SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission File No. 0-22049
S.W. LAM, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 62-1563911
- -------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Unit 25-32, 2nd Floor, Block B, Focal Industrial Centre
Man Lok St., Hunghom, Hong Kong
---------------------------------------------------------
(Address of principal executive offices)
(852) 2766 3688
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
---------------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X
--- ---
As of July 1, 1998, 12,800,000 shares of Common Stock of the issuer were
outstanding.
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
INDEX
Page
Number
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997 and
March 31, 1997.................................................. 1
Consolidated Statements of Operations - For the three and
six month periods ended September 30, 1997 and
September 30, 1996 ............................................. 2
Consolidated Statements of Cash Flows - For the six months ended
September 30, 1997 and September 30, 1996........................ 3
Notes to Consolidated Financial Statements....................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 8
SIGNATURES................................................................ 8
<PAGE>
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US$,000)
(Unaudited)
<TABLE>
September 30, March 31,
ASSETS 1997 1997
============== =============
<S> <C> <C>
Current Assets:
Cash and cash equivalents $5,284 $94
Accounts receivable, net of allowance for doubtful accounts 5,744 5,106
Inventory 10,378 8,509
Prepayments and other current assets 1,647 142
Due from a Director 792 475
Total Current Assets 23,845 14,326
Property, plant and equipment, and capital leases, net 13,007 7,083
------------ ------------
Total Assets $36,852 $21,409
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank borrowings $5,136 $2,275
Long-term bank loans, current portion 351 197
Capital lease obligations, current portion 197 229
Accounts payable 1,759 1,619
Deposits from customers 112 1,125
Accrued liabilities 268 267
Convertible short-term loan 10,000 0
Income tax payable 6,142 5,846
------------ ------------
Total Current Liabilities 23,965 11,558
Long-term Liabilities
Long-term bank loans, non-current portion 1,378 1,290
Capital lease obligations, non current portion 147 260
Deferred taxation 284 284
------------ ------------
Total Liabilities 25,774 13,392
------------ ------------
Stockholders' Equity:
Preferred stock, authorized 25,000,000 shares $.001 par value, issued
and outstanding 100,000 shares - Series A Preferred Stock 0 0
Common stock, authorized 25,000,000 shares $.001 par value, issued
and outstanding 12,800,000 at March 31, 1997 and September 30, 1997 13 13
Additional paid-in capital 846 846
Retained Earnings 10,065 7,008
Cumulative translation adjustments 154 150
------------ ------------
Total Stockholders' Equity 11,078 8,017
Total Liabilities and Stockholders' Equity $36,852 $21,409
============ ============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
<TABLE>
Three Months Ended September 30, Six Months Ended September 30,
--------------------------------- --------------------------------
1997 1996 1997 1996
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue: 15,459 10,000 29,386 16,880
Cost of sales and services: (11,982) (7,604) (22,309) (12,738)
------------ ----------- ----------- -----------
Gross Profit 3,477 2,396 7,077 4,142
Operating Expenses:
Selling, general and administrative expenses (1,750) (861) (3,159) (1,684)
------------ ------------ ----------- -----------
Income from Operations 1,727 1,535 3,918 2,458
Other Income (Expense): (125) (66) (586) (62)
------------ ------------ ----------- -----------
Income before Provision for Income Taxes 1,602 1,469 3,332 2,396
Provision for Income Taxes (134) (454) (276) (773)
------------ ------------ ----------- -----------
Net Income $1,468 $1,015 $3,056 $1,623
============ ============ =========== ===========
Earnings per share:
Primary earning per share $.11 $.08 $.24 $.14
------------ ------------ ----------- -----------
Primary common shares outstanding 12,800,000 12,000,000 12,800,000 12,000,000
------------ ------------- ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$,000)
(Unaudited)
<TABLE>
For the Six Months Ended
September 30, September 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $3,056 $1,623
