | ||||||
Identifiable assets: | |||||||||
Industry A | $ | 672,363 | $ | 541,835 | |||||
Industry B | 1,492,916 | 1,798,725 | |||||||
Industry C | 881,964 | 765,430 | |||||||
$ | 3,047,243 | $ | 3,105,990 | ||||||
July 31, | July 31, | ||||||||
2001 | 2000 | ||||||||
Sales to customers: | |||||||||
United States | $ | 1,253,387 | $ | 1,183,723 | |||||
Far East | 1,019,272 | 858,779 | |||||||
Canada | 368,703 | 278,523 | |||||||
$ | 2,641,362 | $ | 2,321,025 | ||||||
Operating profit: | |||||||||
United States | $ | 131,931 | $ | 80,070 | |||||
Far East | 142,347 | 70,061 | |||||||
Canada | 72,909 | 50,044 | |||||||
$ | 347,187 | $ | 200,175 | ||||||
Identifiable assets: | |||||||||
United States | $ | 944,645 | $ | 993,917 | |||||
Far East | 1,554,094 | 1,584,055 | |||||||
Canada | 548,504 | 528,018 | |||||||
$ | 3,047,243 | $ | 3,105,990 | ||||||
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SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. | Supplemental cash flow information: |
2001 | 2000 | ||||||||
Interest paid during the period | $ | 44,767 | $ | 15,864 | |||||
Income taxes paid during the period | $ | 0 | $ | 0 | |||||
Supplemental schedule of non–cash investing and financing activities: | |||||||||
Issuance of common shares for consulting contract | $ | 220,600 | |||||||
12. | Discontinued operations: | |
On February 1, 2001, the Company adopted a formal plan to sell Fuji Fabrication, SDN, BHD. The anticipated disposal date is approximately July 31, 2001. The assets of Fuji Fabrication to be sold consist primarily of inventories and equipment. | ||
Operating results of Fuji Fabrication for the six months ended July 31, 2001 are shown separately in the accompanying consolidated statement of income. The consolidated statement of income for July 31, 2000 has been restated and operating results of Fuji Fabrication are also shown separately. | ||
Net sales of Fuji Fabrication for 2001 and 2,000 were $163,256 and $443,186, respectively. These amounts are not included in net sales in the accompanying consolidated statement of income. | ||
In January 2001, the Company disposed of its subsidiary FIMAS SDN BHD and took back the 5,000,000 shares of its common stock issued in the acquisition. The net sales of Fimas SDN BHD for the six months ended July 31, 2000 amounted to $10,325,638. This amount is not included in net sales in the accompanying consolidated statement of income. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview and General Developments
1. General
Because of the earlier disassociation of Fimas Sdn Bhd (“Fimas”) at the end of fiscal year 2001 (ending January 31, 2001), the results for the three months and six months ended July 31, 2000 have been restated and utilized in this report for comparison purposes. Also, the closing of Fuji Fabrication Sdn Bhd (“Fuji”), as of the start of fiscal year 2002, the current fiscal year, resulted in their operations reflected in the Financial Statements as “discontinued operations.” Both Fimas and Fuji were located in Malaysia. | |
The asset sale of Fuji’s equipment, supplies and material is still in process requiring a cash payment of $150,000 at the time of asset shipment and $140,000 over the following three (3) months. Management anticipates that the transaction will be totally completed during this fiscal year and that after the Company works down Fuji’s receivables and payables, cash reserves will be increased by approximately $50,000. | |
Even with the conclusion of the operations of Fuji and Fimas, the Company continues to have a substantial presence in the Far East, Malaysia in particular, and, generally, revenue derived globally. During the current second quarter, 38.6% of its revenue was derived from the Far East and 13.9% came from Canada. Thus, global as well as domestic economic conditions are of great interest to Management. Although there was some reduction in net sales in the second quarter of this fiscal year as compared to the first quarter, net income more than doubled from $99,270 to $234,615. Following its strategic corporate restructuring, as a minimum, management believes that this profit trend will continue and probably improve. A substantial portion of this improvement will be derived from its industrial ceramics product line and the new emphasis on SETO Technology Sdn Bhd’s contract manufacturing services for multiple third parties in the U.S., especially on medical and automotive products. The latter contributed net sales of $229,427 during the |
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current quarter as compared to less than $20,000 in the previous quarter and $63,786 in net income or 27.8% of its sales. | |
Management believes that its product lines, now stabilized and better focussed and efficient, will realize a net income in excess of $600,000 during the fiscal year 2002 which will be the Company’s highest annual result, and remain in a range of 10% to 15% of sales. |
2. Financial Condition
Management believes its financial condition is healthy and will remain very much so for the remainder of this 2002 fiscal year. As of July 31, 2001, its cash position improved 3.7% over the previous quarter to $763,184. The nominal decreases from the previous quarter in total current assets and total assets, 1.1% and 2.3% respectively, are normal results of the impact of the residual expenses from the wrap-up of the earlier Fimas disassociation and the still on-going efforts related to the Fuji discontinuation, mostly a 14.3% decrease in accounts receivable. On the other side of the ledger and in a positive vein, total current liabilities dropped 3.9%, long term debt (manageable equipment and shareholder loans) dropped 14.3% and total shareholders’ equity increased by 8.9% to $2,500,502. |
SECOND QUARTER 2001 COMPARED TO 2000
