SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________.
Commission File No. 0-22049
S.W. LAM, INC.
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(Name of registrant as specified in its charter)
Nevada 62-1563911
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Unit 25-32, 2nd Floor, Block B, Focal Industrial Centre
Man Lok Street, Hunghom, Hong Kong
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (852) 2766 3688
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
Indicate by check mark whether the 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 ninety (90) days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 this Form 10-K or any amendment to this
Form 10-K. [ ]
As of August 1, 1997, 12,800,000 shares of common stock of the Registrant
were outstanding. As of such date, the aggregate market value of the voting
stock held by non-affiliates, based on the only sale to non-affiliates to date,
was approximately $7,375,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS................................................ 3
ITEM 2. PROPERTIES.............................................. 9
ITEM 3. LEGAL PROCEEDINGS....................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................... 10
ITEM 6. SELECTED FINANCIAL DATA................................. 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................... 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 17
ITEM 11. EXECUTIVE COMPENSATION.................................. 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................. 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 20
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K............................................. 21
SIGNATURES............................................................. 22
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PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Trends and
Contingencies" beginning on page 14 of this Form 10-K.
The Company operates through its various subsidiaries, all of which are
located outside of the United States. Unless otherwise indicated or the context
otherwise requires, the term Company refers collectively to S.W. Lam, Inc. and
its subsidiaries. All references to China or the PRC are to the Peoples'
Republic of China. The Company's financial statements are presented in United
States Dollars ("US$"). The Company's sales are principally in Hong Kong Dollars
("HK$") and Renminbi ("Rmb"). At March 31, 1997, the prevailing exchange rate of
US$ into HK$ and Rmb was US$1.00 = HK$7.752 and US$1.00 = Rmb 8.297.
ITEM 1. BUSINESS
S.W. Lam, Inc. (the "Company"), a Nevada corporation, through its
subsidiaries, is engaged in the design, manufacturing and marketing of gold and
silver jewelry, gold and silver decorative items, and diamond and color stone
jewelry and decorative products. All of the Company's operations are located in
Hong Kong and the People's Republic of China (the "PRC").
History and Development of the Company
The Company's business began with the formation by Lam Sai Wing ("Mr. Lam")
of an unincorporated sole proprietorship to manufacture and market jewelry at
facilities in Dongguan, PRC (the "Dongguan Facility") in 1983. Subsequently, in
1987, Shenzhen Hang Fung Jewellery Factory, a sole proprietorship formed by Mr.
Lam, established a modern manufacturing facility in Shenzhen, PRC (the "Shenzhen
Facility"). In 1990, Beijing Hang Fung Jewellery Factory, a sole proprietorship
formed by Mr. Lam, entered into a sino-foreign joint venture to manufacture and
market jewelry in Beijing, PRC (the "Beijing Facility"). In 1991, Mr. Lam
transferred operations of the Dongguan Facilities to Dongguan No. 2 Light
Industry Jewelry Bureau, an unaffiliated third party.
In November of 1994, Mr. Lam incorporated Soycue Limited ("Soycue") in the
British Virgin Islands and transferred operations of the Shenzhen Facility and
the Beijing Facility to Soycue. Certain other operations conducted by Mr. Lam
were transferred to Hang Fung Jewellery Company Limited ("Hang Fung Jewellery")
in September of 1995. In December of 1996, Mr. Lam and his wife, Lam Chan Yam
Fai, Jane ("Ms. Chan"), transferred ownership of Soycue, Hang Fung Jewellery and
Kai Hang Jewellery Company Limited, a Hong Kong corporation engaged in jewelry
marketing and owned by Mr. Lam and Ms. Chan ("Kai Hang Jewellery"), to Quality
Prince Limited, a holding company organized in the British Virgin Islands and
owned by Mr. Lam and Ms. Chan ("Quality Prince")(Soycue, Hang Fung Jewellery and
Kai Hang Jewellery are collectively referred to herein as the "Hang Fung
Group").
In December of 1996, the Hang Fung Group completed a "reverse acquisition" with
S.W. Lam, Inc. pursuant to which the companies comprising the Hang Fung Group,
representing all of the jewelry manufacturing and marketing operations
controlled by Mr. Lam and Ms. Chan, became wholly owned subsidiaries of the
Company. S.W. Lam, Inc. was originally incorporated in the State of Tennessee
under the name New Wine, Inc. ("New Wine"). New Wine was formed in April of 1994
to develop, finance and produce record albums, cassette tapes and compact discs
and videotape and television productions for domestic distribution and foreign
licensing; to operate a music publishing firm; and, to engage generally in the
business of providing personal business management services for professional
entertainers. New Wine completed an offering of common stock in September of
1995 selling 225,000 shares for $45,000 pursuant to Rule 504 under the
Securities Act of 1933, as amended (the "Act"). The operations of New Wine
proved unsuccessful and were discontinued and New Wine began efforts to acquire
or combine with an operating business. Pursuant to discussions with the Hang
Fung Group, New Wine reincorporated in the State of Nevada and changed its name
to S.W. Lam, Inc. in November of 1996. In December of 1996, New Wine entered
into an agreement with the shareholders of Quality Prince, Mr. Lam and Ms. Chan,
pursuant to which New Wine agreed to issue 10,500,000 shares of common stock and
100,000 shares of Series A Preferred Stock in exchange for 100% of the issued
and outstanding shares of Quality Prince (the "Exchange"). Following the
Exchange, management of the Hang Fung Group assumed control of management of the
Company and the Company, through its subsidiaries, the Hang Fung Group, is
continuing the operations of the Hang Fung Group.
3
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Overview
The Company's operations include the manufacturing and sale of gold and
silver jewelry and ornamental items in the PRC and Hong Kong.
Because of regulatory issues relating to operations and the marketing of
gold and silver in the PRC, the Company's production and marketing activities in
the PRC are conducted pursuant to a series of agreements with entities having
operations or appropriate licenses in the PRC. The principal agreements in that
regard are (1) a subcontracting agreement with Shenzhen Crafts Hang Fung
Jewellery Factory ("Shenzhen Crafts") pursuant to which gold and silver products
are produced for export, (2) an agreement with Yiu Ping Gold and Silver
Manufacturing Factory ("Yiu Ping") pursuant to which Yiu Ping sells gold and
silver products on the Company's behalf in the PRC, (3) an Agreement for
Jewellery Assembling with China Jewellery Import & Export Co. ("China
Jewellery") pursuant to which China Jewellery is responsible for the assembly of
gold and silver assembly operations at facilities jointly operated with the
Company in Beijing, (4) a Sales Agency Agreement with China Jewellery pursuant
to which China Jewellery acts as the Company's agent in selling jewelry in the
PRC in exchange for an agency fee and the Company acts as China Jewellery's
agent in selling jewelry in Hong Kong in exchange for an agency fee, and (5) an
Agreement for Jewellery Assembling, Sales Agency Agreement and Sales Cooperation
Agreement with Tai Yuen Jewellery Crafts Factory ("Tai Yuen") pursuant to which
Tai Yuen assembles and sells gold and silver products on the Company's behalf in
the PRC.
Shenzhen Crafts, Yiu Ping, Tai Yuen and China Jewellery are each
state-owned enterprises organized under the laws of the PRC and holding
requisite licenses to import, export and sell gold and silver products in the
PRC.
The Company presently markets its products primarily in Hong Kong and the
PRC, and to a lesser extent in other Southeast Asian countries, the Middle East,
Europe and the United States. The Company plans to expand its business in the
near term by (1) expanding the marketing of its products in Europe and the
Middle East, and (2) expanding production and marketing capabilities in the PRC
through the construction and relocation of its current manufacturing operations
in Beijing to an expanded modern manufacturing facility presently under
construction adjacent to the existing manufacturing operations in Beijing.
Products
The Company's products consist of a broad array of gold and silver jewelry
products, gold and silver decorative items, semi-precious stone jewelry and
other decorative products. Examples of the Company's products include, but are
not limited to, bracelets, chains, charms, rings, earrings, ornamental plaques,
serving sets and decorative pieces.
The Company classifies its products in four distinct segments: (1) fine
gold products, consisting of jewelry and ornamental products crafted from 24
carat gold, (2) other gold products, consisting of a broad array of lesser value
electro-form casted fine gold jewelry including jewelry incorporating
semi-precious stones, (3) non-gold/silver ornamental products, consisting of
serving sets, plaques and other decorative or ornamental items crafted from
materials other than gold or silver, and (4) silver products, consisting of a
broad array of jewelry and decorative or ornamental items otherwise falling
within one of the other product segments but crafted from silver. The Company's
products range in wholesale price from approximately $10 to over $100,000. The
mean selling price of the Company's products is between $200 and $220.
The following table illustrates the typical range and average wholesale
price of the Company's products by segment:
Wholesale Average
Price Range Wholesale Price
------------- ---------------
Fine gold products............. $20 to $1,000 $300
Other gold products............ $10 to $1,000 $500
Ornamental products............ $50 to $1,000 $500
Silver products................ $2 to $100 $10
4
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For the two years ended March 31, 1997, sales by segment and major product
line and as a percentage of sales (including subcontracting fees) were as
follows:
1996 1997
------------------- ------------------
Amount Percent Amount Percent
($'000) ($'000)
Fine gold products
Bracelets................... $ 3,762 14 % $ 5,734 14%
Chains...................... 3,619 13 5,734 14
Rings....................... 4,501 17 6,553 16
Earrings.................... 1,926 7 2,457 6
Ornamental.................. 5,000 19 9,831 24
Other gold products
Bracelets................... 333 1 410 1
Chains...................... 502 2 819 2
Rings....................... 1,326 5 1,638 4
Earrings.................... 982 3 819 2
Other....................... 191 1 410 1
Silver products
Bracelets................... 1,420 5 1,638 4
Chains...................... 1,438 5 2,048 5
Rings....................... 946 4 1,638 4
Earrings.................... 485 2 410 1
Ornamental.................. 437 2 819 2
Product Design and Development
The Company maintains an in-house product design and development team in
its Hong Kong offices consisting of approximately 10 staff members. The
Company's product design staff continuously monitors jewelry trends and consumer
preferences and is engaged in ongoing efforts to design new products consistent
with such trends and preferences. After conceiving of a new product, the
Company's design staff will produce detailed drawings and molds for use in
actual production. The Company's design staff currently produces approximately
500 new products annually.
Purchasing
The principal materials in the manufacture and assembly of the Company's
products are gold, silver and color stones which typically represent
approximately 50% to 70% of the total costs of producing the Company's gold
products and 30% to 50% of the total costs of producing the Company's silver
products.
The Company purchases gold primarily from suppliers in South Africa and
Hong Kong. Silver purchases are primarily from suppliers in Hong Kong. Color
stones are purchased primarily from suppliers in Burma and Thailand.
The Company maintains no long term contractual arrangements to purchase
materials. Although purchases of raw materials are made from a relatively small
number of suppliers, the Company believes there are numerous alternative sources
for all materials and products, and that the failure of any principal supplier
would not have a material adverse effect on operations or the Company's
financial condition. To date, the Company has not experienced any difficulty in
securing product.
The Company does not presently engage in any hedging activities with
respect to possible fluctuations in the prices of raw materials. The Company
believes that the risk of not engaging in such activities is minimal, since
historically the Company has been able to adjust prices as material fluctuations
have occurred.
5
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Manufacturing and Assembly
The Company's principal manufacturing and assembly operations are
undertaken at facilities located in Shenzhen and Beijing, PRC pursuant to
agreements with Shenzhen Crafts and China Jewellery.
