SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A
Amendment No. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant Section 12(b) or (g) of the Securities Exchange Act of 1934
S.W. LAM, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 62-1563911
- ---------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Unit 302-303A, 3rd Floor, Fu Hang Industrial Building
No. 1 Hok Yuen Street East, Kowloon, Hong Kong
-----------------------------------------------------
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (852) 2766 3688
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of class)
<PAGE>
The Company operates through its various subsidiaries, all of which are
located outside of the United States. Unless otherwise indicated or the context
otherwise requires, the term Company refers collectively to S.W. Lam, Inc. and
its subsidiaries. All references to China or the PRC are to the Peoples'
Republic of China. The Company's financial statements are presented in United
States Dollars ("US$"). The Company's sales are principally in Hong Kong Dollars
("HK$") and Renminbi ("Rmb"). At December 31, 1996, the prevailing exchange rate
of US$ into HK$ and Rmb was US$1.00 = HK$7.733 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 Hang Fung Jewellery Company
Limited ("Hang Fung Jewellery") in Hong Kong and transferred operations of the
Shenzhen Facility and the Beijing Facility to Hang Fung. In October of 1995, Mr.
Lam and his wife, Lam Chan Yam Fai, Jane ("Ms. Chan"), transferred ownership of
Hang Fung 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 Price")(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 October 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.
2
<PAGE>
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, and (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.
Shenzhen Crafts, Yiu Ping 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
and Europe. 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:
<TABLE>
<CAPTION>
Wholesale Average
Price Range Wholesale Price
----------- ---------------
<S> <C> <C>
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 $10
</TABLE>
3
<PAGE>
For the two years ended March 31, 1996, sales by segment and major product
line and as a percentage of sales (including subcontracting fees) were as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------ ------------------
Amount Percent Amount Percent
------- ------- ------- -------
($'000) ($'000)
<S> <C> <C> <C> <C>
Fine gold products
Bracelets........................$ 3,762 14 % $3,368 14 %
Chains........................... 3,619 13 3,269 14
Rings............................ 4,501 17 4,302 18
Earrings......................... 1,926 7 1,690 7
Ornamental....................... 5,000 19 4,206 18
Other gold products
Bracelets........................ 333 1 189 1
Chains........................... 502 2 282 2
Rings............................ 1,326 5 726 3
Earrings......................... 982 3 532 2
Other............................ 191 1 142 1
Silver products
Bracelets........................ 1,420 5 1,389 6
Chains........................... 1,438 5 1,427 6
Rings............................ 946 4 921 4
Earrings......................... 485 2 471 2
Ornamental....................... 437 2 466 2
</TABLE>
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
5,000 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.
4
<PAGE>
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 1,100,000 pieces of jewelry annually.
Manufacturing capacity is expected to increase to approximately 1,500,000 pieces
annually upon moving into the Company's new facilities in Beijing.
5
<PAGE>
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 the 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 and Yiu Ping 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 and Yiu Ping as agents for the Company. Both China Jewellery and Yiu
Ping 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 pursuant to an
agreement which is similar to the Sales Agency Agreement with China Jewellery.
Pursuant to such agreement, the Company pays agency fees to Yiu Ping consisting
of approximately 3% to 5% of the sales price of jewelry sold.
6
<PAGE>
During the year ended March 31, 1996, the Company's sales and
Subcontracting Fees were approximately $10.1 million, or 38%, in the PRC, $10.1
million, or 37%, in Hong Kong, $2.6 million, or 10%, in the Middle East, $2.1
million, or 8%, in Europe and $1.9 million, or 7%, elsewhere in Southeast Asia.
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 December 31, 1996, the Company had approximately 20
regular customers and its products were sold in approximately 2,200 retail
outlets in the PRC and Hong Kong. The Company's five largest customers (Tai Seng
Ho Silver & Gold Jewellery Co., Ltd, Chow Tai Fook Jewellery Co., Ltd., Chow
Sang Sang Holdings International Ltd., Tse Sui Luen Jewellery (International)
Ltd. and Jewel Trading) accounted for approximately 50% of net sales during the
fiscal year ended March 31, 1996. Tai Seng Ho Silver & Gold Jewellery Co., Ltd.,
which accounted for 27% of sales during fiscal 1996, 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. However, each of the Company's five largest
customers has been a customer of the Company since at least 1990.
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 may 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 December 31, 1996, the Company had approximately 1,080 employees,
including 5 executive officers, 20 other management personnel, 40 persons in
administration, 947 persons in manufacturing and production and 68 persons in
sales and marketing. Of the Company's employees, approximately 80 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.
Facilities
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
7
<PAGE>
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 $14,990.
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 by approximately June of 1997 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.
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 will be transferred from the
United Kingdom to the PRC, and Hong Kong will become 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.
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. Financial Information.
SELECTED COMBINED FINANCIAL DATA
(In thousands, except per share data)
The following tables present selected historical combined financial data
derived from the combined financial statements of the Hang Fung Group and S.W.
Lam, Inc. which appear elsewhere herein. The Hang Fung Group was acquired by the
Company in December of 1996 in a transaction accounted for as a "reverse
acquisition." The operations of the Company prior to acquisition of the Hang
Fung Group have been discontinued and the Company's operations presently consist
solely of the operations of the Hang Fung Group. The combined financial data
gives effect to the acquisition of the Hang Fung Group as if such acquisition
had occurred as of the beginning of the earliest period presented and the
termination of the Company's prior operations had occurred at such time. The
following data should be read in conjunction with the combined financial
statements of the Hang Fung Group, the financial statements of New Wine, Inc.
and the combined financial statements of S.W. Lam, Inc. included elsewhere
herein.
8
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
------------------------------------------------------- --------------------
Income Statement Data: 1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $ 7,549 $ 10,568 $ 13,197 $ 18,478 $ 19,348 $ 14,069 $ 20,523
Subcontracting fees............. 2,689 2,786 3,481 4,902 7,520 5,259 5,179
------- -------- -------- -------- -------- ------- --------
Total revenues................ 10,238 13,354 16,678 23,380 26,868 19,328 25,702
Gross profit.................... 2,866 3,668 4,585 7,004 8,046 5,771 7,569
Operating income................ 1,764 1,870 2,262 4,609 5,372 3,550 4,739
Other income (expense), net..... ( 162 ) ( 169 ) ( 185 ) ( 274 ) ( 329) ( 97) ( 166 )
Income before taxes............. 1,602 1,701 2,077 4,335 5,043 3,453 4,573
Net income...................... $ 936 $ 1,032 $ 1,311 $ 2,863 $ 3,393 $ 2,390 $ 3,379
======= ======= ======= ======= ======= ======= =======
Net income per share (1)........ $ 0.09 $ 0.10 $ 0.12 $ 0.24 $ 0.29 $ 0.20 $ 0.28
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average shares
outstanding (1).............. 10,500,000 10,500,000 10,500,000 11,736,575 11,899,521 11,866,636 12,000,000
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
Balance Sheet Data: 1995 1996 1996
-------- -------- ----------
<S> <C> <C> <C>
Working capital................... $ 3,011 $ 613 $ 2,682
Total assets...................... 17,517 15,676 19,262
Long-term debt, less
current portion.................. 286 879 1,379
Stockholders' equity (2).......... 4,531 3,038 6,439
</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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements, the combined financial statements of the Hang Fung Group
and the pro forma financial information appearing elsewhere herein.
Prior to December of 1996, the Company's 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
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<PAGE>
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 Combined Statements of Income expressed as a percentage of total
revenues.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
------------------------- -----------------
1994 1995 1996 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................. 72.5 70.0 70.1 70.1 70.6
---- ---- ---- ---- -----
Gross profit.................. 27.5 30.0 29.9 29.9 29.4
Operating expenses............ 13.9 10.2 10.0 11.5 11.0
---- ---- ---- ---- ----
Income from operations........ 13.6 19.7 20.0 18.4 18.4
Other income (expense)........ (1.1) (1.2) (1.2) (0.5) (0.6)
---- ---- ---- ---- ----
Income before income taxes.... 12.5 18.5 18.8 17.9 17.8
Income taxes.................. (4.6) (6.3) (6.2) (5.5) (4.6)
---- ---- ---- ---- ----
Net income.................... 7.9 12.2 12.6 12.4 13.2
==== ==== ==== ==== ====
</TABLE>
Nine Months Ended December 31, 1996 Compared to Nine Months Ended December 31,
1995
Revenues and Gross Profit. Operating revenues increased by 33.0% to $25.7
million in the nine months ended December 31, 1996 as compared to the first nine
months of fiscal 1996. Sales of Company products were up 45.9% to $20.5 million
during the first nine months of fiscal 1997 as compared to $14.1 million in
sales during fiscal 1996. The increase in sales was partially offset by a 1.5%
decrease in Subcontracting Fees to $5.2 million during fiscal 1997 from $5.3
million during the first nine months of the prior year. 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 decrease in Subcontracting Fees was attributable to
increased utilization of the Company's manufacturing facilities for manufacture
of Company sold products as opposed to products manufactured on a sub-contract
basis or manufactured at such facilities for sale by China Jewellery.