Disregarding discontinued operations, in the fiscal quarter ended July 31, 2001, net sales increased 2.5% to $1,238,522 from $1,208,738 and net income increased over nine (9) times to $234,615 from $22,407 compared to the previous fiscal quarter ended July 31, 2000. Management points to the 19.5% increase in gross profit from quarter to quarter as the major reason for this improvement. Reflecting the different aspects of the product lines in which the Company is engaged (contract manufacturing services, distribution, manufacturing), from subsidiary to subsidiary gross profit margin varied from 29.4% to 66.3% and averages, for the Company as a whole, at 47.9%, a satisfactory level that management feels can continue for the remainder of the year. | |
Management believes that global economic conditions will only slightly impact financial results for the remainder of the fiscal year. Management is confident that |
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net sales and net profit will continue to grow and points to the bookings as the quarter ended which was in excess of $1,500,000 and to be satisfied over the next four (4) months as a promising sign. |
SIX MONTHS ENDED JULY 31, 2001 COMPARED TO SIX MONTHS ENDED JULY 31, 2000
For the six months ended July 31, 2001 compared to the six months ended July 31, 2000, net sales increased 13.8% to $2,641,362 over sales of $2,321,025 for the previous year’s comparable period. Net income for the six months ended July 31, 2001 was $333,885 a 13.1% increase over net income of $295,278 for the previous year’s comparable period. Contributing to the latter increase was a drop in the selling, general and administrative expenses ratio of 10.4% as a function of sales. |
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2001, the Company had current assets of $2,511,715 inclusive of $763,184 of unrestricted cash, and current liabilities of $1,949,213 yielding a current ratio of 1.29:1, a 3.2% increase over the ratio of April 30, 2001. The current ratio is in the upper range of its historical experience so that Management believes that this measure of a company’s ability to meet current obligations reflects positively on the Company’s financial condition. This is particularly true when one takes into consideration the residual expenses associated with the disassociation (Fimas) and the discontinuance (Fuji). | |
As described in the Overview and General Developments section, Fuji’s asset sale should generate net cash monthly over a period of less than 3 months hence. Although a distinct benefit, Management does not feel that this cash inflow is essential to meeting its needs and that standard cash flow will suffice for the remainder of the fiscal year. | |
There are no plans for large scale, high-priced equipment purchases as of now. The Company does have a need for dicing saws, both for replacement purposes as well as growth needs. These $35,000 pieces of equipment are utilized in the very profitable cutting portion of the industrial ceramics product line. One saw was purchased last quarter and another will be purchased during the next quarter. Dicing saws are generally readily financed on a lease loan basis. |
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The Company’s line of credit of $1 million is with a friendly and cooperative financial institution. It is fully extended and utilized at this point in time. Although no assurances can be given, the Company is satisfactorily servicing the loan and expects no problems in continuing to do so. | |
On the other hand, although no such prospects are presently known, funds for any strategic acquisitions, which the Company has decided to restrict to the U.S. will have to emanate from new financing sources. Although discussions are in process for such transactions and additional sources would have to 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 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 the second quarter of fiscal year 2002, the foreign currency exchange loss was $190; and during the first six months of fiscal year 2000 the foreign currency exchange gain was $2378, and thus neither materially impacted operational results. | |
Management believes that for fiscal year 2002, two factors will continue to keep its foreign currency exchange losses or gains, 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 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, as now constituted, foreign operations are expected to continue to provide strong revenue and earnings growth. |
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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 may occasionally enter 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 Hong Kong and from the Company’s share of the earnings of these operations, which are denominated in other currencies. | |
Also, 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. |
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 cost of operation or the profitability of its products during fiscal year 2002. |
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 |
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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, Hong Kong, Southeast Asia in general, and other parts of the globe 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, ceramic, electronic, telecommunication manufacturing industries, and manufacturing industries in general; 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. |
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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, 2001 |
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, 2001 |
/s/ Craig A. Pian Craig A. Pian Director |
Date: September 14, 2001 |
/s/ Francine Pian Francine Pian Director |
Date: September 14, 2001 |