LAM SW INC, 10-K, 1999-02-01

LAM SW INC
10-K, 1999-02-01
JEWELRY, PRECIOUS METAL

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Fiscal Year Ended March 31, 1998

[ ] 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.
-----------------------------------------------
(Name of registrant as specified in its charter)

Nevada 62-1563911
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

Unit 25-32, Second Floor, Block B, Focal Industrial Centre,
Man Lok Street, Hunghom, Hong Kong
------------------------------------------------------------
(Address of principal executive offices)(Zip code)

Registrant's telephone number, including area code: (852) 2766 3688

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
--------------------- -------------------------------------------
None None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value
-------------------------------
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past ninety (90) days. Yes No X
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of December 28, 1998, 12,800,000 shares of common stock of the
Registrant were outstanding. As of such date, the aggregate market value of the
voting and non-voting common equity held by non-affiliates, based on the average
bid and asked price, was approximately $2,950,000.

DOCUMENTS INCORPORATED BY REFERENCE

None.

<PAGE>
TABLE OF CONTENTS

Page
------
PART I

ITEM 1. BUSINESS................................................. 1
ITEM 2. PROPERTIES .............................................. 7
ITEM 3. LEGAL PROCEEDINGS ....................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS...................................... 8

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.......................... 8
ITEM 6. SELECTED FINANCIAL DATA.................................. 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................. 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............. 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 18

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
AND CONTROL PERSONS OF THE REGISTRANT.................... 19
ITEM 11. EXECUTIVE COMPENSATION................................... 20
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................... 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................................. 23

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K...................................... 24

SIGNATURES............................................... 25

<PAGE>

PART I

This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Factors that May
Affect Future Results" beginning on page 14 of this Form 10-K.

The Company operates through its various subsidiaries, all of which are
located outside of the United States. Unless otherwise indicated or the context
otherwise requires, the term Company refers collectively to S.W. Lam, Inc. and
its subsidiaries. All references to China or the PRC are to the Peoples'
Republic of China. The Company's financial statements are presented in United
States Dollars ("US$"). The Company's sales are principally in Hong Kong Dollars
("HK$") and Renminbi ("Rmb"). At March 31, 1998, the prevailing exchange rate of
US$ into HK$ and Rmb was US$1.00 = HK$7.7480 and US$1.00 = Rmb 8.27930.

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 products to customers in Hong Kong, the People's Republic of
China (the "PRC" or "China") and other parts of the world. The Company's
operations are located in Hong Kong and the PRC.

History and Development of the Company

The Company's business began with the formation of an unincorporated sole
proprietorship by Lam Sai Wing ("Mr. Lam") to manufacture and market jewelry at
facilities in Dongguan, PRC 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 at
facilities in Beijing, PRC (the "Beijing Facility"). In 1991, Mr. Lam
transferred operations of the facilities in Dongguan to an unaffiliated third
party, the Dongguan No. 2 Light Industry Jewelry Bureau.

In April 1994, Mr. Lam incorporated Macadam Profits Limited ("Macadam"),
Priestgill Limited ("Priestgill") and Soycue Limited ("Soycue") in the British
Virgin Islands. Whilst Soycue engaged in the jewelry manufacturing and
distribution business, Macadam and Priestgill remained inactive since the date
of their incorporation. In November 1994, Mr. Lam incorporated Hang Fung
Jewellery Company Limited ("Hang Fung Jewellery") in Hong Kong and transferred
operations of the Shenzhen Facility and Beijing Facility to Hang Fung Jewellery.
Certain other operations previously conducted by Mr. Lam were also transferred
to Hang Fung Jewellery in September 1995. Effective April 1996, Mr. Lam
transferred operations of Soycue to Hang Fung Jewellery and ceased operations of
Soycue, which has since remained dormant. In December 1996, Mr. Lam and his
wife, Chan Yam Fai, Jane ("Ms. Chan") transferred ownership of Hang Fung
Jewellery, Macadam, Priestgill, Soycue and Kai Hang Jewellery Company Limited
("Kai Hang Jewellery"), a Hong Kong corporation engaged in jewelry marketing
owned by Mr. Lam and Ms. Chan, to Quality Prince Limited ("Quality Prince"), a
holding company organized in the British Virgin Islands and also owned by Mr.
Lam and Ms. Chan. (Hang Fung Jewellery, Kai Hang Jewellery, Macadam, Priestgill,
Quality Prince and Soycue are collectively referred to herein as the "Hang Fung
Group").

In December of 1996, Quality Prince 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
shareholders of Quality Prince, 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
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.

1
<PAGE>

Overview

The Company's operations include the manufacturing of gold and silver
jewelry and ornamental items in the PRC and Hong Kong and the sales of those
products in the PRC, Hong Kong and other parts of the world.

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 pursuant
to which the Company carries on operations in the PRC are: (1) a sub-contracting
agreement with Shenzhen Crafts Import and Export Company ("Shenzhen Crafts")
pursuant to which gold and silver products are produced in Shenzhen for export,
(2) an Agreement for Jewellery Assembling with China Jewellery Import & Export
Co. ("China Jewellery") pursuant to which China Jewellery is responsible for
gold and silver assembly operations at facilities jointly operated with the
Company in Beijing, (3) a Sales Agency Agreement with China Jewellery pursuant
to which China Jewellery acts as the Company's agent in selling jewelry in the
PRC in exchange for an agency fee and the Company acts as China Jewellery's
agent in selling jewelry in Hong Kong in exchange for an agency fee, and (4) an
Agreement for Jewellery Assembling, Sales Agency Agreement and Sales Cooperation
Agreement with Tai Yuen Jewellery Crafts Factory ("Tai Yuen Jewellery") pursuant
to which Tai Yuen Jewellery assembles and sells gold and silver products on the
Company's behalf in the PRC.

Shenzhen Crafts and China Jewellery are each state-owned enterprises, and
Tai Yuen Jewellery is a collectively owned enterprise organized under the laws
of the PRC; and each holds requisite licenses to import, export and sell gold
and silver products in the PRC. Both China Jewellery and Tai Yuen Jewellery have
agreed to pay Hang Fung Jewellery's PRC tax liability incurred in connection
with the respective operations of Hang Fung Jewellery pursuant to agreements for
jewelry assembling.

The Company presently markets its products throughout the world including
Hong Kong, the PRC, the Middle East, Southeast Asia, Europe and the United
States. The Company has increased its sales to the Middle East, Southeast Asia,
Europe, and the United States in the last year as a result of increased
marketing.

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) jewelry products, consisting of a broad array of jewelry
including jewelry incorporating semi-precious stones; (3) other precious metal
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 or other precious metals; and (4) others, consisting of medals,
coins and miscellaneous items such as gift boxes and gold surface watches. The
Company's products range in wholesale price from approximately $1 to over
$65,000. 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:

2
<PAGE>

Wholesale Average
Price Range Wholesale Price
----------- ---------------

Fine gold products..................... $10 to $38,000 $300
Jewelry products....................... $25 to $26,000 $500
Other precious metal products.......... $1 to $65,000 $65
Others................................. $6 to $100 $25

For the two years ended March 31, 1998, sales by major product category and
as a percentage of sales (excluding subcontracting fees) were as follows:

1997 1998
---------------- ------------------
Amount Amount
$'000 Percent $'000 Percent
------- ------- ------- -------
Fine gold products................. 32,149 87.3 40,457 69.8
Jewelry products................... 3,392 9.2 7,613 13.1
Other precious metal products...... 1,122 3.1 8,593 14.8
Others............................. 162 0.4 1,331 2.3
------ ------ ------ ------
36,825 100.0 57,994 100.0
====== ====== ====== ======
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 design and drawings for use in
further production. The Company's design staff currently creates approximately
2,000 new designs annually.

Purchasing

The principal material in the manufacture and assembly of the Company's
products is gold which typically represent approximately 69% of the total costs
of purchases.

The Company purchases gold primarily from suppliers in Australia, England,
Germany and Hong Kong. Silver and color stone purchases are primarily from
suppliers in Hong Kong.

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, management believes there are numerous alternative
suppliers for all materials, and that the failure of any principal supplier
would not have a material adverse effect on the Company's operations or
financial condition. To date, the Company has not experienced any difficulty in
securing materials.

The Company does not presently engage in any hedging activities with
respect to possible fluctuations in the prices of raw materials. Management
believes that the risk of not engaging in such activities is minimal, since
historically the Company has been able to adjust selling prices as material
price fluctuations have occurred.

Manufacturing and Assembly

The Company's principal manufacturing and assembly operations are
undertaken at facilities located in Tai Yuen, Shenzhen and Beijing, PRC pursuant
to agreements with Tai Yuen Jewellery, Shenzhen Crafts and China Jewellery.

3
<PAGE>

The Company's largest manufacturing operations take place at the 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 1990, China Jewellery has
provided the factory premises as well as 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. 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"). China Jewellery has agreed to
undertake and pay for all of the Company's PRC tax liabilities relating to
operations at the Beijing Facility. The Agreement for Jewellery Assembling with
China Jewellery expires in November of 2004.

The Company conducts similar jewelry manufacturing and assembly operations
at facilities in Tai Yuen, PRC (the "Tai Yuen Plant") pursuant to an agreement
with Tai Yuen Jewellery which is substantially similar to the manufacturing
arrangement with China Jewellery, including provision for the payment to the
Company of a fee with respect to all jewelry manufactured for third parties at
the Tai Yuen Plant and the assumption and payment by Tai Yuen Jewellery of all
of the Company's PRC tax liabilities relating to operations at the Tai Yuen
Plant. Tai Yuen is paid manufacturing fees in amounts agreed upon from time to
time. The agreement with Tai Yuen Jewellery expires in April of 2006.

The Company also conducts jewelry manufacturing and assembly operations in
Shenzhen, PRC, (the "Shenzhen Facility") pursuant to a subcontracting agreement
with Shenzhen Crafts which provides for use of the Shenzhen Facility exclusively
for manufacturing products for the Company. Shenzhen Crafts is paid
manufacturing fees in an amount equal to approximately $2,000 per month . The
rights and obligations of Shenzhen Crafts were transferred to and assumed by
Shenzhen Jia Yi Jewellery Co., Ltd. ("Shenzhen Jewellery"). The subcontracting
agreement expires December 31, 1999.

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 in diameter. The wire is then stretched to produce a finer wire which is
then cut and swirled to form a spiral. The spiral is then cut to rings, which
are sized and graded and soldered together afterwards to form a chain.
Manufacturing of other jewelry items, including ornaments which may be attached
to chains, typically begins with the construction of a wax prototype. A master
rubber mold is then formed from the wax prototype. An unlimited replica of
plaster molds are eventually produced from the master rubber mold. Casting is
then performed by filling or injecting the plaster mold with melted gold or
silver which has been mixed with appropriate alloys to achieve the desired level
of purity for forming the solid gold or silver items. The plaster mold is then
removed and the constituent jewelry parts are cleaned, assembled, soldered and
pre-polished. 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 wax mold, which is also derived from the master rubber
mold. 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.

4
<PAGE>

In addition to manufacturing undertaken to fill the Company's product
requirements and manufacturing undertaken by (1) China Jewellery at the Beijing
Facility; (2) Tai Yuen Jewellery at the Tai Yuen Plant; and (3) Shenzhen
Jewellery at the Shenzhen 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 4,000,000 pieces of jewelry annually.

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 materials purchased are of the right type, quality and
quantity. Trained technicians monitor and test the purity of all gold to assure
the karat accuracy of all gold produced. Quality checks are carried out on all
products at each stage of production to ensure that the products meet the
Company's quality standards. To ensure the quality of all jewelry produced, all
production workers receive production and quality control training and
production 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 80 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 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, where access 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 Tai Yuen Jewellery 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 attend major local and international
jewelry fairs to promote the Company's products and solicit new customers.
Additionally, the Company periodically advertises in jewelry magazines and makes
direct mailings of new product catalogues.