The Company's largest manufacturing operations take place at the Company's
Beijing Facility which is jointly operated with China Jewellery. Pursuant to an
Agreement for Jewellery Assembling entered into in November of 1994, formalizing
existing manufacturing operations which commenced in 1992, China Jewellery has
provided the use of the existing Beijing Facility as well as a labor supply,
water, electricity and other support services and the Company has provided
equipment, tools, technical expertise and materials necessary to carry on
jewelry manufacturing operations. Under the agreement, China Jewellery is
responsible for actual jewelry assembly and manufacturing and the Company
provides raw materials and technical expertise. The Company pays assembling fees
to China Jewellery in an amount equal to HK$1.00 (US$0.13) per gram for fine
gold jewelry, HK$3.00 (US$0.39) per gram for karat-gold jewelry and HK$0.60
(US$0.08) per gram for silver jewelry and gem assembling. The Agreement also
provides that China Jewellery may perform jewelry manufacturing and assembly
operations for other parties using the Beijing Facility provided that such
operations do not interfere with the manufacturing and assembly operations and
requirements of the Company and provided that such products are manufactured
exclusively for domestic consumption within the PRC. The Company is entitled to
receive a fee from China Jewellery with respect to all jewelry manufactured for
third parties at the Beijing Facility with the amount of such fees to be
determined on a case-by-case basis ("Subcontracting Fees"). The Agreement for
Jewellery Assembling with China Jewellery expires in November of 2004.
The Company also carries on jewelry manufacturing and assembly operations
at its Shenzhen Facility pursuant to an agreement with Shenzhen Craft which is
substantially similar to the manufacturing arrangement with China Jewellery
except on a smaller scale and except that the Shenzhen Facility is used
exclusively for manufacturing products for the Company. Shenzhen Craft is paid
manufacturing fees in an amount equal to approximately $2,000 per month . The
agreement with Shenzhen Craft expires in December of 2010.
Actual manufacturing and assembly operations are performed by skilled
workers under the supervision of a team of technicians. Before actual
manufacturing or assembly commences, product specifications are established,
product design is undertaken and raw materials are purchased and inspected. The
manufacturing and assembly process is tailored to the specifications of the
items being manufactured. Chain jewelry manufacturing begins with the melting of
gold or silver into bars which are rolled and elongated on a press. The process
is repeated a number of times until the bar is reduced to wire of approximately
20mm. The wire is then stretched to produce a finer wire which is then cut and
strung to form chains. The chains are then cut, sized and graded. Manufacturing
of other jewelry items, including ornaments which may be attached to chains,
typically begins with the construction of a metal prototype. A mold is then
formed around the model. Molds are, in turn, used to produce wax models and
hardened plastic molds. For solid gold or silver pieces, casting is then
performed by filling or injecting molds with melted gold or silver which has
been mixed with appropriate alloys to achieve the desired level of purity. As an
alternative to the traditional casting method, the Company casts "electro-form"
jewelry utilizing a proprietary technique to bond gold to an underlying jewelry
form. The plaster mold is then removed and the constituent jewelry parts are
cleaned, assembled, soldered and pre-polished. Designs or impressions are
affixed to appropriate component parts by stamping, cutting or grinding.
Component parts are shaped and assembled to specifications in accordance with
the product design. Virtually all final assembly is performed by hand at row
tables at which all necessary tools to perform fine assembly operations are
available.
In addition to manufacturing undertaken to fill the Company's product
requirements and manufacturing undertaken by China Jewellery at the Company's
Beijing Facility, the Company provides contract jewelry manufacturing for
certain customers who provide all product specifications and raw materials. The
Company is paid negotiated subcontracting fees for manufacturing such products
(also, "Subcontracting Fees").
The Company presently has adequate facilities and support staff to
manufacture and assemble approximately 500,000 pieces of jewelry annually.
Manufacturing capacity is expected to increase to approximately 800,000 pieces
annually upon moving into the Company's new facilities in Beijing.
6
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Quality Control
Strict quality control procedures are followed before and throughout the
manufacturing process to assure that products are manufactured with the highest
degree of precision in compliance with the Company's design specifications.
Before the commencement of manufacturing, all raw materials undergo a thorough
inspection to assure that stones purchased are of the right type, quality and
quantity. Trained technicians monitor and test the purity of all gold to assure
the karat accuracy of all gold produced. Quality checks are carried out on all
products at each stage of production to ensure that the products meet the
Company's quality standards. To ensure the quality of all jewelry produced, all
production workers receive production and quality control training and quality
control supervisors are present and oversee all production operations and,
finally, all finished goods are checked by the Company's quality control team
before shipment to customers.
Inventory Policy and Control
The Company manufactures products in accordance with customer purchase
orders and sales forecasts of management. The Company's production schedule is
closely monitored by the production management team. The Company's policy is to
manufacture and maintain approximately 20 to 30 days' stocks in inventory to
ensure customer's delivery schedules are met.
Raw materials are normally purchased based on production schedules and are
generally ordered 7 to 14 days before the production commences. At the assembly
line, workers are provided only the raw materials required for assembly of
scheduled production. Materials are weighed before and after each production run
and all production workers are required to account for any losses of stones or
gold or silver over prescribed limits.
Stocks of raw materials and finished products are stored in secure areas in
the Company's Hong Kong offices, access to which is restricted to authorized
personnel.
Sales and Marketing
Marketing of the Company's products is carried out by the Company's
internal sales and marketing force for all products sold outside of the PRC and
by China Jewellery, Yiu Ping and Tai Yuen for all products sold within the PRC.
The Company's internal sales staff is located in the Company's offices in
Hong Kong and carries out sales and marketing activities under the guidance of
senior management which oversees the sales staff and overall marketing strategy.
The Company's sales staff is responsible for establishing and maintaining
relations with independent sales representatives and customers as well as
marketing the Company's products to potential customers. The Company's senior
management and marketing staff regularly attends major jewelry fairs in Hong
Kong to promote the Company's products and new customers. Additionally, the
Company periodically advertises in jewelry magazines and makes direct mailings
of new product catalogues.
Marketing of products within the PRC is conducted exclusively through China
Jewellery, Yiu Ping and Tai Yuen as agents for the Company. China Jewellery, Yiu
Ping and Tai Yuen possess the requisite licenses to market gold and silver
within the PRC. Pursuant to a Sales Agency Agreement with China Jewellery, China
Jewellery handles substantially all aspects of marketing the Company's products
in the PRC in exchange for an agency fee in the amount of fifteen percent (15%)
of the sales price of fashion jewelry, ten percent (10%) of the sales price of
silver and karat gold jewelry and Rmb 1.00 (US$0.12) per gram on fine gold
jewelry. The Company, in turn, acts as agent for China Jewellery with respect to
sales of China Jewellery products in Hong Kong, for which the Company is
entitled to agency fees in the same amounts payable by the Company to China
Jewellery. The Sales Agency Agreement with China Jewellery expires in November
of 2004.
The Company also sells jewelry in the PRC through Yiu Ping and Tai Yuen
pursuant to agreements which are similar to the Sales Agency Agreement with
China Jewellery. Pursuant to such agreement, the Company pays agency fees to Yiu
Ping and Tai Yuen consisting of approximately 3% to 5% of the sales price of
jewelry sold.
7
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During the year ended March 31, 1997, the Company's sales and
Subcontracting Fees were approximately $15.6 million, or 38.1%, in Hong Kong,
$12.2 million, or 29.7%, in the PRC, $5.7 million, or 14%, in the Middle East,
$4.6 million, or 11.3%, elsewhere in Southeast Asia, $1.5 million, or 3.7%, in
Europe, and $1.3 million, or 3.2%, in the United States.
The Company's presently intends to seek and hire additional sales and
marketing personnel in order to expand the Company's marketing efforts in Europe
and the Middle East.
Customers
The Company's customers consist principally of a combination of wholesale
distributors and jewelry retailers in the PRC, Hong Kong, Europe, the Middle
East and Southeast Asia. At March 31, 1997, the Company had approximately 30
regular customers and its products were sold in approximately 2,500 retail
outlets in the PRC and Hong Kong. The Company's five largest customers accounted
for approximately 32.3% of net sales during the fiscal year ended March 31,
1997. Chow Tai Fook Jewellery Co., Ltd., which accounted for 12.3% of sales
during fiscal 1997, is the only customer which accounted for more than 10% of
sales in that period. The Company has no long term contracts with any customers.
Chow Tai Fook Jewellery Co., Ltd. has been a customer of the Company for more
than five years.
Competition
The jewelry industry is highly fragmented, with little significant brand
name recognition or consumer loyalty. Selection is generally a function of
design appeal, perceived high value and quality in relation to price.
While many competitors in the wholesale jewelry manufacturing and
distribution business may have a wider selection of products or greater
financial resources, the Company believes its competitive position is enhanced
by the Company's broad customer base, experienced management team and the
Company's close relationship with its customers and vendors. Therefore, although
the competition is intense, the Company believes that it is well positioned to
compete in the jewelry industry.
Employees
As of March 31, 1997, the Company had approximately 1,200 employees,
including 7 executive officers, 22 other management personnel, 45 persons in
administration, 1,054 persons in manufacturing and production and 72 persons in
sales and marketing. Of the Company's employees, approximately 78 are located in
Hong Kong with the remaining employees being located in the PRC. None of the
Company's employees is governed by collective bargaining agreements and the
Company considers its relations with its employees to be satisfactory.
Certain Foreign Operation Considerations
The Company's operations are conducted in Hong Kong and the PRC. As a
result, the Company's business, financial condition and results of operations
may be influenced by the political, economic and legal environments in Hong Kong
and the PRC, and by the general state of the Hong Kong and the PRC economies.
On July 1, 1997, sovereignty over Hong Kong transferred from the United
Kingdom to the PRC, and Hong Kong became a Special Administrative Region of the
PRC (an "SAR"). As provided in the Sino-British Joint Declaration relating to
Hong Kong and the Basic Law of the Hong Kong SAR of the PRC, the Hong Kong SAR
will have full economic autonomy and its own legislative, legal and judicial
systems for fifty years. The Company's management does not believe that the
transfer of sovereignty over Hong Kong will have an adverse impact on the
Company's financial and operating environments. There can be no assurance,
however, that changes in political or other conditions will not result in such
an adverse impact.
8
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The Company's operations in the PRC are subject to special considerations
and significant risks not typically associated with companies operating in North
America and Western Europe. These include risks associated with, among other,
the political, economic and legal environments and foreign currency exchange.
The Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things. In
addition, a portion of the Company's revenue is denominated in Renminbi ("Rmb")
which must be converted into other currencies before remittance outside the PRC.
Both the conversion of Remninbi into foreign currencies and the remittance of
foreign currencies abroad require approvals of the PRC government.
ITEM 2. PROPERTIES
The Company operates three distinct facilities in Hong Kong and the PRC.
The Company's executive offices are located at Unit 302-303A and Unit 410,
Fu Hang Industrial Building, 1 Hok Yuen Street East, Hunghom, Hong Kong. Such
facility consists of approximately 11,000 square feet of office space. Unit
302-303A is leased from Ms. Chan, an officer and director of the Company, for
HK$1.35 million (US$175,000) per year pursuant to a lease expiring March 31,
1998. Unit 410 is leased from an unaffiliated third party for HK$300,000
(US$39,000) per annum pursuant to a lease expiring September 19, 1998. Such
office space also houses certain marketing, product design and high quality gold
production operations.
The Company's principal production operations are located in facilities
located in Shenzhen and Beijing, PRC. The Shenzhen facility consists of a modern
multi-story industrial building of which the Company's manufacturing operations
occupy one floor, or approximately 20,000 square feet. The Company leases the
physical facility from Shenzhen City Highway Construction Co., Ltd. for a term
of 20 years expiring January, 2007. Monthly lease payments on such facility are
$6,420.
