May 3, 1999
SETO HOLDINGS INC (SETO)
Annual Report (SEC form 10KSB)
Management's Discussion and Analysis or Plan of Operation.
General
In fiscal year 1998 the Company altered its business plans and
objectives and reorganized its product lines for faster growth into two major
groupings: Technical Products to Industry and Consumer Products. This decision
followed the Company's June 1998 acquisition of Fuji Fabrication Sdn. Bhd.
("Fuji") and its cellular telephone battery line and its September 1998 sale of
TTH back to its former owner.
During the fiscal year ended January 31, 1999, excluding the
results of discontinued operations the Company experienced the highest annual
net sales in its history and its second highest income from continuing
operations. These results are attributable principally to continued growth in
fabricated industrial ceramics (sales of $1,461,621 compared to $1,225,249) and
diamond cutting tools (sales of $617,140 compared to $554,695) and the launch of
the Company's cellular telephone battery product line in July 1998 (sales of
$428,850).
The Company's financial condition remains healthy. At
January 31, 1999, the Company had total assets of $2,295,863.
Mainly because of short term borrowings needed to fund the purchase
of raw materials and additional property and equipment, which
increased by 11.6%, to match anticipated sales growth, current
liabilities increased by 6% to $791,654. Notes payable to bank
increased by 21.8%, reflecting the Company's drawing down on its
line of credit principally to support the working capital needs
associated with the cost of raw materials needed to manufacture
cellular telephone batteries.
The Company conducts substantially all of its manufacturing
and assembly operations in Malaysia. Accordingly, economic and political
conditions there, and in Southeast Asia as a whole, will remain of importance to
the Company. Management believes that steps taken by the Malaysian Government
since the outset of the area's downturn in mid-1997 involving financial
uncertainties have had a calming and stabilizing effect. In any event, although
no assurance can be given, the Company believes that regional circumstances will
have no material adverse effect on its operations or financial condition during
the fiscal year beginning February 1, 1999.
In fiscal 1999, Management believes certain product lines will
contribute to an anticipated 50% increase in revenues:
1. Cellular telephone batteries:
a. The Company will have the benefit of a full
year of sales;
b. An e-commerce site will be opened in the
Spring of 1999 for retail sales;
c. The Company's Malaysian subsidiary has
recently received exemptions from a
Malaysian 30% import duty tax and a 20%
sales tax on battery cells and a waiver of
its 1999 corporate income tax waiver; and
d. Sales of cellular telephones in the United
States are expected to grow from 66.5
million to 110 million in 2002. (Worldwide,
162.9 million were sold in 1998.)
2. Hard Disk Drive parts
a. The Company has received purchase orders for
these new products from two disk drive
manufacturers; and
b. The parts are consumable.
Fiscal 1998 Compared to Fiscal 1997
Including discontinued operations, in the fiscal year ended
January 31, 1999 the Company had a net loss of $(226,962), compared to net
income of $629,586 in the prior year. However, excluding discontinued
operations, the Company's net sales increased 37%, from $1,931,606 to
$2,646,650, and income from continuing operations declined $18,465, or 7.4%,
from $251,006 to $232,541. The decrease in income from continuing operations
principally resulted from (1) a $260,498 increase in general and administrative
expenses from non-recurring costs related to increases in public relations
expenses and the Company's relocation from Armonk, New York to its new
headquarters and manufacturing/warehouse facilities in Briarcliff Manor, New
York, and (2) a near-doubling in cost of sales (an increase of $481,145,
or 87%) attributable mainly to the high material cost of manufacturing cellular telephone batteries. The significant increase in
cost of sales was attributable principally to the Company's launch of its cellular telephone batteries in July 1998, and these
products will continue to cause a decrease in the Company's gross margins. However, with anticipated volume growth, the
Company's unit cost of these products should decline.
Fiscal 1997 Compared with Fiscal 1996
For the year ended January 31, 1998, the Company's net sales
increased to $7,808,380, a 487% increase over the $1,602,830 in fiscal 1996, and
net income was $629,586 or $.05 per share, a 250% increase over the $213,652 or
$.02 per share in fiscal 1996. The acquisition of TTH contributed $5,876,774 to
net sales and $378,580 to net income during the fourth quarter of fiscal 1997.
In fiscal 1997 gross profit was $2,586,816, or 33% of gross revenues, as
compared to $1,105,570, or 69% of gross revenues in fiscal 1996. In fiscal 1997,
gross profit increased due to higher sales, and gross profit as a percentage of
gross revenues decreased principally due to low profit margins on TTH's
operations, especially its recycling business.
In fiscal 1997, net sales of the Company's diamond cutting
tools increased approximately 4% to $554,695 but generated a loss of $279,395,
approximately 43% higher than the loss in fiscal 1996. Net sales of industrial
ceramics and clean room supplies increased by 26.5% to $1,226,136, and related
net income increased by $31.6% to $409,901. Net sales of TTH for the
approximately two-month period after its acquisition by the Company were
$5,876,774 and related net income was $378,580.
Liquidity and Capital Resources
At January 31, 1999, the Company had current assets of
$1,357,524, including $66,052 of unrestricted cash, and current liabilities of
$830,949, yielding a positive working capital position of $526,575 and a current
ratio of 1.6.:1. These standard measures of a company's ability to meet its
current obligations reflect positively on the Company's improved liquidity and
its ability to internally generate or obtain the funds necessary to support its
current level of business and are expected to enable the Company to obtain more
favorable payment terms from its suppliers.
During the fiscal year, the Company received $120,000 from the
exercise of stock options. The Company also initiated a stock buyback program by
purchasing 29,400 shares in October 1998 and 20,000 in December 1998. The
Company has instituted a moratorium on this program and will utilize its capital
to fund its future growth.
