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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB (Mark One) x
    
    Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934For the fiscal year ended January 31, 2004
 o
    
    Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934For the transition period from ___________ to
___________
 Commission file number 0-28698 SETO HOLDINGS, INC.  Nevada
    
    77-0082545(State or other jurisdiction of
    
    (I.R.S.) Employerincorporation or organization)
    
    Identification Number
 554 North State Road, Briarcliff Manor, New York, 10510   Registrants telephone number, including area code (914) 923-5000
Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 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
o




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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB.                        x State issuers revenues for its most recent fiscal year. $3,897,396 State aggregate market value of the voting stock held by nonaffiliates computed by reference to the price
at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date
within the past 60 days. $1,845,774 as of April 20, 2004. State the number of shares outstanding of each of the issuers classes of common equity, as of the latest
practicable date. 12,693,378 shares of common stock, $0.001 par value, outstanding on April 20, 2004. DOCUMENTS INCORPORATED BY REFERENCE None 2




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TABLE OF CONTENTS  PART IITEM 1. DESCRIPTION OF BUSINESSITEM 2. DESCRIPTION OF PROPERTYITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONITEM 7. FINANCIAL STATEMENTSINDEPENDENT AUDITORS REPORTCONSOLIDATED BALANCE SHEETCONSOLIDATED STATEMENTS OF INCOME (LOSS)CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYCONSOLIDATED STATEMENT OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREPART IIIITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACTITEM 10. EXECUTIVE COMPENSATIONITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 13. EXHIBITS AND REPORTS ON FORM 8-KITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESEXHIBIT 21 LIST OF SUBSIDIARIESExhibit 31 Section 302 CertificationExhibit 32 906 Cert    Table of Contents  
 PART I 
 ITEM 1. DESCRIPTION OF BUSINESS Industry We principally distribute and fabricate on a value-added basis,
industrial ceramic products for the airline security, aircraft, aerospace,
defense and microwave industries. We also manufacture and distribute small
disposable precision diamond cutting tools which are used in the fabrication of
semiconductor chips and integrated circuit boards for the semiconductor and
electronic industries. In addition to fabricating and manufacturing, we also
provide contract manufacturing for personal safety devices and to produce
medical, personal and mining safety devices. In fiscal 2003 we exited the
businesses of manufacturing consumer electronic products and rechargeable and
other batteries, as discussed below and in Business Developments Over the Last
Three Years and in Item 6 Managements Discussion and Analysis of Financial
Condition and Results of Operations  Discontinued Operations. In
1986, we were incorporated in the State of Nevada. Our Internet address is
www.setoholdings.com. On our web site we post the following filings as soon as
reasonable practicable after they are electronically filed with or furnished to
the Securities and Exchange Commission: our annual report on Form 10-KSB, our
quarterly reports on Form 10-QSB, our current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934. All such filings on our web site
are available free of charge. Business Developments Over The Past Three Years Since June 1998, we have made acquisitions and formed joint ventures
designed to enable us to sell rechargeable batteries for telephones, power
tools, and other consumer products. All of our efforts have been unsuccessful,
and these businesses were either sold or discontinued. A summary of these
transactions is set forth below: On June 30, 1998, we issued 100,000 shares of common stock to acquire all
of the issued and outstanding shares of Fuji Fabrication Sdn. Bhd. (Fuji), a
Malaysian company which principally designed, manufactured and distributed
cellular telephone and other rechargeable batteries. On November 19, 1999, we
acquired all the issued and outstanding common stock of Hong Kong Batteries
Industries, Ltd. (HKBI), a Hong Kong manufacturer and distributor of
electronic components and industrial batteries, with joint venture partners in
mainland China, in exchange for 1,500,000 shares of our common stock. In
January 2001, we mutually agreed to reduce the purchase price by
100,000 shares,
which were returned to us and cancelled. In March 2001, we issued to the
former shareholders of HKBI an additional 500,000 shares due to HKBI generating
a certain amount of post acquisition net income. The acquisition of HKBI
marked the beginning of our emphasis on the design, manufacturing, marketing
and distribution of products for the telecommunications industry. On November
27, 1999, we issued 5,000,000 shares of our common stock to acquire all the
issued and outstanding capital stock of Fimas Sdn. Bhd. (Fimas), a Malaysian
holding corporation with facilities in Malaysia and Suzhou, China, to
manufacture electronic consumer products such as DVD players, CD ROM drives,
home theater systems, CD players and a wireless computer mouse. On
January 31, 2001, we sold Fimas back to its former owners in exchange
for the 5,000,000 shares of common stock we originally issued to acquire Fimas.
We decided to dispose of Fimas due to its low gross profit margins, increasing
losses and high working capital requirements. In February 2001, we decided to
discontinue Fujis operations because we could not compete with Chinese
companies. China was producing batteries for a third of what it cost us to
manufacture them. On October 1, 2001, we sold certain equipment and inventory used
to manufacture and assemble cellular telephone packs to G Com Net, Inc. (G
Com), a New York corporation, for $290,547. We accepted a promissory note for
the full amount, interest was stated at 10% and the note was originally due on
October 1, 2002, such note was then amended on October 1, 2002 to increase the
principal to $396,693 to reflect the sale of additional supplies and unpaid
interest, to extend the maturity date to September 30, 2003, and to provide for
the payment of interest on a monthly basis instead of quarterly. On October 1,
2003, G Com defaulted on its note and returned equipment to us with a value of
$32,500. During the third quarter of fiscal 2004, after exhausting all methods
of collection, we wrote off the remaining balance of the note receivable from G
Com which resulted in a charge of $364,193 that reduced our 3




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fiscal 2004 net income. In April 2001, we discontinued our SETO Ventures U.S.
distribution company and its Circle 1.com marketing company, both of which were
formed in 2000. On October 31, 2002, following a significant reduction in
revenues and profits which we could not overcome, we closed HKBI, and
thereafter we dissolved our Lexal Battery Co., Ltd. and Vision Shenzen Center
Power Tech Co., Ltd. joint ventures, effectively terminating our foray into the
business of manufacturing and selling consumer electronic products and
rechargeable and other batteries for consumer products. Products Our major products include industrial ceramics, diamond cutting tools, and
personal safety devices, such as our CPR trainer, rescue helmet,
traffic control lights and portable power supplies. Our major customers are:  
    
    Original equipment manufactures, who make airport security,
bomb detection devices, jet engine and missile components; and
    
    Original equipment manufacturers, who make semiconductors and
light emitting diodes (LEDs); and
    
    Safety and rescue industries. Focusing on our core competencies in the fabrication of industrial
ceramics as well as our diamond tools and personal safety devices, we believe
we are well positioned to provide our customers with the quality
products and services they
demand. Each of our operating segments uses its core competencies, and we use our
relatively small size, to provide niche services for larger companies in order
to compete vigorously in each relevant market segment. Our East Coast Sales
Company segment focuses on industrial ceramics for the security, detection and
jet engine industries. Our Semicon Tools DTI Technology segment focuses on
diamond cutting tools for the semiconductor and electronic industries.
Finally, our SETO Technology segment focuses on contract manufacturing for the
safety and rescue industries. Industrial Ceramic Products  East Coast Sales Company Our
East Coast Sales Company (ECS) operating segment distributes two principal
categories of industrial ceramic products: (1) insulators, tubes, rods,
crucibles and other labware, all of which are standard catalogue items, and (2)
machinable ceramics for the airline security and detection industries and jet
engine manufacturers. The products are manufactured by third parties and
fabricated by us and warehoused and then distributed by us from our New York
facilities. After the terrorist attacks on September 11th, East Coast Sales
experienced an increase in demand for our ceramic products used in the
manufacture of airport safety and detection devices. Our three major customers
are developing new products all of which will require our ceramic products. In
addition to airport security devices, our ceramic products are used in military
defense equipment such as missiles and by manufacturers of jet engines for both
commercial and military use. Net revenue for the Industrial Ceramic Products operating segment made up
approximately 72% of our consolidated net revenue in fiscal 2004. Industrial Diamond Cutting Tools  Semicon Tools/DTI Technology Semicon Tools/DTI Technology manufactures and distributes diamond dicing
blades. Dicing blades are made of industrial diamonds bonded with a circular
nickel alloy blade. They are used with the precision electronic dicing saws
which the microelectronics and semiconductor industries use to cut and separate
integrated circuits and discrete devices made from silicon and other materials.
The blade market consists principally of hubbed blades, which are the most
commonly used, diamond/thermoset plastic known as resin blades, which are
used in precision electronic saws for cutting ceramic substrates and have a
shorter 4




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useful
life, and diamond nickel alloy hubless blades. Hubbed blades are
competitively manufactured principally by Disco, Inc. and Kulicke & Soffa
Corporation. We manufacture hubbed and hubless blades at our Malaysian
facility and we currently have an insignificant share of the world-wide dicing
blade market. There can be no assurance that we will be able to increase our
market share. We also manufacture and distribute Scribes and Dressers. A Scribe, which
resembles a small pencil, has a tip that contains a gem quality diamond which
is used to cut silicon wafers and perform die and integrated circuit
separation. These products, which we assemble in our New York facility, have
limited growth potential in this application since the semiconductor and
electronic industries have switched from scribing machines to dicing saws for
the wafer cutting process. However, diamond scribes are preferred over sawing
for cutting certain wafer materials because they provide cleaner separation.
They are also preferred for certain low volume applications which do not
justify the capital expense of using a dicing saw. We occasionally use
subcontractors to set or lap the diamonds into the tools. Dressers are
diamond tipped tools generally used to dress or shape abrasive grinding
wheels in machine shops. These products, which are assembled in our Malaysian
facility, are sold to companies such as Black & Decker and Snap-On Tools, who
then resell them to third parties. We believe that there are multiple foreign
suppliers of these dressers. Net revenue for the Industrial Diamond Cutting Tool operating segment made
up approximately 16% of our consolidated net revenue in fiscal 2004. Contract Manufacturing  SETO Technology SETO Technology provides contract-manufacturing services for personal
electronic safety devices and to produce medical, automotive and mining safety
devices. This segment is currently developing and selling medical training
products, safety helmets, safety directional lights and mobile power supplies.
Currently this segments main product is a CPR training device used by the
medical industry. We have five different models under contract on an exclusive
and nondisclosure basis. SETO Technology has also contracted with a third
party to develop and manufacture a safety helmet that we expect to bring to
market in fiscal 2005. Net revenue for the Contract Manufacturing operating segment made up
approximately 12% of our consolidated net revenue in fiscal 2003. Miscellaneous Products In addition to the products mentioned above, we distribute small precision
tools such as tweezers, pliers, vacuum pickups and scribes, core drills and
sintered blades for ceramic applications. We also distribute cleaning
chemicals, inspection gloves and other items used to preserve a
contamination-free environment, which we market primarily to semiconductor
manufacturers. Raw Materials We purchase our raw materials and supplies from multiple sources. None of
the raw materials and supplies we require is currently in short supply,
although factors outside of our control could adversely impact their future
availability. Backlog Our sales are made primarily pursuant to standard purchase orders for
delivery of standard products. We believe that only a small portion of our
order backlog is noncancellable and that the dollar amount associated with the
noncancellable portion is not material. Therefore, we do not believe that our
backlog as of any particular date is indicative of future results. Competition Our operating segments each are intensely competitive. Virtually all
competitors have greater financial and personnel resources and greater market
recognition than our company has. As a result, these competitors can obtain
better payment terms and service from suppliers. Furthermore, we face the
possibility of adverse market conditions arising from tariff revisions
resulting from changes in foreign trade policies, raw 5