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation of property, plant and equipment 1,044 394
Decrease (Increase) in Operating Assets:
Accounts receivable (638) (1,322)
Inventory (1,869) (455)
Prepayments and other current assets (1,505) (78)
Due from a Director (317) 370
Increase (Decrease) in Operating Liabilities:
Accounts payable 140 253
Deposits from customers (1,013) (1,024)
Accrued liabilities 0 (127)
Income taxes payable 296 766
------------ -----------
Net cash provided by operating activities (806) 400
------------ -----------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (6,965) (810)
------------ -----------
Net cash used in investing activities (6,965) (810)
------------ -----------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 0 0
Payment of Dividends 0 0
Net (decrease) increase in short term bank borrowings 2,861 102
Net (decrease) increase in convertible short term loans 10,000 0
Additions of capital lease obligations 92 135
Repayment of capital element of capital lease obligations (237) (54)
Additions of long term bank loans 388 637
Repayment of long term bank loans (147) (485)
------------ ------------
Net cash provided by (used in) financing activities 12,957 335
------------ ------------
Effect of exchange rate changes on cash 4 (139)
------------ ------------
Net increase (decrease) in cash 5,190 (214)
Cash and Cash Equivalents, beginning of period 94 244
------------ ------------
Cash and Cash Equivalents, end of period $5,284 $30
============ ============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These statements include the
accounts of S.W. Lam, Inc. and all of its wholly owned and majority owned
subsidiary companies. The March 31, 1997 balance sheet data was derived
from audited financial statements 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 included in the Company's Form 10-K for the
year ended March 31, 1997. In the opinion of management, the interim
financial statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for the interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full year
ending March 31, 1998.
2. CURRENCY PRESENTATION AND 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 average exchange rate during each reporting period.
The gains or losses resulting from translation are included in shareholders
equity separately as cumulative translation adjustments.
3. SIGNIFICANT EVENTS
a. Note Payable
In consideration for a loan of $10,000,000 from Phenomenal Limited, the
Company's wholly owned subsidiary Quality Prince Limited executed a
Convertible Note ("Note") in the principal amount of $10,000,000 with a
maturity of March 20, 1998. The Note may be converted into 2914 shares or
such other number of shares as will constitute not less than 29.14% of
Quality Prince Limited, and bears interest at the rate of three percent
compounded monthly, provided that if the Company is not in Default with
respect to any repayment obligation thereunder, then the rate shall be
reduced to 1.5% compounded monthly.
b. Warrants
As additional consideration for the loan of $10,000,000, the Company issued
Phenomenal Limited, warrants ("Warrants") to purchase 5,263,158 shares of
the Company's common stock, $.001 par value, at a purchase price of $2.19,
exercisable for a period commencing upon the date of the grant of the
Warrants and ending on the earlier of (i) May 31, 1998 or (ii) the closing
of a consolidation or merger of the Company (other than with its
wholly-owned subsidiary), or the transfer of all or substantially all of
the Company's assets to, another corporation (unless the owners of the
capital stock of the Company, prior to such transaction, continue to own a
majority of the capital stock of the surviving corporation). The Warrants
may only be exercised in the event that the Note is not converted pursuant
to its terms.
4. SUBSEQUENT EVENTS
On June 4, 1998, the Company (and its subsidiaries) and Phenomenal Limited
executed an agreement ("Deed Amendment") to modify the terms of the Note
and the Warrants. Pursuant to the Deed Amendment, Phenomenal Limited agreed
to an investment in the Company's subsidiary, Hang Fung Jewellery Company
Limited ("Hang Fung Jewellery") in the form of 5,263,788 redeemable
preference shares (the "Preferred Shares"), $.01 par value issued at a
premium of $1.8897726 as a substitution for the Note. The Preferred Shares
shall have no voting rights except with respect to matters which affect
their rights, matters of dissolution or the issuance of additional shares.