Geographically, sales in Hong Kong were up during the first nine months of
fiscal 1997 due to growing demand for gold jewelry and improving economic
conditions, increasing approximately 56.4% to $10.3 million from $6.6 million in
fiscal 1996, sales in the PRC were up during fiscal 1997 due to improving
economic conditions and higher income, increasing approximately 29.3% to $9.0
million from $7.0 million in fiscal 1996, sales in Europe were down during
fiscal 1997 due to continued weakness in European economies, decreasing
approximately 11.4% to $2.1 million from $2.3 million in fiscal 1996, and sales
10
<PAGE>
in the Middle East were up during fiscal 1997 due to increased marketing
efforts by the Company, increasing approximately 90% to $2.6 million from $1.4
million in fiscal 1996. Sales in Southeast Asia during fiscal 1997 were down
approximately 15.4% to $1.8 million from $2.1 million in fiscal 1996. The
decrease in sales in Southeast Asia was attributable to an increase in the
number of Southeast Asian customers purchasing from the Company through their
offices in Hong Kong and China.
Gross profits increased by 31.2% to $7.6 million in the first nine months
of fiscal 1997 from $5.8 million during the nine months ended December 31, 1995.
The increase in gross profits was attributable to increased sales during the
period which were partially offset by a reduction in Subcontracting Fees and
gross margins. Gross margins were down marginally during the period to 29.4%
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 $2.8 million during the
first nine months of fiscal 1997, an increase of 27.4% from operating expenses
for the same period 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. Net other expense totaled $166,000 during the period as compared to
$97,000 in fiscal 1996. The increase in net other expense during the period was
attributable to increased interest expense associated with higher production and
sales and capital leases of equipment.
Income Taxes. Income taxes increased by 12.3% from approximately $1.1
million in the first nine months of fiscal 1996 to $1.2 million during the nine
months ended December 31, 1996. 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 $2.15 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 $2.6 million from $1.6 million in fiscal 1995. Sales in
Southeast Asia were down during 1996 approximately 24.3% to $1.9 million from
$2.6 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 up during the period to 30.0% from 27.5%.
Operating Expenses. Operating expenses totaled $2.7 million during fiscal
1996, an increase of 11.6% 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.
11
<PAGE>
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.
Year Ended March 31, 1995 Compared to Year Ended March 31, 1994
Revenues and Gross Profit. Operating revenues increased by 40.2% to $23.4
million during the fiscal year ended March 31, 1995 as compared to $16.7 million
during fiscal 1994. Sales of Company products were up 40.0% to $18.5 million
during fiscal 1995 as compared to $13.2 million in sales during fiscal 1994. The
Company also reported a 40.8% increase in Subcontracting Fees to $4.9 million
during fiscal 1995 from $3.5 million during the prior year. The increase in
sales was attributable to the development of lower priced but higher margin
electro-form jewelry which experienced strong acceptance among younger
consumers. The increase in Subcontracting Fees was attributable to strong demand
for moderately priced electro-form gold jewelry which resulted in increased
subcontract manufacturing work being performed for the Company's customers and
by China Jewellery at the Company's facilities on behalf of its customers.
Geographically, sales in Hong Kong were up during fiscal 1995 due to growing
demand for gold jewelry and favorable economic conditions, increasing
approximately 9.2% to $7.7 million from $7.0 million in fiscal 1994, sales in
the PRC were up during fiscal 1995 due to growth in the PRC economy, increasing
approximately 86.8% to $8.7 million from $4.7 million in fiscal 1994, sales in
Europe were up during fiscal 1995 due to improved economic conditions,
increasing approximately 40% to $2.8 million from $2 million in fiscal 1994, and
sales in the Middle East were $1.6 million during fiscal 1995 compared to no
sales during fiscal 1994 due to the commencement of marketing efforts by the
Company. Sales in Southeast Asia during fiscal 1995 were down approximately
14.7% to $2.6 million from $3 million in fiscal 1994 due to a growing trend for
Southeast Asian customers to purchase jewelry through their offices in Hong
Kong.
Gross profits increased by 52.8% to $7.0 million in fiscal 1995 from $4.6
million during fiscal 1994. The increase in gross profits was attributable to
increased sales during the period which were partially offset by a minimal
reduction in gross margins. Gross margins were down marginally during the period
to 29.9% from 30.0%. However, excluding subcontracting fees, profit margins
decreased on sales of Company products during the period as a result of
promotional pricing of newly developed products to establish market share for
those new products.
Operating Expenses. Operating expenses totaled $2.4 million during fiscal
1995, an increase of 3.1% from operating expenses in fiscal 19945. The increase
in operating expenses during the period was primarily attributable to increased
marketing expenses associated with increased sales.
Other Income/Expense. Other income/expense during the period consisted of
gain/loss from trading of fashion jewelry, interest income and interest expense.
Net other expense totaled $274,000 during the period as compared to $185,000 in
1994. The increase in net other expense during the period was attributable to
increased interest expense associated with increased capital leases of
equipment.
Income Taxes. Income taxes increased by 92.2% from approximately $0.8
million in fiscal 1994 to $1.5 million during fiscal 1995. 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 September of 1997. In conjunction
with the expansion of manufacturing capacity, the Company is presently planning
12
<PAGE>
to expand its marketing efforts in Europe and the Middle East during 1997. 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 December 31, 1996, the Company had cash balances totaling $51,000 and a
working capital balance of $2.7 million. This compares to a cash balance of
$244,000 and working capital of $0.6 million at March 31, 1996.
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. Subsequent to December 31, 1996, the Company raised
approximately $1.0 million from a 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.
The Company's accounts receivable increased to $3.9 million at December 31,
1996 as compared to approximately $3.0 million, or 11.1% of fiscal 1996
revenues, at March 31, 1996 and approximately $5.6 million, or 23.8% of fiscal
1995 revenues, at March 31, 1995. The increase in accounts receivable during the
first nine months of fiscal 1997 was attributable to increased sales levels. The
decrease in accounts receivable, in aggregate and as a percentage of revenues,
from fiscal 1995 to fiscal 1996 was attributable to increased sales of jewelry
on a cash or short-term credit basis.
At December 31, 1996, 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 $2,000,000 and will
consist primarily of the cost of new machinery, relocation costs and training
costs. None of such costs had been paid as of December 31, 1996. 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 December 31, 1996, 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
December 31, 1996 were approximately $3.3 million of which approximately $3
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 December 31, 1996, the Company also had a number of capital leases and
operating leases pursuant to which the Company holds various facilities and
equipment. At December 31, 1996, the Company's capital lease obligations totaled
$137,000 of which $95,000 was attributable to current lease obligations.
Obligations under operating leases require minimum annual rental payments by the
Company of approximately $9,000 in fiscal 1997.
13
<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,
--------------------------------------------------------
1994 1995 1996
---------------- ---------------- ---------------
Amount % Amount % Amount %
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
1st Quarter (4/1-6/30) $ 3,719 22.3 $ 5,097 21.8 $ 5,961 22.3
2nd Quarter (7/1-9/30) 4,170 25.0 5,868 25.1 6,608 25.2
3rd Quarter (10/31-12/31) 4,820 28.9 6,804 29.1 7,684 28.6
4th Quarter (1/1-3/31) 3,969 23.8 5,611 24.0 6,615 23.9
------ ----- ------ ----- ------ -----
Total $16,678 100.0 $23,380 100.0 $26,868 100.0
======= ===== ======= ===== ======= =====
</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 3. Properties.
All of the Company's material properties are described in Item 1. above.
14
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management.
Common Stock
The following table is furnished as of January 31, 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 December
31, 1996 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>
- ------------------------
(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.
