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 December 31, 1998
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 Street, 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 X No
As of December 31, 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, 1998
and March 31, 1998......................................... 1
Consolidated Statements of Operations - For the
three months and nine months ended December 31, 1998
and 1997................................................... 2
Consolidated Statements of Cash Flows - For the nine
months ended December 31, 1998 and 1997.................... 3
Notes to Consolidated Financial Statements................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 5
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 9
SIGNATURES.............................................................. 10
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US$,000)
(Unaudited)
March 31, December 31,
ASSETS 1998 1998
--------- ------------
Current assets:
Cash and cash equivalents $ 2,094 $ 5,869
Accounts receivable, net 10,248 17,360
Inventory 13,077 14,839
Prepayments and other current assets 395 658
------- -------
Total current assets 25,814 38,726
Property, plant and equipment, and capital leases, net 19,853 20,729
------- -------
Total assets $45,667 $59,455
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 5,618 $ 12,462
Long-term bank loans, current portion 293 489
Capital lease obligations, current portion 1,106 1,237
Accounts payable 2,880 3,002
Accrued liabilities 4,880 5,077
Convertible short term loan 10,000 0
Income tax payable 1,173 2,422
Due to director 1,034 259
------- -------
Total current liabilities 26,984 24,948
Long-term bank loans, non-current portion 1,189 1,014
Capital lease obligations, non current portion 1,933 1,292
Deferred taxation 1,283 1,283
------- -------
Total liabilities 31,389 28,537
------- -------
Stockholders' Equity:
Preferred stock 0 0
Common stock 13 13
Additional paid-in capital 511 511
Minority interest 0 10,000
Retained earnings 13,628 20,245
Cumulative translation adjustments 126 149
------- -------
Total stockholders' equity 14,278 30,918
------- -------
Total liabilities and stockholders' equity $45,667 $59,455
======= =======
The accompanying notes are an integral part of these financial statements
1
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- -------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 16,812 $ 27,487 $ 43,271 $ 58,950
Subcontracting fees 895 844 3,822 2,040
------- ------- ------- -------
Total revenues 17,707 28,331 47,093 60,990
Cost of sales and services (13,833) (21,375) (36,142) (45,730)
------- ------- ------- -------
Gross profit 3,874 6,956 10,951 15,260
Selling, general and
administrative expenses (1,591) (2,252) (4,750) (6,440)
------- ------- ------- -------
Operating income 2,283 4,704 6,201 8,820
------- ------- ------- -------
Other income (expense), net:
Interest expenses (833) (403) (1,574) (1,118)
Interest income 22 134 94 309
Other income (expense) 16 (51) 99 (129)
------- ------- ------- -------
Total other income
(expense), net (795) (320) (1,381) (938)
------- ------- ------- -------
Income before income taxes 1,488 4,384 4,820 7,882
Provision for income taxes (306) (702) (582) (1,265)
------- ------- ------- -------
Net income $ 1,182 $ 3,682 $ 4,238 $ 6,617
======= ======= ======= =======
Basic income per share $ 0.09 $ 0.29 $ 0.33 $ 0.52
======= ======= ======= =======
Weighted average shares
outstanding 12,800,000 12,800,000 12,800,000 12,800,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
2
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$,000)
(Unaudited)
<TABLE>
Nine Months Ended December 31,
------------------------------
1997 1998
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income 4,238 6,617
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation of property, plant and equipment 1,764 3,394
(Increase) Decrease in operating assets -
Accounts receivable, net (5,364) (7,112)
Inventories (3,437) (1,762)
Prepayments and other current assets (1,682) (263)
Due from a director (226) (775)
(Decrease) Increase in operating liabilities -
Accounts payable 2,946 122
Deposits from customers (1,091) -
Accrued liabilities 89 197
Income taxes payable 582 1,249
------- ------
Net cash provided by operating activities (2,181) 1,667
------- ------
Cash flows from investing activities:
Additions to property, plant and equipment (8,977) (4,270)
------- -------
Net cash used in investing activities (8,977) (4,270)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of preference share by a subsidiary - 10,000
Net increase in short-term bank borrowings 3,294 6,844
Net (decrease) increase in convertible short-term loan 10,000 (10,000)
Additions of capital lease obligations 92 2,495
Repayment of capital element of capital lease obligations (293) (3,005)
Additions of long-term bank loans 388 258
Repayment of long-term bank loans (233) (237)
------- -------
Net cash provided by financing activities 13,248 6,355
------- -------
Effect of exchange rate changes in cash 3 23
------- -------
Net increase in cash 2,093 3,775
Cash and cash equivalents, as of beginning of period 94 2,094
------- -------
Cash and cash equivalents, as of end of period $ 2,187 $ 5,869
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1998
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, 1998 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, 1998. 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, 1999.