5
<PAGE>
Marketing of products within the PRC is conducted exclusively through China
Jewellery and Tai Yuen Jewellery as agents for the Company. Pursuant to a Sales
Agency Agreement with China Jewellery, China Jewellery markets 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 Tai Yuen Jewellery
pursuant to agreements which are similar to the Sales Agency Agreement with
China Jewellery. These agreements provide that the Company shall pay agency fees
on a case by case basis.

Sales by region (excluding subcontracting fees) for the three years ended
March 31, 1998 have been as follows:

<TABLE>
1996 1997 1998
----------------- ------------------- -----------------
Amount Amount Amount
$,000 Percent $,000 Percent $,000 Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>

Southeast Asia............ 1,280 5.6 4,610 12.5 12,232 21.1
United States............. - - 1,305 3.5 10,211 17.6
PRC....................... 6,129 26.8 8,043 21.8 10,000 17.2
Middle East............... 3,288 14.3 5,744 15.6 9,317 16.1
Europe.................... 2,149 9.4 1,506 4.1 5,886 10.2
Hong Kong................. 10,057 43.9 15,617 42.5 10,348 17.8
------ ------ ------ ------ ------ ------
Total.................. 22,903 100.0 36,825 100.0 57,994 100.0
====== ====== ====== ====== ====== ======
</TABLE>

Over the past three years, the Company has devoted substantial resources
and effort, and has hired additional sales and marketing personnel, to expand
its markets outside of the PRC and Hong Kong. As a result of those efforts,
sales outside of the PRC and Hong Kong have risen from $6.7 million, or 29.3% of
sales, during the year ended March 31, 1996 to $37.6 million, or 65% of sales,
during the year ended March 31, 1998.

Customers

The Company's customers consist principally of a combination of wholesale
distributors and jewelry retailers. At March 31, 1998, the Company had
approximately 100 regular customers and its products were sold in approximately
1,800 retail outlets. The Company's five largest customers accounted for
approximately 23.2% of revenue during the fiscal year ended March 31, 1998.
During fiscal 1998, the Company had only two customers which accounted for more
than 5% of the Company's revenues: Chow Tai Fook Jewellery Co., Ltd and Sam Ming
Tong Jewellery Co., Ltd., which comprised 5.9% and 5.5% of revenue respectively.
The Company has no long term contracts with any customers. Chow Tai Fook
Jewellery Co., Ltd. and Sam Ming Tong Jewellery Co., Ltd have been customers of
the Company for more than five years.

Competition

The jewelry industry is highly fragmented, with little significant brand
name recognition or consumer loyalty. Selection is generally a function of
design appeal, perceived high value and quality in relation to price.

While many competitors in the wholesale jewelry manufacturing and
distribution business may have a wider selection of products or greater
financial resources, the Company believes its competitive position is enhanced
by the Company's broad customer base, experienced management team and the
Company's close relationship with its customers and vendors. Therefore, although
the competition is intense, management believes that the Company is well
positioned to compete in the jewelry industry.

6
<PAGE>

Employees

As of March 31, 1998, the Company had approximately 1,800 employees,
including 7 executive officers, 48 other management personnel, 27 persons in
administration, 1,638 persons in manufacturing and production and 80 persons in
sales and marketing. Of the Company's employees, approximately 128 staff members
are located in Hong Kong with the remaining employees being located in the PRC.
None of the Company's employees is governed by collective bargaining agreements
and the Company considers its relations with its employees to be satisfactory.

Certain Foreign Operation Considerations

The Company's operations are conducted in Hong Kong and the PRC. As a
result, the Company's business, financial condition and results of operations
may be influenced by the political, economic and legal environments in Hong Kong
and the PRC, and by the general state of the Hong Kong and the PRC economies.

On July 1, 1997, sovereignty over Hong Kong transferred from the United
Kingdom to the PRC, and Hong Kong became a Special Administrative Region of the
PRC (an "SAR"). As provided in the Sino-British Joint Declaration relating to
Hong Kong and the Basic Law of the Hong Kong SAR of the PRC, the Hong Kong SAR
will have full economic autonomy and its own legislative, legal and judicial
systems for fifty years. The Company's management does not believe that the
transfer of sovereignty over Hong Kong will have an adverse impact on the
Company's financial and operating environments. There can be no assurance,
however, that changes in political or other conditions will not result in such
an adverse impact.

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.
Additionally, due to licensing requirements relating to the manufacture and
marketing of gold products in the PRC, the Company's ability to continue its
current operations in the PRC is substantially dependent upon the Company's
ability to maintain satisfactory contractual arrangements with PRC entities
possessing the requisite licenses such as China Jewellery, Tai Yuen Jewellery
and Shenzhen Jewellery. Further, 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 Renminbi into foreign
currencies and the remittance of foreign currencies abroad require approvals of
the PRC government.

ITEM 2. PROPERTIES

The Company's executive offices are located at Unit 25-32, Second Floor,
Focal Industrial Centre, Man Lok Street, Hunghom, Hong Kong. This facility
consists of approximately 31,500 square feet of office space, and is leased from
an unaffiliated third party for approximately HK$3,362,000 (US$434,000) per year
pursuant to four leases which range in expiration from March 1999, to May 2000.
This office space also houses certain marketing, product design and high quality
gold production operations.

The Company also leased office space 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. Such
office space also housed certain marketing, product design and high quality gold
production operations. Unit 302-303A was leased from Ms. Chan, an officer and
director of the Company, for HK$1.35 million (US$174,000) per year pursuant to a
lease expiring March 31, 1998; and Unit 410 was leased from an unaffiliated
third party for HK$300,000 (US$39,000) per year pursuant to a lease expiring
September 19, 1998. Both of these leases expired during 1998 and the Company has
relocated all operations from those premises to its Focal Industrial Centre
facilities.

The Company's principal production operations are conducted at facilities
located in Beijing, Tai Yuen, and Shenzhen, PRC. The Company's operations in
Beijing occupy approximately 60,000 square feet in the Beijing Facility, a
5-story building, which facility is utilized pursuant to an agreement for
jewelry assembly with China Jewellery.

7
<PAGE>

The Company's operations in Tai Yuen occupy approximately 30,000 square
feet in the Tai Yuen Plant, a 6-story industrial building, which facility is
utilized pursuant to a jewelry assemby agreement with Tai Yuen Jewellery.

The Company's operations in Shenzhen occupy one floor, approximately 20,000
square feet, in the Shenzhen Facility, a multi-story industrial building, which
facility is utilized pursuant to a jewelry assemby agreement with Shenzhen
Crafts.

The Company believes that its existing facilities and facilities will be
adequate to support the Company's operations for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

The Company is from time to time a party to lawsuits incidental to its
business. The Company and its management are not presently aware of any pending
or threatened proceedings which, individually or in the aggregate, are believed
to be material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's shareholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended March 31, 1998.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

While the Company's Common Stock is listed on the OTC Electronic Bulletin
Board under the symbol "CHRM", there is no established trading market in the
Company's Common Stock and trading therein is sporadic. The last reported bid
price of the Company's Common Stock, as of December 28, 1998, was $0.4375.

Holders

At March 31, 1998, there were approximately 134 record holders of the
Company's Common Stock.

Dividends

While the Hang Fung Group paid a one-time dividend of $5 million during
fiscal 1996, prior to the Exchange, the Company has not paid any dividends since
its inception and presently anticipates that all earnings, if any, will be
retained for development of the Company's business and that no dividends on the
shares of Common Stock will be declared in the foreseeable future. Any future
dividends will be subject to the discretion of the Company's Board of Directors
and will depend upon, among other things, future earnings, the operating and
financial condition of the Company, its capital requirements, general business
conditions and other pertinent facts. Therefore, there can be no assurance that
any dividends on the Common Stock will be paid in the future.

8
<PAGE>

Sales of Unregistered Securities

During the fiscal year ended March 31, 1998, the Company sold the following
unregistered securities without the use of underwriters and without the payment
of any discounts or commissions, except as otherwise noted:

On May 20, 1997, in consideration for a loan of $10,000,000 from Phenomenal
Limited ("Phenomenal") to the Company's wholly owned subsidiary Quality Prince,
(1) Quality Prince executed a convertible note ("Note") due March 20, 1998 in
the principal amount of $10,000,000 and (2) the Company issued warrants (the
"Warrants") to purchase 5,263,158 shares of the Company's Common Stock. The Note
accrued interest at three percent (3%) per month, compounded monthly, and was
convertible into 2,914 shares, or such other number of shares as will constitute
not less than 29.14%, of Quality Prince.

The Warrants entitled the holder to purchase 5,263,158 shares of the
Company's common stock 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 (1) May 31, 1998 or (2) 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 were only exercisable in the event that the Note was not converted
pursuant to its terms.

On June 4, 1998, the Company (and its subsidiaries) and Phenomenal executed
an agreement ("Deed Amendment") to modify the terms of the Note and the
Warrants. Pursuant to the Deed Amendment, Phenomenal agreed to waive all
interest accrued on the Note and to convert the Note into 5,263,788 redeemable
preferred shares (the "Preferred Shares") of the Company's wholly owned
subsidiary, Hang Fung Jewellery. The Deed Amendment evidences the Company's
intent to form a new holding company ("Listco") for the shares of the companies,
excluding Quality Prince, comprising the Hang Fung Group (the "Restructuring").
The Preferred Shares must be redeemed and a minimum US$10,000,000 from
redemption are subject to mandatory subscription into shares of common equity of
Listco representing 29.14% of such equity if, and only if, the Company has
listed the shares of Listco on The Stock Exchange of Hong Kong on or before
March 20, 1999. If the Restructuring has been completed but such listing has not
been completed on or before March 20, 1999, Phenomenal shall have the right to
either subscribe for shares of common equity of Listco or to cause the Preferred
Shares to be redeemed for $10,000,000 plus a dividend accruing at 19.56% per
annum.

Pursuant to the Deed Amendment, the Warrants were extended to May 31, 1999
or the date of the proposed listing, whichever is earlier, and the number of
warrant shares was modified to reflect the accrual of dividends on the Preferred
Shares until the Warrants are exercised.

By the terms of the Deed Amendment, Phenomenal may either convert the
Preferred Shares into equity of Listco or exercise the Warrants but may not
avail itself of both such rights. The conversion of the Preferred Shares or
exercise of the Warrants shall cause Phenomenal to forfeit its rights under the
other.

The issuance of the above securities to Phenomenal 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.

9
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following tables present selected historical consolidated financial
data derived from the consolidated financial statements of the Company which
appear elsewhere herein. Quality Prince was acquired by the Company in December
of 1996 in a transaction accounted for as a recapitalization of Quality Prince
with Quality Prince as the acquirer (a "reverse acquisition"). On this basis,
the historical consolidated financial statements of the Company prior to
December 31, 1996 are those of Quality Prince and its subsidiaries and the
historical shareholders' equity of the Company as of March 31,1996 has been
retroactively restated to reflect the equivalent number of shares of the Company
issued for such acquisition. The acquisition of the various members of the Hang
Fung Group by Quality Prince in December of 1996 has been accounted for as a
reorganization of entities under common control, similar to a pooling of
interests. The following data should be read in conjunction with the
consolidated financial statements of the Company included elsewhere herein.