15
<PAGE>
(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 5. Directors and Executive Officers.
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.
<TABLE>
<CAPTION>
Name Age Position
- ------------------- --- -----------------------------------------------------
<S> <C> <C>
Lam Sai Wing........ 41 Chairman, Chief Executive Officer and President
Chan Yam Fai, Jane.. 33 Vice President, Chief Financial Officer and Director
Ng Yee Mei.......... 34 Vice President and Director
Cheng Wa On......... 34 Director
</TABLE>
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.
16
<PAGE>
Item 6. 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, 1996:
<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............. 1996 $ 55,000 $ -0- $ 15,000 $ -0-
Chief Executive Officer,
Chairman of the Board and 1995 45,000 -0- 15,000 -0-
President (1) 1994 40,000 -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, vacation pay and other fringe
benefits.
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 provide for a base salary and bonus of HK$420,000 (US$54,312)
annually for Mr. Lam and HK$280,000 (US$36,208) 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.
17
<PAGE>
Item 7. 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, 1995 and 1996, the Hang Fung Group
reported sales of $112,000 and $83,000, 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, 1995 and 1996, the Hang Fung Group
paid rental payments totaling $174,000 and $199,000, 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 $398,000 at
September 30, 1996. 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 from third parties, and any such transactions will be
approved by a majority of disinterest directors of the Company.
Item 8. Legal Proceeds.
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 9. Market Price of and Dividends on the 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 December 31, 1996, there were approximately 103 record holders of the
Company's Common Stock.
18
<PAGE>
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.
Item 10. Recent Sales of Unregistered Securities.
Since its inception in April of 1994, the Company sold the following
unregistered securities without the use of underwriters and without the payment
of any discounts or commissions:
(1) In April of 1994, the Company issued an aggregate of 1,275,000
shares of common stock to the founders of the Company for $114,631 in cash
and professional services valued at $175,500.
(2) In September of 1995, the Company issued an aggregate of 225,000
shares of common stock for $45,000 in cash to various investors.
(3) 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.
(4) 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 issuance of the above securities to the founding shareholders, to the
shareholders of the Hang Fung Group and to the accredited investor referred to
in (4) 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. The
issuance of the securities referred to in (2) above was deemed to be exempt from
registration under the Securities Act in reliance on Rule 504 of the Securities
Act based on the limited size of the offering and the filing of a Form D.
Item 11. Description of Registrant's Securities to be Registered.
Common Stock
General. The Company is authorized to issue 25,000,000 shares of Common
Stock, $.001 par value per share ("Common Stock"). At January 31, 1997, there
were 12,800,000 shares issued and outstanding. All shares of Common Stock
outstanding are validly issued, fully paid and non-assessable.
Voting Rights. Each share of Common Stock entitles the holder thereof to
one vote, either in person or by proxy, at meetings of shareholders. The holders
are not permitted to vote their shares cumulatively. The voting rights of the
holders of Common Stock are subject to the rights of the outstanding Series A
Preferred Shares which, as a class, is entitled to thirty-percent voting control
of the Company. Accordingly, the holders of Common Stock and Series A Preferred
Shares holding, in the aggregate, more than fifty percent (50%) of the total
voting rights can elect all of the directors of the Company.
Dividend Policy. All shares of Common Stock are entitled to participate
ratably in dividends when and as declared by the Company's Board of Directors
out of the funds legally available therefor and subject to the rights, if any,
of the holders of outstanding shares of preferred stock. Any such dividends may
19
<PAGE>
be paid in cash, property or additional shares of Common Stock. 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.
Miscellaneous Rights and Provisions. Holders of Common Stock have no
preemptive or other subscription rights, conversion rights, redemption or
sinking fund provisions. In the event of the dissolution, whether voluntary or
involuntary, of the Company, each share of Common Stock is entitled to share
ratably in any assets available for distribution to holders of the equity of the
Company after satisfaction of all liabilities and payment of the applicable
liquidation preference of any outstanding shares of Preferred Stock.
Preferred Stock
The Company has 25,000,000 authorized shares of preferred stock, $0.001 par
value. The Board of Directors has the authority, without action by the
shareholders, to create one or more series of preferred stock and to determine
the dividend rights, dividend rate, rights and terms of redemption, liquidation
preferences, sinking fund terms, conversion and voting rights of any such
series, the number of shares constituting any such series and the designation
thereof and the price therefor.
Series A Preferred Shares. Pursuant to the authority granted in the
Company's Articles of Incorporation, the Board of Directors has authorized a
series of preferred stock designated as Series A Preferred Stock (the "Series A
Preferred Shares"). A total of 100,000 Series A Preferred Shares were authorized
and issued entitling the holders thereof to a liquidation preference of $.001
per share and to thirty percent voting control, as a class, of the Company in
all matters voted on by shareholders. Except to the extent declared by the Board
of Directors from time to time, if ever, no dividends are payable with respect
to the Series A Preferred Shares. With the exception of the foregoing, the
holders of the Series A Preferred Shares have no preferences or rights in excess
of those generally available to the holders of Common Stock.
Transfer Agent and Registrar.
The transfer agent and registrar for the Company's Common Stock is OTC
Stock Transfer, Inc., 231 East 2100 South, Salt Lake City, Utah 84115.
Item 12. Indemnification of Directors and Officers.
The Company's Articles of Incorporation provide that the Company shall
indemnify its directors and officers against any damages arising out of their
actions as agents of the Company except in cases where such directors or
officers are adjudged to be liable for negligence or misconduct. Additionally,
the Company's Bylaws provide that the Company shall, to the fullest extent
permitted by Nevada law, indemnify its directors, officers, employees or agents
against any expense, liability or loss by reason of their status or service as
directors, officers, employees or agents of the Company. Section 78.751 of the
Nevada Revised Statutes provides that a corporation may indemnify directors,
officers, employees and agents against all liability, judgments, and expenses
actually incurred by reason of his service in such capacity provided that he
acted in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted and the Company is not aware of any threatened
litigation or proceeding that may result in a claim for such indemnification.
20
<PAGE>
Item 13. Financial Statements and Supplementary Data.
See Item 15 below for a list of financial statements included herewith.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Following the acquisition of Hang Fung Jewellery Company Limited and Kai
Hang Jewellery Company Limited by the Company, on December 20, 1996, the
Company's Board of Directors selected Arthur Andersen 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 served as the principal accounting firm for Hang Fung
Jewellery Company Limited and Kai Hang Jewellery Company Limited with respect to
the financial statements of such companies for fiscal years ended March 31,
1994, 1995 and 1996.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements
The Hang Fung Group
Page
----
Report of Independent Public Accountants.............................. F-1
Combined Statements of Operations for the Years Ended March 31,
1996, 1995 and 1994................................................. F-2
Combined Balance Sheets as of March 31, 1996 and 1995................. F-3
Combined Statements of Cash Flows for the Years Ended March 31,
1996, 1995 and 1994................................................. F-4
Combined Statements of Changes in Equity for the Years Ended March
31, 1996, 1995 and 1994............................................. F-5
Notes to Combined Financial Statements................................ F-6
New Wine, Inc.
Independent Auditors' Report.......................................... F-18
Balance Sheets as of June 30, 1996 and December 31, 1995 and 1994..... F-19
Income Statements for the Six Months Ended June 30, 1996 and the
Years Ended December 31, 1995 and 1994 and for the Period from
Inception (April 12, 1994) to June 30, 1996......................... F-20
Statements of Cash Flows for the Six Months Ended June 30, 1996 and
the Years Ended December 31, 1995 and 1994 and for the Period from
Inception (April 12, 1994) to June 30, 1996......................... F-21
Statements of Stockholders' Equity for the Six Months Ended June 30,
1996 and the Years Ended December 31, 1995 and 1994 and for the
Period from Inception (April 12, 1994) to June 30, 1996............. F-22
Notes to Financial Statements..........................................F-23
21
<PAGE>
S.W. Lam, Inc.