The Company's operations in Beijing are presently housed in a five story
60,000 square foot facility consisting of three floors of manufacturing space,
one floor of office and administrative space and one floor of staff quarters.
The existing facilities in Beijing are held pursuant to a 20 year lease expiring
2010 with China Jewellery and providing for monthly lease payments of $5,048.
Adjacent to the Beijing facility is a 5,000 square foot building which serves as
the facility's power plant. A 14-story building is presently under construction
adjacent to the Company's facility in Beijing. Upon completion, the Company will
lease 3 floors of the new building (approximately 100,000 square feet) and move
all of its Beijing operations to the new building. The Company expects to move
into the new building in early 1998 and will sign a 20 year lease on such
premises at an anticipated monthly rental rate, including management fees, of
$22,500.
The Company believes that its existing facilities and facilities under
construction will be adequate to support the Company's operations for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to lawsuits incidental to its
business. The Company and its management are not presently aware of any pending
or threatened proceedings which, individually or in the aggregate, are believed
to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended March 31, 1997.
9
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established public trading market for the Company's Common
Stock. The Common Stock trades on a sporadic basis in the over-the-counter
market. While the Company intends to commence trading of its shares on the NASD
Electronic Bulletin Board, there is no assurance that a trading market will
develop or that any such market which may develop will be sustained.
Holders
At March 31, 1997, there were approximately 114 record holders of the
Company's Common Stock.
Dividends
While the Hang Fung Group paid a one-time dividend of $5 million during
fiscal 1996, prior to the Exchange, the Company has not paid any dividends since
its inception and presently anticipates that all earnings, if any, will be
retained for development of the Company's business and that no dividends on the
shares of Common Stock will be declared in the foreseeable future. Any future
dividends will be subject to the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, the operating and
financial condition of the Company, its capital requirements, general business
conditions and other pertinent facts. Therefore, there can be no assurance that
any dividends on the Common Stock will be paid in the future.
Sales of Unregistered Securities
During the fiscal year ended March 31, 1997, the Company sold the following
unregistered securities without the use of underwriters and without the payment
of any discounts or commissions, except as otherwise noted:
(1) In December of 1996, the Company issued an aggregate of 10,500,000
shares of common stock and 100,000 shares of Series A Preferred Stock to
the then shareholders of the Hang Fung Group in exchange for all of the
issued and outstanding shares of the Hang Fung Group.
(2) In January of 1997, the Company issued an aggregate of 800,000
shares of common stock for $1,000,000 in cash to a single accredited
investor. The Company paid commissions in connection with the sale totaling
$122,500.
The issuance of the above securities to the shareholders of the Hang Fung
Group and to the accredited investor referred to in (2) above were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act based on the limited number of purchasers and based on
representations from the purchasers that they were acquiring for investment only
and not with a view to or for sale and restrictive legends were affixed to the
share certificates issued in such transactions.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical consolidated financial
data derived from the consolidated financial statements of the Company which
appear elsewhere herein. Quality Prince was acquired by the Company in December
of 1996 in a transaction accounted for as a recapitalization of Quality Prince
with Quality Prince as the acquiror (a "reverse acquisition"). On this basis,
the historical consolidated financial statements of the Company prior to
December 31, 1996 are those of Quality Prince and the historical shareholders'
equity of Quality Prince as of March 31, 1995 and 1996 has been retroactively
restated to reflect the equivalent number of shares of the Company issued for
such acquisition. The acquisition of the various members of the Hang Fung Group
by Quality Prince in December of 1996 has been accounted for as a reorganization
of entities under common control, similar to a pooling of interests. The
following data should be read in conjunction with the consolidated financial
statements of the Company included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------
Income Statement Data: 1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 10,568 $ 13,197 $ 18,478 $ 19,348 $ 32,748
Subcontracting fees................. 2,786 3,481 4,902 7,520 8,210
-------- -------- -------- -------- --------
Total revenues.................... 13,354 16,678 23,380 26,868 40,958
Gross profit........................ 3,668 4,585 7,004 8,046 10,971
Operating income.................... 1,870 2,262 4,335 5,312 7,344
Other income (expense), net......... ( 169) ( 185) ( 274) ( 329) ( 741)
Income before taxes................. 1,701 2,077 4,061 4,983 6,603
Net income.......................... $ 1,032 $ 1,311 $ 2,589 $ 3,333 $ 4,475
======= ======= ======= ======= =======
Net income per share (1)............ $ 0.10 $ 0.12 $ 0.22 $ 0.28 $ 0.37
======= ======= ======= ======= ======
Weighted average shares
outstanding (1).................... 10,500,000 10,500,000 11,736,575 11,899,521 12,197,260
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------
Balance Sheet Data: 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Working capital..................... $ 107 $ 1,042 $ 3,024 $ 613 $ 2,768
Total assets........................ 992 14,288 17,517 15,676 21,409
Long-term debt, less
current portion.................... 54 338 286 879 1,550
Stockholders' equity (2)............ 279 1,579 4,531 3,038 8,017
</TABLE>
- ------------------------
(1) Net income per share is computed assuming (i) the 10,500,000 shares issued
pursuant to the Exchange were outstanding for all periods presented, (ii)
the 1,275,000 shares issued in connection with initial formation of New
Wine were issued April 12, 1994 and (iii) the 225,000 shares issued by New
Wine pursuant to a Rule 504 offering were issued September 11, 1995.
(2) Stockholders' equity at March 31, 1996 reflects the payment of a dividend
in the amount of $5,000,000 by the Hang Fung Group prior to the acquisition
of the Hang Fung Group by the Company.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Trends and
Contingencies" beginning on page 14 of this Form 10-K.
General
The following discussion should be read in conjunction with the Company's
financial statements appearing elsewhere herein.
Prior to December of 1996, the Company was engaged in limited operations
relating to the production and distribution of record albums, cassette tapes and
compact discs and videotape and television productions for domestic distribution
and foreign licensing; operation of a music publishing firm; and, generally, the
business of providing personal business management services for professional
entertainers. On December 19, 1996, the Company acquired the Hang Fung Group and
entered into the jewelry manufacturing and distribution business. The
acquisition of the Hang Fung Group has been accounted for using the purchase
method of accounting with the transaction being accounted for as a "reverse
acquisition." The Company does not consider the operations prior to the
acquisition of the Hang Fung Group to be material to an understanding of the
Company. Accordingly, this discussion relates to the operations of the Hang Fung
Group for all periods presented, excluding the former operations of New Wine,
Inc.
Hang Fung's historical operations have consisted of designing, assembling,
merchandising and distributing a full line of gold and silver jewelry products
and other ornamental products on a wholesale basis in Hong Kong, China, Europe,
the Middle East and Southeast Asia. Revenues from such operations are generated
through the manufacturing and wholesaling of the Company's jewelry products,
subcontract jewelry manufacturing for selected customers and through fees
payable to the Company by its business partners in the PRC, China Jewellery, for
marketing services outside of China and for use of the Company's manufacturing
facilities in the production of jewelry by China Jewellery (fees earned by the
Company for (1) subcontract manufacturing of jewelry on behalf of selected
customers who provide all raw materials and product specifications and (2) the
manufacture of jewelry by China Jewellery at the Beijing Facility for sale to
customers of China Jewellery, are referred to, collectively, as "Subcontracting
Fees").
The primary cost of operating the Company's jewelry business is the raw
material cost of jewelry. The Company assembles or manufactures all of the
jewelry which it sells, other than sales made as agent for China Jewellery. The
Company constantly compares price and quality of jewelry raw materials and
finished products to assure that it is obtaining the best price and quality
available. The cost of such products varies with currency fluctuations and other
factors beyond the Company's control. While any fluctuations in the Company's
price of acquiring raw materials may adversely affect the Company's profit
margins, the Company has historically been able to pass such cost fluctuations
on to its customers. See "Business - Purchasing."
The Company's other significant operating expenses are marketing costs,
including participation in advertising programs, customer support, inventory and
quality control, jewelry design and general corporate overhead.
Results of Operations
The following table sets forth, for the periods indicated, certain items
from the Consolidated Statements of Operations expressed as a percentage of
total revenues.
12
<PAGE>
Year Ended March 31,
1995 1996 1997
----- ---- ----
Total revenues.................. 100.0% 100.0% 100.0%
Cost of sales................... 70.0 70.1 73.2
---- ----- -----
Gross profit.................... 30.0 29.9 26.8
Operating expenses.............. 11.4 10.2 8.9
---- ---- -----
Income from operations.......... 18.6 19.7 17.9
Other income (expense).......... (1.2) (1.2) (1.8)
---- ---- -----
Income before income taxes...... 17.4 18.5 16.1
Income taxes.................... (6.3) (6.2) (5.2)
---- ---- -----
Net income...................... 11.1 12.3 10.9
==== ==== ====
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Revenues and Gross Profit. Operating revenues increased by 52.4% to $40.9
million for the year ended March 31, 1997 as compared to the $26.9 million for
fiscal 1996. Sales of Company products were up 69.3% to $32.7 million during
fiscal 1997 as compared to $19.3 million in sales during fiscal 1996.
Subcontracting Fees increased by a 9.2% to $8.2 million during fiscal 1997 from
$7.5 million during fiscal 1996. The increase in sales was attributable to
growing demand for electro-form jewelry and gold card ornaments as well as
increased demand in the PRC resulting from a recovery in the PRC economy. The
increase in Subcontracting Fees was attributable to increased demand for gold
products in Hong Kong which resulted in an increase in orders by subcontract
manufacturing customers. Geographically, sales in Hong Kong were up during
fiscal 1997 due to growing demand for gold jewelry and improving economic
conditions, increasing approximately 55.3% to $15.6 million from $10.1 million
in fiscal 1996, sales in the PRC were up during fiscal 1997 due to improving
economic conditions and higher income, increasing approximately 20.6% to $12.2
million from $10.1 million in fiscal 1996, sales in Europe were down during
fiscal 1997 due to continued weakness in European economies, decreasing
approximately 29.9% to $1.5 million from $2.1 million in fiscal 1996, sales in
the Middle East were up during fiscal 1997 due to increased marketing efforts by
the Company, increasing approximately 74.7% to $5.7 million from $3.3 million in
fiscal 1996, sales in Southeast Asia during fiscal 1997 were up due to increases
in orders by existing customers, increasing 260.2% to $4.6 million from $1.3
million in fiscal 1996, and sales in the United States totaled $1.3 million
during fiscal 1997 with the commencement of selling efforts in the United States
during the fourth quarter of fiscal 1997.
Gross profits increased by 36.4% to $11.0 million in fiscal 1997 from $8.0
million during fiscal 1996. The increase in gross profits was attributable to
increased sales and Subcontracting Fees during the period which were partially
offset by a reduction in gross margins. Gross margins were down during the
period to 26.8% from 29.9%. However, excluding Subcontracting Fees, profit
margins improved on sales of Company products during the period as a result of
increased demand and accompanying higher profit margins for electro-form
jewelry.
Operating Expenses. Operating expenses totaled $3.6 million during fiscal
1997, an increase of 32.7% from operating expenses of $2.7 million in fiscal
1996. The increase in operating expenses during the period was primarily
attributable to increased marketing expenses associated with higher sales volume
and the impact of inflation in certain expenses in Hong Kong and China.
Other Income/Expense. Other income/expense during the period consisted of
gains/losses from trading of fashion jewelry, interest income and interest
expense and expenses attributable to the reverse acquisition. Net other expense
totaled $0.7 million during fiscal 1997 as compared to $0.3 million in fiscal
1996. The increase in net other expense during the period was primarily
attributable to expenses associated with the reverse acquisition totaling
$350,000.