<TABLE>

Year Ended March 31,
-------------------------------------------------------------------
1994 1995 1996 1997 1998
(amounts stated in US$,000, except per share data)
<S> <C> <C> <C> <C> <C>

Income Statement Data:
Net sales...................... $13,197 $18,478 $22,903 $36,825 $57,974
Subcontracting fees............ 3,481 4,902 3,965 4,133 4,308
Total revenues............... 16,678 23,380 26,868 40,958 62,302
Gross profit................... 4,585 7,004 8,046 10,971 15,143
Operating income............... 2,262 4,335 4,402 6,190 8,207
Other income (expense), net.... (185) (274) (329) (741) (636)
Income before taxes............ 2,077 4,061 4,073 5,449 7,571
Net income..................... $ 1,311 $ 2,589 $ 3,393 $ 4,475 $ 6,285
Net income per share (1)....... $ 0.12 $ 0.22 $ 0.32 $ 0.40 $ 0.49
Weighted average shares
outstanding (1)............... 10,500,000 10,500,000 10,500,000 11,075,000 12,800,000

Balance Sheet Data:
Working capital................ $1,042 $3,011 $ 613 $ 2,768 $(1,170)
Total assets................... 14,288 17,517 15,676 21,409 45,667
Long-term debt, less
current portion............... 338 299 879 1,834 4,405
Stockholders' equity (2)....... 1,579 4,531 3,038 8,017 14,278

</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 December 31, 1996 and (iii) the 225,000 shares issued by
New Wine pursuant to a Rule 504 offering were issued December 31, 1996.

(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.

10
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

General

The following discussion should be read in conjunction with the Company's
financial statements appearing elsewhere herein.

Prior to December of 1996, the Company was engaged in limited operations
relating to the production and distribution of record albums, cassette tapes and
compact discs and videotape and television productions for domestic distribution
and foreign licensing; operation of a music publishing firm; and, generally, the
business of providing personal business management services for professional
entertainers. On December 19, 1996, the Company acquired the Hang Fung Group,
and entered into the jewelry manufacturing and distribution business.

The acquisition of the Hang Fung Group has been accounted for using the
purchase method of accounting with the transaction being accounted for as a
"reverse acquisition." The Company does not consider the operations prior to the
acquisition of the Hang Fung Group to be material to an understanding of the
Company. Accordingly, this discussion relates to the operations of the Hang Fung
Group, for all periods presented, excluding the former operations of New Wine,
Inc.

Hang Fung Group's operations consist of designing, assembling,
merchandising and distributing a full line of gold and silver jewelry products
and other ornamental products on a wholesale basis to customers in Hong Kong,
China, Europe, the Middle East, Southeast Asia, and the United States. 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 ("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 certain business
partners. The Company constantly compares costs and quality of jewelry raw
materials to assure that it is obtaining the best purchase price and quality
available. The cost of such raw materials and products varies with currency
fluctuations and other factors beyond the Company's control. While any
fluctuations in cost 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.

11
<PAGE>

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.

Year Ended March 31,
------------------------------
1996 1997 1998
---- ---- ----
Net sales.......................... 85.2% 89.9% 93.1%
Subcontracting fees................ 14.8 10.1 6.9
------ ------ ------
Total revenues................... 100.0 100.0 100.0
Cost of sales...................... 70.1 73.2 75.7
------ ------ ------
Gross profit....................... 29.9 26.8 24.3
Operating expenses................. 13.6 11.7 11.1
------ ------ ------
Income from operations............. 16.3 15.1 13.2
Other income (expense)............. (1.2) (1.8) (1.0)
------ ------ ------
Income before income taxes......... 15.1 13.3 12.2
Income taxes....................... (2.5) (2.4) (2.1)
------ ------ ------
Net income......................... 12.6 10.9 10.1
====== ====== ======

Year Ended March 31, 1998 Compared to Year Ended March 31, 1997

Revenues and Gross Profit. Operating revenues increased by 52.1% to $62.3
million for the year ended March 31, 1998 as compared to the $40.9 million for
fiscal 1997. Sales of Company products were up 57.3% to $57.9 million during
fiscal 1998 as compared to $36.8 million during fiscal 1997. Subcontracting fees
increased by 4.2% to $4.3 million during fiscal 1998 from $4.1 million during
fiscal 1997.

The increase in sales during fiscal 1998 was attributable to increased
product volumes resulting from an increase in production capacity and
investments in marketing efforts across geographical regions, particularly in
the United States and the Middle East. The increase in subcontracting fees was
attributable to increased marketing, new technology and an increase in the
number of supply contracts.

Geographically, sales in Hong Kong decreased and sales in the PRC increased
marginally due to increased marketing efforts which were offset by economic
weakness. The Company experienced a shift in sales in Hong Kong and the PRC as a
result of the economic turmoil originating in the Asian region. Sales in Hong
Kong declined approximately 33.7% to $10.3 million in fiscal 1998 from $15.6
million in fiscal 1997. Sales in the PRC were up during fiscal 1998 due to
stable economic conditions relative to the region, increasing approximately
24.3% to $10 million in fiscal 1998 from $8.0 million in fiscal 1997. Sales in
Southeast Asia (not including Hong Kong and the PRC) during fiscal 1998 were
also up due to increases in orders by existing customers, increasing 165.3% to
$12.2 million in fiscal 1998 from $4.6 million in fiscal 1997.

Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 197.1% increase in sales with these sales accounting for
43.8% of total sales in fiscal 1998 as compared to 23.2% of total sales in
fiscal 1997. 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 290.8% to
$5.9 million in fiscal 1998 from $1.5 million in fiscal 1997. Sales in the
Middle East were up during fiscal 1998, increasing approximately 62.2% to $9.3
million from $5.7 million in fiscal 1997. Sales in the United States, which
began in the fourth quarter of fiscal 1997, increased approximately 682.5% to
$10.2 million during fiscal 1998 from $1.3 million in fiscal 1997.

Gross profits increased by 38% to $15.1 million in fiscal 1998 from $11.0
million during fiscal 1997. The increase in gross profits was mainly
attributable to increased sales, and expansion into the United States market
which were partially offset by a reduction in gross margins. Gross margins
decreased to 24.3% in fiscal 1998 from 26.8% in fiscal 1997 as a result of
implementation of a marketing strategy offering lower prices to enhance
competitiveness and increase sales volume.

12
<PAGE>

Operating Expenses. Operating expenses totaled $6.9 million during fiscal
1998, an increase of 45.1% from $4.8 million in fiscal 1997. The increase in
operating expenses during the period was primarily attributable to increased
marketing expenses associated with the expanded selling efforts, increased
corporate overhead and depreciation expense on investment in machinery and
equipment to support the increase in sales volumes.

Other Income(Expense), Net. Other income(expense), net during fiscal 1997
and 1998 consisted of miscellaneous income on disposal of production scrap,
recovery of expenses paid on behalf of customers, expenses on exchange losses
and bank charges, and interest income and interest expense. A one time expense
attributable to the reverse acquisition was also included in fiscal 1997. Net
other expenses decreased approximately 14.2% to $0.6 million during fiscal 1998
from $0.7 million during fiscal 1997. The decrease was primarily attributable to
an increase in interest income of $0.1 million and the one time nature of the
$0.35 million expenses attributable to the reverse acquisition during fiscal
1997 which was partially offset by $0.32 million increase in interest expenses
due to increased borrowing levels.

Income Taxes. Income taxes increased by 32% from approximately $1.0 million
in fiscal 1997 to $1.3 million in fiscal 1998. The increase in income taxes
during the period was primarily attributable to the increase in taxable earnings
of the Company.

Year Ended March 31, 1997 Compared to Year Ended March 31, 1996

Revenues and Gross Profit. Operating revenues increased by 52.4% to $40.9
million for the year ended March 31, 1997 as compared to $26.9 million for
fiscal 1996. Sales of Company products were up 60.8% to $36.8 million during
fiscal 1997 as compared to $22.9 million in sales during fiscal 1996.
Subcontracting fees increased by 4.2% to $4.1 million during fiscal 1997 from
$3.9 million during fiscal 1996.

The increase in sales was attributable to growing demand for electro-form
jewelry and gold card ornaments as well as increased demand in the PRC resulting
from a recovery in the PRC economy. The increase in subcontracting fees was
attributable to an increase in orders by subcontract manufacturing customers.

Geographically, sales in Hong Kong were up during fiscal 1997 due to
growing demand for gold jewelry and improving economic conditions, increasing
approximately 55.3% to $15.6 million from $10.1 million in fiscal 1996, sales in
the PRC were up during fiscal 1997 due to improving economic conditions and
higher income, increasing approximately 31.2% to $8.0 million from $6.1 million
in fiscal 1996, sales in Europe were down during fiscal 1997 due to continued
weakness in European economies, decreasing approximately 29.9% to $1.5 million
from $2.1 million in fiscal 1996, sales in the Middle East were up during fiscal
1997 due to increased marketing efforts by the Company, increasing approximately
74.7% to $5.7 million from $3.3 million in fiscal 1996, sales in Southeast Asia
during fiscal 1997 were up due to increases in orders by existing customers,
increasing 260.2% to $4.6 million from $1.3 million in fiscal 1996, and sales in
the United States totaled $1.3 million during fiscal 1997 with the commencement
of selling efforts in the United States during the fourth quarter of fiscal
1997.

Gross profits increased by 36.4% to $11.0 million in fiscal 1997 from $8.0
million during fiscal 1996. The increase in gross profits was attributable to
increased sales and subcontracting fees during the period which were partially
offset by a reduction in gross margins. Gross margins were down during the
period to 26.8% from 29.9%. However, excluding subcontracting fees, profit
margins improved on sales of Company products during the period as a result of
increased demand and accompanying higher profit margins for electro-form
jewelry.

Operating Expenses. Operating expenses totaled $4.8 million during fiscal
1997, an increase of 31.2% from operating expenses of $3.6 million in fiscal
1996. The increase in operating expenses during the period was primarily
attributable to increased marketing expenses associated with higher sales volume
and the impact of inflation on certain expenses in Hong Kong and China.

Other Income(Expense), Net. Other income(expense), net during the period
consisted of gains/losses from miscellaneous income on disposal of production
scrap, recovery of expenses paid on behalf of customers, expenses on exchange
losses and bank charges, and interest income and interest expense. A one time
expense of $0.35 million attributable to the reverse acquisition was also
included in fiscal 1997 and primarily caused the increase in net other expense.

13
<PAGE>

Income Taxes. Income taxes increased by 43.2% from approximately $0.68
million in fiscal 1996 to $0.97 million in fiscal 1997. The increase in income
taxes during the period was attributable to the increase in the taxable earnings
of the Company.

Factors that May Affect Future Results

The Company's quarterly and annual operating results have been, and will
continue to be, affected by a wide variety of factors that could have a material
adverse effect on revenues and profitability during any particular period,
including the level of orders which are received and can be shipped in a
quarter, the rescheduling or cancellation of orders by its customers,
competitive pressures on selling prices, changes in product or customer mix,
availability and cost of raw materials, loss of any strategic relationships, the
Company's ability to introduce new products and implement new or expanded
manufacturing technologies on a timely basis, new product introductions by the
Company's competitors, fluctuations in exchange rates, changes in consumer
tastes and spending patterns and general economic conditions, among others.

The Company's future operating results are particularly dependent upon
several specific factors, in addition to the general factors noted above,
including (1) substantial dependence upon manufacturing and, to a certain
extent, marketing arrangements in the PRC, (2) ability to secure adequate
financing to support planned increases in production and marketing of products,
and (3) the ongoing impact of the Asian financial crisis.

Management believes that the Company's ability to sustain its current
margins and level of profitability is due, to a significant degree, to its
establishment of favorable contract manufacturing and marketing arrangements in
the PRC with PRC government authorized entities. If, for any reason, the Company
were to be unable to continue its existing contractual relationships in the PRC,
or to replace those relationships with similar arrangements, it is possible that
the Company's operating costs could increase reducing both the Company's margins
and profitability.