4
<PAGE>
The Deed Amendment evidences the Company's intent to form a new holding
company for the shares of Hang Fung Jewellery and Kai Hang Jewellery
Company Limited, (the "Restructuring") currently owned by Quality Prince
Limited; and to list the shares of the new holding company on The Stock
Exchange of Hong Kong Limited (the "Listing"). If the Restructuring and
Listing occur before March 20, 1999, the Preferred Shares must be redeemed
and the redemption amount of $10,000,000 plus any amount of dividend must
be used to subscribe for shares in the newly listed holding company. If the
Restructuring and Listing have not occurred by March 20, 1999, the
Preferred Shares must be redeemed as follows: (1) for the redemption amount
of $10,000,000 plus a dividend (the "Aggregate Redemption Amount") without
any obligation to subscribe for shares in the new holding company; or (2)
if the Restructuring occurs before March 31, 1999, then for the Aggregate
Redemption Amount, however all or part of the Aggregate Redemption Amount
must be used to subscribe for shares in the new holding company. If the
Restructuring has not occurred before March 31, 1999, then the Preferred
Shares may not be redeemed until the Restructuring is completed not later
than June 30, 1999, and all or part of the Aggregate Redemption Amount must
be used for subscription shares in the new holding company. Regardless of
whether the Restructuring has occurred, the Preferred Shares may be
redeemed at any time after June 30, 1999, provided that all, part or none
of the Aggregate Redemption Amount is used for such subscription shares.
The Warrants, originally issued for an exercise period expired on May 31,
1998 have been extended by the Deed Amendment to May 31, 1999 or the date
of the Listing, whichever is earlier and the number of warrant shares was
increased. The Warrants may only be exercised as an alternative to
subscription shares in the new holding company; and likewise subscription
to shares in the new holding company is forfeited in the event that the
Warrants are exercised.
5
<PAGE>
Item 2. Management's Discussion and Analysis Of Financial Condition And Results
Of Operations.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements.
Material Changes in Results of Operations (US$,000)
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
The Company's total revenues increased $5,459 or 54.6%, to $15,459 for the three
months ended September 30, 1997 from $10,000 for the three months ended
September 30, 1996. This increase consisted of an increase in sales of $3,575
and an increase in subcontract service income of $1,884. The increase in sales
revenues was attributable to the introduction of new products and additional
marketing. The increase in subcontract service income was attributable to an
increase in marketing, new technology and an increase in the number of supply
contracts.
The cost of sales and services increased $4,378 or 57.6%, to $11,982 for the
three months ended September 30, 1997 from $7,604 for the three months ended
September 30, 1996. The increase resulted from an increase in revenues. The cost
of sales and services as a percentage of revenue increased slightly to 77.5% for
the three months ended September 30, 1997 from 76% for the three months ended
September 30, 1996.
Selling, general and administrative expenses increased $889 or 103.3%, to $1,750
for the three months ended September 30, 1997 from $861 for the three months
ended September 30, 1996. The increase in expenses is attributable to increased
sales and marketing expenses.
Other expense increased $59 to $125 for the three months ended September 30,
1997 from expense of $66 for the three months ended September 30, 1996. This
increase is mainly attributable to an increase of $126 in interest expense which
was partially offset by an increase of $65 in interest income. The increase in
interest expense is attributable to a loan from Phenomenal Limited
The provision for income taxes decreased by $320 to $134 for the three months
ended September 30, 1997 from $454 for the three months ended September 30,
1996. The tax provisions as a percent of pre-tax income decreased to 8.4% for
the three months ended September 30, 1997 from 30.9% for the three months ended
September 30, 1996. The decrease resulted from an increase in revenue derived
from jurisdictions with lower tax rates.
Six Months Ended September 30, 1997 Compared to the Six Months Ended September
30, 1996
The Company's total revenues increased $12,506 or 74.1%, to $29,386 for the six
months ended September 30, 1997 from $16,880 for the six months ended September
30, 1996. This increase consisted of an increase in sales of $7,829 and an
increase in subcontract service income of $4,677. The increase in sales revenues
was attributable to the introduction of new products and additional marketing.
