SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
As of August 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 - December 31, 1997
and March 31, 1997...................................... 1
Consolidated Statements of Operations - For the three
and nine month periods ended December 31, 1997 and
December 31, 1996 ....................................... 2
Consolidated Statements of Cash Flows - For the nine
months ended December 31, 1997 and December 31, 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>
December 31, March 31,
ASSETS 1997 1997
------------------ ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $2,187 $94
Accounts receivable, net of allowance for doubtful accounts 10,471 5,106
Inventory 11,946 8,509
Prepayments and other current assets 1,824 142
Due from a Director 701 475
--------------- -------------
Total Current Assets 27,129 14,326
Property, plant and equipment, and capital leases, net 14,297 7,083
--------------- -------------
Total Assets $41,426 $21,409
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank borrowings $5,569 $2,275
Long-term bank loans, current portion 351 197
Capital lease obligations, current portion 171 229
Accounts payable 4,565 1,619
Deposits from customers 34 1,125
Accrued liabilities 336 267
Convertible short-term loan 10,000 0
Income tax payable 6,448 5,846
--------------- -------------
Total Current Liabilities 27,474 11,558
Long-term Liabilities
Long-term bank loans, non-current portion 1,290
1,291
Capital lease obligations, non current portion
117 260
Deferred taxation 284
284
--------------- -------------
Total Liabilities 29,166 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 December 31, 1997 13 13
Additional paid-in capital 847 846
Retained Earnings 11,246 7,008
Cumulative translation adjustments 154 150
--------------- -------------
Total Stockholders' Equity 12,260 8,017
=============== =============
Total Liabilities and Stockholders' Equity $41,426 $21,409
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------ -----------------------------------
1997 1996 1997 1996
----------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
Revenue: 17,707 12,665 47,093 29,545
Cost of sales and services: (13,833) (9,612) (36,142) (22,350)
----------- ------------- ------------ -------------
Gross Profit 3,874 3,053 10,951 7,195
Operating Expenses:
Selling, general and administrative expenses (1,591) (1,388) (4,750) (3,072)
----------- ------------- ------------ -------------
Income from Operations 2,283 1,665 6,201 4,123
Other Income (Expense): (795) 3 (1,381) (59)
----------- ------------- ------------ -------------
Income before Provision for Income Taxes 1,488 1,668 4,820 4,064
Provision for Income Taxes (306) (640) (582) (1,413)
----------- ------------- ------------ -------------
Net Income $1,182 $1,028 $4,238 $2,651
=========== ============= ============ =============
Earnings per share:
Primary earning per share $.09 $.09 $.33 $.22
------------ ------------- ------------- --------------
Primary common shares outstanding 12,800,000 12,000,000 12,800,000 12,000,000
------------ ------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$,000)
(Unaudited)
<TABLE>
For the Nine Months Ended
December 31, 1997 December 31, 1996
------------------- --------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $4,238 $2,651
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation of property, plant and equipment 1,764 660
Decrease (Increase) In Operating Assets:
Accounts receivable (5,364) (1,863)
Inventory (3,437) 227
Prepayments and other current assets (1,682) (37)
Due from a Director (226) 401
Increase (Decrease) In Operating Liabilities:
Accounts payable 2,946 423
Deposits from customers (1,091) (1,998)
Accrued liabilities 69 (161)
Income taxes payable 602 1,406
------------- ------------
Net cash provided by operating activities (2,181) 1,709
------------- ------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (8,977) (2,960)
------------- ------------
Net cash used in investing activities (8,977) (2,960)
------------- ------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 0 524
Net (decrease) increase in short term bank borrowings 3,294 471
Net (decrease) increase in convertible short term loans 10,000 0
Additions of capital lease obligations 92 331
Repayment of capital element of capital lease obligations (293) (85)
Additions of long term bank loans 388 945
Repayment of long term bank loans (233) (519)
------------- ------------
Net cash provided by (used in) financing activities 13,248 1,667
------------- ------------
Effect of exchange rate changes on cash 3 (34)
------------- ------------
Net increase (decrease) in cash 2,093 382
Cash and Cash Equivalents, beginning of period 94 244
------------- -------------
Cash and Cash Equivalents, end of period $2,187 $626
============= =============
</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. OTHER EXPENSE
Other expense included interest provision for a convertible note of
approximately $146,000 and $1,076,000 for the three and nine months ended
December 31, 1997. Pursuant to the Deed Amendment, the convertible note
holder agreed to waive all interest relating to the convertible note.
5
<PAGE>
Item 2. Management's Discussion and Analysis Of Financial Condition And Results
Of Operations.
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements.
Material Changes in Results Of Operations (US$,000)
Three Months Ended December 31, 1997 Compared to the Three Months Ended December
31, 1996
The Company's total revenues increased $5,042 or 39.8%, to $17,707 for the three
months ended December 31, 1997 from $12,665 for the three months ended December
31, 1996. This increase consisted of an increase in sales of $4,669 and
subcontract service income of $373. The increase in sales revenues is
attributable to increased marketing; and the increase in subcontract service
income is attributable to a slight increase in the number of supply contracts.
The cost of sales and services increased $4,221 or 43.9%, to $13,833 for the
three months ended December 31, 1997 from $9,612 for the three months ended
December 31, 1996. The increase resulted from an increase in revenues. The cost
of sales and services as a percentage of revenue increased to 78.1% for the
three months ended December 31, 1997 from 75.9% for the three months ended
December 31, 1996.