13
<PAGE>
Income Taxes. Income taxes increased by 29.0% from approximately $1.6
million in fiscal 1996 to $2.1 million in fiscal 1997. The increase in income
taxes during the period was attributable to the increase in the taxable earnings
of the Company.
Year Ended March 31, 1996 Compared to Year Ended March 31, 1995
Revenues and Gross Profit. Operating revenues increased by 14.9% to $26.9
million during the fiscal year ended March 31, 1996 as compared to $23.4 million
during fiscal 1995. Sales of Company products were up 4.7% to $19.3 million
during fiscal 1996 as compared to $18.5 million in sales during fiscal 1995. The
Company also reported a 53.4% increase in Subcontracting Fees to $7.5 million
during fiscal 1996 from $4.9 million during the prior year. The increase in
sales was attributable to increased sales of electro-form items and gold card
ornaments as well as market expansion in Hong Kong and the Middle East. The
increase in Subcontracting Fees was attributable to increased demand for gold
products which resulted in the addition of new sub-contract manufacturing
customers and an increase in manufacturing by China Jewellery at the Company's
facilities on behalf of its customers. Geographically, sales in Hong Kong were
up during fiscal 1996 due to growing demand for gold jewelry and improving
economic conditions, increasing approximately 31.3% to $10.1 million from $7.7
million in fiscal 1995, sales in the PRC were up during fiscal 1996 due to
growth in the PRC economy, increasing approximately 15.9% to $10.1 million from
$8.7 million in fiscal 1995, sales in Europe were down during fiscal 1996 due to
weak economic conditions, decreasing approximately 23.4% to $2.1 million from
$2.8 million in fiscal 1995, and sales in the Middle East were up during fiscal
1996 due to increasing marketing efforts by the Company, increasing
approximately 59.6% to $3.3 million from $2.1 million in fiscal 1995. Sales in
Southeast Asia were down during 1996 approximately 40.4% to $1.3 million from
$2.1 million in fiscal 1995 due to an increase in the number of Southeast Asian
customers buying jewelry through their offices in Hong Kong.
Gross profits increased by 14.9% to $8.0 million in fiscal 1996 from $7.0
million during fiscal 1995. The increase in gross profits was attributable to
increased sales during the period and an improvement in gross margins. Gross
margins were down during the period to 29.9% from 30.0%.
Operating Expenses. Operating expenses totaled $2.7 million during fiscal
1996, an increase of 2.4% from fiscal 1995. The increase in operating expenses
during the period was primarily attributable to increased marketing expenses
associated with increased sales and expenses for expansion in overseas markets.
Other Income/Expense. Other income/expense during the period consisted of
gains/losses from trading of fashion jewelry, interest income and interest
expense. Net other expense totaled $329,000 during the period as compared to
$274,000 in 1995. The increase in net other expense during the period was
attributable to interest expense associated with capital leases of new
equipment.
Income Taxes. Income taxes increased by 12.1% from approximately $1.5
million in fiscal 1995 to $1.7 million during fiscal 1996. The increase in
income taxes during the period was attributable to the increase in the taxable
earnings of the Company.
Trends and Contingencies
Future operating results are expected to be impacted by the ongoing
expansion of manufacturing operations in Beijing. Expanded modern manufacturing
facilities are presently being constructed which are expected to increase the
Company's overall manufacturing capacity by approximately 100%. Completion of
such facilities is presently anticipated by early 1998. In conjunction with the
expansion of manufacturing capacity, the Company is presently planning to expand
its marketing efforts in Europe and the Middle East during fiscal 1998. The
expansion of manufacturing operations and marketing efforts will entail certain
increased operating costs, including one-time costs associated with such new
operations, which may adversely impact operating margins in the short-term.
However, management believes that such expansion will improve operating
efficiency adding to revenues, net income and net margins in the coming years.
Liquidity and Capital Resources
At March 31, 1997, the Company had cash balances totaling $94,000 and a
working capital balance of $2.8 million. This compares to a cash balance of
$244,000 and working capital of $0.6 million at March 31, 1996.
14
<PAGE>
Cash provided by operations decreased from the prior year primarily due to
increases in accounts receivable and inventories. The Company's accounts
receivable increased to $5.1 million, or approximately 12.5% of fiscal 1997
revenues, at March 31, 1997 as compared to approximately $3.0 million, or 11.1%
of fiscal 1996 revenues, at March 31, 1996. The increase in accounts receivable
during fiscal 1997 was attributable to increased sales levels and the granting
of more favorable payment terms to selected customers. Days sales outstanding in
receivables increased to 45 days at March 31, 1997, from 40 days at March 31,
1996. The increase in inventory was also attributable to the increase in sales
which has required the Company to maintain higher inventory levels to support
growing sales.
The Company used $4.2 million, $2.1 million and $1.3 million for investing
activities in fiscal 1997, 1996 and 1995, respectively. The investment of cash
in each of those periods related primarily to acquisitions of property, plant
and equipment to increase the Company's production capacity in order to support
growing sales.
Financing activities provided $1.3 million in fiscal 1997 as compared to
using $5.4 million in fiscal 1996. Cash generated from financing activities in
fiscal 1997 consisted primarily of proceeds from the issuance of common stock
and increases in bank borrowings. In fiscal 1996, the Company's cash used in
financing activities included the payment of a one time dividend of $5 million.
The Company's primary liquidity needs are to fund accounts receivable and
inventories as well as to fund the Company's planned expansion. The Company has
historically funded its operations through a combination of internally generated
cash and short-term borrowings under bank lines of credit. The Company's
expansion plans have been funded by bank loan facilities and internally
generated cash. During fiscal 1997, the Company raised $1 million, before
payment of offering expenses, from the sale of 800,000 shares of common stock to
fund certain costs associated with construction of the Beijing facility and
working capital requirements. The Company is presently evaluating other possible
efforts to raise additional capital but has no commitments in that regard.
At March 31, 1997, the Company had no material capital commitments other
than those necessary to support its existing operations and to carry out planned
expansion of its Beijing operations. The total cost of establishment of the new
manufacturing facilities in Beijing is expected to be $2.8 million and will
consist primarily of the cost of new machinery, relocation costs and training
costs. Approximately $1.2 million of such costs had been paid as of March 31,
1997. Such costs are expected to be financed through internally generated cash.
The Company is not responsible for any costs associated with the construction of
such facilities.
The Company has no other material commitments to expend capital resources
outside of ordinary operating expenses. However, the Company intends to use
available funds as needed to expand its jewelry distribution operations in
Europe and the Middle East.
At March 31, 1997, the Company's capital resources consisted of various
bank credit facilities and certain capital leases, in addition to funds on hand.
The Company's bank credit facilities consist of a combination of term loans,
lines of credit, letters of credit, bank guarantees, overdraft, revolving and
similar credit facilities generally utilized in the jewelry industry. The
Company's bank credit facilities are used to fund purchases of raw materials and
inventory and to finance accounts receivable and overdrafts. Such facilities are
consistent with credit facilities generally available to operators in the
jewelry industry in terms of interest rates and fees, collateral, repayment
terms, and renewal. The Company's total available bank credit facilities at
March 31, 1997 were approximately $5.5 million of which approximately $4.2
million had been used at such date. Management believes that such bank credit
facilities are adequate to meet the Company's bank credit needs for at least the
next 12 months and that such facilities can be readily renewed or replaced as
they come due.
At March 31, 1997, the Company also had a number of capital leases and
operating leases pursuant to which the Company holds various facilities and
equipment. At March 31, 1997, the Company's capital lease obligations totaled
$489,000 of which $229,000 was attributable to current lease obligations.
Obligations under operating leases require minimum annual rental payments by the
Company of approximately $281,000 in fiscal 1998.
15
<PAGE>
The Company believes that the available trade credit, bank credit
facilities, funds on hand and funds generated from operations, will be
sufficient to satisfy the Company's anticipated working capital requirements for
at least the next 12 months.
Seasonality
The jewelry business is highly seasonal, with the third and fourth calendar
quarters (second and third fiscal quarters), which includes the Christmas
shopping season, historically contributing the highest sales. Seasonality cannot
be predicted or counted upon, and the results of any interim period are not
necessarily indicative of the results that might be expected during a full
fiscal year.
The following table sets forth the Company's unaudited net sales for the
periods indicated (dollar amounts are in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------------------------------------
1995 1996 1997
-------------------- ------------------ --------------------
Amount % Amount % Amount %
------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
1st Quarter (4/1-6/30) $5,097 21.8 $5,961 22.2 $ 7,788 19.0
2nd Quarter (7/1-9/30) 5,868 25.1 6,608 24.6 9,980 24.4
3rd Quarter (10/31-12/31) 6,804 29.1 7,684 28.6 12,639 30.8
4th Quarter (1/1-3/31) 5,611 24.0 6,615 24.6 10,551 25.8
------ ----- ------ ----- ------- -----
Total $23,380 100.0 $26,868 100.0 $ 40,958 100.0
======= ===== ======= ===== ======== =====
</TABLE>
Inflation
Inflation has historically not had a material effect on the Company's
operations. When the price of gold or other raw materials has increased, these
costs historically have been passed on to the customer. Furthermore, as the
Company does not have either long-term supply contracts or long-term contracts
with customers, prices are quoted based on the prevailing prices for
semi-precious gemstones or metals. Accordingly, the Company does not believe
inflation will have a material effect on its future operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent auditors' report thereon of Arthur Andersen & Co., appears on pages
F-1 through F-18 of this report. See Index to Financial Statements on page 23 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Following the acquisition of the Hang Fung Group by the Company, on
December 20, 1996, the Company's Board of Directors selected Arthur Andersen &
Co. to serve as its new independent accountants and dismissed Albright, Persing
& Associates, Ltd., Certified Public Accountants, of Reno, Nevada which
previously served as the independent accountants for the Company.
Albright, Persing & Associates' reports on the financial statements of the
Company for the fiscal years ended December 31, 1994 and 1995 contain no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty (other than uncertainty as to the company's continuing as a going
concern), audit scope, or accounting principles. In connection with its audits
for fiscal years 1994 and 1995 and through December 20, 1996, there were no
disagreements with Albright, Persing & Associates on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Albright,
Persing & Associates would have caused them to make reference thereto in its
reports on the financial statements for such years.
Arthur Andersen & Co. served as the principal accounting firm for the Hang
Fung Group with respect to the financial statements of such companies for fiscal
years ended March 31, 1994, 1995 and 1996.
16
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Identification of Directors, Executive Officers and Certain Significant
Employees
The following table sets forth certain information regarding the directors
and executive officers of the Company.
Name Age Position
- ---- --- --------
Lam Sai Wing........... 42 Chairman, Chief Executive Officer and President
Chan Yam Fai, Jane..... 34 Vice President, Chief Financial Officer and Director
Ng Yee Mei............. 35 Vice President and Director
Cheng Wa On............ 44 Director
Terms of Office
The directors of the Company hold office until the next annual meeting of
stockholders of the Company or until their successors in office are elected and
duly qualified. All officers serve at the discretion of the Board of Directors
except as set forth in employment agreements.
Family Relationships
Lam Sai Wing and Chan Yam Fai, Jane are husband and wife.
Business Experience
Lam Sai Wing has served as Chairman of the Board, Chief Executive Officer
and President of the Company since the Exchange in December of 1996 and of the
Company's predecessor and operating subsidiaries, the Hang Fung Group since
founding the Hang Fung Group in 1986.
Chan Yam Fai, Jane has served as Vice President, Chief Financial Officer
and a Director of the Company since the Exchange in December of 1996 and of the
Hang Fung Group since 1990.
Ng Yee Mei has served as Vice President and a Director of the Company since
the Exchange in December of 1996 and of the Hang Fung Group since 1991.