Combined Balance Sheet as of December 31, 1996 (unaudited).............F-27
Combined Income Statements for the Three and Nine Months Ended
December 31, 1996 and 1995 (unaudited)...............................F-28
Combined Statements of Cash Flows for the Nine Months Ended
December 31, 1996 and 1995 (unaudited)...............................F-29
Notes to Combined Financial Statements (unaudited).....................F-30
(b) Exhibits
Exhibit
Number Description
------- -------------------------------------------------------------
2.1 Acquisition Agreement between S.W. Lam, Inc. and the shareholders
of Hang Fung Jewellery Company Limited and Kai Hang Jewellery
Company Limited
3.1 Articles of Incorporation
3.2 Bylaws
4.1 Certificate of Designation for Series A Preferred Stock
10.1 Employment Agreement with Lam Sai Wing dated January 1, 1994
10.2 Employment Agreement with Chan Yam Fai, Jane dated January 1, 1994
10.3 Sales Agency Agreement between Hang Fung Jewellery Co., Ltd. and
China Jewellery Import & Export Co.
10.4 Agreement for Jewellery Assembling between Hang Fung Jewellery
Co., Ltd. and China Jewellery Import & Export Co.
10.5 Sales Cooperation Agreement between Hang Fung Jewellery Co., Ltd.
and China Jewellery Import & Export Co.
10.6 Confirmation Agreement between Hang Fung Jewellery Co., Ltd. and
China Jewellery Import & Export Co.
10.7 Lease Agreement between Chan Yam Fai, Jane and Hang Fung Jewellery
Co., Ltd. re: executive offices
16.1* Letter from Albright, Persing & Associates re: change of
accountants
21.1 Subsidiaries
27.1* Financial Data Schedules
- ------------------------
* Filed herewith
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
S.W. LAM, INC.
(Registrant)
Date: March 20, 1997 By: /s/ Lam Sai Wing
-------------------------------
Lam Sai Wing, President
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of New Wine, Inc.:
We have audited the accompanying combined balance sheets of the companies as
described in Note 2 to the accompanying combined financial statements (the
"Group") as of March 31, 1995 and 1996, and the related combined statements of
operations, cash flows and changes in equity for the years ended March 31, 1994,
1995 and 1996. These financial statements are the responsibility of the
management of the Group. 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Group as of
March 31, 1995 and 1996, and the results of its operations and its cash flows
for the years ended March 31, 1994, 1995 and 1996, in conformity with generally
accepted accounting principles in the United States of America.
/s/ Arthur Andersen & Co.
-------------------------
Arthur Andersen & Co.
Hong Kong,
October 26, 1996.
F-1
<PAGE>
THE HANG FUNG GROUP
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(Expressed in United States dollars)
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- -----
$'000 $'000 $'000
<S> <C> <C> <C>
Revenues
Net sales 13,197 18,478 19,348
Subcontracting fees 3,481 4,902 7,520
------- ------ -------
Total revenues 16,678 23,380 26,868
Cost of sales and services (12,093) (16,376) (18,822)
------- ------ -------
Gross profit 4,585 7,004 8,046
Selling, general and administrative
expenses (2,323) (2,395) (2,674)
------- ------ ------
Operating income 2,262 4,609 5,372
Interest expenses (224) (346) (403)
Interest income 11 17 11
Other income, net 28 55 63
------- ------ ------
Income before income taxes 2,077 4,335 5,043
Provision for income taxes (766) (1,472) (1,650)
------- ------ -------
Net income 1,311 2,863 3,393
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
THE HANG FUNG GROUP
COMBINED BALANCE SHEETS
AS OF MARCH 31, 1995 AND 1996
(Expressed in United States dollars)
<TABLE>
<CAPTION>
1995 1996
------- -------
$'000 $'000
<S> <C> <C>
ASSETS
Current assets:
Cash 400 244
Accounts receivable, net 5,562 2,989
Inventories 8,248 8,069
Prepayments and other current assets 14 14
Due from a director 1,487 1,056
------ ------
Total current assets 15,711 12,372
Property, plant and equipment, net 1,806 3,304
------ ------
Total assets 17,517 15,676
====== ======
LIABILITIES AND EQUITY
Current liabilities:
Short-term bank borrowings 2,025 1,616
Long-term bank loans, current portion 968 381
Capital lease obligations, current portion 2 50
Accounts payable 187 1,353
Accrued expenses 172 329
Deposit from customers 6,990 4,016
Income taxes payable 2,343 4,014
------ ------
Total current liabilities 12,687 11,759
Long-term bank loans, non-current portion 286 851
Capital lease obligations,
non-current portion - 28
Deferred income taxes 13 -
------ ------
Total liabilities 12,986 12,638
------ ------
Equity:
Capital 1 66
Retained earnings 4,474 2,867
Cumulative translation adjustments 56 105
------ ------
Total equity 4,531 3,038
------ ------
Total liabilities and equity 17,517 15,676
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THE HANG FUNG GROUP
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(Expressed in United States dollars)
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
$'000 $'000 $'000
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 1,311 2,863 3,393
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities -
Depreciation of property, plant and equipment 207 373 678
Provision for bad and doubtful debts 124 202 114
Provision for deferred income taxes 2 (5) (13)
(Increase) Decrease in operating assets -
Accounts receivable (1,552) (1,773) 2,455
Inventories (1,637) 490 179
Prepayments and other current assets 9 (4) -
Due from a director (3,304) (1,440) 431
Increase (Decrease) in operating liabilities-
Accounts payable (703) (6) 1,166
Accrued expenses 73 50 157
Deposit from customers 4,137 (904) (2,974)
Income taxes payable 707 1,515 1,671
------ ------ ------
Net cash (used in) provided by operating
activities (626) 1,361 7,257
------ ------ ------
Cash flows from investing activities:
Additions to property, plant and equipment (728) (1,297) (2,090)
----- ------ ------
Net cash used in investing activities (728) (1,297) (2,090)
----- ------ ------
Cash flows from financing activities:
Issuance of common stock - - 65
Payment of dividends - - (5,000)
Net increase (decrease) in short-term bank
borrowings 842 (57) (409)
Repayment of capital lease obligations (36) (24) (27)
Additions of long-term bank loans 1,074 129 1,257
Repayment of long-term bank loans (292) (418) (1,279)
------ ------ ------
Net cash provided by (used in) financing
activities 1,588 (370) (5,393)
------ ------ ------
Effect of exchange rate changes on cash 1 89 70
------ ------ ------
Net increase (decrease) in cash 235 (217) (156)
Cash, as of beginning of year 382 617 400
------ ------ ------
Cash, as of end of year 617 400 244
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THE HANG FUNG GROUP
COMBINED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(Expressed in United States dollars)
<TABLE>
<CAPTION>
Cumulative
Retained Translation
Capital Earnings Adjustments
------- -------- -----------
$'000 $'000 $'000
<S> <C> <C> <C>
Balance as of March 31, 1993 1 300 -
Net income - 1,311 -
Translation adjustments - - (31)
----- ------ ---
Balance as of March 31, 1994 1 1,611 (31)
Net income - 2,863 -
Translation adjustments - - 87
----- ------ ---
Balance as of March 31, 1995 1 4,474 56
Issuance of common stock 65 - -
Net income - 3,393 -
Dividends - (5,000) -
Translation adjustments - - 49
----- ------ ---
Balance as of March 31, 1996 66 2,867 105
===== ====== ===
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THE HANG FUNG GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS
(Amounts expressed in United States dollars unless otherwise stated)
1. ORGANIZATION AND OPERATIONS
The Hang Fung Group (the "Group") composed of companies/entities owned and
controlled by Mr. Lam Sai Wing and Ms. Chan Yam Fai, husband and wife. During
the years ended March 31, 1994, 1995 and 1996, the Group had the following
companies/entities:
<TABLE>
<CAPTION>
Place of
Name of company/entity Incorporation Principal activities
- ----------------------------------- ---------------- -----------------------------
<S> <C> <C>
Hang Fung Jewellery Co., Limited Hong Kong Manufacturing and selling of
("HFJCL") (Note a) jewellery products
Kai Hang Jewellery Co., Limited Hong Kong Selling of jewellery products
("KHJCL") (Note a)
Hang Fung Jewellery Company Hong Kong Dormant
("HFJC") (Note a)
Hang Fung Manufacturing Company Hong Kong Dormant
("HFMC") (Note a)
Beijing Huarong Jewellery Co., Ltd. The People's Dormant
("BHJCL") (Note b) Republic of
China ("PRC")
</TABLE>
- -----------------------------
Notes:
a. HFJCL took over the businesses previously undertaken by HFJC (effective
September 1995) and HFMC (effective November 1994). 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. BHJCL is a contractual joint venture incorporated in the PRC to be operated
for 20 years up to 2013. It was registered to engage in the manufacturing
and trading of jewellery products. However, the Company has not commenced
operation since incorporation.