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material shortages, technological change, shifting product emphasis among
competitors and the entry of new competitors into its markets. We believe the
principal competitive factors affecting our products are quality, price and
availability. Marketing We market our products though direct sales, joint ventures, account
representatives, telephone solicitations, participation in trade shows, the
Internet and advertisements in trade journals. Manufacturing Facilities In Briarcliff Manor, New York, we operate a machine shop and a
manufacturing facility for the fabrication of resin/diamond dicing
blades, and ceramic products. We lease a facility in Kepala Batas, Penang, Malaysia which
is equipped to manufacture dicing blades, diamond dressing tools and the
fabrication of ceramics. Government Regulation We believe our operations and facilities are in compliance with all
federal, state and local environmental laws in the United States and Malaysia.
We have not incurred any special or unusual costs to comply with environmental
laws or other applicable governmental regulations. Research and Development Through fiscal year ended January 31, 2003, we spent approximately
$178,878 on deferred product development costs regarding the
development of molds for our new safety
helmet. As of January 31, 2004, these costs have been capitalized and are now
being depreciated over their estimated useful lives. Employees We employ approximately 18 full-time employees, of which 6 employees work
in the United States and the remaining 12 are employed in Malaysia. We also
utilize outside consultants and part-time workers when required. 
 ITEM 2. DESCRIPTION OF PROPERTY In Malaysia, we lease approximately 4,600 square feet of manufacturing and
warehouse space and 500 square feet of office space in Kepala Batas, Penang,
pursuant to a lease expiring in July 2004, with a minimum annual lease payment
of $7,200. We also occupy approximately 1,500 square feet of office space in
Penang, pursuant to a lease expiring in September 2004, with a minimum annual
lease payment of $12,000. In the United States, we lease approximately 2,400 square feet of
manufacturing and warehouse space and 1,200 square feet of office space in
Briarcliff Manor, New York, from Rachrob Realty, LLC, a company owned by Eugene
Pian, the President and principal shareholder, pursuant to a 15 year lease
which expires on April 30, 2013, with an annual base rent, excluding utilities,
maintenance and repairs, as follows: years 1 to 5, $60,000; years 6 to 10,
$66,000; and years 11 to 15, $72,000. 
 ITEM 3. LEGAL PROCEEDINGS There are no pending material legal proceedings to which we are a party to
or which any of our property is subject, and we know on no such threatened or
contemplated proceedings against us. 6




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the last
fiscal quarter covered by this report. 
 PART II 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Our common stock, $.001 par value, is traded on NASDAQs over-the-counter
Bulletin Board under the symbol SETO. The following table sets forth the range of high and low bid information
for our common stock for each calendar quarter within the last two fiscal
years, and for the first calendar quarter of 2004, as provided by Pink Sheets,
LLC. Such quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission, and may not represent actual transactions. Low
    
    High2004First quarter
    
    $
    0.13
    
    
    $
    0.222003First quarter
    
    $
    0.21
    
    
    $
    0.36Second quarter
    
    $
    0.17
    
    
    $
    0.28Third quarter
    
    $
    0.18
    
    
    $
    0.25Fourth quarter
    
    $
    0.17
    
    
    $
    0.242002First quarter
    
    $
    0.13
    
    
    $
    0.20Second quarter
    
    $
    0.13
    
    
    $
    0.20Third quarter
    
    $
    0.19
    
    
    $
    0.39Fourth quarter
    
    $
    0.19
    
    
    $
    0.31
 Holders As of January 31, 2004, there were 335 record holders of our common stock. Recent Sales of Unregistered Securities In March 2001, we issued 500,000 shares pursuant to Section 4(2) of the
Securities Act to the former owners of Hong Kong Batteries Industries, Ltd.
(HKBI), our former wholly owned subsidiary which we acquired in December
1999, and discontinued in fiscal 2003. Such shares were issued as an
additional purchase price based on HKBIs generation of a certain amount of
post acquisition net income. In
April 2001, we issued an aggregate of 500,000 shares to our officers,
Eugene Pian (250,000 shares), Craig Pian (150,000 shares) and Francine Pian
(100,000 shares), for agreeing to extend the terms of their respective
employment agreements for an additional five years, pursuant to Section 4(2) of
the Securities Act. Such shares were cancelled on December 6, 2001 and
replaced with options to purchase a like number of shares at $.15 per share
with an expiration date of April 30, 2006. 7




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Voting and Other Rights Holders of common stock are entitled to one vote for each share held.
There are no preemptive, subscription, conversion or redemption rights
pertaining to the common stock. Holders of common stock are entitled to
receive such dividends as may be declared by the Board of Directors out of
assets legally available, and to share ratably in the assets of the Company
available upon liquidation. The holders of common stock do not have the right to cumulate their votes
in the election of directors and, accordingly, the holders of more than 50% of
all such shares outstanding can elect all of the directors of Company. Dividends We have not paid cash dividends to date and we intend to apply our
earnings, if any, for use in our activities. Payments of cash dividends in
future will be wholly dependent upon the Board of Directors and upon our
earnings, financial condition, capital requirements and other factors we deem
relevant. It is not likely that cash dividends will be paid in the foreseeable
future. In the event of the acquisition of, or merger with a business by us,
control of the Company and its Board of Directors may pass to others. In that
event, the payment of dividends would be wholly dependent upon such persons. Securities Authorized for
Issuance Under Equity Compensation Plans Number ofsecuritiesremainingavailable forNumber of
    
    
    
    
    
    future issuanceSecurities to be
    
    
    
    
    
    under equityissued upon
    
    Weighted-Average
    
    compensationexercise of
    
    exercise price of
    
    plans (excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    reflected inand rights
    
    and rights
    
    column (a))Plan Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    0
    
    
    
    0
    
    
    
    0Equity compensation
plans not approved by
security holders
    
    
    6,000,000
    
    
    $
    0.25
    
    
    
    0TOTAL
    
    
    6,000,000
    
    
    $
    0.25
    
    
    
    0
 8




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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following section should be read in conjunction with Item 1: Business
and Item 7: Financial Statements. The Strategy, Critical Accounting Estimates and Outlook sections all
contain a number of forward-looking statements, all of which are based on our
current expectations. Our actual results may differ materially. FORWARD LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-KSB, INCLUDING WITHOUT LIMITATION, ITEM 6,
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-KSB 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 RISK OF DOING BUSINESS IN MALAYSIA AND SOUTHEAST ASIA, LACK OF
ACCEPTANCE OF OUR NEW PRODUCTS, ABILITY TO RETAIN CREDIT FACILITIES WE NEED,
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,
COMPETITION AND TECHNOLOGICAL OBSOLESCENCE. THE COMPANY ASSUMES NO OBLIGATION
TO UPDATE SUCH FORWARD-LOOKING STATEMENTS, IF ANY, AT ANY TIME. Strategy Our goal is to be a niche company, with the ability to provide products
and services to a variety of larger corporations who need contract
manufacturing and/or made-to-order products. Our primary areas of focus are
the fabrication of ceramic parts for the airline security business and jet
engine manufacturing along with cutting blades for silicon wafers. All of our businesses operate in competitive environments characterized by
the introduction of new products with lower prices. As part of our overall
strategy, we use our relatively small size and ability to provide niche
services for larger companies in order to compete vigorously in each relevant
market segment. Our competition comes from established businesses as well as
new entrants to the marketplace. The trend in the United States (U.S.) toward
HomeLand Security will offer us new opportunities, but will result in more
competition. Competition tends to increase pricing pressure on our products,
which may mean that we must offer our products at lower prices than we had
anticipated, resulting in lower profits. Because some of our customers already
have established products, it is inherently difficult for us to compete against
them. In addition, certain market segments in which we compete, such as dicing
blade products, have experienced an overall economic decline, increasing the
degree of competition within this market segment. When we believe it is
appropriate, we will take various steps, including discontinuing older products
and reducing prices, in order to increase acceptance of our products and to be
competitive within each relevant market segment. We plan to continue to cultivate new businesses and work with the security
and chip making industries to expand our product lines. East Coast Sales Company East Coast Sales Company (ECS) operating
segment specializes in the distribution and value-added fabrication of
technical ceramic products for the airline security industry and jet engine
manufacturers, and distributes clean room supplies and tools. Our strategy for
ceramic fabrication is to increase our production efficiency by utilizing our
foreign subsidiarys labor force and updating our machinery. After September
11th, East Coast Sales experienced an increase in demand for its ceramic
products used in the 9




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manufacture of airport safety and detection devices. Our three major customers
are developing new products which will require our ceramic products. In
addition to airport security devices, our ceramic products are used in military
defense equipment such as missiles, and by manufacturers of jet engines for
both commercial and military use. To increase the acceptance and deployment of
our ceramic products, we are focused on providing our customers with the
highest quality products and services. Semicon Tools and DTI Technology Semicon Tools and DTI Technology
operating segments strategy is to produce quality diamond cutting tools for
the semiconductor industry. We plan to improve the quality and capability of
our diamond cutting products that we currently have on the market. We are
currently consulting with an outside source in Taiwan to improve our
manufacturing process and diamond tool technology. The diamond tool segment is
very dependent on the semiconductor industry which over the last three years has
experienced economic decline and is starting to showing signs of growth. The
diamond blades manufactured by DTI Technology are a vital part of East Coast
Sales ceramic fabrication process. SETO Technology SETO Technologys strategy is to provide
contract-manufacturing services for personal electronic safety devices and to
produce medical, automotive and mining safety devices. This segment is
currently developing and/or selling medical training products, personal safety
devices and safety helmets. Currently this segments main product is a CPR
training device used by the medical industry. We have five different models
under contract on an exclusive and nondisclosure basis. SETO Technology has
also contracted with a third party to develop and manufacture a safety helmet
that we expect to bring to market in fiscal 2005. The safety helmets are close
to meeting our specifications. We are currently modifying the helmets LED
lights and internal circuit boards, which we expect to complete by June 2004.
We expect to make our first sale by July 2004, depending on market acceptance
and no further modifications. As of January 31, 2004 we advanced a total of
$178,878 to the developer who is producing the tooling and molds to be used in
the manufacturing process of the helmet. In late fiscal 2004, we capitalized
the mold costs and began depreciating them over their estimated useful lives. Critical Accounting Estimates The methods, estimates and judgments we use in applying our accounting
policies have a significant impact on the results reported in our financial
statements. Some of these accounting policies require us to make difficult and
subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Our most critical accounting estimates
include the assessment of recoverability of goodwill, which impacts write-offs
of goodwill; valuation of inventory, which impacts gross margin; assessment of
recoverability of long-lived assets, which primarily impacts gross margin when
we impair assets or accelerate their depreciation; and recognition and
measurement of current and deferred income tax assets and liabilities, which
impacts our tax provision. Below we discuss these policies further, as well as
the estimates and judgments involved. We also have other policies that we
consider to be key accounting policies, such as our policy for revenue
recognition; however, this policy does not meet the definition of critical
accounting estimates because they generally require us to make estimates or
judgments that are difficult or subjective. Goodwill In conjunction with the implementation of the new accounting
rules for goodwill as of the beginning of Fiscal 2004, we completed a goodwill
impairment review of East Coast Sales Company which is the reporting unit that
has substantially all of our recognized goodwill. According to our accounting
policy, we also performed an annual review during the fourth quarter of fiscal
2004, and in both reviews we found no impairment. We will perform a similar
review in the fourth quarter of each year, or more frequently if indicators of
potential impairment exist. Our impairment review process is based on a
discounted future cash flow approach that uses our estimates of revenue for the
reporting unit, driven by assumed market growth rates and assumed segment
share, and estimated costs as well as appropriate discount rates. In the
future, we may incur charges for impairment of goodwill if the ceramic
fabrication business experiences an economic downturn, new technology becomes
available, we lose market acceptance, we fail to deliver new products, or if we
fail to achieve our assumed revenue growth rates or assumed gross margin. Inventory Our policy for valuation of inventory, including the
determination of obsolete or excess inventory requires us to estimate the
future demand for our products within specific time horizons, generally one
year or less. If our demand forecast for specific products is greater than
actual demand and we fail to reduce manufacturing output accordingly, we could
be required to record additional inventory reserves, which would have a
negative impact on our gross margin. 10




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Long-Lived Assets We assess the impairment of long-lived assets when events
or changes in circumstances indicate that the carrying value of the assets or
the asset grouping is not recoverable. Factors that we consider in deciding
when to perform impairment review include significant under-performance of a
business or product line in relation to expectations, significant negative
industry or economic trends, and significant changes in our use of the assets.
Recoverability of assets that will continue to be used in our operations is
measured by comparing the carrying amount of the assets grouping to the related
total future net cash flows. If an assets grouping carrying value is not
recoverable through those cash flows, the asset grouping is considered to be
impaired. The impairment is measured by the difference between the assets
carrying amount and their fair value, based on the best information available,
including market prices or discounted cash flow analysis. Income Taxes In determining income for financial statement purposes, we
must make certain estimates and judgments. These estimates and judgments occur
in the calculation of certain tax liabilities and in the determination of the
recoverability of certain tax assets, which arise from temporary differences
between the tax and financial statement recognition of revenue and expense. As
of January 31, 2004, taxes were not provided on approximately $995 of
undistributed earnings of foreign subsidiaries, as we invest or expect to
invest the undistributed earnings indefinitely. If in the future these
earnings are repatriated to the United States, or if we determine such earnings
will be remitted in the foreseeable future, additional tax provisions would be
required. We must assess the likelihood that we will be able to recover our deferred
tax assets. If recovery is not likely, we must increase our provision for
taxes by recording a reserve, in the form of a valuation allowance, for the
deferred tax assets that we estimate will not ultimately be recoverable. As of
January 31, 2004, we believe that our recorded deferred tax assets will
ultimately be recovered. However, should there be a change in our ability to
recover our deferred tax assets; our tax provision would increase in the period
in which we determine that the recovery is not probable. In addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We recognize
potential liabilities for anticipated tax audit issues in the U.S. and other
tax jurisdictions based on our estimate of whether, and the extent to which,
additional taxes will be due. If payment of these amounts ultimately proves to
be unnecessary, the reversal of the liabilities would result in tax benefits
being recognized in the period when we determine the liabilities are no longer
necessary. If our estimate of tax liabilities proves to be less than the
ultimate assessment, a further charge to expense would result. Results of Operations The following table sets forth certain consolidated statements of income
data as a percentage of net revenue for the periods indicated: 2004
    