The increase in subcontract service income is attributable to an increase in
marketing, new technology and an increase in the number of supply contracts.
The cost of sales and services increased $9,571 or 75.1%, to $22,309 for the six
months ended September 30, 1997 from $12,738 for the six months ended September
30, 1996. The increase resulted from the increase in revenues. The cost of sales
and services as a percentage of revenue increased slightly to 75.9% for the six
months ended September 30, 1997 from 75.5% for the six months ended September
30, 1996.
Selling, general and administrative expenses increased $1,475 or 87.6%, to
$3,159 for the six months ended September 30, 1997 from $1,684 for the six
months ended September 30, 1996. The increase in expenses is attributable to
increased sales and marketing expenses.
Other expense increased $524 to $586 for the six months ended September 30, 1997
from expense of $62 for the six months ended September 30, 1996. This increase
is attributable to an increase of $598 in interest expense which was partially
offset by an increase of $72 in interest income. The increase in interest
expense is attributable to a loan from Phenomenal Limited
The provision for income taxes decreased by $497 to $276 for the six months
ended September 30, 1997 from $773 for the six months ended September 30, 1996.
The tax provisions as a percent of pre-tax income decreased to 8.3% for the six
months ended September 30, 1997 from 32.3% for the six months ended September
30, 1996. The decrease resulted from an increase in revenue derived from
jurisdictions with lower tax rates.
6
<PAGE>
Material Changes in Financial Condition, Liquidity and Capital Resources
($US,000, except per share data)
The Company had a cash balance of $5,284 and a deficit working capital of $120
at September 30, 1997 compared to a cash balance of $94 and working capital of
$2,768 at March 31, 1997. The increase in cash is attributable to the receipt of
proceeds from a short term loan of $10,000. The decrease in working capital
resulted from the increase in short term loans.
For the six months ended September 30, 1997 net cash used in operating
activities totaled $806 as compared to net cash provided by operating activities
of $400 for the corresponding period of the prior year. This change resulted
from an increase in inventory, prepaid expenses, which were partially offset by
increased earnings, depreciation, accounts payable and income taxes payable.
Net cash used in investing activities amounted to $6,965 and $810 for the six
months ended September 30, 1997 and 1996 respectively. This increase resulted
from substantial additions to property, plant and equipment.
Net cash provided by financing activities amounted to $12,957 and $335 for the
six months ended September 30, 1997 and 1996, respectively. This increase is
attributable to an increase in short-term bank borrowings and the $10,000 short
term loan from Phenomenal Limited.
At September 30, 1997, the Company had long term debt totaling $1,809 compared
to long term debt at March 31, 1997 of $1,834. This $25, or 1.4% decrease is
primarily attributable to repayments which offset additions of the Company's
bank loan.
In consideration for a loan of $10,000 from Phenomenal Limited, the Company's
wholly owned subsidiary Quality Prince Limited executed a Convertible Note
("Note") in the principal amount of $10,000 with a maturity of March 20, 1998.
The Note may be converted into 2914 shares or such other number of shares as
will constitute not less than 29.14% of Quality Prince Limited, and bears
interest at the rate of three percent compounded monthly, provided that if the
Company is not in Default with respect to any repayment obligation thereunder,
then the rate shall be reduced to 1.5% compounded monthly.
As additional consideration for the loan of $10,000, the Company issued
Phenomenal Limited, warrants ("Warrants") to purchase 5,263,158 shares of the
Company's common stock, $.001 par value, at a purchase price of $2.19,
exercisable for a period commencing upon the date of the grant of the Warrants
and ending on the earlier of (i) May 31, 1998 or (ii) the closing of a
consolidation or merger of the Company (other than with its wholly-owned
subsidiary), or the transfer of all or substantially all of the Company's assets
to, another corporation (unless the owners of the capital stock of the Company,
prior to such transaction, continue to own a majority of the capital stock of
the surviving corporation). The Warrants may only be exercised in the event that
the Note is not converted pursuant to its terms.