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.
4
<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. Statements contained herein which are not historical facts are
forward-looking statements that involve risks and uncertainties. All phases of
the Company's operations are subject to a number of uncertainties, risks and
other influences. Therefore, the actual results of the future events described
in such forward-looking statements in this Form 10-Q could differ materially
from those stated in such forward-looking statements. Among the factors which
could cause the actual results to differ materially are the risks and
uncertainties described both in this Form 10-Q and the risks, uncertainties and
other factors set forth from time to time in the Company's other public reports,
filings and public statements. Many of these factors are beyond the control of
the Company, any of which, or a combination of which, could materially affect
the results of the Company's operations and whether the forward-looking
statements made by the company ultimately prove to be accurate.
Results Of Operations
The following table sets forth, for the periods indicated, certain items
from the Consolidated Statements of Operations expressed as a percentage of
total revenues.
Quarter Ended Nine Months Ended
December 31, December 31,
--------------------- --------------------
1997 1998 1997 1998
---- ---- ---- ----
Net sales 94.9 % 97.0 % 91.9 % 96.7 %
Subcontracting fees 5.1 3.0 8.1 3.3
Total revenues 100.0 100.0 100.0 100.0
Cost of sales 78.1 75.4 76.7 75.0
Gross profit 21.9 24.6 23.3 25.0
Operating expenses 9.0 8.0 10.1 10.6
Income from operations 12.9 16.6 13.2 14.4
Other income (expense), net (4.5) (1.1) (2.9) (1.5)
Income before income taxes 8.4 15.5 10.2 12.9
Income taxes 1.7 2.5 1.2 2.1
Net income 6.7 13.0 9.0 10.8
Quarter Ended December 31, 1998 Compared to Quarter Ended December 31, 1997
Revenues and Gross Profit. Total revenues increased $10.6 million, or 60%,
to $28.3 million for the quarter ended December 31, 1998 from $17.7 million for
the quarter ended December 31, 1997. Sales of Company products were up 63.5% to
$27.5 million during the current period compared to $16.8 million during the
same period in the prior fiscal year. Subcontracting fees decreased by 5.7% to
$0.8 million in the current period from $0.9 million during the same period in
the prior fiscal year.
5
<PAGE>
The increase in sales for the quarter ended December 31, 1998 was
attributable to the introduction of new products and increased marketing
efforts. Net sales for the quarter ended December 31, 1998 increased 77.8% from
the prior fiscal quarter level and year-over-year sales growth increased during
the quarter ended December 31, 1998 to 63.5% from 9.6% during the prior fiscal
quarter. The increase in net sales and growth rate during the latest quarter
when compared to the prior quarter was attributable to increased marketing
efforts and seasonal strength experienced by the Company during its peak selling
season from October through March. The decrease in subcontracting fees for the
quarter was attributable to increased concentration on the manufacturing of
products designed by the Group as opposed to products manufactured on a
subcontract basis in order to raise the Group's brand name recognition.
Geographically, within Southeast Asia (including Hong Kong and the PRC) the
Company's sales increased 21.8% to $12.3 million during the quarter ended
December 31, 1998 from $10.1 million during the same period in the prior year.
Sales within Southeast Asia accounted for 44.7% of total sales during the
quarter as compared to 60% during the same period in the prior year. Sales
within the region were adversely impacted by continuing economic weakness in
Southeast Asia during the period, which weakness was offset by increased
marketing efforts. Sales in Hong Kong declined approximately 12.7% to $2.5
million for the quarter ended December, 31, 1998 from $2.9 million for the same
period of the prior year. Sales in the PRC were up during the quarter ended
December 31, 1998 due to stable economic conditions relative to the region,
increasing approximately 62.9% to $6.3 million for the quarter ended December
31, 1998 from $3.9 million in the same period of the prior year. Sales in
Southeast Asia (not including Hong Kong and the PRC) during the quarter ended
December 31, 1998 were also up due to increases in orders by existing customers,
increasing 3.9% to $3.5 million for the quarter ended December 31, 1998 from
$3.4 million in the same period of the prior year.
Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 126% increase in sales with these sales accounting for
55.3% of total sales in the quarter ended December 31, 1998 as compared to 40%
of total sales in the same period of the prior year. The increase in sales
outside of Asia was driven by increased marketing efforts and strong product
demand which accompanied strong economic conditions in those regions. Sales in
Europe increased approximately 317% to $6.3 million for the quarter ended
December 31, 1998 from $1.5 million in the same period of the prior year. Sales
in the Middle East were up during the quarter ended December 31, 1998,
increasing approximately 19.9% to $3 million from $2.5 million in the same
period of the prior year. Sales in the United States increased approximately
118% to $5.9 million during the quarter ended December 31, 1998 from $2.7
million in the same period of the prior year.