    2003Net revenues
    
    
    100.00
    %
    
    
    100.00
    %Cost of sales
    
    
    43.66
    %
    
    
    48.90
    %Gross margin
    
    
    56.34
    %
    
    
    51.10
    %Selling, general and administrative expenses
    
    
    55.75
    %
    
    
    29.38
    %Amortization and impairment of acquisition-related intangibles
    
    
    1.54
    %
    
    
    0.14
    %Operating income (loss)
    
    
    -0.95
    %
    
    
    21.58
    %
 For fiscal 2004, our net revenue of $3,897,396 decreased approximately 47%
compared to fiscal 2003, primarily due to the decrease in demand for our
ceramic products used by the airline security and jet engine manufacturing
industries. Net revenue for our diamond tool segment decreased 22% compared
with fiscal 2003 which were due to decreased demand from the semiconductor
industry. Our contract manufacturing revenues were also down 37%, primarily
due to decreased demand for our personal safety products and the delay in the
release of our new safety helmet. 11




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##### Table of Contents



Our gross margin percentage in fiscal 2004 of 56% was higher compared to
51% in fiscal 2003, primarily due to higher margins in our ceramic segment due
to lower labor costs in Malaysia. The gross margin for our diamond tool
segment decreased 32% compared to fiscal 2003 primarily due to lower
sales volume; and our gross margins for
our contract manufacturing segment was down 108%, which was due to the
retooling of our CPR Trainer product per a customers request in fiscal 2004. For fiscal 2004, the majority of our consolidated net revenue and gross
margin came from sales of our custom ceramic products. Ceramics
 East Coast Sales Company The revenue and operating income for the East Coast Sales Company
operating segment for the two fiscal years ended January 31, 2004 and 2003 were as
follows: 2004
    
    2003Revenue
    
    $
    2,814,380
    
    
    $
    5,843,564Operating income
    
    $
    468,965
    
    
    $
    1,890,414
 The
East Coast Sales Company operating segments ceramics division,
experienced a dramatic decrease in sales due to a decrease in demand for its
ceramic products used by the airline security industry. Net revenues for this
segment decreased $3,029,184 or 52% in fiscal 2004 compared to fiscal 2003.
The decrease in revenue was due to significantly lower sales of custom cut
ceramics that are used in airport security devices and in the manufacturing
process of jet engines and missiles for the military. Net operating income for the East Coast Sales Company operating segment
decreased by $1,421,449 or 75% compared to fiscal 2003 primarily due to a
significant decrease in demand from one of East Coast Sales Companys customers
in the airline security industry. Orders for new detection devices
dramatically decreased subsequent to the U.S. Department of Homeland Securitys
deadline of December 31, 2002, that required all U.S. airports to install
security detection devices. We are forecasting a 5%-10% increase in sales for
fiscal 2005. Diamond Tools  Semicon Tools/DTI Technology The revenue and operating loss for the diamond tool operating segment for
the two fiscal years ended January 31, 2004 and 2003 were as follows: 2004
    
    2003Revenue
    
    $
    638,745
    
    
    $
    817,066Operating loss
    
    
    ($404,095
    )
    
    
    ($311,437
    )
 Net revenue in fiscal 2004 was down $178,321 or 22%, compared to fiscal
2003. The net operating loss for fiscal 2004 increased $92,658 or 30%,
compared to fiscal 2003. The increase in the net operating loss from fiscal
2003 to fiscal 2004 was primarily due to the segment writing off its note
receivable from G Com.Net for $364,193 and lower unit sales of the segments
diamond cutting tools. If we exclude the write off of G Com.Nets note
receivable, our diamond tool segments operating loss would have been $39,902.
In addition, during fiscal 2004 we wrote off $75,000 in slow moving or obsolete
inventory and eliminated certain products with low margins. With the
elimination of certain low margin diamond products and the introduction of
improved diamond blades, we expect our diamond tool segments sales to increase
5-10%, and we are expecting to show an operating profit by the fourth quarter
of fiscal 2005. 12




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##### Table of Contents



Contract Manufacturing  SETO Technology The revenue and operating income for the contract manufacturing operating
segment for the two fiscal years ended January 31, 2004 and 2003 were as follows: 2004
    
    2003Revenue
    
    $
    444,271
    
    
    $
    703,808Operating income
    
    $
    (101,714
    )
    
    $
    10,334
 Net revenue for fiscal 2004 was down $259,537 or 37%, compared to fiscal
2003, primarily due to lower unit volume and higher operating expenses which
decreased operating income by $112,048 or 108%, compared to fiscal 2003. For
fiscal 2004 the decrease in revenue compared to fiscal 2003 was due to a
technical change a customer requested which resulted in lower unit sales. We
expect revenue to increase in fiscal 2005 with the introduction of our new
safety helmet and with the additional sales of our reconfigured safety devices. Operating Expenses Operating
expenses for the two fiscal years ended January 31, 2004 and 2003 were
as follows: 2004
    
    2003Selling, general and administrative expenses
    
    $
    2,172,803
    
    
    $
    2,163,762Amortization and impairment of acquisition-related intangibles
    
    $
    60,000
    
    
    $
    10,000
 Selling, general and administrative expenses increased $9,041, or .41%
compared to fiscal 2003. This increase was primarily due higher payroll costs,
insurance costs and professional fees. Amortization and impairment of acquisition-related intangibles increased
$50,000 in fiscal 2004 compared to fiscal 2003 due to the amortization of the
cost of purchased customer lists over a full year. On December 1, 2002, we
acquired the customer lists of a Malaysian company for $300,000. We are
amortizing the cost over a period of 5 years. Our future annual amortization
expense will be $60,000 for the next four years and $50,000 in fiscal 2008. If
market conditions change and it is deemed that the customer lists do not have
any future benefit and become impaired, we may write off the entire amount,
which would have a negative effect on our operating income. Interest and Other, Net Interest
and other, net and taxes for the two fiscal years ended January 31, 2004
and 2003 were as follows: 2004
    
    2003Interest income
    
    $
    11,970
    
    
    $
    33,005Gain (loss) on sale of assets
    
    $
    31,748
    
    
    $
    1,068Interest expense
    
    ($
    18,588
    )
    
    ($
    101,217
    )Loss on write off of note receivable
    
    ($
    364,193
    )Foreign currency exchange loss
    
    ($
    1,454
    )
    
    ($
    1,534
    )Provision for income taxes (benefit)
    
    $
    46,161
    
    
    $
    44,681
 For fiscal 2004, interest income decreased primarily due to the write off
of our note receivable from G-Com Net on October 1, 2003. In fiscal 2004 we
sold equipment in Malaysia and realized a gain of $31,748 compared to fiscal
2003 when we had a small gain on some miscellaneous equipment sold in Malaysia. Interest expense decreased $82,629, or 82%, to $18,588 in fiscal 2004
compared to $101,217 in fiscal 2003. This decrease was primarily due to us
paying down the line-of-credit during the first two quarters of fiscal 2004. 13




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On October 1, 2003, we wrote off the note receivable that G Com Net
defaulted on for $364,193. Foreign currency exchange loss decreased $80, or 5%, in fiscal 2004 to
$1,454 compared to $1,534 in fiscal 2003. We experience currency translation
gains or losses when we purchase items from foreign countries (other than
Malaysia) whose currencies are not pegged to the U.S. Dollar. Historically,
these gains and losses have been insignificant and therefore we do not expect
any significant losses in the future. Our effective income tax rate was 12.2% in fiscal 2004 compared to an
effective income tax rate of 2.9% for fiscal 2003. The increase in the
effective rate in fiscal 2004 is primarily due to state income taxes as a
result of a state audit of fiscal years 2003, 2002 and 2001 and the reduction
of our deferred tax asset as a result of this audit. We are also carrying a
deferred tax asset of $384,622 on our balance sheet, which is related to our
federal and state net operating loss carryover which we expect to realize
before they expire in 2024. Discontinued Operations In fiscal 2003, we exited the business of manufacturing consumer
electronic products and rechargeable and other batteries for consumer products.
On February 1, 2001, we adopted a formal plan to sell Fuji Fabrication, Sdn.
Bhd. On October 1, 2001; we sold the assets, which consisted primarily of
inventory and equipment of Fuji Fabrication to G Com Net for $290,547. We
assumed a 10% note for the full amount of the selling price which was due on
September 30, 2002. On October 1, 2002 at the request of G Com Net, we
increased the principal amount of the note to $396,693 due to sales of
additional inventory and previously accrued interest and extended its maturity
so the note was payable in full on September 30, 2003. On October 1, 2003, G
Com Net defaulted on this note and we wrote off the remaining balance of the
note ($364,193) which was reduced by equipment that was returned to us with a
value of $32,500. Also, G Com Net returned inventory to us which we feel is
now worthless and we are not carrying on our balance sheet nor did we offset
the notes balance by any inventory amount. The future storage costs, if any,
related to the inventory returned will be charged to current operations. In
addition, we wrote off the remaining assets of Fuji Fabrication, which
consisted of accounts receivable, prepaid expenses and net plant and equipment
for $36,395 which is included in Loss from disposal of subsidiaries on our
consolidated condensed statement of income (loss). On October 31, 2002, we adopted a formal plan to discontinue the
operations of Hong Kong Batteries Industries, Ltd. (Hong Kong Batteries). Hong
Kong Batteries was a trading company that bought industrial batteries from
manufacturers in mainland China and resold them to companies in Hong Kong, Asia
and Europe. When China was approved for World Trade Organization status (WTO)
at the end of 2001, without our knowledge most of Hong Kong Batteries
suppliers hired English speaking sales and marketing managers and began to
directly approach all the end user customers of Hong Kong Batteries. During
the first and second quarters of fiscal 2003, Hong Kong Batteries was still
receiving orders from its customers. Then during the third quarter Hong Kong
Batteries did not receive any orders and was informed by its customers that
the Chinese suppliers offered substantial discounts if they bought their
products directly from the Chinese manufacturers. After many discussions and
meetings with the management of Hong Kong Batteries, we could not overcome the
problem and decided to cease operations as soon as possible due to the lack of
revenue and the high overhead cost we would have incurred if we continued
operating. The discontinuance of Hong Kong Batteries Industries, Ltd resulted in us
writing off $688,183 in goodwill and incurring an additional $225,759 in
disposal costs, which consisted mainly of the write off of cash advances to
Hong Kong Batteries and travel expenses. 14




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##### Table of Contents



The components of income (loss) from discontinued operations of
subsidiaries are as follows: Fuji Fabrication 2004
    
    2003Net sales
    
    $
    0
    
    
    $
    0Cost of salesGross profit
    
    
    
    
    
    
    0Selling, general and administrative expenses
    
    
    1,339
    
    
    
    7,691Interest and other, net
    
    
    
    
    
    
    (129,708
    )1,339
    
    
    
    (122,017
    )Income (loss) before income taxes
    
    
    (1,339
    )
    
    
    122,017Income taxes
    
    
    
    
    
    
    14Net income (loss)
    
    
    ($1,339
    )
    
    $
    122,003
 For fiscal 2003 Fuji Fabrications interest and other, net consisted of
debt forgiven by our subsidiary, DTI Technology. DTI Technology wrote off the
corresponding receivable from Fuji Fabrication and charged this amount to
discontinued operations. In our consolidated statement of income, this amount
had no effect on our loss from discontinued operations as it was a zero net
transaction or a wash. Hong Kong Batteries 2004
    
    2003Net sales
    
    
    
    
    
    $
    445,641Cost of sales
    
    
    
    
    
    
    368,534Gross income
    
    
    