Selling, general and administrative expenses increased $203 or 14.6%, to $1,591
for the three months ended December 31, 1997 from $1,388 for the three months
ended December 31, 1996. The increase in expenses is attributable to increased
sales and marketing efforts of the Company.
Other expense increased $798 to $795 for the three months ended December 31,
1997 compared to other income of $3 for the three months ended December 31,
1996. This increase is attributable to a decrease in other income of $89, and an
increase of $731 in interest expense which was partially offset by an increase
of $22 in interest income. The increase in interest expense is attributable to a
loan from Phenomenal Limited.
The provision for income taxes decreased by $334 to $306 for the three months
ended December 31, 1997 from $640 for the three months ended December 31, 1996.
The tax provisions as a percent of pre-tax income decreased to 20.6% for the
three months ended December 31, 1997 from 38.4% for the three months ended
December 30, 1996. The decrease resulted from an increase in revenue derived
from jurisdictions with lower tax rates.
Nine Months Ended December 31, 1997 Compared to the Nine Months Ended December
31, 1996
The Company's total revenues increased $17,548 or 59.4%, to $47,093 for the nine
months ended December 31, 1997 from $29,545 for the nine months ended December
31, 1996. This increase consisted of an increase in sales of $12,498 and
subcontract service income of $5,050. 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 $13,792 or 61.7%, to $36,142 for the nine
months ended December 31, 1997 from $22,350 for the nine months ended December
31, 1996. The increase resulted from the increase in revenues. The cost of sales
and services as a percentage of revenue increased 1.1% to 76.7% for the nine
months ended December 31, 1997 from 75.6% for the nine months ended December 31,
1996.
Selling, general and administrative expenses increased $1,678 or 54.6%, to
$4,750 for the nine months ended December 31, 1997 from $3,072 for the nine
months ended December 31, 1996. The increase in expenses is attributable to
increased sales and marketing efforts of the Company.
Other expense increased $1,322 to $1,381 for the nine months ended December 31,
1997 from expense of $59 for the nine months ended December 31, 1996. This
increase is attributable to a decrease in other income of $87 and an increase of
$1,329 in interest expense which was partially offset by an increase of $94 in
interest income. The increase in interest expense is attributable to a loan from
Phenomenal Limited.
The provision for income taxes decreased by $831 to $582 for the nine months
ended December 31, 1997 from $1,413 for the nine months ended December 31, 1996.
The tax provisions as a percent of pre-tax income decreased to 12.1% for the
nine months ended December 31, 1997 from 34.8% for the nine months ended
December 31, 1996. The decrease resulted from a decrease in revenue derived from
jurisdictions with lower tax rates.
6
<PAGE>
Material Changes in Financial Condition, Liquidity and Capital Resources
($US,000, except per share data)
The Company had a cash balance of $2,187 and a deficit working capital of $345
at December 31, 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 nine months ended December 30, 1997 net cash used in operating
activities amounted to $2,181 as compared to net cash provided by operating
activities of $1,709 for the corresponding period of the prior year. This change
resulted from an increase in accounts receivable, inventory, prepaid expenses
and a reduction in deposits from customers, which were partially offset by
increased earnings, depreciation and accounts payable.
Net cash used in investing activities amounted to $8,977 and $2,960 for the nine
months ended December 30, 1997 and 1996 respectively. This increase resulted
from substantial additions to property, plant and equipment. Net cash provided
by financing activities amounted to $13,248 and $1,667 for the nine months ended
December 30, 1997 and 1996, respectively. This increase is attributable to an
increase in short-term borrowings and the $10,000 short term loan from
Phenomenal Limited.
At December 31, 1997, the Company had long term debt totaling $1,692 compared to
long term debt at March 31, 1997 of $1,834. This $142, or 7.7% 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.
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.
7
<PAGE>
Other expense included interest provision for a convertible note of
approximately $146,000 and $1,076,000 for the three and nine months ended
December 31, 1997. On June 4, 1998 the Company and the convertible note holder
agreed to waive all interest relating to the convertible note.
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
10.1 Warrant Agreement with Phenomenal Limited (1)
10.2 Convertible Note with Phenomenal Limited (1)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
--------------------
(1) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10Q for the period ended June 30, 1997.
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: August 20, 1998 By: /s/ Lam Sai Wing
------------------------------
Lam Sai Wing, President and
Chief Executive Officer
Dated: August 20, 1998 By: /s/ Chan Yam Fai
------------------------------
Chan Yam Fai , Jane
Chief Financial Officer
8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> SEP-30-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,187
<SECURITIES> 0
<RECEIVABLES> 10,471
<ALLOWANCES> 0
<INVENTORY> 11,946
<CURRENT-ASSETS> 27,129
<PP&E> 14,297
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,426
<CURRENT-LIABILITIES> 27,474
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 12,247
<TOTAL-LIABILITY-AND-EQUITY> 41,426
<SALES> 47,093
<TOTAL-REVENUES> 47,093
<CGS> (36,142)
<TOTAL-COSTS> (40,892)
<OTHER-EXPENSES> (1,381)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,820
<INCOME-TAX> (582)
<INCOME-CONTINUING> 4,238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,238
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