Cheng Wa On has served as a Director of the Company since the Exchange in
December of 1996. Mr. Cheng has been employed by the Hang Fung Group as Export
Manager since 1986.
Compliance With Section 16(a) of the Exchange Act
Under the securities laws of the United States, the Company's directors,
its executive officers and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established and the Company is required to disclose any failure to file by
these dates during fiscal 1997.
All of the filing requirements were satisfied on a timely basis in fiscal
1997, except that Lam Sai Wing, Chan Yam Fai Jane, Ng Yee Mei, Cheng Wa On, Lam
Mo Wan, Chan Wai Sum and Good Day Holdings, Ltd. failed to file on a timely
basis their initial report of their holdings on Form 3. Reports on Form 3 have
since been filed by each of such persons. In making these disclosures, the
Company has relied solely on written statements of its directors, executive
officers and shareholders and copies of the reports that they filed with the
Commission.
17
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Table
The following table sets forth information as to the compensation paid or
accrued to each officer and director receiving compensation of at least $100,000
and the Chief Executive Officer for the three years ended March 31, 1997:
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation (2) Compensation
--------------------------- ---- -------- ----- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Lam Sai Wing............................ 1997 $145,000 $ -0- $ -0- $ -0-
Chief Executive Officer, Chairman of 1996 55,000 -0- 15,000 -0-
the Board and President (1) 1995 45,000 -0- 15,000 -0-
</TABLE>
- ------------------------
(1) Mr. Lam assumed the positions indicated, including the position of Chief
Executive Officer, following the Exchange in December of 1996. The
compensation indicated represents amounts paid by the Hang Fung Group
during each of the years indicated. Mr. Claude Smith served as Chief
Executive Officer of the Company during each of the years indicated and up
until the Exchange in December of 1996 at which time Mr. Lam assumed the
position of Chief Executive Officer.
(2) Mr. Lam's other annual compensation consists of a housing allowance of
$15,000.
Director's Compensation
No compensation has been paid to any directors for service in such capacity
in the past and no such compensation is presently payable to directors. At such
time as the Board of Directors deems appropriate, the Company intends to adopt
an appropriate policy to compensate non-employee directors in order to attract
and retain the services of qualified non-employee directors.
Employment Agreements
The Company has employment agreements with Lam Sai Wing and Chan Yam Fai,
Jane. Each of these agreements expires December 31, 2003. The employment
agreements, as amended, provide for a base salary and bonus of HK$1,122,000
(US$145,000) annually for Mr. Lam and HK$150,000 (US$19,000) for Ms. Chan
including a housing allowance and participation in all other benefit plans
adopted by the Company.
Pension Plan
The Company's subsidiaries in Hong Kong have adopted a voluntary defined
contribution pension plan (the "Plan") for its employees in Hong Kong. The Plan
generally covers all employees of the Company's operating subsidiaries
(excluding contract workers in the PRC) who have completed three months of
service with the Company. Employees electing to participate in the Plan defer,
in the form of a contribution to the Plan, an amount equal to five percent (5%)
of their monthly salary and the Company makes a matching contribution on behalf
of each participating employee.
Participating employees are always fully vested with respect to
contributions made by them to the Plan and earnings or increases thereon.
Employees become vested in contributions made by the Company ratably over ten
years.
18
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock
The following table is furnished as of August 1, 1997 to indicate
beneficial ownership of shares of the Company's Common Stock by (1) each
shareholder of the Company who is known by the Company to be a beneficial owner
of more than 5% of the Company's Common Stock, (2) each director and named
officer of the Company, individually, and (3) all officers and directors of the
Company as a group. The information set out in the following table was supplied
by such persons.
<TABLE>
<CAPTION>
Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned Percent
- -------------------- ------------------ -------
<S> <C> <C>
Good Day Holdings, Ltd (2)........................... 6,600,000 (2) 51.6%
Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg.
No. 1 Hok Yuen Street East, Kowloon, Hong Kong
Lam Mo Wan........................................... 1,800,000 14.1%
Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg.
No. 1 Hok Yuen Street East, Kowloon, Hong Kong
Chan Wai Sum......................................... 1,800,000 14.1%
Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg.
No. 1 Hok Yuen Street East, Kowloon, Hong Kong
Lam Sai Wing (2)..................................... 6,600,000 (2) 51.6%
Carhill Limited...................................... 800,000 6.3%
c/o Suite 4703, Central Plaza
18 Harbour Road, Wanchai, Hong Kong
Chan Yam Fai, Jane................................... 300,000 2.3%
Ng Yee Mei........................................... -0- -
Cheng Wa On.......................................... -0- -
All officers and directors
as a group (4 persons).............................. 6,900,000 (2) 53.9%
</TABLE>
- ------------------------
(1) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to the shares shown opposite the
name of such person or group.
(2) Good Day Holdings Ltd. is controlled 100% by Lam Sai Wing, an officer and
director of the Company. Accordingly, Mr. Lam may be deemed to be the
beneficial owner of the shares held by Good Day Holdings Ltd.
Preferred Stock
Series A Preferred Stock. The following table is furnished as of August 1,
1997 to indicate beneficial ownership of the Company's Series A Preferred Stock
by each shareholder of the Company who is known by the Company to be a
beneficial owner of more than 5% of the Company's Series A Preferred Stock.
<TABLE>
<CAPTION>
Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned Percent
- -------------------- ------------------ -------
<S> <C> <C>
Good Day Holdings Ltd................................ 100,000 (2) 100.0%
Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg.
No. 1 Hok Yuen Street East, Kowloon, Hong Kong
Lam Sai Wing......................................... 100,000 (2) 100.0%
</TABLE>
19
<PAGE>
- ------------------------
(1) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to the shares shown opposite the
name of such person or group.
(2) Good Day Holdings Ltd. is controlled 100% by Lam Sai Wing, an officer and
director of the Company. Accordingly, Mr. Lam may be deemed to be the
beneficial owner of the shares held by Good Day Holdings Ltd.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's predecessor and subsidiary, Hang Fung Group, has, from time
to time entered into transactions with officers and directors of the Company and
companies controlled by officers and directors of the Company.
During the fiscal years ended March 31, 1996 and 1997, the Hang Fung Group
reported sales of $83,000 and $0, respectively, to Hang Fung Jewellery Co., Inc.
("HFJCI"). Prior to October 1, 1996, HFJCI was beneficially owned by Lam Sai
Wing and was engaged in marketing of products of the Hang Fung Group in the
United States. Effective October 1, 1996, Mr. Lam disposed of all of his
holdings in HFJCI to an unrelated party.
During the fiscal years ended March 31, 1996 and 1997, the Hang Fung Group
paid rental payments totaling $199,000 and $174,000, respectively, to Chan Yam
Fai, Jane in connection with the lease of the Company's principal executive
offices in Hong Kong.
The Hang Fung Group has from time to time advanced funds to Lam Sai Wing.
Receivables from Mr. Lam totaled $1,056,000 at March 31, 1996 and $475,000 at
March 31, 1997. Such loans are unsecured, non-interest bearing and without
pre-determined repayment terms.
Lam Sai Wing and Chan Yam Fai, Jane have personally guaranteed the existing
banking facilities of the Hang Fung Group and have pledged certain real estate
as collateral to secure such banking facilities.
With the exception of the non-interest bearing loans to Lam Sai Wing, all
of the above transactions are believed by management to be on terms at least as
favorable to the Company as may have been obtained from unaffiliated third
parties. The Company has no present policy governing related party transactions
but intends to implement a policy such that all future and ongoing transactions
between the Company and its directors, officers, principal stockholders or
affiliates will be on terms no less favorable to the Company than may be
obtained from unaffiliated third parties, and any such transactions will be
approved by a majority of disinterested directors of the Company.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements: See Index to Financial
Statements on page 23 of this report for financial statements and
supplementary data filed as part of this report.
(2) Financial Statement Schedules
None
(3) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
2.1 Acquisition Agreement between S.W. Lam, Inc. and the
shareholders of Hang Fung Jewellery Company Limited and
Kai Hang Jewellery Company Limited (1)
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Certificate of Designation for Series A Preferred
Stock (1)
10.1++ Employment Agreement with Lam Sai Wing dated January 1,
1994 (1)
10.2++ Employment Agreement with Chan Yam Fai, Jane dated
January 1, 1994 (1)
10.3 Sales Agency Agreement between Hang Fung Jewellery Co.,
Ltd. and China Jewellery Import & Export Co. (1)
10.4 Agreement for Jewellery Assembling between Hang Fung
Jewellery Co., Ltd. and China Jewellery Import & Export
Co. (1)
10.5 Sales Cooperation Agreement between Hang Fung Jewellery
Co., Ltd. and China Jewellery Import & Export Co. (1)
10.6 Confirmation Agreement between Hang Fung Jewellery Co.,
Ltd. and China Jewellery Import & Export Co. (1)
10.7 Lease Agreement between Chan Yam Fai, Jane and Hang
Fung Jewellery Co., Ltd. re: executive offices (1)
10.8++* Supplementary Employment Contract with Lam Sai Wing and
Lam Chan Yam Fai
16.1 Letter from Albright, Persing & Associates re: change
of accountants (1)
21.1 Subsidiaries (1)
27.1* Financial Data Schedules
------------------------
++ Compensatory plan or management agreement.
* Filed herewith
(1) Incorporated by reference to the respective exhibits filed
with Registrant's Registration Statement on Form 10
(Commission File No. 0-22049)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1997.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
S.W. LAM, INC.
By: /s/ Lam Sai Wing
-------------------------------------
Lam Sai Wing
President and Chief Executive Officer
Dated: September 30, 1997
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Lam Sai Wing
- ------------------------- President, Chief Executive Officer September 30, 1997
Lam Sai Wing (Principal Executive Officer) and
Chairman of the Board
/s/ Chan Yam Fai
- ------------------------- Vice President, Chief Financial September 30, 1997
Chan Yam Fai, Jane Officer (Principal Accounting
and Financial Officer) and Director
/s/ Ng Yee Mei
- ------------------------- Vice President and Director September 30, 1997
Ng Yee Mei
/s/ Cheng Wa On
- ------------------------- Director September 30, 1997
Cheng Wa On
</TABLE>
22
<PAGE>
S.W. LAM, INC.
Index to Consolidated Financial Statements
Page
Report of Independent Public Accountants................................ F-1
Consolidated Statements of Operations for the Years ended
March 31, 1995, 1996 and 1997.......................................... F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997............... F-3
Consolidated Statements of Cash Flows for the Years ended
March 31, 1995, 1996 and 1997.......................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for
the Years ended March 31, 1995, 1996 and 1997.......................... F-5
Notes to Consolidated Financial Statements.............................. F-6
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of S. W. Lam, Inc.:
We have audited the accompanying consolidated balance sheets of S. W. Lam, Inc.
(a company incorporated in the State of Nevada, United States of America; "the
Company") and Subsidiaries ("the Group") as of March 31, 1996 and 1997, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for the years ended March 31, 1995, 1996 and 1997. 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 generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of 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 that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of S. W. Lam, Inc. and
Subsidiaries as of March 31, 1996 and 1997, and the results of their operations
and their cash flows for the years ended March 31, 1995, 1996 and 1997, in
conformity with generally accepted accounting principles in the United States of
America.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
August 5, 1997.