    
    
    
    77,107Selling, general and administrative expenses
    
    
    
    
    
    
    347,635Interest and other, net
    
    
    
    
    
    
    (14,891
    )332,744Income (loss) before income taxes
    
    
    
    
    
    
    (255,637
    )Income tax (benefit)
    
    
    
    
    
    
    (9,313
    )Net income (loss)
    
    
    
    
    
    
    ($246,324
 Financial Condition Our
financial condition remains satisfactory. At January 31, 2004, cash totaled
$146,750, down from $508,414 at January 31, 2003. At January 31, 2004, total
short-term and long-term debt was $713,128 a decrease of $393,481 compared to
January 31, 2003. At January 31, 2004, total debt was 31% of stockholders
equity compared to 34% in fiscal 2003. For fiscal 2004, cash provided by operating activities was $346,184,
compared to $1,367,389 in fiscal 2003. This decrease was primarily due to the
decrease in revenue we experienced in fiscal 2004. Cash was provided by net
income adjusted for non-cash related items. Decreases in accounts receivable,
inventory and prepaid expenses and other current assets were offset by
decreases in accounts payable and gain on sale of equipment. For fiscal 2004,
net cash used in discontinued operations was $9,678, compared to cash used in
discontinued operations of $134,862 in fiscal 2003. This decrease was
primarily due to closing down Fujis operations in fiscal 2004. 15




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For fiscal 2004, our three largest customers accounted for approximately
60% of net revenue, with one of these customers accounting for approximately
26% of net revenue. At January 31, 2004, these three largest customers
accounted for approximately 58% of net accounts receivable. We used $110,359 in net cash for investing activities during fiscal 2004,
compared to $422,285 during fiscal 2003. The decrease in cash used for
investing activities as compared to fiscal 2003 was due to the purchase of
customer lists for $300,000 in December 2002. Capital expenditures in fiscal
2004 increased 25% compared to fiscal 2003. We anticipate capital expenditures
of $150,000 for fiscal 2005. We used $597,489 in net cash for financing activities in fiscal 2004,
which decreased from $619,107 in fiscal 2003. The major financing uses of cash
for both years were the repayment of debt and repurchase of our common stock.
In fiscal 2004, we purchased 1,791,322 shares of our common stock for $432,577.
Financing sources of cash amounted to $604,527 during fiscal 2004 were
primarily from amounts we drew down on our revolving line-of-credit and a new
Malaysian term loan. In addition we paid back at total of $700,000 on the line
of credit and $7,515 on the term loan during fiscal 2003. We have another
potential source of liquidity from authorized borrowings in the form of a
line-of-credit with a U.S. financial institution for $1.2 million. At January
31, 2004, we had $803,080 available for use from this line of credit. We believe that we have the financial resources needed to meet our
anticipated business requirements for the next 12 months, including capital
expenditures for the expansion or upgrading of our manufacturing capacity and
working capital requirements. Outlook In general, as we look ahead to the rest of fiscal 2005, the outlook
continues to be uncertain, and we anticipate a year that will be largely driven
by the introduction of our new personal safety devices, demand from the
airline security industry, military and jet engine industries, the
semiconductor industry as well as the overall global economy. Although it is
difficult to predict product demand for the rest of fiscal 2005, we expect a 5%
to 10% increase in revenue from our ceramic segment, East Cost Sales Company.
The outlook for the diamond tools industry is showing some strength, and with
the introduction of our new cutting blades, sales could increase 10%-12% in
fiscal 2005. The diamond tool industry is very dependent on the semiconductor
industry, which over last three years has experienced economic decline and is
now starting to show signs of growth. The outlook for the contract
manufacturing segment in fiscal 2005 should be stronger than fiscal 2004. With
the introduction of our new personal safety devices sales for our contract
manufacturing segment could grow 30%-50% in fiscal 2005. In this environment,
revenue growth for our new safety helmet is largely dependent on the commercial
acceptance of our current designs and successfully marketing the designs to the
safety and rescue industries, which we can not assure. Our financial results are substantially dependent on sales of ceramics and
related products by the East Coast Sales Company operating segment. Revenue is
partly a function of the mix of products we offer, all of which are difficult
to forecast. Because of the changing conditions throughout the world our
revenue is subject to the impact of economic conditions in various geographic
regions. Our gross margin expectation for fiscal 2005 is approximately 52% plus or
minus a few points, which is a slight decrease from the fiscal 2004 gross
margin of 56%. Our gross margin varies depending on unit sales volumes and
product mixes. Our policy for valuation of inventory, including the
determination of obsolete inventory, requires us to estimate the future demand
for our products within six months or less. The estimates of future demand
that we use in the valuation of inventory are also used for near-term factory
planning. If our demand forecast is greater than actual demand and we fail to
reduce manufacturing output accordingly, we would likely be required to record
additional inventory reserves, which would have a negative impact on our gross
margin. Various other factors including unit sales volumes and new
technologies will also continue to affect cost of sales and the variability of
gross margin percentages. In fiscals 2004 and 2003 we improved our cutting blade facility and
updated our ceramics fabrication facility. We expect that capital spending
will remain around $150,000 for fiscal 2005 down from $156,319 in fiscal 2003.
If market demand does not grow or our new products are not accepted, revenues
and gross margins may also be adversely affected. 16




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##### Table of Contents



Depreciation for fiscal 2005 is expected to be approximately $175,000,
compared to $196,501 in fiscal 2004. We expect amortization of other intangible assets to be approximately
$60,000 in fiscal 2005, as compared to $60,000 in fiscal 2004. In conjunction with the implementation of the new accounting rules for
goodwill, we completed the initial goodwill impairment review as of the
beginning of fiscal 2004 and the required annual review during the fourth
quarter of fiscal 2004 for East Coast Sales Company, which is the reporting
unit with substantially all of our recorded goodwill. We found no impairment.
Our impairment review process is based on a discounted cash flow approach that
uses estimates of revenue for the reporting unit and appropriate discount
rates. The estimates we used are consistent with the plans and estimates that
we are using to manage the underlying business. If we fail to deliver products
for this group, if our new products fail to gain market acceptance, or if
market conditions in the ceramic business decline, our revenue and cost
forecasts may not be achieved and we may incur charges for impairment of
goodwill. We expect our tax rate to be approximately 15% for fiscal 2005. This
estimate is slightly higher than the rate in fiscal 2004, primarily due the
loss of our available net operating loss carryover for state income tax
purposes as a result of a state tax audit. The expected rate is based on
current tax law and is subject to change. Our future results of operations and the other forward-looking statements
contained in this Outlook section and in our Strategy and Critical
Accounting Estimates sections involve a number of risks and uncertainties, in
particular the statements regarding our strategies, our expectations regarding
new products, future economic conditions, revenues, gross margin and costs,
capital spending and depreciation and amortization. In addition to the factors
discussed above, among the other factors that could cause actual results to
differ materially are the following: business and economic conditions and
trends in the airline security business, jet engine manufacturers, microchip
industry, and safety industries in various geographic regions; possible
disruption in commercial activities related to terrorist activity and armed
conflict, such as change in logistics and security arrangements, and reduced
end-user purchases relative to expectations; the impact of events outside the
United States, such as the business impact of fluctuating currency rates,
unrest or political instability in a locale; changes in customer order
patterns; competitive factors and acceptance of new products in specific market
segments; pricing pressures; excess or obsolete inventory and variations in
inventory valuation. We believe that we have the products, facilities, personnel and financial
resources for continued business success, but future revenues, costs, margins
and profits are all influenced by a number of factors, including those
discussed above, all of which are inherently difficult to forecast. Off-Balance Sheet
Arrangements None 17




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##### Table of Contents



INSERT A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in currency
exchange rates and interest rates. We do not try to mitigate these risks by
utilizing derivative financial instruments or other risky strategies. A substantial majority of our revenue, expense, and capital purchasing
activities are transacted in U. S. dollars. However, we do enter into these
transactions in other currencies, primarily the Malaysian Ringgit. The
Malaysian Ringgit is pegged to the U.S. Dollar and is translated to U.S.
dollars for consolidated purposes. In fiscal 2004 we reported a foreign
currency exchange loss of $1,454, compared to a loss of $1,534 in fiscal 2003,
neither of which materially impacted the financial statements. Inflation has not had a material effect on our revenues and income from
continuing operations in the past four years. Inflation is not expected to
have a material future effect. 18




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##### Table of Contents



ITEM 7. FINANCIAL STATEMENTS The following are filed as part of this Report:  
    
    Independent Auditors Report  
    
    Consolidated Balance Sheet as of January 31, 2004  
    
    Consolidated Statement of Income (Loss) for the Years Ended January 31, 2004 and 2003  
    
    Consolidated Statement of Stockholders Equity for
the Years Ended January 31, 2004 and 2003  
    
    Consolidated Statement of Cash Flows for the Years Ended January 31, 2004 and 2003  
    
    Notes to Consolidated Financial Statements 19




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INDEPENDENT AUDITORS REPORT Board of Directors
SETO Holdings, Inc. and Subsidiaries
Briarcliff Manor, New York We have audited the consolidated balance sheet of SETO Holdings, Inc. and
Subsidiaries as of January 31, 2004 and the related consolidated statements of
income, cash flows and stockholders equity for the years ended January 31,
2004 and 2003. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion. In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of SETO Holdings, Inc. and Subsidiaries as of January 31, 2004 and the
results of their operations, cash flows and changes in stockholders equity for
the years ended January 31, 2004 and 2003, in accordance with accounting
principles generally accepted in the United States of America. April 20, 2004
Mountainside, New Jersey
    
    (ZELLER WEISS & KAHN, LLP)
 20




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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - JANUARY 31, 2004 ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    146,750Accounts receivable
    
    
    559,254Inventory
    
    
    866,016Prepaid expenses and other current assets
    
    
    7,837Deferred tax asset, current portion
    
    
    80,750TOTAL CURRENT ASSETS
    
    
    1,660,607PROPERTY, PLANT AND EQUIPMENT, NET OF DEPRECIATION
    
    
    758,431OTHER ASSETSGoodwill
    
    
    85,453Other intangible asset, net of amortization
    
    
    230,000Security deposits and other assets
    
    
    6,000Deferred tax asset, net of current portion
    
    
    303,872TOTAL OTHER ASSETS
    
    
    625,325TOTAL ASSETS
    
    $
    3,044,363LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent portion of long-term debt
    
    $
    9,682Note payable, line of credit
    
    
    396,920Accounts payable
    
    
    190,039Accrued expenses
    
    
    51,052TOTAL CURRENT LIABILITIES
    
    
    647,693OTHER LIABILITIESDeferred lease liability
    
    
    30,000Long-term debt
    
    
    35,435TOTAL OTHER LIABILITIES
    
    
    65,435STOCKHOLDERS EQUITYCommon stock par value $.001; 100,000,000 shares authorized; 13,184,100 shares issued
    
    
    13,184Additional paid in capital
    
    
    4,339,485Accumulated other comprehensive income
    
    
    (150,522
    )Retained earnings (deficit)
    
    
    (1,759,168
    )2,442,979Less common shares held in treasury, 490,722 shares at cost
    
    
    (111,744
    )TOTAL STOCKHOLDERS EQUITY
    
    
    2,331,235TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    3,044,363
 See notes to consolidated financial statements. 21




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SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED JANUARY 31, 2004 AND 2003 2004
    
    2003Net revenues
    
    $
    3,897,396
    
    
    $
    7,364,438Cost of sales
    
    
    1,701,437
    
    
    
    3,601,365Gross margin
    
    
    2,195,959
    
    
    
    3,763,073Selling, general and administrative expenses
    
    
    2,172,803
    
    
    
    2,163,762Amortization and impairment of acquisition-related intangibles
    
    
    60,000
    
    
    
    10,000Operating expenses
    
    
    2,232,803
    
    
    
    2,173,762Operating income (loss)
    
    
    (36,844
    )
    
    
    1,589,311Interest and other, net
    
    
    (340,517
    )
    
    
    (68,678
    )Income (loss) before income taxes
    
    
    (377,361
    )
    
    
    1,520,633Income taxes
    
    
    46,161
    
    
    
    44,681Income (loss) from continuing operations
    
    
    (423,522
    )
    
    
    1,475,952Discontinued operations:Loss from operations of subsidiaries
    
    
    (1,339
    )
    
    
    (124,321
    )Loss on disposal of subsidiaries
    
    
    (36,395
    )
    
    
    (913,942
    )(37,734
    )
    
    
    (1,038,263
    )Net income (loss)
    