Management believes that the Company's recent growth, and anticipated
future growth, is a result of investments, and planned investments, in new and
expanded production capacity and expanded marketing efforts. The Company has
invested substantial amounts in new machinery and the modernization and
expansion of the Beijing Facility. The Company has also invested substantial
amounts to expand marketing efforts in the United States, the Middle East and
Europe. In order to continue to grow revenues and profitability, the Company
plans to invest substantial additional funds to expand production capacity
further and to support further increases in marketing efforts, particularly
outside of Asia. The Company has formed Listco and plans to list Listco on The
Stock Exchange of Hong Kong to facilitate fund raising efforts to support future
investment. Quality Prince previously received a $10 million loan (which was
subsequently converted to Preferred Shares) from Phenomenal to partially fund
the Company's proposed expansion of production and marketing. Phenomenal has
agreed to redeem the Preferred Shares and apply a minimum of $10 million to
subscribe for equity of Listco provided that the listing is completed by March
20, 1999. If the Company is unable to list the securities of Listco as
anticipated or is otherwise unable to secure additional financing to support
increased production and marketing efforts, the Company may be unable to support
anticipated future growth in revenues and profitability. Further, the Company
may be required to redeem the $10 million of Preferred Shares held by
Phenomenal. See "-- Liquidity and Capital Resources."

Countries in the Asia Pacific region have recently experienced weaknesses
in their currency, banking and equity markets. These weaknesses could adversely
affect, among other things, consumer demand for luxury goods in the region
(perhaps including the Company's products which may be considered luxury
consumer goods), and the U.S. dollar value of the Company's foreign currency
denominated sales (e.g., to the extent sales are denominated in Hong Kong
dollars). In addition, the Company's interest income and expense is sensitive to
fluctuations in the general level of Hong Kong interest rates. However, as
described below, the Company believes that overall, it is well positioned to
minimize such risks.

The Company produces, markets and sells a broad range of jewelry and
ornamental products for different market segments, has already increased its
marketing efforts in North America, Europe and the Middle East, and has taken
steps to stabilize both demand for and supply of its products. See "Business --
Sales and Marketing."

14
<PAGE>

In addition, the Company's policy is to denominate all its sales and assets
in U.S. dollars or Hong Kong dollars. The Hong Kong Government has, throughout
fiscal 1998 and since the beginning of fiscal 1999, repeatedly assured the
public that the "peg" of Hong Kong dollar to the U.S. dollar will not be changed
and the Hong Kong dollar will not be devalued. Similarly, the governor of PRC's
central bank has reassured the public that the Renminbi will not be devalued.
Therefore, based on information available to management at this time, management
does not anticipate significant fluctuations in the exchange rate between the
U.S. dollar and the Hong Kong dollar in the foreseeable future. As the Company
makes its purchases of raw materials in local currencies, and those currencies
have generally exhibited weakness since mid-1997 when compared to the U.S.
dollar, management does not believe the Company is exposed to undue amount of
risk arising from fluctuations of the exchange rates between those currencies
and the U.S. dollar.

The Company does not enter into foreign exchange forward contracts or
currency options to hedge against foreign exchange fluctuations or interest rate
swaps, interest rate forward contracts and other derivatives to hedge against
interest rate exposures. The Company monitors its exchange and interest rate
risks on a continuous basis, both on a stand-alone basis and in conjunction with
each other, from both an accounting and an economic perspective. Given the
horizons of the Company's risk management activities, there may be adverse
financial impacts resulting from unfavorable movements in either foreign
exchange or interest rates.

Overall, the Company believes it is well positioned to minimize material
adverse impact that the recent economic developments in the Asia Pacific region
may have on the Company.

Year 2000 Issue

The Year 2000 Issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock
or date recording mechanism including date sensitive software which uses only
two digits to represent the year, may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.

The Company is using both internal and external resources to identify
significant applications that will require modification, and to make such
modifications, to ensure Year 2000 Compliance. The total cost to the Company of
these Year 2000 Compliance activities has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
The Company has completed the modifications of all significant applications and
its systems are 2000 compliant.

The Company has planned to communicate with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's system, would not have a material adverse effect on the Company.

Liquidity and Capital Resources

At March 31, 1998, the Company had cash balances totaling $2.1 million and
a working capital deficit of $1.2 million. This compares to a cash balance of
$0.1 million and working capital of $2.8 million at March 31, 1997.

Cash provided by operations decreased to $1.9 million during fiscal 1998
from $2.8 million during fiscal 1997. The decrease in cash provided by
operations was primarily due to increases in accounts receivable and inventories
which accompanied the increase in sales during fiscal 1998. The Company's
accounts receivable increased to $10.2 million, or approximately 16.4% of fiscal
1998 revenues, as compared to $5.1 million, or approximately 12.5% of fiscal
1997 revenues. The increase in accounts receivable during fiscal 1998 was
attributable to increased sales levels, particularly in growing non-Asian
markets and the granting of more favorable payment terms to selected customers.
Days sales outstanding in receivables increased to 45 days for fiscal 1998, from
36 days for fiscal 1997. Inventories increased to $13.1 million at March 31,
1998 from $8.5 million at March 31, 1997. The increase in year end inventories
was required to support growing sales. The Company used $15.7 million, $4.8
million and $2.2 million for investing activities in fiscal 1998, 1997 and 1996,
respectively. The investment of cash in each of those periods related primarily
to acquisitions of machinery and equipment to increase the Company's production
capacity in order to support growing sales.

15
<PAGE>

Financing activities provided $15.9 million in fiscal 1998 as compared to
$1.8 million in fiscal 1997. Cash generated from financing activities in fiscal
1998 consisted primarily of the proceeds of a $10 million loan from Phenomenal
to the Company's wholly owned subsidiary Quality Prince. The Note evidencing the
loan accrued interest at three percent (3%) per month, compounded monthly, and
was convertible into 2914 shares, or such other number of shares as will
constitute not less than 29.14%, of Quality Prince. As additional consideration
for the loan, the Company issued Warrants to Phenomenal which entitled the
holder to purchase 5,263,158 shares of the Company's common stock 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 (1) May 31, 1998 or (2) 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 were only exercisable in the event that
the Note was not converted pursuant to its terms.

On June 4, 1998, the Company (and its subsidiaries) and Phenomenal executed
a Deed Amendment to modify the terms of the Note and the Warrants. Pursuant to
the Deed Amendment, Phenomenal agreed to waive all interest accrued on the Note
and to convert the Note into 5,263,788 Preferred Shares of the Company's wholly
owned subsidiary, Hang Fung Jewellery. The Deed Amendment evidences the
Company's intent to form a new holding company, Listco, for the shares of the
companies, excluding Quality Prince, comprising the Hang Fung Group. The
Preferred Shares must be redeemed and a minimum $10,000,000 from redemption are
subject to mandatory subscription into shares of common equity of Listco
representing 29.14% of such equity if, and only if, the Company has listed the
shares of Listco on The Stock Exchange of Hong Kong on or before March 20, 1999.
If the Restructuring has been completed but such listing has not been completed
on or before March 20, 1999, Phenomenal shall have the right to either subscribe
for shares of common equity of Listco or to cause the Preferred Shares to be
redeemed for $10,000,000 plus a dividend accruing at 19.56% per annum.

The Company's primary liquidity needs are to fund accounts receivable and
inventories as well as to fund the purchase of new machinery in the total amount
of approximately $25.5 million. Prior to Phenomenal's investment in Hang Fung
Group, the Company had historically funded its operations through a combination
of internally generated cash, short-term borrowings under bank lines of credit
and hire purchase financing.

At March 31, 1998, the Company had no material capital commitments.
However, the Company intends to use available funds as needed to expand its
production capacity and jewelry distribution operations in Europe, the Middle
East and the United States.

At March 31, 1998, the Company's capital resources consisted of various
bank credit facilities and certain capital leases, in addition to funds on hand.
The Company's bank credit facilities consist of a combination of term loans,
lines of credit, letters of credit, bank guarantees, overdraft, revolving and
similar credit facilities generally utilized in the jewelry industry. The
Company's bank credit facilities are used to fund purchases of raw materials and
inventory and to finance accounts receivable and overdrafts. Such facilities are
consistent with credit facilities generally available to operators in the
jewelry industry in terms of interest rates and fees, collateral, repayment
terms, and renewal. The Company's total available bank credit facilities at
March 31, 1998 were approximately $12.4 million of which approximately $9.9
million had been used at such date.

16
<PAGE>

At March 31, 1998, the Company also had a number of capital leases and
operating leases pursuant to which the Company holds various facilities and
equipment. At March 31, 1998, the Company's capital lease obligations totaled $3
million of which $1.1 million was attributable to current lease obligations.
Obligations under operating leases require minimum annual rental payments by the
Company of approximately $0.35 million in fiscal 1999.

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 bank credit needs and 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:

Fiscal Year Ended March 31,
--------------------------------------------------
1996 1997 1998
(US$,000) (US$,000) (US$,000)
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
1st Quarter (4/1-6/30) $5,961 22.3 $ 7,788 19.0 $13,926 22.4
2nd Quarter (7/1-9/30) 6,608 25.2 9,980 24.4 15,458 24.8
3rd Quarter (10/1-12/31) 7,684 28.6 12,639 30.8 17,706 28.4
4th Quarter (1/1-3/31) 6,615 23.9 10,551 25.8 15,212 24.4
------ ----- ------ ----- ------ -----
Total $26,868 100.0 $40,958 100.0 $62,302 100.0
====== ===== ====== ===== ====== =====
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 believes inflation
will not have a material effect on its future operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company, together with the
independent auditors' report thereon of Arthur Andersen & Co. ("Arthur
Andersen"), Certified Public Accountants, appears on pages F-1 through F-23 of
this report. See Index to Financial Statements on page 26 of this report.

17
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Following the acquisition of the Hang Fung Group by the Company, in
December 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, Ltd.'s 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, Ltd. 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, Ltd. 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 with respect to the
financial statements of for the Hang Fung Group for fiscal years ended March 31,
1994, 1995, 1996 and 1997.

18
<PAGE>

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Identification of Directors, Executive Officers and Certain Significant
Employees

The following table sets forth certain information regarding the directors
and executive officers of the Company.

Name Age Position
- -------- ----- --------
Lam Sai Wing........ 43 Chairman, Chief Executive Officer and President
Chan Yam Fai, Jane.. 35 Vice President, Chief Financial Officer and Director
Ng Yee Mei.......... 36 Vice President and Director
Cheng Wai On........ 45 Director

Terms of Office

The directors of the Company hold office until the next annual meeting of
stockholders of the Company or until their successors in office are elected and
duly qualified. All officers serve at the discretion of the Board of Directors
except as set forth in employment agreements.

Family Relationships

Lam Sai Wing and Chan Yam Fai, Jane are husband and wife.

Business Experience

Lam Sai Wing has served as Chairman of the Board, Chief Executive Officer
and President of the Company since the Exchange in December of 1996 and of the
Company's predecessor and operating subsidiaries, the Hang Fung Group, since
founding the Hang Fung Group in 1986.

Chan Yam Fai, Jane has served as Vice President, Chief Financial Officer
and a Director of the Company since the Exchange in December of 1996 and of the
Hang Fung Group since 1990.

Ng Yee Mei has served as Vice President and a Director of the Company since
the Exchange in December of 1996 and of the Hang Fung Group since 1991.

Cheng Wai On has served as a Director of the Company since the Exchange in
December of 1996. Mr. Cheng has been employed by the Hang Fung Group as Export
Manager since 1986.