F-1
<PAGE>
S. W. LAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(Expressed in United States dollars)
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
-------------------- -------------------- -------------------
$'000 $'000 $'000
<S> <C> <C> <C>
Revenues
Net sales 18,478 19,348 32,748
Subcontracting fees 4,902 7,520 8,210
-------------------- -------------------- -------------------
Total revenues 23,380 26,868 40,958
Cost of sales and services (16,376) (18,822) (29,987)
-------------------- -------------------- -------------------
Gross profit 7,004 8,046 10,971
Selling, general and administrative
expenses (2,669) (2,734) (3,627)
-------------------- -------------------- -------------------
Operating income 4,335 5,312 7,344
Express relating to the reverse acquisition
- - (350)
Interest expenses (346) (403) (389)
Interest income 17 11 -
Other income (expenses), net 55 63 (2)
-------------------- -------------------- -------------------
Income before income taxes 4,061 4,983 6,603
Provision for income taxes (1,472) (1,650) (2,128)
-------------------- -------------------- -------------------
Net income 2,589 3,333 4,475
==================== ==================== ===================
Earnings per common share $ 0.22 $ 0.28 $ 0.37
==================== ==================== ===================
Weighted average number of common share
11,736,575 11,899,521 12,197,260
==================== ==================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
S. W. LAM, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1997
(Expressed in United States dollars)
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7
------------------ ------------------
$'000 $'000
<S> <C> <C>
ASSETS
Current assets:
Cash 244 94
Accounts receivable, net 2,989 5,106
Inventories 8,069 8,509
Prepayments and other current assets 14 142
Due from a director 1,056 475
------------------ ------------------
Total current assets 12,372 14,326
Property, plant and equipment and capital leases, net 3,304 7,083
------------------ ------------------
Total assets 15,676 21,409
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings 1,616 2,275
Long-term bank loans, current portion 381 197
Capital lease obligations, current portion 50 229
Accounts payable 1,353 1,619
Deposits from customers 4,016 1,125
Accrued liabilities 329 267
Income taxes payable 4,014 5,846
------------------ ------------------
Total current liabilities 11,759 11,558
Long-term bank loans, non-current portion 851 1,290
Capital lease obligations, non-current portion 28 260
Deferred taxation - 284
------------------ ------------------
Total liabilities 12,638 13,392
------------------ ------------------
Shareholders' equity:
Common stock, par value $0.001 each; authorized
- 25,000,000 shares; issued and outstanding -
12,000,000 shares at March 31, 1996 and
12,800,000 shares at March 31, 1997 12 13
Preferred stock, par value $0.001 each; authorized -
25,000,000 shares; issued and outstanding -
Series A Preferred Stock - 100,000 shares - -
Additional paid-in capital 323 846
Retained earnings 2,533 7,008
Cumulative translation adjustments 170 150
------------------ ------------------
Total shareholders' equity 3,038 8,017
------------------ ------------------
Total liabilities and shareholders' equity 15,676 21,409
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
S. W. LAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(Expressed in United States dollars)
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
-------------------- -------------------- -------------------
$'000 $'000 $'000
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 2,589 3,333 4,475
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation of property, plant and
equipment 373 678 1,031
Provision for bad and doubtful debts 202 114 -
(Write back of) Provision for deferred
income taxes (5) (13) 284
(Increase) Decrease in operating assets -
Accounts receivable, net (1,773) 2,455 (2,117)
Inventories 490 179 (440)
Prepayments and other current assets (4) - (128)
Due from a director (1,440) 431 581
(Decrease) Increase in operating
liabilities -
Accounts payable (6) 1,166 266
Deposits from customers (904) (2,974) (2,891)
Accrued liabilities 50 157 (62)
Income taxes payable 1,515 1,671 1,832
-------------------- -------------------- -------------------
Net cash provided by operating
activities 1,087 7,197 2,831
-------------------- -------------------- -------------------
Cash flows from investing activities:
Additions to property, plant and equipment
(1,297) (2,090) (4,243)
-------------------- ------------------- --------------------
Net cash used in investing activities (1,297) (2,090) (4,243)
-------------------- -------------------- -------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock
279 45 524
Payment of dividends - (5,000) -
Net (decrease) increase in short-term bank
borrowings (57) (409) 659
Repayment of capital element of capital
lease obligations (24) (27) (138)
Additions of long-term bank loans 129 1,257 772
Repayment of long-term bank loans (418) (1,279) (517)
-------------------- -------------------- -------------------
Net cash (used in) provided by
financing activities (91) (5,413) 1,300
-------------------- -------------------- -------------------
Effect of exchange rate changes on cash 84 150 (38)
-------------------- -------------------- -------------------
Net decrease in cash (217) (156) (150)
Cash, as of beginning of year 617 400 244
-------------------- -------------------- -------------------
Cash, as of end of year 400 244 94
==================== ==================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
S. W. LAM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(Expressed in United States dollars)
<TABLE>
<CAPTION>
Series A
Common stock Preferred stock Cumulative
------------------------ ------------------------
Number of Number of Additional Retained translation
shares Par value shares Par value paid-in earnings adjustments
capital
------------ ----------- ----------- ------------ ----------- -------- -----------
`000 $'000 `000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of
March 31, 1994 10,500 11 100 - - 1,611 (31)
Common stock 1,275 1 - - 278 - -
issued
Net income - - - - - 2,589 -
Translation
adjustments - - - - - - 72
------------ ----------- ----------- ------------ ----------- ------------ -----------
Balance as of
March 31, 1995 11,775 12 100 - 278 4,200 41
Common stock 225 - - - 45 - -
issued
Net income - - - - - 3,333 -
Dividends - - - - - (5,000) -
Translation
adjustments - - - - - - 129
------------ ----------- ----------- ------------ ----------- ------------ -----------
Balance as of
March 31, 1996 12,000 12 100 - 323 2,533 170
Common stock 800 1 - - 999 - -
issued
Common stock
issuance
expenditures - - - - (476) - -
Net income - - - - - 4,475 -
Translation
adjustments - - - - - - (20)
------------ ----------- ----------- ------------ ----------- ------------ -----------
Balance as of
March 31, 1997 12,800 13 100 - 846 7,008 150
============ =========== =========== ============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
S. W. LAM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in United States dollars unless otherwise stated)
ORGANIZATION AND OPERATIONS
S. W. Lam, Inc. ("the Company"), formerly known as New Wine Inc., was
incorporated on April 12, 1994 in the State of Tennessee, United States of
America. On November 15, 1996, the Company effected a change of domicile by
reincorporating in the State of Nevada, United States of America, and changed
its name from New Wine, Inc. to S. W. Lam, Inc. In addition, on the same date,
the Company effected a change in par value of each share of its common stock
from $0.01 per share to $0.001 per share.
On December 31, 1996, the Company acquired 100% interest in Quality Prince
Limited ("QPL"; a company incorporated in the British Virgin Islands) by issuing
10,500,000 shares of its common stock of par value $0.001 each, representing
87.5% of its enlarged issued share capital, and 100,000 shares of Series A
Preferred Stock of par value $0.001 each, to the previous owners of QPL. QPL is
an investment holding company which had acquired on December 19, 1996, 100%
interest in the following companies:
<TABLE>
<CAPTION>
Place of
Name of company incorporation Principal activities
- --------------------------------------- ------------------- --------------------------------------
<S> <C> <C>
Hang Fung Jewellery Company Limited Hong Kong Production and selling of jewellery
("HFJCL")(Note a) products
Kai Hang Jewellery Company Limited Hong Kong Selling of jewellery products
("KHJCL")(Note a)
Soycue Limited ("SL")(Note b) British Virgin Production and selling of jewellery
Islands products
Macadam Profits Limited ("MPL") British Virgin Sourcing, marketing and selling of
(Note b) Islands jewellery products
Priestgill Limited ("PL")(Note b) British Virgin Marketing and selling of jewellery
Islands products
</TABLE>
- ------------------------
Note -
a. HFJCL took over the businesses previously undertaken by Hang Fung Jewellery
Company ("HFJC") effective September 1995, and the businesses previously
undertaken by Hang Fung Manufacturing Company ("HFMC") effective November
1994. Prior to December 19, 1996, HFJCL and KHJCL were jointly owned by Mr.
Lam Sai Wing and Ms. Chan Yam Fai. HFJC was an unincorporated
sole-proprietorship entity owned by Mr. Lam Sai Wing. HFMC was an
unincorporated sole-proprietorship entity owned by Ms. Chan Yam Fai.
b. Prior to December 19, 1996, SL, MPL and PL were solely owned by Mr. Lam Sai
Wing.
F-6
<PAGE>
1. ORGANIZATION AND OPERATIONS (Cont'd)
The Company and its subsidiaries ("the Group") are principally engaged in the
production and selling of jewellery products to customers in Hong Kong, the
People's Republic of China ("the PRC") and other parts of the world. The Group
maintains its head office in Hong Kong where it coordinates the Group's
marketing and selling functions. Its production facilities are located in Hong
Kong and the PRC.
The Group's production and selling activities in the PRC are mainly operated
through arrangements with China National Pearl, Diamond, Gem and Jewellery
Import and Export Corporation ("CNPIEC"), a PRC state-owned enterprise, which is
one of the few entities authorized to trade gold and silver products in the PRC.
During the year ended March 31, 1997, approximately 20% of the Group's sales and
approximately 50% of the Group's subcontracting fees resulted from its business
conducted in the PRC under these arrangements. The key transactions with CNPIEC
were as follows:
a. Under a subcontracting agreement dated November 18, 1994 and subsequent
supplemental agreement entered into between SL and CNPIEC, SL has operated
a plant in Beijing, the PRC ("the Beijing Plant") to produce jewellery
products for sales to customers outside the PRC.
b. The Beijing Plant also provides subcontracting services to PRC customers at
the instruction and on behalf of CNPIEC, and shares a portion of the
subcontracting fees received by CNPIEC. The initial term of the agreements
is ten years expiring on November 17, 2004, and is renewable upon
expiration. During the years ended March 31, 1995, 1996 and 1997, SL's
share of these subcontracting fees amounted to approximately $3,566,000,
$3,965,000 and $4,133,000, respectively.
c. Under an agency agreement and a co-operative selling agreement both dated
November 18, 1994 and a subsequent supplemental agreement for these two
agreements entered into between SL and CNPIEC, SL has appointed CNPIEC as
its agent for sales of its gold and silver products in the PRC. In return,
SL pays to CNPIEC an agency fee determined on a fixed percentage of the
sales proceeds collected by CNPIEC. The term of the agreements is ten years
expiring on November 17, 2004. During the years ended March 31, 1995, 1996
and 1997, the SL paid to CNPIEC agency fees approximately $196,000, $88,000
and $36,000, respectively.
d. Other transactions with CNPIEC were as follows:
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
------------------ ----------------- -----------------
$'000 $'000 $'000
<S> <C> <C> <C>
Purchases of gold and silver from
CNPIEC 2,961 2,461 -
Management fees paid to CNPIEC 115 84 54
================== ================= =================
</TABLE>
e. Pursuant to an agreement between SL and CNPIEC, CNPIEC has agreed to
undertake and pay for all of SL's PRC tax liabilities, including
value-added tax, if any, relating to SL's operations under the
above-mentioned activities.
F-7
<PAGE>
1. ORGANIZATION AND OPERATIONS (Cont'd)
Under an agency agreement and a co-operative selling agreement both dated
December 1, 1994, SL has appointed Yiu Ping Gold and Silver Manufacturing
Factory ("YPGSMF"), a PRC state-owned enterprise which is licensed to sell gold
and silver products in the PRC, as its agent for sales of its gold and silver
products in the PRC. In return, SL pays to YPGSMF an agency fee determined on a
fixed percentage of the sales effected by YPGSMF. The term of the agreements is
five years expiring on November 30, 1999. During the years ended March 31, 1995,
1996 and 1997, the Group paid to YPGSMF agency fees of approximately $35,000,
$48,000 and Nil, respectively.
Under an agency agreement and a co-operative selling agreement both dated April
30, 1996, SL has appointed Tai Yuan Jewellery Crafts Factory ("TYJCF"), a PRC
state-owned enterprise which is also licensed to sell gold and silver products
in the PRC, as its agent for sales of its gold and silver products in the PRC.