Gross profits increased by 79.6% to $7 million during the quarter ended
December 31, 1998 from $3.9 million during the same period in the prior fiscal
year. Gross margins increased from 21.9% of revenues during the quarter ended
December 31, 1997 to 24.6% during the quarter ended December 31, 1998. The
increase in gross profits was principally attributable to the increase in net
sales. The increase in gross profit percentage during the quarter ended December
31, 1998 was primarily attributable to cost control measures implemented by
management.
6
<PAGE>
Operating Expenses. Operating expenses totaled $2.3 million during the
quarter ended December 31, 1998, up 41.5%, from $1.6 million during the same
period in the prior fiscal year. The principal components of the increase in
operating expenses during the quarter were marketing expenses, depreciation,
salary and wages to support planned sales growth.
Other Expense, Net. Other expenses, net of other income, decreased during
the quarter ended December 31, 1998 to $320,000 from $795,000 in the same period
during the prior year. The decrease in net other expenses was principally
attributable to (1) an increase in interest income of $112,000 which resulted
from an increase in cash generated by operations and (2) a decrease in interest
expense during the period of $430,000 which resulted from the maturity of a
convertible loan on March 19, 1998.
Income Taxes. Income taxes increased by 129.4% to $702,000 during the
quarter ended December 31, 1998 from $306,000 during the same period in the
prior year. The increase in income taxes during the period was primarily
attributable to increased income during the period and provision for a higher
effective tax rate for the current period in Hong Kong pending the resolution of
the Company' offshore claims with respect to prior periods.
Nine Months Ended December 31, 1998 Compared to Nine Months Ended December 31,
1997
For the nine months ended December 31, 1998, total revenues increased $13.9
million, or 29.5%, to $61 million as compared to total revenues of $47.1 million
during the nine months ended December 31, 1997. Sales of Company products were
up 36.2% to $58.9 million during the nine months ended December 31, 1998
compared to $43.3 million during the nine months ended December 31, 1997.
Subcontracting fees decreased by 46.6% to $2 million during the nine months
ended December 31, 1998 compared to $3.8 million during the nine months ended
December 31, 1997.
The increase in sales for the nine months ended December 31, 1998 was
attributable to the introduction of new products and increased marketing
efforts. The decrease in subcontracting fees for the period was attributable to
increased concentration on the manufacturing of products designed by the Group
as opposed to products manufactured on a subcontract basis in order to raise the
Group's brand name recognition.
Geographically, within Southeast Asia (including Hong Kong and the PRC) the
Company' sales increased 6.7% to $27.7 million during the nine months ended
December 31, 1998 from $26 million during the same period in the prior year.
Sales within Southeast Asia accounted for 47% of total sales during the period
as compared to 59.9% during the same period in the prior year. Sales within the
region were adversely impacted by continuing economic weakness in Southeast Asia
during the period, which weakness was offset by increased marketing efforts.
Sales in Hong Kong declined approximately 31.9% to $5 million for the nine
months ended December, 31, 1998 from $7.4 million for the same period of the
prior year. Sales in the PRC were up during the nine months ended December 31,
1998 due to stable economic conditions relative to the region, increasing
approximately 39.2% to $13.9 million for the nine months ended December 31, 1998
from $10 million in the same period of the prior year. Sales in Southeast Asia
(not including Hong Kong and the PRC) during the nine months ended December 31,
1998 were also up due to increases in orders by existing customers, increasing
2.2% to $8.8 million for the nine months ended December 31, 1998 from $8.7
million in the same period of the prior year.
Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 80.5% increase in sales with these sales accounting for
53% of total sales in the nine months ended December 31, 1998 as compared to
40.1% of total sales in the same period of the prior year. The increase in sales
outside of Asia was driven by increased marketing efforts and strong product
demand which accompanied strong economic conditions in those regions. Sales in
Europe increased approximately 255% to $13.9 million for the nine months ended
December 31, 1998 from $3.9 million in the same period of the prior year. Sales
in the Middle East were down during the nine months ended December 31, 1998,
decreasing approximately 0.1% to $6.4 million from $6.5 million in the same
period of the prior year. Sales in the United States increased approximately
57.5% to $10.9 million during the nine months ended December 31, 1998 from $6.9
million in the same period of the prior year.