    ($
    461,256
    )
    
    $
    437,689Earning (loss) per share information:Income from continuing operationsBasic
    
    ($
    0.03
    )
    
    $
    0.10Diluted
    
    ($
    0.03
    )
    
    $
    0.10Discontinued operations:Basic
    
    ($
    0.00
    )
    
    ($
    0.07
    )Diluted
    
    ($
    0.00
    )
    
    ($
    0.07
    )Weighted average common shares outstanding
    
    
    13,551,598
    
    
    
    14,484,700Weighted average common shares outstanding, assuming dilution
    
    
    13,551,598
    
    
    
    14,484,700
 See notes to consolidated financial statements. 22




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SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED JANUARY 31, 2004 AND 2003 AccumulatedAdditional
    
    
    
    
    
    Other
    
    
    
    
    
    TotalCommon
    
    Paid in
    
    Treasury
    
    Comprehensive
    
    Accumulated
    
    StockholdersShares
    
    Stock
    
    Capital
    
    Stock
    
    Income
    
    Deficit
    
    EquityBalance at January 31, 2002, restated
    
    
    14,783,400
    
    
    $
    14,783
    
    
    $
    4,720,986
    
    
    ($
    12,026
    )
    
    ($
    150,522
    )
    
    ($
    1,735,601
    )
    
    $
    2,837,620Components of comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    437,689
    
    
    
    437,689Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    437,689Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,241
    )
    
    
    
    
    
    
    
    
    
    
    (50,241
    )Shares cancelled, treasury stock
    
    
    (225,000
    )
    
    
    (225
    )
    
    
    (46,338
    )
    
    
    46,563
    
    
    
    
    
    
    
    
    
    
    
    0Balance at January 31, 2003
    
    
    14,558,400
    
    
    
    14,558
    
    
    
    4,674,648
    
    
    
    (15,704
    )
    
    
    (150,522
    )
    
    
    (1,297,912
    )
    
    
    3,225,068Components of comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (461,256
    )
    
    
    (461,256
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (461,256
    )Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (432,577
    )
    
    
    
    
    
    
    
    
    
    
    (432,577
    )Shares cancelled, treasury stock
    
    
    (1,374,300
    )
    
    
    (1,374
    )
    
    
    (335,163
    )
    
    
    336,537Balance at January 31, 2004
    
    
    13,184,100
    
    
    $
    13,184
    
    
    $
    4,339,485
    
    
    ($
    111,744
    )
    
    ($
    150,522
    )
    
    ($
    1,759,168
    )
    
    $
    2,331,235
 See notes to consolidated financial statements. 23




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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED JANUARY 31, 2004 AND 2003 2004
    
    2003OPERATING ACTIVITIESIncome (loss) from continuing operations
    
    
    ($423,522
    )
    
    $
    1,475,952Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation
    
    
    196,501
    
    
    
    141,488Amortization and impairment of intangibles and other acquisition-related costs
    
    
    60,000
    
    
    
    10,000Gain on sale of equipment
    
    
    (31,749
    )
    
    
    (1,068
    )Provision for deferred income taxes
    
    
    35,304
    
    
    
    10,074Write off of note receivable
    
    
    364,193Changes in assets and liabilities:Accounts receivable
    
    
    326,721
    
    
    
    (69,672
    )Note receivable
    
    
    
    
    
    
    (106,146
    )Inventories
    
    
    34,396
    
    
    
    (40,600
    )Prepaid expenses and other current assets
    
    
    22,587
    
    
    
    18,519Deferred product development costs
    
    
    
    
    
    
    (138,878
    )Other assets
    
    
    
    
    
    
    45,237Accounts payable and accrued expenses
    
    
    (230,069
    )
    
    
    151,345Deferred lease liability
    
    
    1,500
    
    
    
    6,000NET CASH PROVIDED BY CONTINUING OPERATIONS
    
    
    355,862
    
    
    
    1,502,251NET CASH USED IN DISCONTINUED OPERATIONS
    
    
    (9,678
    )
    
    
    (134,862
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    346,184
    
    
    
    1,367,389INVESTING ACTIVITIESProceeds from sale of equipment
    
    
    45,960
    
    
    
    2,500Purchase of distribution lines
    
    
    
    
    
    
    (300,000
    )Purchase of property and equipment
    
    
    (156,319
    )
    
    
    (124,785
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (110,359
    )
    
    
    (422,285
    )FINANCING ACTIVITIESProceeds from financing
    
    
    52,632Decrease in short-term debt, net
    
    
    (148,105
    )
    
    
    (502,627
    )Repayments of and retirement of long-term debt
    
    
    (69,439
    )
    
    
    (66,239
    )Repurchase and retirement of common stock
    
    
    (432,577
    )
    
    
    (50,241
    )NET CASH USED IN FINANCING ACTIVITIES
    
    
    (597,489
    )
    
    
    (619,107
    )NET INCREASE (DECREASE) IN CASH
    
    
    (361,664
    )
    
    
    325,997CASH, BEGINNING OF YEAR
    
    
    508,414
    
    
    
    182,417CASH, END OF YEAR
    
    $
    146,750
    
    
    $
    508,414
 See notes to consolidated financial statements. 24




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##### Table of Contents



SETO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Nature of Operations SETO Holdings, Inc.(the Company) a Nevada Corporation, is primarily in
the business of selling small precision disposable diamond and other base
material tools used to cut and separate electronic components and devices. In
addition, the Company has three wholly owned subsidiaries with their own
product lines. They are as follows: East Coast Sales Company, Inc.(ECS) is a Connecticut corporation, which
distributes and fabricates industrial ceramic products for the aircraft,
aerospace, defense, and detection industries in addition to distributing clean
room supplies and tools for use by semiconductor and electronic manufacturing
companies. DTI Technology, SDN BHD(DTI) is a Malaysian corporation that
manufactures a product line similar to that of SETO Holdings, Inc. SETO Technology, SDN BHDis a Malaysian corporation, which offers sales
and services to United States corporations for contract manufacturing in
Malaysia. SETO Technology is also designing and developing two new safety
devices which it expects to launch in fiscal 2005. Note 2: Accounting Policies: Use of Estimates The preparation of financial statements in conformity with accounting
principles accepted in the U.S. requires management to make estimates and
judgments that affect the amounts reported in the financial statements and
accompanying notes. The accounting estimates that require managements most
difficult and subjective judgments include the assessment of recoverability of
property, equipment and goodwill, inventory, and the recognition and
measurement of income tax assets and liabilities. The actual results
experienced by the Company may differ materially from managements estimates. Principles of Consolidation The consolidated financial statements include the Companys accounts and
those of its wholly owned subsidiaries. Upon consolidation, all significant
intercompany accounts and transactions are eliminated. Certain prior period
amounts have been reclassified to conform to the current period presentation.
Accounts denominated in non-U.S. currencies have been remeasured using the U.S.
Dollar as the functional currency. Cash and Cash Equivalents Cash and cash equivalents include highly liquid, temporary cash
investments having original maturity dates of three months or less. Short-term
investments include certificates of deposit, commercial paper and other
investments not qualifying as cash equivalents. For reporting purposes, such
cash equivalents and short-term investments are stated at cost plus accrued
interest, which approximates fair value. Concentrations of Credit Risk Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company places its cash and cash equivalents with
high quality financial institutions. Currency Risk. The Company transacts business in currencies other than
the U.S. dollar, primarily the Malaysian Ringgit. The Malaysian Ringgit is
pegged to the U.S. dollar therefore the Company has not established any
transaction or balance sheet risk management programs. For foreign
subsidiaries whose functional currency is the local foreign currency, balance
sheet accounts are translated at exchange rates in effect at the end of the
year and income statement accounts are translated at average exchange rates for
the 25




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##### Table of Contents



year. Acquisition related translation gains or losses are included as a
separate component of shareholders equity. Exchange differences arising from
foreign currency translation are included in the profit and loss account. Foreign Operations Substantially all of the Companys products are manufactured in Malaysia.
The foreign operations represent captive manufacturing facilities of the
Company. The Companys operations are subject to various political, economic,
and other risks and uncertainties inherent in countries in which the Company
operates. Among other risks, the Companys operations are subject to the risks
of restrictions on transfer of funds; export duties, quotas, and embargoes;
domestic and international customs and tariffs; changing taxation policies;
foreign exchange restrictions; and political conditions and government
regulations. Inventories Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis and market is considered at net realizable
value. Inventories at fiscal year-end were as follows: Finished goods
    
    $
    504,159Work in Process
    
    
    43,328Raw Materials
    
    
    312,692Supplies
    
    
    5,837$
    866,016
 Product Development Costs The Company defers certain costs related to the preliminary activities
associated with the manufacture of its products which the Company has
determined to have future economic benefit. Management periodically reviews, and
when necessary, revises its estimate of
the future benefit of these costs and expenses them if it is deemed there is no
longer a future benefit. At January 31, 2003, the Company capitalized product
development costs of $178,878. This amount represents advance payments for
contractual services for the development of a new personal safety device that
the Company expects to release in fiscal 2005. In fiscal 2004, the Company
converted these costs to machinery and equipment and is now depreciating them
over their estimated useful lives. Deferred Tax Assets Included in the accompanying balance sheet at January 31, 2004 is a
deferred tax asset of $384,622 that represents the Companys tax benefit of its
federal net operating loss carryover. Realization of this asset is dependent
on the Companys ability to generate future taxable income. Management
believes that it is more likely than not that forecasted taxable income will be
sufficient to utilize the tax carryforwards before their expiration in 2024.
However, there can be no assurance that the Company will meet its expectations
of future income. As a result, the amount of the deferred tax asset considered
realizable could be reduced in the near term if estimates of future taxable
income are reduced. Such an occurrence could have an adverse affect on the
Companys results of operations and financial condition. Property and Equipment Property and equipment are stated at cost. Depreciation is computed for
financial reporting purposes principally using the straight-line method over
the following estimated useful lives: Useful LivesLeasehold improvements
    
    10  50Manufacturing equipment
    
    5  20Office equipment
    
    5  14
 26




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##### Table of Contents



Reviews are regularly performed to determine whether facts and
circumstances exist which indicate that the carrying amount of assets may not
be recoverable or the useful life is shorter than originally estimated. The
Company assesses the recoverability of its assets by comparing the projected
undiscounted net cash flows associated with the related asset or group of
assets over their remaining lives against their respective carrying amounts.
Impairment, if any, is based on the excess of the carrying amount over the fair
value of those assets. If assets are determined to be recoverable, but the
useful lives are shorter than originally estimated, the net book value of the
assets is depreciated over the newly determined remaining useful lives. Identified Intangible Assets Acquisition-related intangibles include developed technology and customer
lists, and are amortized on a straight-line basis over periods ranging from 2-6
years. All identified intangible assets are classified within other assets on
the balance sheet. In the quarter following the period in which identified
assets become fully amortized, the fully amortized balances are removed from
the gross asset and accumulated amortization accounts. Identified intangible assets are regularly reviewed to determine whether
facts and circumstances exist which indicate that the useful life is shorter
than originally estimated or the carrying amount of assets may not be
recoverable. The Company assesses the recoverability of identifiable
intangible assets by comparing the projected undiscounted net cash flows
associated with the related asset or group of assets over their remaining lives
against their respective carrying amounts. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those assets. Revenue Recognition The Company recognizes net revenue when the earnings process is complete,
as evidenced by an agreement with the customer, transfer of title and
acceptance, if applicable, as well as fixed pricing and probable
collectibility. When the Company sells its products to distributors, the
distributors have substantial independent operations under sales arrangements
whose terms do not allow for rights of return or price protection on unsold
products held by them. In these instances, the Company recognizes revenue when
it ships the product directly to the distributors. Shipping and handling costs
billed to customers are included in net revenue and the related shipping costs
are included in cost of sales. Stock-Based Compensation The Company accounts for non-cash stock-based compensation in accordance
with the provisions of Accounting Principles Board Opinion No. 25 (Accounting
for Stock Issued to Employees), and its related interpretations, which state
that no compensation expense is recognized for stock options or other stock
based awards to employees that are granted with an exercise price equal to or
above the estimated fair value per share of the Companys common stock on the
grant date. In the event that stock options are granted with an exercise price
below the estimated fair market value of the Companys common stock at the
grant date, the difference between the fair market value of the Companys
common stock and the exercise price of the stock option is recorded as deferred
compensation. Deferred compensation is amortized to compensation expense over
the vesting period of the related stock option. In fiscal 2004, the Company
did not recognize any non-cash compensation. Reclassifications Certain amounts reported in the previous year have been reclassified to
conform to the 2004 presentation. 27