Compliance With Section 16(a) of the Exchange Act

Under the securities laws of the United States, the Company's directors,
its executive officers and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established and the Company is required to disclose any failure to file by
these dates during fiscal 1998.

All of the filing requirements were satisfied on a timely basis in fiscal
1998. In making these disclosures, the Company has relied solely on written
statements of its directors, executive officers and shareholders and copies of
the reports that they filed with the Commission.

19
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Executive Compensation Table

The following table sets forth information as to the compensation paid or
accrued to each officer and director receiving compensation of at least $100,000
per year and the Chief Executive Officer for the three years ended March 31,
1998:

<TABLE>

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............................ 1998 $194,000 $ 0 $ 0 $ 0
Chief Executive Officer, Chairman of.. 1997 145,000 0 0 0
the Board and President (1)........... 1996 55,000 0 15,000 0
</TABLE>

- ------------------

(1) Mr. Lam assumed the positions indicated, including the position of Chief
Executive Officer, following the Exchange in December of 1996. The
compensation indicated represents amounts paid by the Hang Fung Group
during each of the years indicated. Mr. Claude Smith served as Chief
Executive Officer of the Company during each of the years indicated and up
until the Exchange in December of 1996 at which time Mr. Lam assumed the
position of Chief Executive Officer.

(2) Mr. Lam's other annual compensation consists of a housing allowance of
$15,000.

Director's Compensation

No compensation has been paid to any directors for service in such capacity
in the past and no such compensation is presently payable to directors. At such
time as the Board of Directors deems appropriate, the Company intends to adopt
an appropriate policy to compensate non-employee directors in order to attract
and retain the services of qualified non-employee directors.

Employment Agreements

The Company has employment agreements with Mr. Lam and Ms. Chan. Each of
these agreements expires December 31, 2003. The employment agreements, as
amended, provide for a base salary and bonus of HK$1,499,000 (US$194,000) for
Mr. Lam and HK$155,000 (US$20,000) for Ms. Chan including a housing allowance
and participation in all other benefit plans adopted by the Company for fiscal
1998.

Provident Plan

The Company's subsidiaries in Hong Kong have adopted a voluntary defined
contribution provident 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.

Compensation Report

The Company does not presently maintain a Compensation Committee of its
Board of Directors. The Board of Directors, acting under the guidance of the
Company's Chairman and Chief Executive Officer, Mr. Lam, has historically fixed
the compensation of executive officers. The salary of Mr. Lam was fixed pursuant
to the terms of an Employment Agreement entered in 1994 and amended in 1997.

20
<PAGE>

In fixing the compensation of Mr. Lam and other executive officers, the
Board of Directors considered the following factors, among others: (1) from
fiscal 1995 through fiscal 1998, the Company and its predecessor, the Hang Fung
Group, was consistently profitable -- with revenues increasing 166% and net
income increasing 143%, (2) the importance of attracting and retaining the
highly skilled executive officers in the management team that has been
responsible for such financial performance, (3) the efforts, skills and
responsibilities of, and contributions made by, each such executive officer, and
(4) the competitiveness of the Company's compensation packages.

With respect to the Chairman and Chief Executive Officer, the Directors
acknowledged that he has brought to the Company not only his expertise and
personal relationships in the jewelry industry, but also his vision, foresight
and efforts to bring about the Company's financial performance over the past
several years, and to steer the Company toward the more profitable segments of
the business. The Directors also took into account the need to retain such
highly qualified officers by providing competitive compensation packages.

Performance Graph

The following graph summarizes cumulative total shareholder return
(assuming reinvestment of dividends) on the Common Stock of the Company compared
to the returns of the S&P Smallcap 600 Index and of a peer group (the "Peer
Group") consisting of DG Jewellry CDA Ltd. ("DGJ") and IWI Holding Limited
("IWI"). The Company's Common Stock was first registered under Section 12(g) of
the Securities Exchange Act of 1934, as amended, on March 24, 1997. The
measurement period hereto commenced on March 24, 1997 and ended on March 31,
1998, the Company's 1998 fiscal year end date. The graph assumes that $100 was
invested on March 24, 1997.

As there is no broad equity market index for the OTC Bulletin Board where
the Company's Common Stock is traded and there is no published industry or
line-of-business index for the jewelry business in which the Company is engaged,
the Company has selected DGJ and IWI as peer issuers for comparison. DGJ and IWI
are engaged primarily in the design, assembly, merchandising and wholesale
distribution of jewelry and whose shares are traded in the over-the-counter
market in the United States.

The comparisons in this graph are required by the Securities and Exchange
Commission and are not intended to forecast or be indicative of future stock
price performance or the financial performance of the Company. Shareholders are
encouraged to review the Financial Statements of the Company mentioned in Item 8
above.

[PERFORMANCE GRAPH]

March 24, 1997 March 31, 1997 March 31, 1998
-------------- -------------- --------------

S.W. Lam, Inc. 100 100.00 16.67
S&P Smallcap 600 Index 100 96.34 145.89
Peer Group 100 107.63 35.72

21
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Common Stock

The following table is furnished as of December 28, 1998 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>

Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned (2) Percent (2)
- -------------------- ---------------------- -----------
<S> <C> <C>

Good Day Holdings, Ltd (3)(5)..................... 6,600,000 (3) 51.6%
Phenomenal Limited (7)............................ 5,263,158 (4) 29.1%
Lam Mo Wan (5).................................... 1,800,000 14.1%
Chan Wai Sum (5).................................. 1,800,000 14.1%
Lam Sai Wing (3).................................. 6,600,000 (3) 51.6%
Carhill Limited (6)............................... 800,000 6.3%
Chan Yam Fai, Jane................................ 300,000 2.3%
Ng Yee Mei........................................ -0- -
Cheng Wai On...................................... -0- -
All officers and directors as a group (4 persons). 6,900,000 (3) 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) Includes shares of common stock not outstanding, but which are subject to
options and warrants exercisable within 60 days of the date of the
information set forth in this table, which are deemed to be outstanding for
the purpose of computing the shares held and percentage of outstanding
common stock with respect to the holder of such options or warrants. Such
shares are not, however, deemed to be outstanding for the purpose of
computing the percentage of any other person.

(3) 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.

(4) Includes 5,263,158 shares of common stock issuable upon exercise of
Warrants originally issued by the Company and a convertible note (the
"Note") issued by Quality Price in consideration of a loan, in the amount
of $10,000,000, from Phenomenal to Quality Prince. The Warrants originally
entitled the holder to purchase 5,263,158 shares of the Company's common
stock 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 (1)
May 31, 1998 or (2) 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 were only exercisable in the event that the Note
was not converted pursuant to its terms. On June 4, 1998, the Company (and
its subsidiaries) and Phenomenal executed a Deed Amendment to modify the
terms of the Note and the Warrants. Pursuant to the Deed Amendment, the
Warrants were extended to May 31, 1999 or the date of the proposed listing
of Listco, whichever is earlier, and the number of warrant shares was
modified to reflect the accrual of dividends on the Preferred Shares until
the Warrants are exercised. By the terms of the Deed Amendment, Phenomenal
may either convert the Preferred Shares into equity of Listco or exercise
the Warrants but may not avail itself of both such rights. The conversion
of the Preferred Shares or exercise of the Warrants shall cause Phenomenal
to forfeit its rights under the other. See "Item 5. Market for Registrant's
Common Equity and Related Stockholder Matters -- Sales of Unregistered
Securities."

(5) Address is Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg. No. 1 Hok
Yuen Street East, Kowloon, Hong Kong.

(6) Address is c/o Suite 4703, Central Plaza, 18 Harbour Road, Wanchai, Hong
Kong.

(7) Address is P.O. Box 957, Offshore Incorporations Centre, Road Town,
Tortola, British Virgin Islands.

22
<PAGE>

Preferred Stock

Series A Preferred Stock. The following table is furnished as of December
28, 1998 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.

Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned Percent
- -------------------- ------------------ -------
Good Day Holdings Ltd. (3)............ 100,000 (2) 100.0%
Lam Sai Wing.......................... 100,000 (2) 100.0%

(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.

(3) Address is Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg., No. 1 Hok
Yuen Street East, Kowloon, Hong Kong

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company's predecessor and subsidiary, Hang Fung Group, has, from time
to time entered into transactions with officers and directors of the Company and
companies controlled by officers and directors of the Company.

During the fiscal years ended March 31, 1997 and 1998, the Hang Fung Group
paid rental payments of $174,000 each year to Ms. Chan in connection with the
lease of the Company's principal executive offices in Hong Kong.

The Company has from time to time both advanced to and borrowed funds from
Mr. Lam. At March 31, 1997, receivables from Mr. Lam totaled $475,000. At March
31, 1998, the Company owed Mr. Lam $1.0 million. All of such loans to and from
Mr. Lam are unsecured, non-interest bearing and without pre-determined repayment
terms.

Mr. Lam and Ms. Chan 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. Additionally, Mr. Lam and Ms. Chan
have guaranteed the repayment of the $10 million of Preferred Shares issued by
Hang Fung Jewellery and held by Phenomenal pursuant to the terms of a Put
Option. See "Market For Registrant's Common Equity and Related Stockholder
Matters -- Sales of Unregistered Securities."

With the exception of the non-interest bearing loans to Mr. Lam, all of the
above transactions are believed by management to be on terms at least as
favorable to the Company as may have been obtained from unaffiliated third
parties. The Company has no present policy governing related party transactions
but intends to implement a policy such that all future and ongoing transactions
between the Company and its directors, officers, principal stockholders or
affiliates will be on terms no less favorable to the Company than may be
obtained from unaffiliated third parties, and any such transactions will be
approved by a majority of disinterested directors of the Company.

23
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this Report:

(1) Consolidated Financial Statements: See Index to Financial Statements
on page 26 of this report for financial statements and supplementary
data filed as part of this report.

(2) Financial Statement Schedules

None

(3) Exhibits

Exhibit
Number Description of Exhibit
------- ----------------------

2.1 Acquisition Agreement between S.W. Lam, Inc. and the shareholders of
Hang Fung Jewellery Company Limited and Kai Hang Jewellery Company
Limited (1)
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Certificate of Designation for Series A Preferred Stock (1)
10.1++ Employment Agreement with Lam Sai Wing dated January 1, 1994 (1)
10.2++ Employment Agreement with Chan Yam Fai, Jane dated January 1, 1994 (1)
10.3 Sales Agency Agreement between Hang Fung Jewellery Co., Ltd. and China
Jewellery Import & Export Co. (1)
10.4 Agreement for Jewellery Assembling between Hang Fung Jewellery Co.,
Ltd. and China Jewellery Import & Export Co. (1)
10.5 Sales Cooperation Agreement between Hang Fung Jewellery Co., Ltd. and
China Jewellery Import & Export Co. (1)
10.6 Confirmation Agreement between Hang Fung Jewellery Co., Ltd. and China
Jewellery Import & Export Co. (1)
10.7 Lease Agreement between Chan Yam Fai, Jane and Hang Fung Jewellery
Co., Ltd. re: executive offices (1)
10.8++ Supplementary Employment Contract with Lam Si Wing and Lam Chan Yam
Fai (2)
10.9 Warrant Agreement with Phenomenal Limited (3)
10.10 Convertible Note with Phenomenal Limited (3)
10.11 Deed Amendment (3)
27.1* Financial Data Schedule

- -------------------
++ Compensatory plan or management agreement.

* Filed herewith

(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form 10 (Commission File No.
0-22049)

(2) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended March 31, 1997

(3) Incorporated by reference to the respective exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1997

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended March 31, 1998.

24
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

S.W. LAM, INC.