On June 4, 1998, the Company (and its subsidiaries) and Phenomenal Limited
executed an agreement ("Deed Amendment") to modify the terms of the Note and the
Warrants. Pursuant to the Deed Amendment, Phenomenal Limited agreed to an
investment in the Company's subsidiary, Hang Fung Jewellery Company Limited
("Hang Fung Jewellery") in the form of 5,263,788 redeemable preference shares
(the "Preferred Shares"), $.01 par value issued at a premium of $1.8897726 as a
substitution for the Note. The Preferred Shares shall have no voting rights
except with respect to matters which affect their rights, matters of dissolution
or the issuance of additional shares.
7
<PAGE>
The Deed Amendment evidences the Company's intent to form a new holding company
for the shares of Hang Fung Jewellery and Kai Hang Jewellery Company Limited,
(the "Restructuring") currently owned by Quality Prince Limited; and to list the
shares of the new holding company on The Stock Exchange of Hong Kong Limited
(the "Listing"). If the Restructuring and Listing occur before March 20, 1999,
the Preferred Shares must be redeemed and the redemption amount of $10,000 plus
any amount of dividend must be used to subscribe for shares in the newly listed
holding company. If the Restructuring and Listing have not occurred by March 20,
1999, the Preferred Shares must be redeemed as follows: (1) for the redemption
amount of $10,000 plus a dividend (the "Aggregate Redemption Amount") without
any obligation to subscribe for shares in the new holding company; or (2) if the
Restructuring occurs before March 31, 1999, then for the Aggregate Redemption
Amount, however all or part of the Aggregate Redemption Amount must be used to
subscribe for shares in the new holding company. If the Restructuring has not
occurred before March 31, 1999, then the Preferred Shares may not be redeemed
until the Restructuring is completed not later than June 30, 1999, and all or
part of the Aggregate Redemption Amount must be used for subscription shares in
the new holding company. Regardless of whether the Restructuring has occurred,
the Preferred Shares may be redeemed at any time after June 30, 1999, provided
that all, part or none of the Aggregate Redemption Amount is used for such
subscription shares.
The Warrants, originally issued for an exercise period expired on May 31, 1998
have been extended by the Deed Amendment to May 31, 1999 or the date of the
Listing, whichever is earlier and the number of warrant shares was increased.
The Warrants may only be exercised as an alternative to subscription shares in
the new holding company; and likewise subscription to shares in the new holding
company is forfeited in the event that the Warrants are exercised.
Management of the Company believes, based on its current operating agreements,
that future operating cash flows will be positive, and that the Company's
working capital is sufficient to meet the Company's anticipated needs for at
least the following twelve months, including the performance of all existing
contracts of the Company.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
S.W. LAM, INC.
Dated: July 29, 1998 By: /s/ Lam Sai Wing
----------------------------
Lam Sai Wing, President and
Chief Executive Officer
Dated: July 29, 1998 By: /s/ Chan Yam Fai
----------------------------
Chan Yam Fai , Jane
Chief Financial Officer
8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,284
<SECURITIES> 0
<RECEIVABLES> 5,744
<ALLOWANCES> 0
<INVENTORY> 10,378
<CURRENT-ASSETS> 23,845
<PP&E> 13,007
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,852
<CURRENT-LIABILITIES> 23,965
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 11,065
<TOTAL-LIABILITY-AND-EQUITY> 36,852
<SALES> 29,386
<TOTAL-REVENUES> 29,386
<CGS> (22,309)
<TOTAL-COSTS> (25,468)
<OTHER-EXPENSES> (586)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,332
<INCOME-TAX> (276)
<INCOME-CONTINUING> 3,056
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,056
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