F-6
<PAGE>
1. ORGANIZATION AND OPERATIONS (Continued)
The Group is principally engaged in the production and selling of jewellery
products to customers in Hong Kong, the PRC and other parts of the world.
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, 1996, approximately 45% of the Group's sales and
approximately 53% of the Group's subcontracting fees resulted from its business
conducted in the PRC under this arrangement. The key transactions with CNPIEC
were as follows:
a. Under a subcontracting agfeement dated November 18, 1994 and subsequent
supplemental agreement entered into between HFJCL and CNPIEC, HFJCL 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 agreement
is ten years expiring November 17, 2004, and is renewable upon expiration.
During the years ended March 31, 1994, 1995 and 1996, HFJCL's share of
these subcontracting fees amounted to approximately $3,113,000, $3,566,000
and $3,966,000, repectively.
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 HFJCL and CNPIEC, HFJCL has appointed
CNPIEC as its agent for sales of its gold and silver products in the PRC.
In return, HFJCL pays to CNPIEC an agency fee determined on a fixed
percentage of the sales proceeds collected by CNPIEC. The term of the
agreement is ten years expiring on November 17, 2004. During the years
ended March 31, 1994, 1995 and 1996, agency fees paid to CNPIEC amounted to
approximately $207,000, $196,000 and $88,000, respectively.
d. Other transactions with CNPIEC were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
$'000 $'000 $'000
<S> <C> <C> <C>
Purchases of gold and silver
from CNPIEC 3,714 2,961 2,461
Management fees paid to 87 115 84
CNPIEC ===== ===== =====
</TABLE>
e. Pursuant to an agreement between HFJCL and CNPIEC, CNPIEC has agreed to
undertake and pay for all of HFJCL's PRC tax liabilities, including
value-added tax, if any, relating to HFJCL's operations under the
above-mentioned activities.
F-7
<PAGE>
1. ORGANIZATION AND OPERATIONS (Continued)
Underan agreement dated December 1, 1994, HFJCL has appointed Yiu Ping Gold and
Silver Manufacturing Factory ("YPGSMF"), another 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, HFJCL pays to
YPGSMF an agency fee determined on a fixed percentage of the sales effected by
YPGSMF. The term of the agreement is five years expiring November 30, 1999.
During the years ended March 31, 1994, 1995 and 1996, agency fees paid to YPGSMF
amounted to approximately $34,000, $35,000 and $48,000, respectively.
In addition, HFJCL also entered into a subcontracting agreement with Shenzhen
Crafts Hang Fung Jewellery Factory ("SCHFJF"), another PRC state-owned
enterprise, for the production of HFJCL's gold and silver products in Shenzhen,
the PRC, for shipments out of the PRC. During the years ended March 31, 1994,
1995 and 1996, subcontracting fees paid to SCHFJF amounted to approximately
$263,000, $240,000 and $240,000, respectively.
2. BASIS OF PRESENTATION
The combined financial statements include the financial statements of the
following companies/entities, which are all owned and controlled by Mr. Lam Sai
Wing and Ms. Chan Yam Fai:
o Hang Fung Jewellery Co., Limited
o Kai Hang Jewellery Co., Limited
o Hang Fung Jewellery Company
o Hang Fung Manufacturing Company
o Beijing Huarong Jewellery Co., Ltd.
Significant transactions and balances among the companies/entities have been
eliminated on combination.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The combined financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America. Significant
accounting policies are summarized below:
a. 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 to
goods are recorded as deposits from customers.
F-8
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b. 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.
c. 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.
d. Property, plant and equipment
Property, plant and equipment are stated at cost. 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 70 years
Building 20 years
Machinery and equipment 5 - 10 years
Motor vehicles 5 years
Furniture, fixtures and office equipment 5 years
Machinery and equipment held under capital leases are depreciated on the
same basis as described above.
e. 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
equity separately as cumulative translation adjustments. Aggregate (loss)
gain from foreign currency transactions included in the results of
operations were ($1,721), $3,463 and $942 for the year ended March 31,
1994, 1995 and 1996, respectively.
f. Financial instruments
Financial instruments of the Group include cash, accounts receivable and
payable, short-term and long-term bank borrowings, and capital lease
obligations for which their carrying amounts approximate fair market
values.
F-9
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
g. 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.
4. PROVISION FOR INCOME TAXES
The group companies are subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdiction in which they operate.
Companies/entities operating in Hong Kong are subject to Hong Kong profits tax
at rates ranging from 15% to 16.5%, and companies/entities 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>
1994 1995 1996
------ ------ ------
$'000 $'000 $'000
<S> <C> <C> <C>
Provision for current tax
- Hong Kong 70 39 21
- The PRC 694 1,438 1,642
Provision for (Write-back of)
deferred tax 2 (5) (13)
--- ----- -----
766 1,472 1,650
=== ===== =====
</TABLE>
Deferred tax represented the taxation effect of timing differences relating to
accelerated depreciation for taxation purposes.
The reconciliation of the statutory income tax rate to the effective income tax
rate as stated in the combined statements of operations is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Weighted average statutory
tax rate 32.3% 32.3% 32.3%
Permanent differences arising
from non-deductible items 4.6% 1.7% 0.4%
----- ----- -----
Effective income tax rate 36.9% 34.0% 32.7%
===== ===== =====
</TABLE>
F-10
<PAGE>
5. ACCOUNTS RECEIVABLES
Accounts receivable comprised:
1995 1996
------ ------
$'000 $'000
Trade receivables 5,896 3,441
Less: Allowance for doubtful accounts (334) (452)
----- -----
Accounts receivable, net 5,562 2,989
===== =====
6. INVENTORIES
Inventories comprised:
1995 1996
------ ------
$'000 $'000
Raw materials 1,530 2,784
Finished goods 3,153 3,317
Consigned finished goods 3,565 1,968
----- -----
8,248 8,069
===== =====
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
1995 1996
------ ------
$'000 $'000
Leasehold land and building 255 255
Machinery and equipment 1,721 3,737
Motor vehicles 184 88
Furniture, fixtures and office equipment 555 312
----- ------
2,715 4,392
Less: Accumulated depreciation (909) (1,088)
----- ------
1,806 3,304
===== ======
Certain machinery and equipment with a net book value of approximately $22,000
and $131,000 as of March 31, 1995 and 1996, respectively, were held under
capital leases.
F-11
<PAGE>
8. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings comprised :
1995 1996
------ ------
$'000 $'000
Bank overdraft 1,836 518
Import trust receipt loans 189 1,098
----- -----
2,025 1,616
===== =====
Short-term bank borrowings were secured by 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 was charged at Hong Kong prime lending rate plus 1.5% to 3%, which
was 10% to 11.5% per annum as of March 31, 1996.
Supplemental information with respect to the short-term bank borrowings was:
1995 1996
------ ------
$'000 $'000
Maximum amount outstanding 2,065 2,025
Average amount outstanding 1,856 1,443
Weighted average interest rate per annum 11.9% 10.5%
===== =====
9. ACCRUED EXPENSES
Accrued expenses comprised:
1995 1996
------ ------
$'000 $'000
Accruals for operating expenses
- Employee salaries 84 122
- Others 88 207
--- ---
172 329
=== ===
10. LONG-TERM BANK LOANS
Long-term bank loans were secured by mortgages over the Group's real estate
property (leasehold land and building), mortgages over 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 average interest rates of
approximately 10.5% per annum.
F-12
<PAGE>
10. LONG-TERM BANK LOANS (Continued)
Aggregate maturities of long-term bank loans are as follows:
1996
------
$'000
Year ending March 31,
1997 381
1998 88
1999 98
2000 108
2001 121
Thereafter 436
-----
1,232
=====
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:
1995 1996
------ ------
$'000 $'000
Payable during the following period:
Within one year 3 59
Over one year but not exceeding two years - 29
----- ----
Total minimum lease payments 3 88
Less: Amount representing future interest (1) (10)
----- ----
Present value of minimum lease payments 2 78
Less: Current portion (2) (50)
----- ----
Non-current portion - 28
===== =====
12. GENERAL BANKING FACILITIES
As of March 31, 1996, the Group had credit facilities with several banks of
approximately $4,890,000. Unused credit facilities as of March 31, 1996 amounted
to approximately $1,642,000. These facilities are collateralized by the Group's
leasehold land and building with a net book value of approximately $255,000,
personnal guarantees given by Mr. Lam Sai Wing and Ms. Chan Yam Fai, and
mortgages over real estate properties owned by Mr. Lam Sai Wing and Ms. Chan Yam
Fai.