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Recent Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 requires an investor
with a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity
is an entity which the equity investors do not have a controlling interest or
the equity investment at risk is insufficient to finance the entities
activities without receiving additional financial support from the other
parties. At January 31, 2004, the Company does not have an investment in any
variable interest entity that must be consolidated. Treasury Stock The Company accounts for treasury stock using the cost method. Note 3: Accounts Receivable The following is a summary of accounts receivable at January 31, 2004: Trade accounts
    
    $
    579,254Less allowance for doubtful accounts
    
    
    (20,000
    )$
    559,254
 At January 31, 2004 accounts receivable in the amount of $579,254 were
pledged as collateral in connection with bank loans. Note 4: Property and Equipment The following is a summary of property and equipment at cost less
depreciation at January 31, 2004: Leasehold improvements
    
    $
    150,961Manufacturing equipment
    
    
    1,115,028Office equipment
    
    
    111,9841,377,973Less accumulated depreciation
    
    
    (619,542
    )Total
    
    $
    758,431
 Depreciation expense charged to operations was $196,501 and $141,488 in
fiscal 2004 and 2003, respectively. At January 31, 2004, property and
equipment with a cost of $1,377,973 was pledged as collateral for the Companys
bank and equipment loans. Note 5: Goodwill The Company adopted SFAS No. 142 effective January 31, 2002 and
accordingly, has ceased amortizing amounts related to goodwill starting January
31, 2002. The balance of goodwill is related to the Companys East Coast Sales
Company segment. In accordance with SFAS No. 142, the Company has evaluated
the fair value of its East Coast Sales segment and determined that none of the
goodwill recorded was impaired. The fair value was determined using a
reasonable estimate of future cash flows of the segment and a risk adjusted
discount rate to compute a net present value of future cash flows. 28




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##### Table of Contents



Note 6: Identified Intangible Assets On December 1, 2002, the Company acquired the customer lists from a
Malaysian company for $300,000, to be amortized over a period of 5 years. The
Companys identified intangible assets are subject to amortization.
Amortization of identified intangible assets amounted to $60,000 in fiscal 2004
and $10,000 for fiscal 2003. Based on the carrying value of identified intangible assets recorded at
January 31, 2004, and assuming no subsequent impairment of the underlying
assets, the annual amortization expense, excluding acquisition-related costs,
is expected to be as follows: 2005
    
    2006
    
    2007
    
    2008Customer lists
    
    $
    60,000
    
    
    $
    60,000
    
    
    $
    60,000
    
    
    $
    50,000
 Note 7: Earnings Per Share The number of shares used in the computation of the Companys basic and
diluted earnings per common share is as follows: 2004
    
    2003Weighted average common shares outstanding
    
    
    13,551,598
    
    
    
    14,484,700Effect of using diluted securities:Weighted average common equivalent shares
from stock options
    
    
    0
    
    
    
    0Diluted number of common shares outstanding
    
    
    13,551,598
    
    
    
    14,484,700
 Weighted average common shares outstanding, assuming dilution, includes
the incremental shares that would be issued upon the exercise of stock options.
For 2004 and 2003 approximately 6 million of the Companys stock options were
excluded from the calculation of diluted earnings per share because their
inclusion would have been antidilutive. These options could be dilutive in the
future. Note 8: Common Stock Repurchase Program The Company has an ongoing authorization as amended from the Board of
Directors to repurchase up to 2.5 million shares of SETOs common stock in open
market or negotiated transactions in compliance with Rule 10b-18 of the
Securities Exchange Act, subject to market conditions, applicable legal
requirements and other factors. This program does not obligate the Company to
acquire any particular amount of its common stock, and the program may be
suspended at any time at the Companys discretion. During 2004 the company
repurchased 1,791,322 shares of common stock at a cost of $432,577. As of
January 31, 2004, 750,700 shares remained available under the repurchase
authorization. On
March 15, 2004, the Company filed a report on Form 8-K
containing a press release announcing an odd-lot purchase
program for stockholders of less than 100 shares of the
Companys common stock, whereby stockholders will have the
opportunity to sell their shares to the Company for a price of $0.20
per share with no brokerage fees. According to the Company, in the
event that the odd-lot program reduces the number of the
Companys registered stockholders to less than 300, the Company
may deregister its common stock and suspend its reporting obligation
under the Securities Exchange Act of 1934, which would result among
other things, in the Company common stock being delisted from the
Bulletin Board and only being quoted on the Pink Sheets®, which is a
centralized quotation service that collects and publishes market
maker quotations in real time. The odd-lot program expires on
June 15, 2004. 29




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##### Table of Contents



Note 9: Borrowings Short-Term Debt Short-term debt at January 31, 2004 was as follows: Payable in U.S. dollars:Line of credit
    
    $
    396,920Payable in other currencies:Malaysian Ringgit, loan due fiscal 2009 at 6.54%
    
    
    9,682Total
    
    $
    406,602
 Short-term debt at January 31, 2003 consisted of an outstanding line of
credit with a U.S. financial institution in the amount of $1,200,000. The line
of credit expires on October 31, 2004 and carries interest at an annual rate of
2.90% plus the 30 day dealer commercial paper rate. As of January 31, 2004,
the Company had utilized $396,920 of the line of credit. The loan is secured
by the personal guarantee of the Companys president and the Companys assets. Long-Term Debt Long-term debt at January 31, 2004 was as follows: Payable in other currencies:Malaysian Ringgit, loan due fiscal 2009 at 6.54%
    
    $
    45,117Less current portion of long-term debt
    
    
    (9,682
    )Total
    
    $
    35,435
 The aggregate debt maturities were as follows: January 31, 2005
    
    $
    9,682January 31, 2006
    
    
    10,312January 31, 2007
    
    
    11,007January 31, 2008
    
    
    11,749January 31, 2009
    
    
    2,367$
    45,117
 The Malaysian borrowings were made in connection with the financing of the
Companys Malaysian operations. Note 10: Concentrations of Credit Risk Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Federal Deposit Insurance Corporation (FDIC)
insures the cash balances up to $100,000. At January 31, 2004 the Company had
uninsured cash balances of $85,885. A majority of the Companys trade receivables are derived from sales of
security detection and protection devices to original equipment manufacturers.
The Companys three largest customers accounted for approximately 60% of net
revenue for fiscal 2004 which decreased from 70% for fiscal 2003. At January
31, 30




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2004, the three largest customers accounted for approximately 58% of net
accounts receivable (82% of net accounts receivable at January 31, 2003). The Company attempts to keep pace with the changing security and cutting
blade industries and has adopted credit policies and standards intended to
accommodate industry growth and inherent risk. Management believes that credit
risks are moderated by the diversity of the Companys customers and geographic
sales areas. SETO performs ongoing credit evaluations of its customers. Note 11: Interest and Other, Net 2004
    
    2003Interest income
    
    $
    11,970
    
    
    $
    33,005Gain on sale of assets
    
    
    31,748
    
    
    
    1,068Interest expense
    
    
    (18,588
    )
    
    
    (101,217
    )Loss on note receivable from G Com .Net
    
    
    (364,193
    )Foreign currency exchange loss
    
    
    (1,454
    )
    
    
    (1,534
    )Total
    
    
    ($340,517
    )
    
    
    ($68,678
    )
 Note 12: Comprehensive Income The components of other comprehensive income were $0 for fiscal 2004 and
fiscal 2003. The remaining amount of $150,522 on the Companys balance sheet
classified under accumulated other comprehensive income is all related to the
acquisition of the Companys foreign subsidiary, DTI Technology, Sdn Bhd. The components of accumulated other comprehensive income at January 31,
2004 consisted of $150,522 in foreign currency translation adjustments relating
to the acquisition of the Companys foreign subsidiary DTI Technology Sdn Bhd. 31




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Note 13: Provision for Taxes The following table presents the U.S. and non-U.S. components of income
(loss) from continuing operations before income taxes and the provision
(benefit) for income taxes: Income (loss) from Continuing Operations Before Income Taxes: 2004
    
    2003Domestic
    
    
    ($378,356
    )
    
    $
    1,464,125Foreign
    
    
    995
    
    
    
    56,508Income from continuing operations before
income taxes
    
    
    ($377,361
    )
    
    $
    1,520,633
 Provision (Benefit) for Income Taxes
    
    2004
    
    2003Current:Federal
    
    
    ($132,487
    )
    
    $
    8,567State
    
    
    10,857
    
    
    
    4,074Foreign
    
    
    0
    
    
    
    21,966Subtotal
    
    
    (121,630
    )
    
    
    34,607Deferred:Federal
    
    
    93,121
    
    
    
    10,074State
    
    
    74,670Foreign
    
    
    0
    
    
    
    0Subtotal
    
    
    167,791
    
    
    
    10,074Provision (benefit) for income taxes
    
    $
    46,161
    
    
    $
    44,681
 The following table presents the principal reasons for the difference
between the effective tax (benefit) rate on continuing operations and the U.S.
federal statutory income tax (benefit) rate: 2004
    
    2003U.S. federal statutory income tax (benefit) rate
    
    
    -35.0
    %
    
    
    -35.0
    %State tax (benefit), net of federal benefit
    
    
    2.8
    %
    
    
    0.2
    %Foreign earnings taxed at different rates
    
    
    -0.2
    %
    
    
    -1.6
    %Operating loss carryforward
    
    
    37.7
    %
    
    
    33.3
    %Change in valuation allowance
    
    
    6.9
    %
    
    
    6.0
    %Effective income (benefit) tax rate
    
    
    12.2
    %
    
    
    2.9
    %
 32




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The components of deferred income tax assets and liabilities are as
follows: 2004
    
    2003Deferred Income Tax AssetsNet operating loss/credit carryforwards
    
    $
    531,973
    
    
    $
    622,549Allowance for doubtful accounts
    
    
    0
    
    
    
    6,800Total deferred tax assets
    
    
    531,973
    
    
    
    629,349Deferred Income Tax LiabilitiesDifference between book and tax depreciation
    
    
    3,325
    
    
    
    3,315Total deferred tax liabilities
    
    
    3,325
    
    
    
    3,315Net deferred tax assets before valuation
allowance
    
    
    528,648
    
    
    
    626,034Valuation allowance
    
    
    144,026
    
    
    
    206,108Net deferred tax asset
    
    $
    384,622
    
    
    $
    419,926
 Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes (SFAS 109) requires that a valuation allowance be
established when it is more likely than not that all or a portion of a deferred
tax asset will not be realized. A review of all available positive and
negative evidence needs to be considered, including a companys current and
past performance, the market environment in which the company operates, the
utilization of past tax credits, length of carryback and carryforward periods,
existing contracts or sales backlog that will result in future profits, etc. Forming a conclusion that a valuation allowance is not needed is difficult
when there is negative evidence such as cumulative losses in recent years.
Cumulative losses weigh heavily in the overall assessment. During the first
and third quarters of fiscal 2004, due to a decrease in revenue, the write off
of a note receivable and an examination of SETOs state tax returns for 2003,
2002, and 2001, SETO increased its valuation allowance for future tax benefits.
With the introduction of new products in fiscal 2005, management believes that
SETO will utilize its remaining net operating loss carryforward within the next
five years. The following table presents carryforwards for losses (tax effected): Description
    
    Amount
    
    ExpirationFederal net operating losses
    
    $
    1,438,871
    
    
    
    2024State net operating loses
    
    
    378,239
    
    
    
    2024Total
    
    $
    1,817,110
 The Company does not provide for the U.S. income taxes or foreign
withholding taxes on the undistributed earnings of its foreign subsidiaries, as
such cumulative earnings are intended to be permanently reinvested in those
operations. It is not practicable to estimate the amount of unrecognized
deferred tax liabilities for these undistributed foreign earnings. 33




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##### Table of Contents



Note 14: Common Stock Options On March 25, 1997, the Company effectuated a Non-statutory Stock Option
Plan for the purpose of advancing the interests of the Company and its
stockholders by helping the Company obtain and retain the services of key
management employees, officers, directors and consultants. The Board of Directors of the Company administers the
Plan. The Board has full authority and discretion to determine the
eligible participants to be granted the options, the date of issuance, exercise
price and expiration date. The total number of shares set aside for the Plan
is 6,500,000. Under the Plan, the option exercise price is equal to the fair
market value of the Companys common stock at the date of the grant. Options
currently expire no later than 10 years from the grant date. Proceeds received
by the Company from exercises of stock options are credited to common stock and
additional paid-in capital. No options were issued during fiscal 2004. Additional information with respect to stock option activity other than
the Companys Non-statutory Stock Option Plan is as follows: Weighted AverageNumber of Shares
    