By: /s/ Lam Sai Wing
------------------------------------
Lam Sai Wing
President and Chief Executive Officer
Dated: January 13 , 1999
----

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signature Title Date
------------- --------- --------

/s/ Lam Sai Wing
- -------------------- President, Chief Executive Officer January 13, 1999
Lam Sai Wing (Principal Executive Officer) and
Chairman of the Board
/s/ Chan Yam Fai, Jane
- -------------------- Vice President, Chief Financial January 13, 1999
Chan Yam Fai, Jane Officer (Principal Accounting
and Financial Officer) and Director
/s/ Ng Yee Mei
- -------------------- Vice President and Director January 13, 1999
Ng Yee Mei

/s/ Cheng Wai On
- -------------------- Director January 13, 1999
Cheng Wai On

25
<PAGE>

S.W. LAM, INC.

Index to Consolidated Financial Statements

Page
------

Report of Independent Public Accountants.................................. F-1

Consolidated Balance Sheets as of March 31, 1997 and 1998................. F-2

Consolidated Statements of Operations for the Years ended March 31, 1996,
1997 and 1998.......................................................... F-3

Consolidated Statements of Cash Flows for the Years ended March 31, 1996,
1997 and 1998.......................................................... F-4

Consolidated Statements of Changes in Shareholders' Equity for the Years
ended March 31, 1996, 1997 and 1998.................................... F-5

Notes to Consolidated Financial Statements................................ F-6

26
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of S. W. Lam, Inc.:

We have audited the accompanying consolidated balance sheets of S. W. Lam, Inc.
(incorporated in the State of Nevada, United States of America; "the Company")
and Subsidiaries ("the Group") as of March 31, 1997 and 1998, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for the years ended March 31, 1996, 1997 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of S. W. Lam, Inc. and
Subsidiaries as of March 31, 1997 and 1998, and the results of their operations
and their cash flows for the years ended March 31, 1996, 1997 and 1998, in
conformity with generally accepted accounting principles in the United States of
America.

ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong

Hong Kong,
October 9, 1998.
S. W. LAM, INC.

F-1

<PAGE>

S.W. LAM, INC.

CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1998

(Amounts expressed in United States dollars)

Note 1997 1998
------ ------ ------
$'000 $'000

ASSETS
- ------

Current assets:
Cash and bank deposits 94 2,094
Accounts receivable, net 5 5,106 10,248
Deposits and prepayments 6 142 395
Inventories 7 8,509 13,077
Due from a director 18 475 -
------ ------

Total current assets 14,326 25,814

Property, machinery and equipment and capital
leases, net 8 7,083 19,853

Total assets 21,409 45,667
====== ======

LIABILITIES AND SHAREHOLDERS'EQUITY
- -----------------------------------

Current liabilities:
Short-term bank borrowings 9 2,275 5,618
Long-term bank loans, current portion 11 197 293
Capital lease obligations, current portion 12 229 1,106
Accounts payable 1,619 2,880
Deposits from customers 1,125 -
Accrued liabilities 10 4,754 4,880
Convertible note 13 - 10,000
Due to a director 18 - 1,034
Taxation payable 14 1,359 1,173
------ ------

Total current liabilities 11,558 26,984

Long-term bank loans, non-current portion 11 1,290 1,189
Capital lease obligations, non-current portion 12 260 1,933
Deferred taxation 14 284 1,283

Total liabilities 13,392 31,389

Shareholders' equity:
Common stock, par value $0.001 each:
- authorized - 25,000,000 shares;
- outstanding and fully paid - 12,800,000 shares 13 13
Preferred stock, par value $0.001 each:
- authorized - 25,000,000 shares;
- outstanding and fully paid - Series A
preferred stock - 100,000 shares - -
Additional paid-in capital 511 511
Retained earnings 7,343 13,628
Cumulative translation adjustments 150 126
------ ------
Total shareholders' equity 8,017 14,278
------ ------
Total liabilities and shareholders' equity 21,409 45,667
====== ======

The accompanying notes are an integral part of these financial statements.

F-2

<PAGE>

S. W. LAM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998

(Amounts expressed in United States dollars)

Note 1996 1997 1998
$'000 $'000 $'000

Revenues
Net sales 22,903 36,825 57,994
Contract processing fees 3,965 4,133 4,308
------ ------ -------
Total revenues 26,868 40,958 62,302
Cost of sales and services (18,822) (29,987) (47,159)
------- ------- -------
Gross profit 8,046 10,971 15,143
Selling, general and administrative expenses (3,644) (4,781) (6,936)
Interest expenses (403) (389) (711)
Interest income 11 - 137
Other income (expenses), net 63 (2) (62)
Expenses related to reverse acquisition - (350) -
------ ------ -------
Income before income taxes 4,073 5,449 7,571
Provision for income taxes 14 (680) (974) (1,286)
------ ------ -------
Net income 3,393 4,475 6,285
====== ====== =======
Earnings per common share $ 0.32 $ 0.40 $ 0.49
====== ====== =======
Weighted average number of
common shares 10,500,000 11,075,000 12,800,000
========== ========== ==========

The accompanying notes are an integral part of these financial statements.

F-3

<PAGE>

S. W. LAM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998

(Amounts expressed in United States dollars)

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

Cash flows from operating activities:
- ------------------------------------
Net income 3,393 4,475 6,285
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation of property, machinery and equipment 678 1,031 2,988
Provision for bad and doubtful debts 114 - -
Decrease (Increase) in operating assets -
Accounts receivable, net 2,455 (2,117) (5,142)
Deposits and prepayments - (128) (253)
Inventories 179 (440) (4,568)
Due from a director 431 581 475
Increase (Decrease) in operating liabilities -
Accounts payable 1,168 266 1,261
Deposits from customers (2,974) (2,891) (1,125)
Accrued liabilities 1,135 1,069 126
Due to a director - - 1,034
Taxation payable 693 701 (186)
Deferred taxation (13) 284 999
------- ------- -------
Net cash provided by operating activities 7,259 2,831 1,894
======= ======= =======
Cash flows from investing activities:
- ------------------------------------
Additions to property, machinery and equipment (2,173) (4,809) (15,756)
======= ======= =======
Cash Flows from financing activities:
- ------------------------------------
Net proceeds from issuance of common stock - 524 -
Decrease in bank overdrafts (1,318) (77) (56)
Increase in import trust receipts bank loans 909 736 3,399
New long-term bank loans 1,257 772 278
Repayment of long-term bank loans (1,279) (517) (283)
New capital lease obligations 151 871 3,825
Repayment of capital element of capital lease
obligations (75) (460) (1,275)
Net proceeds from issuance of convertible note - - 10,000
Dividends paid (5,000) - -
------- ------ -------
Net cash (used in) provided by financing
activities (5,355) 1,849 15,888
------- ------ -------
Effect of cumulative translation adjustments 113 (21) (26)
------- ------ -------
Net (decrease) increase in cash and bank deposits (156) (150) 2,000
Cash and bank deposits, as of beginning of year 400 244 94
------- ------ -------
Cash and bank deposits, as of end of year 244 94 2,094
======= ====== =======

The accompanying notes are an integral part of these financial statements.

F-4

<PAGE>

S. W. LAM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998

(Amounts expressed in United States dollars)

<TABLE>
Series A
Common Stock preferred stock
--------------------- ---------------------- Cumulative
Number of Number of Additional Retained translation
shares Amount Shares Amount paid-in capital earnings adjustments
--------- -------- ----------- -------- --------------- -------- -----------
'000 $'000 '000 $'000 $'000 $'000 $'000
<S> <C> <C> <C> <C> <C> <C> <C>

Balance as of March 31,
1995 10,500 11 100 - - 4,475 56
Net income - - - - - 3,393 -
Dividends - - - - - (5,000) -
Translation adjustments - - - - - - 114
Balance as of March 31,
1996 10,500 11 100 - - 2,868 170
Effect of the exchange
reorganization 1,500 1 - - (12) - -
Issuance of common stock 800 1 - - 999 - -
Common stock issuance expenditure - - - - (476) - -
Net income - - - - - 4,475 -
Translation adjustments - - - - - - (20)
Balance as of March 31,
1997 12,800 13 100 - 511 7,343 150
Net income - - - - - 6,285 -
Translation adjustments - - - - - - (24)
Balance as of March 31,
1998 12,800 13 100 - 511 13,628 126

</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5

<PAGE>

S. W. LAM, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------

(Amounts expressed in United States dollars unless otherwise stated)

1. ORGANIZATION AND OPERATIONS
---------------------------

S. W. Lam, Inc. ("the Company"), formerly known as New Wine Inc., was
incorporated on April 12, 1994 in the State of Tennessee, United States of
America. On November 15, 1996, the Company effected a change of domicile by
reincorporating in the State of Nevada, United States of America, and changed
its name from New Wine, Inc. to S. W. Lam, Inc. In addition, on the same date,
the Company effected a change in par value of each share of its common stock
from $0.01 per share to $0.001 per share.

On December 31, 1996, the Company acquired 100% interest in Quality Prince
Limited ("QPL"; a company incorporated in the British Virgin Islands) by issuing
10,500,000 shares of its common stock of par value $0.001 each, and 100,000
shares of its Series A preferred stock of par value $0.001 each, to the previous
shareholders of QPL. QPL is an investment holding company which had acquired on
December 19, 1996, 100% interest in the following companies:

Place of
Name of company incorporation Principal activities
- ----------------- --------------- --------------------

Hang Fung Jewellery Company Limited
("HFJCL")(Note a) Hong Kong Production and selling
of jewellery products

Kai Hang Jewellery Company Limited
("KHJCL")(Note a) Hong Kong Property holding

Macadam Profits Limited
("MPL") (Note b) British Virgin
Islands Inactive

Priestgill Limited
("PL")(Note b) British Virgin
Islands Inactive

Soycue Limited
("SL")(Note b) British Virgin
Islands Inactive
Notes -

a. HFJCL took over the businesses previously undertaken by Hang Fung Jewellery
Company ("HFJC") effective September 1995. Prior to December 19, 1996,
HFJCL and KHJCL were jointly owned by Mr. Lam Sai Wing and Ms. Chan Yam
Fai. HFJC was an unincorporated sole-proprietorship entity owned by Mr. Lam
Sai Wing.

b. HFJCL took over the business previously undertaken by SL effective April
1996. Prior to December 19, 1996, SL, MPL and PL were solely owned by Mr.
Lam Sai Wing.

F-6
<PAGE>

1. ORGANIZATION AND OPERATIONS (Cont'd)
---------------------------

The Company and its subsidiaries ("the Group") are principally engaged in the
production and selling of jewellery products to customers in Hong Kong, the
People's Republic of China ("the PRC") and other parts of the world. The Group
maintains its head office in Hong Kong where it coordinates the Group's
marketing and selling functions. Its production facilities are located in Hong
Kong and the PRC.