Although no assurances can be given, the Company expects that
internally generated funds together with its existing credit facilities will
enable it to meet it obligations as they come due and finance its operations.
The Company recently increased its available line of credit to $500,000 from
$350,000. To improve its liquidity and accelerate its anticipated growth,
especially in sales of its cellular telephone batteries, the Company has been
seeking additional capital via even higher lines of credit and bank loans.
However, no new definite funding source has yet been identified and no assurance
can be given that such financing will be obtained on commercially reasonable
terms, or at all.
During the fiscal year ending January 31, 1999, the Company
purchased a computerized precision saw for $33,000 in conjunction with the
increased sales of industrial ceramic and fabrication product lines, of which
$24,000 was financed, and a belt-driven assembly line for approximately $12,000
for use by Fuji in its battery business. As at the end of fiscal 1998, there
were no material commitments for significant capital expenditures.
A small percentage of the Company's profits may not be
distributable to the Company's other subsidiaries or as dividends. Under
Malaysian law a Malaysia corporation is required to maintain a statutory reserve
of five percent (5%) of profit after taxation in accordance with the Foreign
Investment Law until such reserve equals ten percent (10%) of legal capital.
Such reserve is non-distributable.
Effects of Foreign Currency Fluctuations
The Company's foreign operations are subject to certain risks
related to fluctuation in foreign currency exchange rates. In the fiscal year
ended January 31, 1998, due to a strengthening U.S. dollar and a weaker
Malaysian ringgit the Company's operating results were hurt by a $37,719 loss on
foreign currency exchange. In fiscal 1998, such loss amounted to only $900,
although the Company suffered a foreign currency translation adjustment of
($119,374). While future fluctuations in currency exchange rates
could impact results of operations or financial conditions, foreign operations are expected to continue to provide strong
financial results and earnings growth.
A number of economists, including some high in the United
States Government's financial circles, believe that predictable policies (e.g.,
pegging exchange rates, which Malaysia did in 1998, and sticking to that policy)
yields a key element of financial stability. That is a course which Malaysia has
chosen to follow. At the moment, the perception is that the financial crises
which began in mid-1997 in Southeast Asia is easing and may be ending, e.g., in
the first quarter of 1999, container traffic from the West Coast to East Asia
ran 10% ahead of projections. This appears to bode will for Malaysia.
Disclosures about Market Risk
The Company is exposed to market risks primarily from changes
in interest rates and foreign currency exchange rates. To manage exposure to
these fluctuations, the Company occasionally enters into various hedging
transactions. The Company does not use derivatives for trading purposes, or to
generate income or to engage in speculative activity, and the Company never uses
leveraged derivatives. The Company does not use derivatives to hedge the value
of its net investments in these foreign operations.
The Company's exposure to foreign exchange rate fluctuations
results from wholly-owned subsidiary operations in Malaysia, and from the
Company's share of the earnings of these operations, which are denominated in
the Malaysian ringgit.
Year 2000 Costs
The Company currently operates numerous date-sensitive
computer applications and network systems throughout its business. As the
century change approaches, it is essential for the Company to ensure that these
systems properly recognize the year 2000 and continue to process operational and
financial information. The Company recently upgraded its computer systems and is
year 2000 compliant.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (FAS 130),
"Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income
and requires that all components of comprehensive income be reported in financial statement having the same prominence as
other financial statements. For the Company, FAS 130 was effective in 1998, and it requires reclassification of prior period
financial statements for comparative purposes. Adoption of this standard should have little effect on the Company's financial
statements as the new requirements primarily involve modifications to the way that existing information is displayed.
Also in June 1997, the FASB issued FAS 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement supersedes
FAS 14, "Financial Reporting of Segments of a Business Enterprise," by
establishing new standards for the way that a public business enterprise reports
operating segment information in its annual and interim financial statements. In
general, FAS 131 requires reporting of financial information as it is used by
senior company management for evaluating performance and deciding how to
allocate resources. The statement is effective for 1998, but need not be applied
to interim financial statements in that year. Comparative information for
earlier years must be restated.
Impact of Inflation
Although it is difficult to predict the impact of inflation on
costs and revenues of the Company in connection with the Company's products, the
Company does not anticipate that inflation will materially impact its costs of
operation or the profitability of its products.
Forward-Looking Statements
THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION", CONTAINS STATEMENTS WHICH ARE NOT HISTORICAL FACTS AND ARE
FORWARD-LOOKING STATEMENTS WHICH REFLECT MANAGEMENT'S EXPECTATIONS, ESTIMATES
AND ASSUMPTIONS. SUCH STATEMENTS ARE BASED ON INFORMATION AVAILABLE AT THE TIME
THIS FORM 10K-SB WAS PREPARED AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD
CAUSE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER
SIGNIFICANTLY FROM PROJECTED RESULTS. FACTORS THAT COULD CAUSE ACTUAL FUTURE
RESULTS TO DIFFER MATERIALLY INCLUDE, AMONG OTHERS, THE RISKS OF DOING BUSINESS
IN MALAYSIA AND SOUTHEAST ASIA, 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 MANUFACTURING INDUSTRY, 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.
Item 7. Financial Statements.
The following are filed as part of this Report:
Consolidated Financial Statements:
Independent Accountants' Report
Consolidated Balance Sheet as at January 31, 1999
Consolidated Statement of Income (Loss) for the Years ended January 31, 1999 and 1998
Consolidated Statement of Comprehensive Income for the Years ended January 31, 1999 and 1998
Consolidated Statement of Cash Flows for the Years ended January 31, 1999 and 1998
Consolidated Statement of Changes in Stockholders' Equity for the Years ended January 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None. |