F-13
<PAGE>
13. SEGMENTAL INFORMATION
During the years ended March 31, 1994, 1995 and 1996, the Group's operations by
geographical are analyzed as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
$'000 $'000 $'000
----- ----- -----
<S> <C> <C> <C>
Net sales to customers in
- Hong Kong 6,646 6,322 6,502
- PRC 1,548 5,142 6,129
- Europe (export sales) 2,001 2,806 2,149
- South East Asia (export sales) 3,002 2,560 1,938
- Middle East (export sales) - 1,648 2,630
------ ------ ------
13,197 18,478 19,348
====== ====== ======
Subcontracting income
- Hong Kong 368 1,335 3,555
- PRC 3,113 3,567 3,965
------ ------ -------
3,481 4,902 7,520
====== ====== =======
</TABLE>
14. SUPPLEMENTAL DISCLOSURE TO COMBINED STATEMENTS OF CASH FLOWS
1994 1995 1996
------ ------ ------
$'000 $'000 $'000
Cash paid for interest expenses 224 347 392
Cash received from interest income 11 17 11
=== === ===
Capital lease obligations of Nil, Nil and approximately $103,000 were incepted
during the years ended March 31, 1994, 1995 and 1996 when the Group entered into
leases for new machinery and equipment.
15. PENSION SCHEME
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. Seven out of the 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, 1994, 1995 and 1996 were approximately
$10,000, $7,000 and $2,000, respectively.
F-14
<PAGE>
16. LEASE COMMITMENTS
The Group leases various staff quarters, factory premises and warehouses under
non-cancelable operating leases which expire at various dates through 1997.
Rental expenses for the years ended March 31, 1994, 1995 and 1996 were
approximately $181,000, $213,000 and $257,000, respectively.
Future minimum rental payments as of March 31, 1996, under agreements classified
as operating leases with noncancelable terms in excess of one year and payable
within next year, are approximately $9,000.
17. OPERATING RISKS
a. Dependence
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. The Group's present
operations in the PRC are conducted through various agreements with three
PRC state-owned enterprises as described in Note 1. Any changes in any of
these strategic relationships would have a material adverse effect on the
revenue and profitability of the Group and would potentially limit the
Group's ability to continue to conduct business in the PRC.
b. Concentration
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 10% of the Group's total
revenues are as follows:
Percentage of total revnues
--------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
CNPIEC 14.4% 18.0% 14.5%
Tai Seng Ho Silver & Gold
Jewellery Co., Ltd. - - 27.1%
=============== =============== ===============
F-15
<PAGE>
18. OPERATING RISKS (Cont'd)
b. Concentration of credit risk and major customers (Continued)
Concentration of accounts receivable as of March 31, 1995 and 1996 is as
follows:
Percentage of accounts
receivable
-----------------------------------
1 9 9 5 1 9 9 6
--------------- ---------------
Five largest accounts receivable 47.1% 32.3%
=============== ===============
TheGroup 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 10% of the Group's
purchases are as follows:
Percentage of purchases
--------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
CNPIEC 30.0% 21.3% 13.2%
Heraeus Ltd. 27.3% 36.5% 32.7%
=============== =============== ===============
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 will be transferred from the
United Kingdom to the PRC, and Hong Kong will become 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 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 ("Rmb") 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.
F-16
<PAGE>
19. RELATED PARTY TRANSACTIONS
a. The Group entered into the following transactions with related parties:
1 9 9 4 1 9 9 5 1 9 9 6
--------- --------- ---------
$'000 $'000 $'000
Sales to a related company
- - Hang Fung Jewellery
Co., Inc. ("HFJCI") 201 112 83
Rental paid to Ms. Chan Yam Fai 149 174 199
Salaries paid to
- - Mr. Lam Sai Wing 40 45 55
- - Ms. Chan Yam Fai 40 45 55
==== ==== ====
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 $1,487,000 and
$1,056,000 as of March 31, 1995 and 1996, 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 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.
20. OTHER SUPPLEMENTAL INFORMATION
1994 1995 1996
------ ------ ------
$'000 $'000 $'000
Depreciation of fixed assets
- - owned assets 196 362 663
- - assets held under capital leases 11 11 15
Provision for bad and doubtful debts 124 202 114
==== ==== ====
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
New Wine, Inc.
We have audited the accompanying balance sheets of New Wine, Inc. (a
development stage Company) as of June 30, 1996, December 31, 1995 and 1994, and
the related statements of income, stockholders' equity and cash flows for the
period ended June 30, 1996, December 31, 1995 and 1994 and for the period from
inception (April 12, 1994) to June 30, 1996. 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. 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 financial statements referred to above present fairly,
in all material respects, the financial position of New Wine, Inc. (a
development stage Company) as of June 30, 1996, December 31, 1995 and 1994, and
the results of its operations and its cash flows for the years ended June 30,
1996, December 31, 1995 and 1994 and for the period from inception (April 12,
1994) to June 30, 1996 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are to raise additional capital and
acquire any and all types of assets, properties and businesses, which management
expects will result in profitable operations for the Company. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts and classification of liabilities that
might result from the outcome of these uncertainties.
/s/ Albright, Persing & Associates, Ltd.
- ----------------------------------------
Albright, Persing & Associates, Ltd.
Reno, Nevada
August 2, 1996
F-18
<PAGE>
NEW WINE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
JUNE 30, 1996, DECEMBER 31, 1995 AND 1994
(SEE INDEPENDENT AUDITORS' REPORT)
ASSETS
<TABLE>
<CAPTION>
Years Ended
----------------------------------------
June 30, December 31, December 31,
1996 1995 1994
--------- ------------ ------------
<S> <C> <C> <C>
Current Assets
Cash $ - $ 60 $ 2,454
--------- --------- ---------
Other Assets
Deferred tax asset, net of
valuation allowance (Note 4) - - -
--------- --------- ---------
- - -
--------- --------- ---------
Total Assets $ - $ 60 $ 2,454
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY/DEFICIT
Stockholders' Equity/Deficit
Common stock, par value $.01/share
authorized 3,000,000 shares,
issued and outstanding 1,500,000
shares at June 30, 1996, December
31, 1995, and 1,275,000 at December
31, 1994 $ 15,000 $ 15,000 $ 12,750
Additional paid-in-capital 320,131 320,131 277,381
Deficit accumulated during the
development stage (335,131) (335,071) (274,261)
--------- --------- ---------
- 60 15,870
Less: Subscriptions receivable - - (13,416)
--------- --------- ----------
Total Liabilities and Stockholders'
Equity $ - $ 60 $ 2,454
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
NEW WINE, INC.