In return, SL pays to TYJCF an agency fee, which is subject to revision
annually. The term of the agreements is ten years expiring on April 29, 2006.
During the year ended March 31, 1997, the Group paid to TYJCF an agency fee of
$60,000. TYJCF has also agreed to undertake and pay for all of SL's PRC tax
liabilities, including value-added tax, if any, relating to SL's operations
under the above-mentioned activities.
In addition, SL has entered into a subcontracting agreement with Shenzhen Crafts
Hang Fung Jewellery Factory ("SCHFJF"), another PRC state-owned enterprise, for
the production of SL's gold and silver products in Shenzhen, the PRC, for
shipments out of the PRC. During the years ended March 31, 1995, 1996 and 1997,
subcontracting fees paid to SCHFJF amounted to approximately $240,000, $240,000
and $127,000, respectively.
2. SUBSIDIARIES
Details of the Company's subsidiaries as of March 31, 1997 were as follows:
<TABLE>
<CAPTION>
Place of Percentage
incorporation Issued and fully of equity
Name and operations paid share capital interest held Principal activities
- ------------------------- ----------------- ------------------- -------------- ----------------------
<S> <C> <C> <C> <C>
Quality Prince Limited British Virgin $70 shares of $1 100% Investment holding
Islands each
Hang Fung Jewellery Hong Kong 2 Class A - Production and
Company Limited (non-voting) selling of
and 100% jewellery products
2 Class B (Note a)
(voting) shares
of HK$1 each
Kai Hang Jewellery Hong Kong 10,000 Class A - Selling of jewellery
Company Limited (non-voting) and products
2 Class B 100%
(voting) shares (Note a)
of HK$1 each
Soycue Limited British Virgin 1 share of $1 each 100% Production and
Islands selling of
jewellery products
Macadam Profits Limited British Virgin 1 share of $1 each 100% Sourcing, marketing
Islands and selling of
jewellery products
Priestgill Limited British Virgin 1 share of $1 each 100% Marketing and
Islands selling of
jewellery products
</TABLE>
F-8
<PAGE>
2. SUBSIDIARIES (Cont'd)
Note -
a. According to the Articles of Association of HFJCL and KHJCL, only the Class
B (voting) shares have voting rights and preferential rights to dividends
and in the distribution of assets. QPL held all of the Class B (voting)
shares of HFJCL and KHJCL.
3. BASIS OF PRESENTATION
The consolidated financial statements of the Company as presented herein include
the financial statements of the Company and its subsidiaries. The acquisition of
QPL by the Company on December 31, 1996 was treated as a recapitalization of QPL
with QPL as the acquirer (reverse acquisition). On this basis, the historical
consolidated financial statements of the Company prior to December 31, 1996 are
those of QPL and the historical shareholders' equity of QPL as of March 31, 1995
and 1996 has been retroactively restated to reflect the equivalent number of
shares of common stock of the Company issued for this acquisition.
The acquisitions of HFJCL, KHJCL, SL, MPL and PL by QPL on December 19, 1996
have been accounted for as a reorganization of entities under common control,
similar to a pooling of interests as the shareholders and management control of
HFJCL, KHJCL, SL, MPL, PL and QPL are the same before and after the acquisition.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America. Significant
accounting policies are summarized below:
a. Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All material intra-group transactions
and balances have been eliminated on consolidation.
b. Revenues
Revenues comprise (i) the net invoiced value of goods supplied to
customers, which are recognized upon delivery of goods, passage of title to
customers and the expiration of any right of return, and (ii)
subcontracting fees, which are recognized when the subcontracting service
is rendered.
Deposits or advanced payments from customers prior to passage of title of
goods and the expiration of right of return are recorded as deposits from
customers.
F-9
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
c. Income taxes
Income taxes are provided under the provisions of Statement of Financial
Accounting Standards No. 109, which requires recognition of deferred tax
assets and liabilities for expected future tax consequences of events that
have been included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
d. Inventories
Inventories are stated at the lower of cost, on a first-in first-out basis,
or market. Costs of finished goods include direct materials, direct labor
and an attributable portion of production overheads.
e. Property, plant and equipment and capital leases
Property, plant and equipment and capital leases are stated at cost. Gains
or losses on disposals are reflected in current operations. Depreciation
for financial reporting purposes is provided using the straight-line method
over the asset's estimated useful life after taking into account the
estimated residual value. The estimated useful lives are as follows :
leasehold land - 50 years, building - 20 years, machinery and equipment - 5
to 7 years, motor vehicles - 5 years, and furniture, fixtures and office
equipment - 5 years.
f. Foreign currency translation
The translation of the financial statements of group companies into United
States dollars is performed for balance sheet accounts using closing
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using an average exchange rate during each reporting
period. The gains or losses resulting from translation are included in
shareholders' equity separately as cumulative translation adjustments.
Aggregate gain (loss) from foreign currency transactions included in the
results of operations were approximately $3,000, $1,000 and $(2,000) for
the years ended March 31, 1995, 1996 and 1997, respectively.
g. Financial instruments
Financial instruments include cash, accounts receivable, accounts payable,
short-term and long-term bank borrowings, and capital lease obligations for
which their carrying amounts approximate fair values.
h. Earnings per common share
Earnings per common share is computed by dividing the net income by the
weighted average number of shares of common stock outstanding during the
year.
F-10
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
i. Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from
those estimates.
5. PROVISION FOR INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate.
The companies operating in Hong Kong are subject to Hong Kong profits tax at a
rate of 16.5%, and the companies operating in the PRC are subject to PRC income
taxes at a rate of 33%.
The components of provision for income taxes are:
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
------------------- -------------------- -------------------
$'000 $'000 $'000
<S> <C> <C> <C>
Current tax
- Hong Kong profits tax 39 21 24
- PRC income taxes 1,438 1,642 1,820
Deferred tax (5) (13) 284
------------------- -------------------- -------------------
1,472 1,650 2,128
=================== ==================== ===================
</TABLE>
The reconciliation of the United States federal income tax rate to the effective
income tax rate based on the income before income taxes as stated in the
consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
------------------ ------------------ ------------------
<S> <C> <C> <C>
U.S. federal income tax rate 35.0% 35.0% 35.0%
Weighted average effect of different
tax rates in the foreign
jurisdictions (2.7%) (2.7%) (4.0%)
Permanent differences arising from
non-deductible items 3.9% 0.8% 1.2%
------------------ ------------------ ------------------
Effective income tax rate 36.2% 33.1% 32.2%
================== ================== ==================
</TABLE>
F-11
<PAGE>
6. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
Accounts receivable comprise:
1 9 9 6 1 9 9 7
------------------ ------------------
$'000 $'000
<S> <C> <C>
Trade receivables 3,441 5,558
Less: Allowance for doubtful accounts (452) (452)
------------------ ------------------
Accounts receivable, net 2,989 5,106
================== ==================
7. INVENTORIES
Inventories comprise:
1 9 9 6 1 9 9 7
------------------ ------------------
$'000 $'000
Raw materials 2,784 3,907
Finished goods 3,317 4,107
Consigned finished goods 1,968 495
------------------ ------------------
8,069 8,509
================== ==================
</TABLE>
8. PROPERTY, PLANT AND EQUIPMENT AND CAPITAL LEASES
Property, plant and equipment and capital leases comprise:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7
------------------ ------------------
$'000 $'000
<S> <C> <C>
Property, plant and equipment:
Leasehold land and building 255 255
Machinery and equipment 3,586 6,688
Motor vehicles 88 89
Furniture, fixtures and office equipment 312 1,087
Capital leases:
Machinery and equipment 151 1,022
------------------ ------------------
Cost 4,392 9,141
Less: Accumulated depreciation
Property, plant and equipment (1,058) (1,823)
Capital leases (30) (235)
------------------ ------------------
Property, plant and equipment and capital
leases, net 3,304 7,083
================== ==================
</TABLE>
As of March 31, 1997, leasehold land and building with a net book value of
approximately $221,000 and machinery and equipment with a net book value of
approximately $328,000 were mortgaged to secure certain of the Group's banking
facilities.
F-12
<PAGE>
9. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprise:
1 9 9 6 1 9 9 7
------------------ ------------------
$'000 $'000
Bank overdraft 518 441
Import trust receipt loans 1,098 1,834
------------------ ------------------
1,616 2,275
================== ==================
Short-term bank borrowings are secured by mortgages over the real estate
property (leasehold land and building) and pledges of certain machinery and
equipment of the Group, mortgages over certain real estate properties owned by
Mr. Lam Sai Wing and Ms. Chan Yam Fai, and personal guarantees given by Mr. Lam
Sai Wing and Ms. Chan Yam Fai. Interest on these borrowings is charged at Hong
Kong prime lending rate plus 0.75% to 3.75%, which was 9.5% to 12.5% per annum
as of March 31, 1997.
Supplemental information with respect to short-term bank borrowings is:
1 9 9 6 1 9 9 7
------------------ ------------------
$'000 $'000
Maximum amount outstanding 2,025 3,317
Average amount outstanding 1,443 1,735
Weighted average interest
rate per annum during the year
10.5% 10.5%
Weighted average interest
rate per annum at the end of year
10.3% 10.8%
================== ==================
10. LONG-TERM BANK LOANS
Long-term bank loans are secured by mortgages over the real estate property
(leasehold land and building) and pledges of certain machinery and equipment of
the Group, mortgages over certain real estate properties owned by Mr. Lam Sai
Wing and Ms. Chan Yam Fai, and personal guarantees given by Mr. Lam Sai Wing and
Ms. Chan Yam Fai. They bear interest at Hong Kong prime lending rate plus 2% to
3.25%, which was 10.75% to 12% per annum as of March 31, 1997.
Aggregate maturities of long-term bank loans are as follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7
------------------ ------------------
$'000 $'000
<S> <C> <C>
Payable during the following periods:
Within one year 381 197
Over one year but not exceeding two years 88 195
Over two years but not exceeding three years 98 137
Over three years but not exceeding four years 108 155
Over four years but not exceeding five years 121 133
Over five years 436 670
------------------ ------------------
Total bank loans 1,232 1,487
Less: Current maturities (381) (197)
------------------ ------------------
Long-term bank loans 851 1,290
================== ==================
</TABLE>
F-13
<PAGE>
11. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under the capital leases together with the present
value of the minimum lease payments are as follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7
------------------ ------------------
$'000 $'000
<S> <C> <C>
Payable during the following periods:
Within one year 59 281
Over one year but not exceeding two years 29 193
Over two years but not exceeding three years - 95
------------------ ------------------
Total minimum lease payments 88 569
Less: Amount representing future interest (10) (80)
------------------ ------------------
Present value of minimum lease payments 78 489
Less: Current portion (50) (229)
------------------ ------------------
Non-current portion 28 260
================== ==================
</TABLE>
12. GENERAL BANKING FACILITIES
As of March 31, 1997, the Group's had credit facilities with several banks of
approximately $5,550,000. Unused credit facilities as of March 31, 1997 amounted
to approximately $1,309,000. These facilities are collaterized by the Group's
leasehold land and building with a net book value of approximately $221,000, the
Group's machinery and equipment with a net book value of approximately $328,000,
personnal guarantees given by Mr. Lam Sai Wing and Ms. Chan Yam Fai, and
mortgages over certain real estate properties owned by Mr. Lam Sai Wing and Ms.
Chan Yam Fai.