The Group's production activities in the PRC are mainly operated through a
series of contract processing agreements with China National Pearl, Diamond, Gem
and Jewellery Import and Export Corporation ("CNPIEC"), Tai Yuen Jewellery
Crafts Factory ("TYJCF"), Shenzhen Crafts Import and Export Company ("SCIEC")
and Shenzhen Jia Yi Jewellery Co., Ltd. ("SJYJC"), PRC state-owned enterprises,
which are among the few entities authorized to engage in the production and
trading of gold and silver products in the PRC. The key transactions with
CNPIEC, TYJCF and SCIEC were as follows:

a. Under a contract processing agreement 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. The Beijing Plant also provides contract
processing services to PRC customers at the instruction and on behalf of
CNPIEC, and shares a portion of the contract processing fees received by
CNPIEC. The initial term of the agreements is ten years expiring on
November 17, 2004, and is renewable upon expiration.

b. On April 30, 1996, HFJCL entered into a contract processing agreement with
TYJCF, pursuant to which a plant was operated by HFJCL in Tai Yuen, the
PRC, ("the Tai Yuen Plant") to produce jewellery products. The Tai Yuen
Plant also provides contract processing services to PRC customers at the
instruction and on behalf of TYJCF. The agreement expires on April 29,
2006.

c. Pursuant to the aforesaid agreements, CNPIEC and TYJCF have agreed to
undertake and pay for all of HFJCL's PRC tax liabilities, including
value-added tax and other related charges, if any, relating to HFJCL's
operations under the above-mentioned activities.

d. On April 4, 1988, HFJCL entered into a contract processing agreement with
SCIEC for the production of gold and silver products in Shenzhen, the PRC.
Pursuant to an agreement dated January 2, 1997, the rights and obligations
of SCIEC under the contract processing agreement was taken over by SJYJC.
The agreement with SJYJC expires on December 31, 1999.

e. Other transactions with the above-named parties include:

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

Purchases of gold and silver from
- - CNPIEC 2,461 - -

Management fees paid to
- - CNPIEC 84 54 28

F-7
<PAGE>

2. BASIS OF PRESENTATION
---------------------

The acquisition of QPL by the Company on December 31, 1996 was treated as a
reverse acquisition since QPL is the continuing entity as a result of the
exchange reorganisation. On this basis, the historical financial statements
prior to December 31, 1996 represent the consolidated financial statements of
QPL and its subsidiaries. The historical shareholders' equity accounts of the
Company represented 10,500,000 shares of common stock of par value of $0.001
each and 100,000 shares of Series A preferred stock of par value $0.001 each
which were issued in connection with the acquisition. The original 1,500,000
shares of common stock of par value $0.001 each outstanding prior to the
exchange reorganisation have been reflected as an addition in the historical
shareholders' equity accounts of the Company on December 31, 1996.

The acquisitions of HFJCL, KHJCL, MPL, PL and SL by QPL on December 19, 1996
have been accounted for as a reorganization of entities under common control,
similar to a pooling of interests as the shareholders and management control of
HFJCL, KHJCL, SL, MPL, PL and QPL are the same before and after the acquisition.

3. SUBSIDIARIES
------------

Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of March 31, 1998 were as follows:

Place of Percentage of
incorporation equity interest Principal
Name operations held activities
- ---------------- --------------- ----------------- -----------

Quality Prince Limited British Virgin
Islands 100% Investment holding

Hang Fung Jewellery
Company Limited Hong Kong 100% Production and
selling of
jewellery products
Kai Hang Jewellery
Company Limited Hong Kong 100% Property holding

Macadam Profits Limited British Virgin
Islands 100% Inactive

Priestgill Limited British Virgin
Islands 100% Inactive

Soycue Limited British Virgin
Islands 100% Inactive

Hang Fung Gold
Technology Limited Bermuda 100% Inactive

There is no restriction on the distribution of the subsidiaries' retained
earnings.

F-8
<PAGE>

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------

a. Basis of consolidation
----------------------

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intra-group transactions and balances have been
eliminated on consolidation.

Inventories

Inventories are stated at the lower of cost, on a first-in, first-out basis, and
market value. Costs of work-in-progress and finished goods include direct
materials, direct labour and an attributable portion of production overheads.

Property, machinery and equipment and capital leases

Property, machinery and equipment and capital leases are recorded at cost. Gains
or losses on disposals are reflected in current operations. Depreciation for
financial reporting purposes is provided using the straight-line method over the
estimated useful lives of the assets as follows: leasehold land - 50 years,
building - 20 years, machinery and equipment - 5 to 10 years, motor vehicles - 5
years, and furniture, fixtures and office equipment - 5 years. Major
expenditures for betterments and renewals are capitalized. All ordinary repair
and maintenance costs are expensed as incurred.

Impairment loss on property, machinery and equipment is recognized when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges) indicates that future operations will not produce
sufficient revenue to cover the related future costs, including depreciation,
and when the carrying amount of the asset cannot be realized through sale.
Measurement of the impairment loss is based on fair value of the assets.

d. Sales
-----

Sales comprise (i) the invoiced value of merchandise supplied to customers, net
of sales returns and allowances, which are recognized when merchandise is
shipped and title is passed to customers, and (ii) contract processing fees,
which are recognized when the contract processing service is rendered.

Deposits or advanced payments from customers prior to passage of title of goods
and the expiration of right of return are recorded as deposits from customers.

e. Income taxes
------------

The Group accounts for income tax under the provisions of Statement of Financial
Accounting Standards No. 109, which requires recognition of deferred tax assets
and liabilities for the 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.

F-9
<PAGE>

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------

f. Leases
------

Finance leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets are transferred to the Group.
Fixed assets held under finance leases are initially recorded at the present
value of the minimum payments at the inception of the leases, with equivalent
liabilities categorized as appropriate under current or non-current liabilities.
Interest expenses, which represent the difference between the minimum payments
at the inception of the finance leases and the corresponding fair value of the
assets acquired, are allocated to accounting periods over the period of the
leases to produce a constant rate of charge on the outstanding balances.

Operating leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets remain with the lessors. Rental
payments under operating leases are charged to expense on the straight-line
basis over the period of the relevant leases.

g. Foreign currency translation
----------------------------

The Company considers Hong Kong dollars as its functional currency as a
substantial portion of the Group's business activities is based in Hong Kong
dollars.

The translation of the financial statements into United States dollars is
performed for balance sheet accounts using the closing exchange rate in effect
at the balance sheet date and for revenue and expense accounts using an average
exchange rate during each reporting period. The gains or losses resulting from
translation are included in shareholders' equity separately as cumulative
translation adjustments. Aggregate gains (losses) from foreign currency
transactions included in the results of operations for the years ended March 31,
1996, 1997 and 1998 were approximately $1,000, $(2,000) and $(2,000),
respectively.

h. Earnings per common share
-------------------------

Basic earnings per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 by dividing net income for each year by
the weighted average number of shares of common stock outstanding during the
years, as if the Company had acquired the 100% interest in QPL as of the
beginning of years as a recapitalization of QPL with QPL as the acquirer (see
Note 2). The weighted average number of shares used to compute basic earnings
per common share was 10,500,000, 11,075,000 and 12,800,000 for the years ended
March 31, 1996, 1997 and 1998, respectively.

No diluted earnings per common share is computed as the exercise price of the
warrant was higher than the average market price of common stock during the
year.

i. Use of estimates
----------------

The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.

F-10
<PAGE>

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------

j. Fair value of financial instruments
-----------------------------------

All financial instruments of the Group are carried at cost, which
approximate their fair values.

5. ACCOUNTS RECEIVABLE
-------------------

Accounts receivable comprised:

1997 1998
------ ------
$'000 $'000

Trade receivables 5,558 10,700
Less: Provision for bad and doubtful
receivables (452) (452)
------- -------
Accounts receivable, net 5,106 10,248
======= =======

6. DEPOSITS AND PREPAYMENTS
------------------------

Deposits and prepayments comprised:

1997 1998
------ ------
$'000 $'000

Rental and utility deposits 123 80
Prepayments 19 139
Others - 176
------ ------
142 395
====== ======

7. INVENTORIES
-----------

Inventories comprised:

1997 1998
------ ------
$'000 $'000

Raw materials 3,907 4,371
Finished goods 4,107 8,706
Consigned finished goods 495 -
------ ------
8,509 13,077

As of March 31, 1997 and 1998, inventories of approximately $1,834,000 and
$5,233,000, respectively, were released under import trust receipts bank loans
arrangements.

F-11
<PAGE>

8. PROPERTY, MACHINERY AND EQUIPMENT AND CAPITAL LEASES
----------------------------------------------------

Property, machinery and equipment and capital leases comprised:

1997 1998
------ ------
$'000 $'000

Property, machinery and equipment:
Leasehold land and building 255 255
Machinery and equipment 7,239 17,238
Motor vehicles 89 119
Furniture, fixtures and office equipment 1,087 2,989

Capital leases:
Machinery and equipment 1,022 4,847
------ ------
Cost 9,692 25,448

Less: Accumulated depreciation
Property, machinery and equipment (2,374) (4,391)
Capital leases (235) (1,204)
------ ------
Property, machinery and equipment and capital
leases, net 7,083 19,853
====== ======

As of March 31, 1997 and 1998, all of the Group's leasehold land and building
were situated in Hong Kong and were held under a long-term lease.

As of March 31, 1997 and 1998, leasehold land and building with a net book value
of approximately $221,000 and $216,000, respectively, were mortgaged and
machinery and equipment with a net book value of approximately $328,000 and
$248,000, respectively, were pledged as collateral of certain of the Group's
banking facilities.

9. SHORT-TERM bank BORROWINGS
--------------------------

Short-term bank borrowings comprised :

1997 1998
------ ------
$'000 $'000

Bank overdraft 441 385
Import trust receipts bank loans 1,834 5,233
------ ------
2,275 5,618
====== ======

F-12
<PAGE>

9. SHORT-TERM BANK BORROWINGS (Cont'd)
--------------------------

Short-term bank borrowings were denominated in Hong Kong dollars, and bore
interest at the Hong Kong prime lending rate plus 0.75% to 3.75%, which ranged
from 9.5% to 12.5% per annum as of March 31, 1997 and 9.25% to 12.25% per annum
as of March 31, 1998. Short-term bank borrowings are collaterized by mortgages
over the Group's leasehold land and building and pledges of certain of the
Group's machinery and equipment (see Note 8), mortgages over leasehold land and
buildings owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, directors of the
Company, and personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam
Fai.

Supplemental information with respect to short-term bank borrowings for the
years ended March 31, 1997 and 1998 is as follows:

<TABLE>

Maximum Average Weighted Weighted
amount amount average interest average interest
outstanding outstanding rate at rate at
during the year during the year the end of year the end of year
--------------- --------------- ---------------- -----------------
$'000 $'000
<S> <C> <C> <C> <C>

Year ended March 31,
1997
- --------------------
Bank overdrafts 1,389 306 10.22% 11.36%

Import trust receipts bank
loans 1,937 1,433 10.94% 10.49%

Year ended March 31,
1998
- --------------------
Bank overdrafts 517 415 9.73% 11.87%

Import trust receipts bank
loans 5,414 4,194 10.87% 10.08%
accrued liabilities

</TABLE>

10. ACCRUED LIABILITIES
-------------------

Accrued liabilities comprised:

1997 1998
------ ------
$'000 $'000

Accruals for operating expenses
- - Audit fee 103 86
- - Workers' wages and bonus 154 270
- - Rental expenses 1 21
- - Others 4,496 4,503
------ ------
4,754 4,880
====== ======
F-13
<PAGE>

11. LONG-TERM BANK LOANS
--------------------

Long-term bank loans were denominated in Hong Kong dollars, and bore interest at
the Hong Kong prime lending rate plus 2% to 3.25%, which ranged from 10.75% to
12% per annum as of March 31, 1997 and 10.5% to 11.75% per annum as of March 31,
1998. Long-term bank loans are collaterized by mortgages over the Group's
leasehold land and building and pledges of certain of the Group's machinery and
equipment (see Note 8), mortgages over certain leasehold land and buildings
owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, and personal guarantees provided
by Mr. Lam Sai Wing and Ms. Chan Yam Fai.