(A DEVELOPMENT STAGE COMPANY)
INCOME STATEMENT
FOR THE PERIOD ENDED JUNE 30, 1996,
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996
(SEE INDEPENDENT AUDITORS' REPORT)
<TABLE>
<CAPTION>
Cumulative
Years Ended During
June 30, December 31 Development
1996 1995 1994 Stage
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net Sales $ - $ - $ - $ -
---------- ---------- ---------- ----------
Cost of Goods Sold - - - -
---------- ---------- ---------- ----------
Gross Profit - - - -
---------- ---------- ---------- ----------
Costs and expenses
Advertising - 4,755 856 5,611
Auto expenses - 3,419 407 3,826
Bank Charges - 122 32 154
Contributions (donations) - 219 - 219
Dues and subscriptions - 38 250 288
Insurance - 672 - 672
Maintenance - 1,757 - 1,757
Miscellaneous 24 159 97 280
Office expense 16 4,149 673 4,838
Outside labor - 163 - 163
Professional Services - 22,741 270,126 292,867
Rent - 15,470 1,030 16,500
Studio time - 22 150 172
Taxes and licenses - 798 - 798
Telephone - 4,579 390 4,969
Travel 20 767 250 1,037
Utilities - 1,004 - 1,004
---------- ---------- ---------- ----------
60 60,834 274,261 335,155
Net Loss Before Debt
Forgiveness Income (60) (60,834) (274,261) (335,155)
Debt Forgiveness Income
(Note 5) - 24 - 24
---------- ---------- ---------- ----------
Net (loss) before
income taxes (60) (60,810) (274,261) (335,131)
Income Taxes (Note 4) - - - -
---------- ---------- ---------- ----------
Net (loss) $ (60) $ (60,810) $ (274,261) $ (335,131)
========== ========== ========== ==========
Net income (loss) per common share
Continuing operations $ (.00) $ (.05) $ (.22) $ (.24)
========== ========== ========== ==========
Weighted average shares
outstanding $1,500,000 $1,343,425 $1,275,000 $1,382,746
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
NEW WINE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD ENDED JUNE 30, 1996,
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996
(SEE INDEPENDENT AUDITORS' REPORT)
<TABLE>
<CAPTION>
Cumulative
Years Ended During
June 30, December 31 Development
1996 1995 1994 Stage
------ --------- --------- -----------
<S> <C> <C> <C> <C>
Cash Flows from/(for) Operating Activities:
Continuing operations
Net income (loss) $(60) $(60,810) $(274,261) $(335,131)
---- -------- --------- ---------
Noncash items included in net income
(loss)
Stock issued for professional
services rendered - - 269,565 269,565
Changes in assets and liabilities:
Increase in deferred tax asset (9) (9,122) (41,139) (50,270)
Increase in valuation allowance 9 9,122 41,139 50,270
---- -------- --------- ---------
Net Adjustments - - 269,565 269,565
---- -------- --------- ---------
Cash (Used) by Operating
Activities (60) (60,810) (4,696) (65,566)
---- -------- --------- ---------
Cash Flows from/(for) Financing Activities:
Proceeds from sale of common stock - 45,000 20,566 65,566
(Increase) Decrease in stock
subscriptions receivable - 13,416 (13,416) -
---- -------- --------- ---------
Cash Provided by Investing
Activities - 58,416 7,150 65,566
---- -------- --------- ---------
Net change in cash (60) (2,394) 2,454 0
Cash at beginning of period 60 2,454 - -
---- -------- --------- ---------
Cash at end of period $ 0 $ 60 $ 2,454 $ 0
==== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
NEW WINE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIT
FOR THE PERIOD ENDED JUNE 30, 1996,
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996
(SEE INDEPENDENT AUDITORS' REPORT)
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Amount Capital Stage Total
--------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of shares of common stock on
April 12, 1994, for professional
services rendered 877,500 $ 8,775 $166,725 $ - $ 175,500
Issuance of shares of common stock on
April 12, 1994 for cash and services 397,500 3,975 110,656 - 114,631
Net loss for 1994 - - - (274,261) (274,261)
--------- ------- ------- --------- ----------
Balance - December 31, 1994 1,275,000 12,750 277,381 (274,261) 15,870
Issuance of shares of common stock on
September 11, 1995 for cash 225,000 2,250 42,750 - 45,000
Net loss for 1995 - - - (60,810) (60,810)
--------- ------- ------- --------- ---------
Balance - December 31, 1995 1,500,000 $15,000 $320,131 $(335,071) $ 60
Net loss for the six months ended
June 30, 1996 - - - (60) (60)
--------- ------- -------- --------- ---------
Balance - June 30, 1996 1,500,000 $15,000 $320,131 $(335,131) $ -
========= ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
NEW WINE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996
(SEE INDEPENDENT AUDITORS' REPORT)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY
This summary of significant accounting policies of New Wine, Inc. (the
Company) is presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of the
Company's management, which is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
Business Activity
The Company, a Tennessee corporation located in Broken Bow, Oklahoma, was
incorporated on April 12, 1994, and is currently in the development stage. The
sole purpose for organizing the Company was to provide a shell corporation for
possible future mergers with privately-held companies seeking to go public.
Noncash Securities Issuance
Shares of common stock issued for other than cash have been assigned
amounts equivalent to the fair value of the services received in exchange.
Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting.
Income (Loss) per Share
The computation of income (loss) per share of common stock is based on the
weighted average number of shares outstanding during the periods presented.
Statement of Cash Flows
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents for purposes of the
statement of cash flows.
F-23
<PAGE>
NEW WINE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996
(SEE INDEPENDENT AUDITORS' REPORT)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY -
Continued
Income Taxes
Effective January 1, 1993, New Wine, Inc. adopted SFAS No. 109, "Accounting
for Incomes Taxes," which requires a liability approach to financial accounting
and reporting for incomes taxes. The differences between the financial statement
and tax bases of assets and liabilities is determined annually. Deferred income
tax assets and liabilities are computed for those differences that have future
tax consequences using the currently enacted tax laws and rates that apply to
the periods in which they are expected to affect taxable income. Valuation
allowances are established, if necessary, to reduce deferred tax asset accounts
to the amounts that will more likely than not be realized. Income tax expense is
the current tax payable or refundable for the period, plus or minus the net
change in the deferred tax asset and liability accounts.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect (1) the reported amounts of assets and liabilities, (2)
disclosure of contingent assets and liabilities at the date of the financial
statements, and (3) reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 - BASIS OF PRESENTATION AND CONSIDERATIONS RELATED TO CONTINUED EXISTENCE
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred net losses of $335,131 for the period from inception (April 12, 1994)
to June 30, 1996. This factor, among others, raises substantial doubt as to the
Company's ability to obtain additional long-term debt and/or equity financing
and achieve profitable operations. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence. In the interim period,
management is still seeking additional investment capital to support its
entrance into a new business venture and provide the capital needed to operate.
F-24
<PAGE>
NEW WINE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996
(See Independent Auditor's Report)
NOTE 3 - DEVELOPMENT STAGE COMPANY
The Company is a development stage company as defined in Financial
Accounting Standards Board Statement No. 7. It has yet to commence full-scale
operations. From inception through the date of these financial statements, the
Company did not have any revenues or earnings. At the current time, the Company
has no assets or liabilities.
If a public market develops for the Company's shares, certain
privately-held companies or business opportunities may be interested in merging
with the Company because the Company's securities would be publicly traded,
thereby allowing the privately-held company to become publicly traded through
the merger.
At the current time, the Company has no agreement, understanding or
arrangement to acquire or participate in any specific business opportunity nor
has it identified any opportunities for investigation. The Company's potential
future success depends upon its management and its continuing search for a
business opportunity.
NOTE 4 - INCOME TAXES
Deferred income taxes arise from temporary differences resulting from
income and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or noncurrent,
depending on the classification of the assets and liabilities to which they
relate. Deferred taxes arising from temporary differences that are not related
to an asset or liability are classified as current or noncurrent depending on
the periods in which the temporary differences are expected to reverse.
Amounts for deferred tax assets are as follows:
<TABLE>
<CAPTION>
Year Ended
----------------------------------
June 30, December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Deferred tax asset, net of
valuation allowance of $50,270
in 1996, $50,261 in 1995 and
$41,139 in 1994 $ - $ - $ -
===== ===== =====
</TABLE>
F-25
<PAGE>
NEW WINE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTIONS (APRIL 12, 1994) TO JUNE 30, 1996
(See Independent Auditor's Report)
NOTE 4 - INCOME TAXES - Continued
The following temporary differences gave rise to the deferred tax asset at
June 30, 1996, December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Year Ended
June 30, December 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Tax benefit of net operating loss
carryforward $ 9 $ 9,122 $ 41,139
Valuation allowance for judgement of
realizability of net operating loss
carryforward in future years (9) (9,122) (41,139)
</TABLE>
Because the Company has not generated taxable income since its inception,
no provision for income taxes has been made.
The Company can carry forward its $335,131 net operating loss as follows:
Year Ended
December 31,
------------
2009.........................$274,261
2010......................... 60,810
2011......................... 60
--------
$335,131
NOTE 5 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 1995, the principal shareholder of the
corporation loaned money to the corporation. While most of the monies loaned to
the corporation were repaid, $24 of the loan balance remained. On December 31,
1995, the shareholder forgave the remaining debt due and accordingly, the
corporation has recorded this as debt-forgiveness income.
F-26
<PAGE>
S.W. LAM, INC.