13. SEGMENTAL INFORMATION
Analysis of the Group's operations by geographical areas is as follows:
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
------------------ ------------------ ------------------
$'000 $'000 $'000
<S> <C> <C> <C>
Net sales to customers in
- Hong Kong 6,321 6,502 11,540
- PRC 5,143 6,129 8,043
- Middle East (export sales) 2,059 3,288 5,744
- South East Asia (export sales)
2,149 1,280 4,610
- Europe (export sales) 2,806 2,149 1,506
- United States of America
(export sales) - - 1,305
------------------ ------------------ ------------------
18,478 19,348 32,748
================== ================== ==================
Subcontracting income
- Hong Kong 1,336 3,555 4,077
- PRC 3,566 3,965 4,133
------------------ ------------------ ------------------
4,902 7,520 8,210
================== ================== ==================
</TABLE>
F-14
<PAGE>
14. SUPPLEMENTAL DISCLOSURE TO CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
------------------ ------------------ ------------------
$'000 $'000 $'000
<S> <C> <C> <C>
Cash paid for interest expenses 347 392 389
Cash received from interest income
17 11 -
================== ================== ==================
</TABLE>
During the years ended March 31, 1995, 1996 and 1997, capital lease obligations
of approximately Nil, $103,000 and $567,000, respectively, were incurred to
finance the Group's additions of new machinery and equipment.
15. PENSION SCHEME AND LONG SERVICE PAYMENTS
The Group's employees in the PRC are all hired on a contractual basis and
consequently the Group has no obligation for pension liabilities of these
employees.
The Group has arranged a voluntary defined contribution pension scheme for its
employees in Hong Kong. Nine out of a total of approximately eighty employees
have joined the scheme and the aggregate amounts of the Group's contribution to
the scheme for the years ended March 31, 1995, 1996 and 1997 were approximately
$7,000, $2,000 and $10,000, respectively. In addition, certain of the Group's
employees in Hong Kong have completed the required number of years of service
under the Hong Kong Employment Ordinance to be eligible for long service
payments on termination of their employment. The Group is only liable to make
such payments when the termination meets the required circumstances specified in
the Ordinance. If the termination of all these employees met the circumstances
required by the Ordinance, the Company's liability as of March 31, 1997 would
amount to approximately $42,000, which has not been provided for in the
financial statements.
16. LEASE COMMITMENTS
The Group leases various staff quarters, factory premises and warehouses under
non-cancellable operating leases which expire at various dates through March
1999. Rental expenses for the years ended March 31, 1995, 1996 and 1997 were
approximately $213,000, $257,000 and $285,000, respectively. Future minimum
rental payments as of March 31, 1997, under agreements classified as operating
leases with non-cancellable terms in excess of one year, are as follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7
------------------ ------------------
$'000 $'000
<S> <C> <C>
Payable during the following periods:
Within one year 9 556
Over one year but not exceeding two years - 347
------------------ ------------------
9 903
================== ==================
</TABLE>
F-15
<PAGE>
17. OPERATING RISKS
a. Dependence on strategic relationship
Gold and silver products are restricted commodities in the PRC and special
authorization is required to trade gold and silver products in the PRC. The
PRC government has only granted a few licences to PRC state-owned
enterprises to trade gold and silver products in the PRC. The Group's
present operations in the PRC are conducted through various agreements with
PRC state-owned enterprises as described in Note 1. Any changes in any of
these strategic relationships could have a material adverse effect on the
revenue and profitability of the Group and could potentially limit the
Group's ability to continue to conduct business in the PRC.
b. Concentration of credit risk and major customers
The Group's sales and subcontracting services are made to customers on an
open account basis and generally no collateral is required. Details of
individual customers accounting for more than 5% of the Group's total
revenues are as follows:
<TABLE>
<CAPTION>
Percentage of total revenues
---------------------------------------------------------
1 9 9 5 1 9 9 6 1 9 9 7
----------------- ----------------- -----------------
<S> <C> <C> <C>
CNPIEC 18.0% 14.5% 0.9%
Chow Tai Fook Jewellery Co., Ltd.
2.9% 6.0% 12.3%
World Commercial Sales Co. Ltd. 0.1% 0.2% 6.4%
================= ================= =================
</TABLE>
Concentration of accounts receivable as of March 31, 1996 and 1997 is as
follows:
Percentage of accounts receivable
-----------------------------------------
1 9 9 6 1 9 9 7
------------------ ------------------
Five largest accounts receivable 32.3% 36.5%
================== ==================
The Group performs ongoing credit evaluation of each customer's financial
condition and maintains reserves for potential credit losses and such
losses, in the aggregate, have not exceeded management's expectations.
c. Concentration of suppliers
Details of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
<TABLE>
<CAPTION>
Percentage of purchases
---------------------------------------------------------
1 9 9 5 1 9 9 6 1 9 9 7
----------------- ----------------- -----------------
<S> <C> <C> <C>
CNPIEC 16.0% 11.6% -
Heraeus Ltd. 27.4% 28.6% 43.6%
Johnson Matthey H.K. Ltd. 0% 3.6% 16.4%
Degussa China Ltd. 0% 0.7% 9.9%
AGR Hong Kong 0% 0.7% 6.5%
Cheong Hing Refinery Works Ltd. 4.8% 5.6% 5.3%
================= ================= =================
</TABLE>
F-16
<PAGE>
17. OPERATING RISKS (Cont'd)
d. Country risk
The Group's operations are conducted in Hong Kong and the PRC. As a result,
the Group's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in Hong Kong
and the PRC, and by the general state of the Hong Kong and the PRC
economies.
On July 1, 1997, sovereignty over Hong Kong was transferred from the United
Kingdom to the PRC, and Hong Kong became a Special Administrative Region of
the PRC ("SAR"). As provided in the Sino-British Joint Declaration relating
to Hong Kong and the Basic Law of the Hong Kong SAR of the PRC, the Hong
Kong SAR has full economic autonomy and its own legislative, legal and
judicial systems for fifty years. The Group's management does not believe
that the transfer of sovereignty over Hong Kong will have an adverse impact
on the Group's financial and operating environments. There can be no
assurance, however, that changes in political or other conditions will not
result in such an adverse impact.
The Group's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies operating in
North American and Western European. These include risks associated with,
among others, the political, economic and legal environments and foreign
currency exchange. The Group's results may be adversely affected by changes
in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations, inflationary
measures, currency conversion and remittance abroad, and rates and methods
of taxation, among other things. In addition, a portion of the Group's
revenue is denominated in Renminbi which must be converted into other
currencies before remittance outside the PRC. Both the conversion of
Renminbi into foreign currencies and the remittance of foreign currencies
abroad require approvals of the PRC government.
18. RELATED PARTY TRANSACTIONS
a. The Group entered into the following transactions with related parties:
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
------------------ ----------------- -----------------
$'000 $'000 $'000
<S> <C> <C> <C>
Sales to a related company
- Hang Fung Jewellery Co., Inc.
("HFJCI") 112 83 -
Rental paid to Ms. Chan Yam Fai 174 199 174
Salaries paid to
- Mr. Lam Sai Wing 45 55 145
- Ms. Chan Yam Fai 45 55 19
================== ================= =================
</TABLE>
F-17
<PAGE>
18. RELATED PARTY TRANSACTIONS (Cont'd)
a. The Group entered into the following transactions with related parties:
(Cont'd)
Prior to October 1, 1996, HFJCI was beneficially owned by Mr. Lam Sai Wing
and was principally engaged in the provision of marketing service for HFJCL
in the United States of America. Effective from October 1, 1996, Mr. Lam
Sai Wing disposed all of his shareholdings in HFJCI to an unrelated party.
b. The amounts due from Mr. Lam Sai Wing of approximately $1,056,000 and
$475,000 as of March 31, 1996 and 1997, respectively, were unsecured,
non-interest bearing and without pre-determined repayment terms.
c. The Group's banking facilities were secured by, among others, mortgages
over certain real estate properties owned by Mr. Lam Sai Wing and Ms. Chan
Yam Fai and personal guarantees given by Mr. Lam Sai Wing and Ms. Chan Yam
Fai.
19. OTHER SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
1 9 9 5 1 9 9 6 1 9 9 7
----------------- ----------------- -----------------
$'000 $'000 $'000
<S> <C> <C> <C>
Depreciation of fixed assets
- owned assets 362 663 826
- assets held under capital leases 11 15 205
Provision for bad and doubtful debts 202 114 -
================= ================= =================
</TABLE>
F-18
SUPPLEMENTARY EMPLOYMENT CONTRACT
This Contract is made on the 31st day of March 1996
Parties to the Contract:
A. Hang Fung Jewellery Co. Ltd., of 302-303A, 3/F, Fu Hang Industrial
Building, Hok Yuen Street East, Hunghom, Hong Kong ("Company"),
B. Mr. Lam Sai Wing H.K.I.D. No. D526157(1) ("Mr. Lam"),
C. Mrs. Lam Chan Yam Fai, H.K.I.D. No. G293329(1) ("Ms. Chan").
Whereas pursuant to the Employment Contract between the Company and Mr. Lam
("Contract A") and the Employment Contract between the Company and Ms. Chan
("Contract B") both dated the 1st day of January 1994.
1. Salary of Mr. Lam for the twelve months period ended 31 March 1996 being
HK$586,950.00 subject to an increment rate of 30% per annum effective on
the 1st day of January of each calendar year.
2. Salary of Ms. Chan for the twelve months period ended 31 March 1996 being
HK$391,300.00 subject to an increment rate of 30% per annum effective on
the 1st day of January of each calendar year.
Whereas the Company agrees to continue to pay a total annual salary to Mr. Lam
and Ms. Chan which shall not exceed the total amount the Company have to pay per
Contract A and Contract B.
Whereas Mr. Lam and Ms. Chan agree to continue to receive a total annual salary
from the Company which shall not be less than the total amount they are entitled
per Contract A and Contract B.
Now that in consideration of the respective responsibilities and duties of Mr.
Lam and Ms. Chan has been varying from time to time, it is hereby mutually
agreed amongst the Company, Mr. Lam and Ms. Chan that:
1. Commencing on 1st of April 1996, Mr. Lam and Ms. Chan shall be allowed to
share the total amount of the annual alary which shall be payable by the
Company and receivable by Mr. Lam and Ms. Chan per the Contract A and
Contract B on the portion which is subject to review and revise from time
to time to be mutually agreed between Mr. Lam and Ms. Chan.
<PAGE>
The amount of salary as agreed between and entitled by Mr. Lam and Ms. Chan
is to be HK$1,121,725.00 and HK$150,000.00 respectively for the twelve
months period ended 31 March, 1997.
2. Mr. Lam and Ms. Chan agree that they shall perform duties for the Company,
its associated companies, related companies or its assigns in Hong Kong,
and at such other place as is required.
This contract is supplementary to the Contract A and Contract B and signed and
agreed by:
- -----------------------------------
Hang Fung Jewellery Co. Ltd.
- -----------------------------------
Mr. Lam Sai Wing
- -----------------------------------
Mrs. Lam Chan Yam Fai
keane/lam10-K
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 94
<SECURITIES> 0
<RECEIVABLES> 5,558
<ALLOWANCES> 452
<INVENTORY> 8,509
<CURRENT-ASSETS> 14,326
<PP&E> 9,141
<DEPRECIATION> 2,058
<TOTAL-ASSETS> 21,409
<CURRENT-LIABILITIES> 11,558
<BONDS> 1,834
0
0
<COMMON> 13
<OTHER-SE> 8,004
<TOTAL-LIABILITY-AND-EQUITY> 21,409
<SALES> 32,748
<TOTAL-REVENUES> 40,958
<CGS> 29,987
<TOTAL-COSTS> 29,987
<OTHER-EXPENSES> 3,627
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 389
<INCOME-PRETAX> 6,603
<INCOME-TAX> 2,128
<INCOME-CONTINUING> 4,475
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,475
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