7
<PAGE>
For the nine months ended December 31, 1998, gross profits increased 39.3%
to $15.3 million from $11 million during the same period in the prior fiscal
year. Gross margins increased from 23.3% of revenues during the nine months
ended December 31, 1997 to 25.5% during the nine months ended December 31, 1998.
The increase in gross profits was mainly attributable to the increase in net
sales. The increase in gross profit percentage during the nine month period
ended December 31, 1998 was primarily attributable to cost control measures
implemented by management.
Operating Expenses. Operating expenses totaled $6.4 million during the nine
months ended December 31, 1998, up 35.6%, from $4.75 million during the same
period in the prior fiscal year. The principal components of the increase in
operating expenses during the period were marketing expense, depreciation,
salary and wages to support planned sales growth.
Other Expense, Net. Other expenses, net of other income, decreased during
the nine months ended December 31, 1998 to $938,000 from $1.4 million in the
same period during the prior year. The decrease in net other expenses was
attributable to (1) an increase in interest income of $215,000 which resulted
from an increase in cash generated by operations and (2) a decrease in interest
expense during the period of $456,000 which resulted from the maturity of a
convertible loan on March 19, 1998; which was partially offset by a $228,000
adverse swing in other income/expense which resulted from an increase in bank
charges during the current period and the recognition of a nonrecurring gain
from an insurance claim during the prior period.
Income Taxes. Income taxes increased by 117.4% to $1.3 million during the
nine month period ended December 31, 1998 from $582,000 during the same period
in the prior year. The increase in income taxes during the period was primarily
attributable to increased income during the period and provision for a higher
effective tax rate for the current period in Hong Kong pending the resolution of
the Company's offshore claims with respect to prior periods.
Financial Condition, Liquidity and Capital Resources
The Company had a cash balance of $5.9 million and working capital of $13.8
at December 31, 1998 compared to a cash balance of $2.1 million and a deficit in
working capital of $1.2 million at March 31, 1998. The increase in cash is
attributable to a combination of the income during the period and increases in
short-term bank borrowing. The increase in working capital was attributable to
restructuring and capitalization of the convertible note into redeemable
preferred share capital of a subsidiary of the Company.
8
<PAGE>
For the nine months ended December 31, 1998 net cash provided by operating
activities amounted to $1.7 million as compared to net cash used by operating
activities of $2.2 million for the corresponding period of the prior year. This
change resulted from a smaller increase in inventories and prepayments and other
current assets during the current period and a smaller decrease in customer
deposits which was partially offset by increases in accounts receivable and
amounts due from a director.
Net cash used in investing activities decreased to $4.3 million during the
nine months ended December 31, 1998 from $9 million during the nine months ended
December 31, 1997. This decrease was attributable to a decrease in acquisition
of machinery and equipment during the current period.
Net cash provided by financing activities decreased to $6.4 million during
the nine months ended December 31, 1998 from $13.2 million during the nine
months ended December 31, 1997. This decrease was attributable to the receipt of
a $10 million convertible loan during the prior year. The convertible loan was
converted to preferred stock of a subsidiary of the Company during the current
year in connection with the planned listing of that subsidiary on the Hong Kong
Stock Exchange. The decrease in net cash provided by financing activities
attributable to activities relating to the convertible loan was partially offset
by net increases in short term bank borrowings and additions to capital lease
obligations during the current period.
At December 31, 1998, the Company had long term debt totaling $3.6 million
compared to long term debt at March 31, 1998 of $4.4 million. The decrease in
long term debt was primarily attributable to the repayment of the principal of
the loan while no new long term bank loan was acquired during the nine months
ended December 31, 1998 .
Management believes that based on its current financial condition, the
Company's cash and working capital is sufficient to meet the Company's
anticipated needs for at least the next twelve months.
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
9
<PAGE>
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: February 12, 1999 By: /s/ Lam Sai Wing
----------------------------
Lam Sai Wing, President and
Chief Executive Officer
Dated: February 12, 1999 By: /s/ Chan Yam Fai, Jane
----------------------------
Chan Yam Fai, Jane
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,869
<SECURITIES> 0
<RECEIVABLES> 17,360
<ALLOWANCES> 0
<INVENTORY> 14,839
<CURRENT-ASSETS> 38,726
<PP&E> 20,729
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,455
<CURRENT-LIABILITIES> 24,948
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 30,905
<TOTAL-LIABILITY-AND-EQUITY> 59,455
<SALES> 58,950
<TOTAL-REVENUES> 60,990
<CGS> 45,730
<TOTAL-COSTS> 45,730
<OTHER-EXPENSES> 6,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,118
<INCOME-PRETAX> 7,882
<INCOME-TAX> 1,265
<INCOME-CONTINUING> 6,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,617
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