    Exercise PriceOutstanding at January 31, 2003
    
    
    6,000,000
    
    
    $
    0.21Granted
    
    
    0
    
    
    
    0.00Cancelled
    
    
    0
    
    
    
    0.00Outstanding at January 31, 2004
    
    
    6,000,000
    
    
    $
    0.25Options exercisable at January 31, 2003
    
    
    4,500,000
    
    
    $
    0.17Options exercisable at January 31, 2004
    
    
    2,500,000
    
    
    $
    0.11
 Stock Options
OutstandingWeighted AverageRemainingNumber of Shares
    
    Contractual Life in
    
    Weighted AverageRanges of Exercise Prices
    
    Outstanding
    
    Years
    
    Exercise Price$0.10 - $0.25
    
    
    4,500,000
    
    
    
    2.25
    
    
    $
    0.17$0.26 - $0.50
    
    
    1,500,000
    
    
    
    2.25
    
    
    $
    0.506,000,000
    
    
    
    2.25
    
    
    $
    0.25
 34




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##### Table of Contents



Stock Options
ExercisableWeighted AverageRemainingNumber of Shares
    
    Contractual Life in
    
    Weighted AverageRanges of Exercise Prices
    
    Outstanding
    
    Years
    
    Exercise Price$0.10 - $0.25
    
    
    2,500,000
    
    
    
    2.25
    
    
    $
    0.11$0.26 - $0.50
    
    
    0
    
    
    
    0.00
    
    
    $
    0.002,500,000
    
    
    
    2.25
    
    
    $
    0.11
 Note 15: Commitments 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 any increases in real estate taxes
over the base year as stipulated by the lease. The lease requires the
following future minimum payments: January 31, 2005
    
    
    66,000January 31, 2006
    
    
    66,000January 31, 2007
    
    
    66,000January 31, 2008
    
    
    70,500January 31, 2009
    
    
    72,000Thereafter
    
    
    306,000$
    646,500
 Rent expense charged to operations was $85,820 and $84,988 in fiscal 2004
and 2003, respectively. In addition, the Company leases several vehicles under operating lease
terms expiring through fiscal 2004. Total lease expense was $42,025 and
$24,716 for the years ended January 31, 2004 and 2003, respectively. Note 16: Employment Agreements In
fiscal 2004, the Company amended its employment agreements with its
President and Executive Vice President. The terms of the agreements changed
and expire on April 30, 2006. Compensation is now set at a base of $150,000
for the President and Executive Vice President, respectively, with
each getting a 2-3% commission on SETO Holdings, Inc. /East Coast Sales Companys
sales. In
fiscal 2004, the Company amended its employment agreement with the
acting secretary of the Company. The term of the agreement remained unchanged
and expires on April 30, 2006. Compensation is set at a base of $75,000 with a
bonus of 2% of any increase in SETO Holdings, Inc./East Coast Sales Companys
consolidated net income over the net income from the previous years. As
of January 31, 2004, the Company paid $162,514 in commissions to
its officers. 35




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##### Table of Contents



Note 17: Discontinued Operations On February 1, 2001, the Company adopted a formal plan to sell Fuji
Fabrication, SDN, BHD. On October 1, 2001, the assets of Fuji Fabrication,
which consisted primarily of inventory and equipment, were sold for $290,547
with the Company assuming a note for the full amount of the selling price. On
October 1, 2002 the Company recast the note for $396,693, which included the
sales of additional inventory and previously accrued interest. Interest on the
note is stated at 10% (annually) and was payable in 12 monthly installments.
On July 1, 2003 the company received $32,500 in equipment which was offset
against the note receivable at July 31, 2003. The note was payable in full on
September 30, 2003. On October 1, 2003, the payee, G Com.Net, defaulted on the
note and the Company wrote off the remaining note balance of $364,193 and
expensed it to Interest and other, net (see Note 11). Fuji Fabrication had no sales for the year ended January 31, 2004 and
2003. General and administrative expenses for the years ended January 31, 2004
and 2003 totaled $1,608 and $7,691, respectively. In addition, at October 31,
2002, Fuji Fabrication recognized $129,708 in miscellaneous income related to
forgiveness of debt. The company ceased Fujis operations on October 31, 2003. On October 31, 2002, we adopted a formal plan to discontinue the
operations of Hong Kong Batteries Industries, Ltd. (Hong Kong Batteries). Hong
Kong Batteries was a trading company that bought industrial batteries from
manufacturers in mainland China and resold them to companies in Hong Kong, Asia
and Europe. When China was approved for World Trade Organization Status (WTO)
at the end of 2001, without our knowledge most of Hong Kong Batteries
suppliers hired English speaking sales and marketing managers and began to
directly approach all the end user customers of Hong Kong Batteries. During
the first and second quarters of fiscal 2003, Hong Kong Batteries was still
receiving orders from its customers. Then during the third quarter Hong Kong
Batteries did not receive any orders and was informed by its customers that
the Chinese suppliers offered substantial discounts if they bought their
products directly from the Chinese manufacturers. After many discussions and
meetings with the management of Hong Kong Batteries, we could not overcome the
problem and decided to cease operations as soon as possible due to the lack of
revenue and the high overhead cost we would have incurred if we continued
operating. The discontinuance of Hong Kong Batteries Industries, Ltd resulted in us
writing off $688,183 in goodwill and incurring an additional $225,759 in
disposal costs, which consisted mainly of the write off of cash advances to
Hong Kong Batteries and travel expenses. The components of income (loss) from discontinued operations of
subsidiaries are as follows: Fuji Fabrication 2004
    
    2003Net sales
    
    $
    0
    
    
    $
    0Cost of salesGross profit
    
    
    
    
    
    
    0Selling, general and administrative expenses
    
    
    1,339
    
    
    
    7,691Interest and other, net
    
    
    
    
    
    
    (129,708
    )1,339
    
    
    
    (122,017
    )Income (loss) before income taxes
    
    
    (1,339
    )
    
    
    122,017Income taxes
    
    
    
    
    
    
    14Net income (loss)
    
    
    ($1,339
    )
    
    $
    122,003
 For fiscal 2003 Fuji Fabrications interest and other, net consisted of
debt forgiven by our subsidiary, DTI Technology. DTI Technology wrote off the
corresponding receivable that from Fuji Fabrication and charged this amount to
discontinued operations. In our consolidated statement of income, this amount
had no effect on our loss from discontinued operations as it was a zero net
transaction or a wash. 36




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##### Table of Contents



Hong Kong Batteries 2004
    
    2003Net sales
    
    
    
    
    
    $
    445,641Cost of sales
    
    
    
    
    
    
    368,534Gross income
    
    
    
    
    
    
    77,107Selling, general and administrative expenses
    
    
    
    
    
    
    347,635Interest and other, net
    
    
    
    
    
    
    (14,891
    )332,744Loss before income taxes
    
    
    
    
    
    
    (255,637
    )Income tax (benefit)
    
    
    
    
    
    
    (9,313
    )Net loss
    
    
    
    
    
    
    ($246,324
 Note 18: Principal Products and Segmentation of Sales The Company has adopted FASB Statement No. 131, Disclosures about
Segments of a Business Enterprise and Related Information. The Company is
managed in three principal operating segments, which are (1) custom cut and
fabricated ceramic parts for the aircraft, aerospace, defense,
detection/protection industries, (2) the manufacturing of disposable precision
diamond cutting tools for the semiconductor and electronics industries, and (3)
contract manufacturing of personal safety devices. These operating segments
were determined based on the nature of the products and services offered.
Operating segments are defined as components of an enterprise about which
separate financial information is available and is evaluated regularly by the
chief operating decision-maker (CEO) to decide how to allocate resources and to
assess performance. Operating segments do not record inter-segment revenue, and, accordingly,
there is none to be recorded. The accounting policies for segment reporting
are the same as for the Company as a whole. Financial information relating to
the principal industry segments and classes of products are as follows: 2004
    
    2003Sales to customers:Industry A - Ceramics
    
    $
    2,814,380
    
    
    $
    5,843,564Industry B - Diamond tools
    
    
    638,745
    
    
    
    817,066Industry D - Contract manufacturing
    
    
    444,271
    
    
    
    703,808Total sales
    
    $
    3,897,396
    
    
    $
    7,364,438Operating profit or loss:Industry A - Ceramics
    
    $
    468,965
    
    
    $
    1,890,414Industry B - Diamond tools
    
    
    (404,095
    )
    
    
    (311,437
    )Industry D - Contract manufacturing
    
    
    (101,714
    )
    
    
    10,334Total operating profit
    
    
    ($36,844
    )
    
    $
    1,589,311
 Information as to the Companys sales in different geographical areas is
as follows: 2004
    
    2003Sales to customers:United States
    
    $
    2,786,596
    
    
    $
    2,831,380Far East
    
    
    106,015
    
    
    
    193,612Canada
    
    
    1,004,785
    
    
    
    4,339,446Total sales
    
    $
    3,897,396
    
    
    $
    7,364,438
 37




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##### Table of Contents



The Companys Canadian sales decreased 76% during fiscal 2004 as compared
to fiscal 2003. The decline in sales was primarily due to a significant
decrease in demand from one of East Coast Sales Companys customers in the
airline security industry. Orders for new detection devices dramatically
decreased subsequent to the U.S. Department of Homeland Securitys deadline of
December 31, 2002, that required all U.S. airports to install security
detection devices. Net property, plant and equipment by country were as follows: 2004
    
    2003United States
    
    $
    301,937
    
    
    $
    211,803Malaysia
    
    
    456,494
    
    
    
    375,456Total property, plant and equipment, net
    
    $
    758,431
    
    
    $
    587,259
 In fiscal 2004 one customer accounted for 26% of the Companys revenue and
three customers accounted for 60% of the Companys revenue. In fiscal 2003
three customers accounted for 70% of the Companys revenue. Note 19: Supplemental Cash Flow Information 2004
    
    2003Interest paid during the year
    
    $
    17,249
    
    
    $
    99,263Income taxes paid during the year
    
    $
    19,259
    
    
    $
    4,908Supplemental schedule of non-cash investing and
financing activities:Conversion of deferred product development
costs to equipment.
    
    $
    178,878Conversion of note receivable to equipment.
During the year ended January 31, 2004 the Company
received equipment in lieu of partial payment
regarding its note receivable from G Com.Net.
    
    $
    32,500
 38




---



##### Table of Contents



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A. CONTROLS AND PROCEDURES  (a)
    
    Evaluation of Disclosure Controls and Procedures: Our
principal executive and financial officers reviewed and evaluated
our disclosure controls and procedures (as defined in Exchange Act
Rule 13a-14) as of a date within 90 days before the filing of this
Form 10-KSB. Based on that evaluation, our principal executive and
financial officers concluded that our disclosure controls and
procedures are effective in timely providing them with material
information relating to the Company, as required to be disclosed in
the reports we file under the Exchange Act.(b)
    
    Changes in Internal Controls: There were no significant
changes in our internal controls or other factors that could
significantly affect those controls subsequent to the date of our
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses. 
 PART III 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth certain information concerning the current
directors and executive officers of the Company, who will serve for one year or
until their respective successors are elected and have qualified: Name
    