COMBINED BALANCE SHEETS (UNAUDITED)
(AMOUNTS EXPRESSED IN UNITED STATES $`000)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 51 $ 244
Accounts receivable, net 3,935 2,989
Inventories 9,921 8,069
Prepayments and other current assets 33 14
Due from directors 186 1,056
--------- --------
Total current assets 14,126 12,372
Property plant and equipment, net 5,136 3,304
-------- --------
Total assets $19,262 $15,676
======= =======
LIABILITIES AND EQUITY
Current liabilities:
Short-term bank borrowings $ 993 $ 1,616
Current portion of long-term debt 310 381
Current portion of lease obligations 95 50
Accounts payable 1,596 1,353
Accrued expenses 301 329
Deposits 4,014 4,016
Income taxes payable 4,102 4,014
Deferred income taxes 33 -
--------- -----------
Total current liabilities 11,444 11,759
Long-term loans 1,337 851
Capital lease obligations 42 28
--------- ---------
Total liabilities 12,823 12,638
------- -------
Shareholders' equity
Common Stock, $.001 par value 12 66
Preferred Stock 1 -
Additional paid-in capital 53 -
Retained earnings 6,246 2,867
Cumulative translation adjustments 127 105
----- -----
Total shareholders equity 6,439 3,038
------ -----
Total liabilities and shareholders equity $19,262 $15,676
======= =======
</TABLE>
See accompanying notes to condensed combined financial statements.
F-27
<PAGE>
S.W. LAM, INC.
COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN UNITED STATES $`000)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ -----------------
1996 1995 1996 1995
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 8,465 $ 4,879 $ 20,523 $ 14,069
Subcontracting fee 2,076 1,880 5,179 5,259
----- ------ ------ ------
Total revenues 10,541 6,759 25,702 19,328
Cost of sales and services 7,432 4,706 18,133 13,558
----- ------ ------- ------
Gross profit 3,109 2,054 7,569 5,771
Selling, general and
administrative expenses 1,187 669 2,830 2,221
------ ------- -------- -------
Operating income 1,922 1,385 4,739 3,550
Interest income (expense), net (85) (96) (218) (141)
Other income, net 17 16 52 44
------ -------- -------- -------
Income before taxes 1,854 1,305 4,573 3,453
Provision for income taxes 482 413 1,194 1,063
------ ------ ------ ------
Net income $ 1,372 $ 892 $ 3,379 $ 2,390
======= ====== ======= =======
</TABLE>
See accompanying notes to condensed combined financial statements
F-28
<PAGE>
S.W. LAM, INC.
COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS $`000)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities
Net income $ 3,379 $ 2,390
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities
Depreciation of property, plant and
equipment 458 509
Provision for bad and doubtful debts 73 86
Provision for deferred income taxes 33 (10)
(Increase) decrease in operating assets
Account receivable (946) 1,841
Inventories (1,852) 134
Prepayments and other current assets (19) -
Due from a director 870 323
Increase (decrease) in operating liabilities
Accounts payable 243 875
Accrued expenses (28) 117
Deposit from customers (2) (2,230)
Income taxes payable 88 1,253
------ -------
Net cash provided by (used in)
operating activities 2,297 5.288
------- -------
Cash flows from investing activities:
Additions to property, plant and
equipment (2,290) (1,567)
--------- ---------
Net cash used in investing activities (2,290) (1,567)
--------- ---------
Cash flows from financing activities:
Issuance of common stock - 49
Payment of dividends - (3,750)
Net increase (decrease) in short-term
bank borrowings (623) (306)
Repayment of capital lease obligations (14) (20)
Additions of long-term bank loans 1,105 943
Repayment of long-term bank loans (690) (959)
------- -------
Net cash provided by (used in)
financing activities (222) (4,043)
------- --------
Effect of exchange rate changes on cash 22 52
-------- --------
Net increase (decrease) in cash (193) (270)
Beginning cash balance 244 400
------ ------
Ending cash balance $ 51 $ 130
======== ========
</TABLE>
See accompanying notes to condensed combined financial statements
F-29
<PAGE>
S.W. LAM, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
1. ACQUISITION OF HANG FUNG GROUP
The condensed combined financial statements of S.W. Lam, Inc. (the
"Company") as of and for the periods ended December 31, 1996 reflect the
acquisition by the Company on December 19, 1996 of 100% of the stock of
Quality Prince Limited and Subsidiaries ("Quality Prince") in exchange for
the issuance of 10,500,000 shares of common stock and 100,000 shares of
Series A preferred stock (the "Exchange"). Quality Prince is a British
Virgin Island corporation whose principal subsidiaries (the "Hang Fung
Group") are engaged in the manufacture and sale of jewelry. The Hang Fung
Group's operations are located in Hong Kong and the People's Republic of
China.
2. INTERIM FINANCIAL PRESENTATION
The combined financial statements have been prepared to account for the
Exchange using the purchase method of accounting as a "reverse acquisition"
whereby the company issuing its shares to effect a business combination is
determined to be the acquiree in the business combination. Accordingly, the
Hang Fung Group is deemed to be the acquirer and the assets of the company
deemed to be acquired, S.W. Lam, Inc., are required to be adjusted to fair
value on acquisition. As S.W. Lam had no assets, no fair value adjustments
were required.
As a result of the Company's acquisition of the Hang Fung Group, these
interim financial statements include the accounts of the Company and the
Hang Fung Group for the period from the date of the Exchange, December 19,
1996, to December 31, 1996. The balance sheet and statement of operations
for all dates and periods prior to December 19, 1996 reflect only the
accounts of the Hang Fung Group.
The March 31, 1996 balance sheet data was derived from audited financial
statements of the Hang Fung Group but does not include all disclosures
required by generally accepted accounting principles. The interim financial
statements and notes thereto should be read in conjunction with the
financial statements and notes for the year ended March 31, 1996. In the
opinion of management, the interim financial statements reflect all
adjustments of normal recurring nature necessary for a fair presentation of
the results for the interim periods presented.
3. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at period and
exchange rates, while revenues and expenses are translated at average
exchange rates during the period. Adjustments arising from translating
foreign currency financial statements are reported as a separate component
of stockholders' equity. Gains and losses from foreign currency
translations are included in income. Aggregate net foreign currency gains
or losses were immaterial for all periods.
The financial statements of the Company are maintained, and its financial
statements are expressed, in Hong Kong dollars. The translations of HK
dollar amounts into US dollars are for convenience only and have been made
at the rate of HK$7.73 to US$1, the approximate free rate of exchange at
December 31, 1996. Such translations should not be construed as
representations that the Hong Kong dollar amount could be converted into US
dollars, at that rate or any other rate.
4. SHAREHOLDERS' EQUITY
In connection with the Exchange, on December 19, 1996, the Company issued
100,000 shares of Series A Preferred Stock to the former shareholders of
Quality Prince. The holders of the Series A Preferred Stock are entitled,
as a class, to such number of votes as shall constitute thirty percent
(30%) of the total eligible votes in all matters voted on by the
F-30
<PAGE>
S.W. LAM, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
shareholders of the Company. The Series A Preferred Stock has no dividend
preference and has a liquidation preference of $.001 per share.
5. SUBSEQUENT EVENTS
On January 2, 1997, the Company completed a private placement of an
aggregate of 800,000 shares of its common stock for $1,000,000.
F-31
March 14, 1997
U. S. Securities & Exchange Commission
450 Fifth Street, N. W.
Washington, D. C. 20549
Re: S. W. Lam, Inc. (formerly, New Wine, Inc.)
Dear Sirs:
We have read the disclosure contained in Item 14 of Amendment No. 1 to Form
10 as filed by S. W. Lam, Inc. (formerly, New Wine, Inc.) with respect to our
dismissal as accountants for the company. We concur with the statements
contained therein and consent to the filing of this letter as an exhibit to Form
10.
Sincerely,
ALBRIGHT, PERSING & ASSOCIATES, LTD.
/s/ Albright, Persing & Associates, Ltd.
--------------------------------------------
Albright, Persing & Associates, Ltd.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1996
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 3,935
<ALLOWANCES> 0
<INVENTORY> 9,921
<CURRENT-ASSETS> 14,126
<PP&E> 5,136
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,262
<CURRENT-LIABILITIES> 11,444
<BONDS> 1,379
0
1
<COMMON> 12
<OTHER-SE> 6,426
<TOTAL-LIABILITY-AND-EQUITY> 19,262
<SALES> 25,702
<TOTAL-REVENUES> 25,754
<CGS> 18,133
<TOTAL-COSTS> 18,133
<OTHER-EXPENSES> 2,830
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 218
<INCOME-PRETAX> 4,573
<INCOME-TAX> 1,194
<INCOME-CONTINUING> 3,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,379
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