    Age
    
    PositionEugene Pian
    
    
    64
    
    
    President, Chief Executive Officer and DirectorCraig Pian
    
    
    42
    
    
    Executive Vice President, Treasurer and DirectorFrancine Pian
    
    
    44
    
    
    Secretary and Director
 Craig and Francine Pian are the children of Eugene Pian. Eugene J. Pian Mr. Pian has been President of the Company since April
1987. He was president of East Coast Sales Company from its inception in 1975
until its acquisition by the Company in January 1990. From 1969 to 1975, Mr.
Pian was a division manager for Consolidated Refining Company, where he was
responsible for organizing a division that manufactured materials necessary to
plate and stamp semiconductor materials and supervising all the sales and
manufacturing. From 1960 to 1969, he was vice president of Semi Alloys, Inc.
where he was responsible for the manufacture and sales of fabricated metal
products to the semiconductor industry. Craig Pian Craig Pian has been Executive Vice President and Treasurer of
the Company since February 1, 1995. He has been employed by the Company Since
April 1987. Craig Pian has been involved with all aspects of the Companys
diamond cutting tool and ceramic operations as well as the Companys United
States manufacturing, sales and administrative operations. Craig Pian
graduated from Manhattan College with a Bachelor of Science Degree in Business. Francine Pian Ms. Pian has been a director of the Company since March
1996. She has been employed by the Company since 1987, serving as the
Companys secretary since March 1996. Ms. Pian graduated from the Laboratory
Institute of Merchandising in New York City with a degree in marketing. Corporate Governance
Matters Audit
Committee. The Board of Directors has not yet established an
audit committee, and the functions of the audit committee are
currently performed by the entire board of directors as specified in
section 3(a)(58)(B) of the Exchange Act. We are under no legal
obligation to establish an audit committee and have elected not to do
so at this time so as to avoid the time and expense of identifying
independent directors willing to serve on the audit committee and
obtaining director and officers liability insurance. We may
establish an audit committee in the future if the board deems it
advisable or we are otherwise required to do so by applicable law,
rule or regulation. Audit
Committee Financial Expert. We do not yet have an audit committee
and, therefore, we have no audit committee financial
expert within the meaning of Item 401(e) of
Regulation S-B. In general, an audit committee financial
expert is an individual member of the audit committee who
(a) understands generally accepted accounting principles and
financial statements, (b) is able to assess the general
application of such principles in connection with accounting for
estimates, accruals and reserves, (c) has experience in
preparing, auditing, analyzing or evaluating financial statements
comparable to the breadth and complexity to the Companys
financial statements, (d) understands internal controls over
financial reporting and (e) understands audit committee
functions. Code
of Ethics. We have not yet adopted a Code of Ethics
applicable to our Chief Executive Officer, principal financial and
accounting officers or persons performing similar functions, nor are we
under any legal obligation to do so. A Code of Ethics is a written
standard designed to deter wrongdoing and to promote (a) honest
and ethical conduct, (b) full, fair, accurate, timely and
understandable disclosure in regulatory filings and public
statements, (c) compliance with applicable governmental laws,
rules and regulations, (d) the prompt internal reporting of
violation of the Code and (e) accountability for adherence of
the Code. If and to the extent we adopt a Code of Ethics, we will
file a copy of the Code of Ethics with the SEC and we will post a copy of the Code on our
corporate website at www.setoholdings.com. In addition, we will
post future amendments to, or waivers from, certain provisions of the
Code of Ethics on our website within five business days following the
date of such amendment or waiver. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Based
solely on a review of copies of Forms 3, 4, and 5 furnished to the
Company we believe that no
officer or director filed a late report or failed to file a required report
under Section 16(a) of the Exchange Act during or in respect at the year ended
January 31, 2004. Recommending Nominees to
the Board The
Company does not have any procedure whereby security holders may
recommend nominees to the Companys Board of Directors. 39




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##### Table of Contents



ITEM 10. EXECUTIVE COMPENSATION In
fiscal 2004, the Company amended its employment agreements with its
President and Executive Vice President. The terms of the agreements changed
and expire on April 30, 2006. Compensation is now set at a base of $150,000
for the President and Executive Vice President, respectively, with
each getting a commission of 2-3% of SETO Holdings, Inc. /East Coast Sales Companys
sales. Such commissions are listed in the Summary of
Compensation table listed below under Other Annual
Comp. In
fiscal 2004, the Company amended its employment agreement with the
acting secretary of the Company. The term of the agreement remained unchanged
and expires on April 30, 2006. Compensation is set at a base of $75,000 with a
bonus of 2% of any increase in SETO Holdings, Inc./East Coast Sales Companys
consolidated net income over the net income from the previous years. Director Compensation Directors do not receive compensation for their services as directors, but
may be reimbursed for expenses incurred for attendance at meetings of the Board
of Directors. Summary Compensation The following summary compensation table reflects information for our
Chief Executive Officer and our executive officers who had total annual salary
and bonus for any of the last three fiscal years exceeding $100,000. Long-TermAnnual Compensation
    
    CompensationOther
    
    SecuritiesAnnual
    
    UnderlyingName and Principal Position
    
    Year
    
    Salary
    
    Bonus
    
    Comp (1)
    
    Options/SARs (#)Eugene Pian, Chief
Executive Officer
    
    
    2004
    
    
    
    150,000
    
    
    
    
    
    
    
    78,492
    
    
    
    2003
    
    
    
    142,308
    
    
    
    55,856
    
    
    
    
    
    
    
    2002
    
    
    
    125,000
    
    
    
    27,370
    
    
    
    
    
    
    
    250,000Craig Pian, Executive Vice
President and Treasurer
    
    
    2004
    
    
    
    150,000
    
    
    
    
    
    
    
    84,022
    
    
    
    2003
    
    
    
    159,808
    
    
    
    55,856
    
    
    
    
    
    
    
    2002
    
    
    
    115,000
    
    
    
    26,370
    
    
    
    
    
    
    
    150,000
  (1)
    
    Excludes perquisites and other benefits, unless the aggregate
amount of such compensation is at least the lesser of either $50,000
or 10% of the total annual salary and bonus reported for the named
executive officer. 40




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##### Table of Contents



Options/SAR Grants in the Last Fiscal Year None
issued. Aggregated Option/SAR
Exercises in Fiscal Year 2004 and Option/SAR Values at
January 31, 2004 Number of SecuritiesUnderlying Unexercised
    
    Value of UnexercisedOptions/SARs Fiscal
    
    in-the-Money Options/SARs atYear-End (#)
    
    Fiscal Year-end ($)SharesAcquired on
    
    ValueName
    
    Exercise (#)
    
    Realized ($)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableEugene Pian
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    0
    
    
    $
    37,500
    
    
    
    0
    
    
    
    
    
    
    
    1,000,000
    
    
    
    0
    
    
    $
    100,000
    
    
    
    0
    
    
    
    
    
    
    
    1,000,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    500,000
    
    
    
    0
    
    
    
    0
    
    
    
    0Craig Pian
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    0
    
    
    $
    22,500
    
    
    
    0
    
    
    
    
    
    
    
    1,000,000
    
    
    
    0
    
    
    $
    100,000
    
    
    
    0
    
    
    
    
    
    
    
    1,000,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    500,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information as to the number of
shares of our common stock deemed to be owned beneficially by each person known
by the Registrant to be the beneficial owner of more than 5% of our outstanding
common stock, each of its executive officers and directors, and all of its
executive officers and directors as a group at April 20, 2004. Except as
indicated in the footnotes to this table, we believe that the named persons
have sole voting power with respect to the shares indicated: Name and Address of Beneficial
    
    
    
    
    
    Number
    
    
    
    
    
    PercentageOwner
    
    Position with Company
    
    of Shares
    
    
    
    
    
    of ClassEugene Pian
    
    President & Director
    
    
    4,069,067
    
    
    
    (1)
    
    
    
    31.69
    %c/o Semicon Tools, Inc.
554 North State Road
Briarcliff Manor, NY 10510Craig Pian
    
    Executive Vice President,
    
    
    2,650,333
    
    
    
    (2)
    
    
    
    19.68
    %c/o Semicon Tools, Inc.
    
    Treasurer & Director554 North State Road
Briarcliff Manor, NY 10510Francine Pian
    
    Secretary & Director
    
    
    803,560
    
    
    
    (3)
    
    
    
    7.62
    %c/o Semicon Tools, Inc.
554 North State Road
Briarcliff Manor, NY 10510All Directors and Executive Officer
as a group (3 persons)
    
    
    
    
    
    
    7,522,660
    
    
    
    (4)
    
    
    
    59.27
    %
 41




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##### Table of Contents



(1)
    
    Includes currently exercisable options to purchase 2,750,000 shares of common stock, 225,000 shares of common stock held under
voting trusts which terminate when the shareholder sells his stock,
and 25,000 shares owned by his spouse as to which he disclaims
beneficial ownership.(2)
    
    Includes currently exercisable options to purchase 2,650,000 shares of common stock.(3)
    
    Includes currently exercisable options to purchase 600,000 shares of common stock(4)
    
    Includes currently exercisable options to purchase 6,000,000 shares of common stock. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 
 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Index of Exhibits 3(a)
    
    Articles of Incorporation13(b)
    
    By-Laws13(c)
    
    Amendment to Articles of Incorporation210(a)
    
    Agreement of merger with Semicon Tools, Inc., a New York Corporation210(b)
    
    Articles of Merger210(c)
    
    Certificate of Merger210(d)
    
    Patent License110(e)
    
    Patent No. 4,219.004110(f)
    
    License Agreement with Bookuk Industry Company, Ltd. 110(g)
    
    Thermode/Synthrode Supplier Agreement110(h)
    
    East Coast Sales Acquisition Agreement310(i)
    
    $300,000 Promissory Note310(j)
    
    Amendment to East Coast Sales Acquisition Agreement410(k)
    
    Hong Kong Batteries Industries, Ltd. Acquisition Agreement510(l)
    
    Fimas Sdn. Bhd. Acquisition Agreement610(m)
    
    Fimas Sdn. Bhd. Disposition
Agreement721
    
    List of Subsidiaries31
    
    Section 302 Certification32
    
    Certification of Chief Executive Officer and Chief
Financial Officer to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
  1.
    
    Incorporated by Reference from Registrants Registration
Statement on Form S-18 declared effective June 8, 1988.2.
    
    Incorporated by Reference from Registrants Form 8-K
Report dated May, 19, 1987.3.
    
    Incorporated by Reference from Registrants Form 8-K
Report dated February 19, 1990.4.
    
    Incorporated by Reference from Registrants Form 10-K
Report for the year ended January 31, 1991.5.
    
    Incorporated by Reference from Registrants Form 8-K
Report dated December 9, 1999.6.
    
    Incorporated by Reference from Registrants Form 8-K
Report dated December 10, 1999.7.
    
    Incorporated by Reference from Registrants Form 8-K
Report dated January 31, 2001. 42




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##### Table of Contents



(b)
    
    Reports on Form 8-K No
reports on Form 8-K were filed during the Quarter ended January 31,
2004. On
March, 15, 2004, we filed a report on Form 8-K containing a
press release announcing an odd-lot purchase program for stockholders
of less than 100 shares of our common stock, whereby stockholders
will have the opportunity to sell their shares to the Company for a
price of $0.20 per share with no brokerage fees. 
 ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES The following table shows the
fees that we paid or accrued for the audit and other services
provided by Zeller Weiss & Kahn, LLP for the 2004 and 2003 fiscal
years.  2004
    
    2003Audit Fees
    
    $
    55,500
    
    
    $
    52,500Audit 
Related Fees
    
    
    8,900
    
    
    
    12,000Tax Fees
    
    
    16,000
    
    
    
    7,500$
    80,400
    
    
    $
    72,000
 Audit
Fees  This category includes the audit of our annual
financial statements, review of financial statements included in our
Form 10-QSB Quarterly Reports and services that are normally
provided by the independent auditors in connection with engagements
for those fiscal years. This category also includes advice on audit
and accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements. Audit
Related Fees  This category consists of
assurance and related services by the independent auditors that are
reasonably related to the performance of the audit or review of our
financial statements and are not reported above under Audit
Fees. The services for the fees disclosed under this category
include consultation regarding our correspondence with the SEC and
other accounting consulting. Tax
Fees  This category consists of professional services
rendered by Zeller Weiss & Kahn, LLC for tax compliance and tax
advice. The services for the fees disclosed under this category
include tax return preparation and technical tax advice. The
Board of Directors has adopted a procedure for pre-approval of all
fees charged by Zeller Weiss & Kahn, LLC, the Companys
independent auditors. Under this procedure, the Board approves the
engagement letter with respect to audit, tax and review services.
Other fees are subject to pre-approval by the Board, or, in the
period between meetings, by a designated member of the Board. Any
such approval by the designated member is disclosed to the entire
Board at the next meeting. The audit and tax fees paid to Zeller
Weiss & Kahn, LLP with respect to fiscal year 2004 were pre-approved by the entire Board of Directors. 43




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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, thereto duly
authorized. SETO Holdings, Inc.
RegistrantBy:
    
    /s/ Eugene J. PianEugene J. Pian, President
Date: April 30, 2004
 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. PianEugene J. PianDirectorDate: April 30, 2004/s/ Craig A. PianCraig A. PianDirectorDate: April 30, 2004/s/ Francine PianFrancine PianDirectorDate: April 30, 2004
 44




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##### Table of Contents



Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Exchange Act by Non-reporting Issuers  1.
    
    No annual report to security holders covering registrants
last fiscal year was sent to security holders; and2.
    
    No proxy statement, form of proxy or other proxy soliciting
material has been sent to more than ten of the registrants security
holders with respect to any annual or other meeting of security
holders. 45