Aggregate maturities of long-term bank loans are as follows:

1997 1998
------ ------
$'000 $'000

Payable during the following periods:
- Within one year 197 293
- Over one year but not exceeding two years 195 251
- Over two years but not exceeding three years 137 116
- Over three years but not exceeding four years 155 132
- Over four years but not exceeding five years 133 148
- Over five years 670 542
------ ------
Total bank loans 1,487 1,482

Less: Current portion (197) (293)
------ ------
Non-current portion 1,290 1,189
====== ======

12. CAPITAL LEASE OBLIGATIONS
-------------------------

Future minimum lease payments under the capital leases, together with the
present value of the minimum lease payments, were:

1997 1998
------ ------
$'000 $'000

Payable during the following periods:
- Within one year 281 1,384
- Over one year but not exceeding two years 193 1,283
- Over two years but not exceeding three years 95 830

Total minimum lease payments 569 3,497
Less: Amount representing future interest (80) (458)

Present value of minimum lease payments 489 3,039
Less: Current portion (229) (1,106)

Non-current portion 260 1,933

F-14
<PAGE>

13. CONVERTIBLE NOTE
----------------

On May 20, 1997, the Company and its wholly owned subsidiary, QPL, entered into
an agreement with Phenomenal Limited, an independent third party, under which
QPL issued a convertible note ("the Note") of $10,000,000 to Phenomenal Limited
at face value. The Note bore interest at 3% per month, and was repayable in a
lump sum payment on March 20, 1998. As one of the conditions for the lending,
the Company issued a non-detachable warrant ("the Warrant") to Phenomenal
Limited to subscribe for 5,263,158 shares of common stock of the Company at an
exercise price of $2.19 per share. The Note was secured by personal guarantees
provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai and the 53.9% equity interest
in the Company owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai. In accordance
with the term of the agreement, the Warrant expired on May 31, 1998.

On June 4, 1998, Phenomenal Limited agreed to extend the maturity date of the
Note from March 20, 1998 to June 4, 1998, and waive its entitlement to interest
accrued under the Note during the period from May 20, 1997 (date of issue of the
Note) to June 4, 1998. Also, the Group and Phenomenal Limited agreed to
restructure and capitalize the Note into redeemable preference shares of HFJCL,
another wholly owned subsidiary of the Company. As a result, on June 30, 1998,
HFJCL issued 5,263,788 shares of redeemable preference stock of $0.01 each ("the
Preference Shares") at approximately $1.90 per share to Phenomenal Limited in
replacement of the Note. Under the revised agreement, Phenomenal Limited is
required to convert its interest in the Preference Shares to ordinary shares of
Hang Fung Gold Technology Limited, a related company, upon satisfaction of
certain conditions. Alternatively, Phenomenal Limited has an option to require
HFJCL to redeem the Preference Shares at a redemption amount as determined in
accordance with a pre-determined formula, or requires Mr. Lam Sai Wing and Ms.
Chan Yam Fai to purchase the Preference Shares held by Phenomenal in case HFJCL
defaults in redeeming the Preference Shares.

14. PROVISION FOR INCOME TAXES
--------------------------

The provision for income taxes consisted of the following:

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

Current tax
- Hong Kong profits tax 693 690 287

Deferred tax (13) 284 999
----- ----- ------
680 974 1,286
===== ===== ======

The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate.
Subsidiaries with business operations in Hong Kong are subject to Hong Kong
profits tax at a rate of 16.5%. The British Virgin Islands subsidiaries are
incorporated under the International Business Companies Act of the British
Virgin Islands and, accordingly, are exempted from payment of the British Virgin
Island income taxes. The Bermuda subsidiary is incorporated under the Companies
Act 1981 of Bermuda (as amended) as an exempted company and, accordingly, is
exempted from payment of Bermuda income taxes until 2016.

F-15
<PAGE>

14. PROVISION FOR INCOME TAXES (Cont'd)
--------------------------

The reconciliation of the United States federal income tax rate to the effective
income tax rate based on the income before income taxes as stated in the
consolidated statements of operations is as follows:

1996 1997 1998
------ ------ ------

U.S. federal income tax rate 35.0% 35.0% 35.0%

Weighted average effect of
different tax rates in the foreign
jurisdictions (18.3%) (17.1%) (18.0%)
------ ------ ------
Effective income tax rate 16.7% 17.9% 17.0%
====== ====== ======

Components of deferred tax balances as of March 31, 1997 and 1998 are as
follows:

1997 1998
------ ------
$'000 $'000

Tax effect of accumulated difference between
taxation allowance and depreciation expenses 284 1,283
====== ======

15. COMMITMENTS
-----------

a. Capital commitments
-------------------

As of March 31, 1997 and 1998, the Group had capital commitments for acquisition
of machinery and equipment amounting to approximately $42,000 and $78,000
respectively.

b. Operating lease commitments
---------------------------

The Group has various operating lease agreements for staff quarters, factory
premises, warehouses and motor vehicles under non-cancellable operating leases
which extend through March 1999. Rental expenses for the years ended March 31,
1996, 1997 and 1998 were approximately $257,000, $285,000 and $612,000,
respectively. As of March 31, 1997 and 1998, future rental payments under
agreements classified as operating leases with non-cancellable terms are as
follows:

1997 1998
------ ------
$'000 $'000

Payable during the following periods:
- Within one year 556 351
- Over one year but not exceeding two years 347 7
- Over two years but not exceeding three years - 7
- Over three years but not exceeding four years - 7
- Over four years but not exceeding five years - 4
------ ------
903 376
====== ======
F-16
<PAGE>

16. RETIREMENT PLAN
---------------

The Group's employees in the PRC are all employed on a contractual basis and
consequently the Group has no obligation for pension liabilities of these
employees.

The employees of the Group's operation in Hong Kong after completing a probation
period may join the Group's defined contribution provident fund managed by an
independent trustee. Both the Group and the employees make monthly contributions
to the scheme of 5% of the employees' basic salaries. The employees are entitled
to receive their entire contribution together with accrued interest thereon at
any time upon leaving the Group, and 100% of the Group's employer contribution
and the accrued interest thereon upon retirement or leaving the Group after
completing ten years of service or at a reduced scale of between 30% to 90%
after completing three to nine years of service. Any forfeited contributions
made by the Group and the accrued interest thereon are used to reduce future
employer's contributions. The aggregate amount of the Group's employer
contributions (net of forfeited contributions) for the years ended March 31,
1996, 1997 and 1998 was approximately $2,000, $10,000 and $12,000, respectively.

17. BANKING FACILITIES
------------------

As of March 31, 1997 and 1998, the Group had aggregate banking facilities of
approximately $5,550,000 and $12,448,000, respectively from several banks for
bank overdrafts, loans and trade financing. Unused facilities as of the same
date amounted to approximately $1,309,000 and $2,576,000, respectively. These
facilities were secured by:

i. pledge of machinery and equipment with a net book value of approximately
$328,000 and $248,000 as of March 31, 1997 and 1998, respectively;

ii. mortgage over the Group's leasehold land and building with a net book value
of approximately $221,000 and $216,000 as of March 31, 1997 and 1998,
respectively;

iii. the Group's stocks held under import trust receipts bank loans arrangement;

iv. pledges of the Group's bank deposits of nil and approximately $1,290,000 as
of March 31, 1997 and 1998, respectively;

v. mortgages over certain leasehold land and buildings owned by Mr. Lam Sai
Wing and Ms. Chan Yam Fai, directors of the Company;

vi. personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai; and

vii. corporate guarantee provided by the Company.

F-17
<PAGE>

18. RELATED PARTY TRANSACTIONS
--------------------------

a. The Group entered into the following transactions with related parties:

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

Sales to a related company
- Hang Fung Jewellery Co., Inc.
("HFJCI") 83 - -

Rental paid to Ms. Chan Yam Fai 199 174 174
===== ===== =====

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.

b. The Group had the following outstanding balances with related companies:

1997 1998
------ ------
$'000 $'000

Due from (to) a director
- Mr. Lam Sai Wing 475 (1,034)
====== ======

The balances due from (to) a director were unsecured, non-interest bearing and
without pre-determined repayment terms.

c. The Group's banking facilities were secured by, among others, mortgages
over leasehold land and buildings owned by Mr. Lam Sai Wing and Ms. Chan
Yam Fai and personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan
Yam Fai.

19. SEGMENT INFORMATION
-------------------

a. Revenue
-------

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

Sales of jewellery products to customers in
- Hong Kong 10,057 15,617 10,348
- PRC 6,129 8,043 10,000
- Middle East (export sales) 3,288 5,744 9,317
- South East Asia (export sales) 1,280 4,610 12,232
- Europe (export sales) 2,149 1,506 5,886
- United States of America (export sales) - 1,305 10,211
------ ------ ------
22,903 36,825 57,994
------ ------ ------
Contract processing fees
- PRC 3,965 4,133 4,308
====== ====== ======

F-18
<PAGE>

19. SEGMENT INFORMATION (Cont'd)
-------------------

b. Operating profit *
----------------

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

Hong Kong operation 445 2,004 3,486
The PRC operation 3,957 4,292 4,898
Others - (106) (177)
----- ------ ------
Total 4,402 6,190 8,207
===== ====== ======

* Operating profit represents gross profit less selling, general and
administrative expenses.

c. Identifiable assets **
-------------------

1997 1998
------ ------
$'000 $'000

Hong Kong operation 12,661 35,198
The PRC operation 8,677 10,469
Others 71 -
------ ------
Total 21,409 45,667
====== ======

** Identifiable assets represent total assets of the respective operations.

d. Major customers
---------------

Details of individual customers accounting for more than 5% of the Group's sales
are as follows:

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

CNPIEC 14.5% 0.9% -
Chow Tai Fook Jewellery Co., Ltd. 6.0% 12.3% 5.9%
World Commercial Sales Co. Ltd. 0.2% 6.4% 2.28%
Sam Ming Tong Jewellery Co., Ltd. 0.1% 3.0% 5.5%
------ ------ ------

F-19
<PAGE>

20. OPERATING RISKS
---------------

a. Country risk
------------

The Group's operations are conducted in Hong Kong and the PRC. Accordingly, the
Group's business, financial position 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.

Effective from July 1, 1997, sovereignty over Hong Kong was transferred from the
United Kingdom to the PRC, and Hong Kong became a Special Administrative Region
of the PRC ("SAR"). As provided in the 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 had an adverse impact on
the Group's financial and operating environment. 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 in North America and
Western Europe. 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, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other things.

b. Dependence on strategic relationship
------------------------------------

Gold and silver products are restricted commodities in the PRC and special
authorization is required for production and trading of gold and silver products
in the PRC. The PRC government has only granted a few licences to PRC
state-owned enterprises to produce and trade gold and silver products in the
PRC. The Group's present operations in the PRC are conducted through various
contract processing agreements with PRC state-owned enterprises as described in
Note 1. Any changes in any of these strategic relationships could have a
material adverse effect on the revenue and profitability of the Group and could
potentially limit the Group's ability to continue to conduct business in the
PRC.

c. Concentration of credit risk
----------------------------

Concentration of accounts receivable as of March 31, 1997 and 1998 is as
follows:

1997 1998
------ ------

Five largest accounts receivable 36.5% 30.1%
===== =====

The Group performs ongoing credit evaluation of each customer's financial
condition. It maintains reserves for potential credit losses and such losses in
the aggregate have not exceeded management's projections.

F-20
<PAGE>

20. OPERATING RISKS (Cont'd)
---------------

Dependence on a limited number of suppliers

The Group purchases raw materials from a limited number of suppliers.
Concentration on the Group's suppliers for the years ended March 31, 1996, 1997
and 1998 is as follows:

1996 1997 1998
------ ------ ------

Purchases from five largest suppliers 50.8% 81.7% 66.2%
===== ===== =====

21. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------

a. Cash paid for interest and income taxes are as follows:

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

Interest paid 392 389 711
===== ===== =====
Income taxes - - 473
===== ===== =====

b. Cash received for interest income are as follows:

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

Interest received 11 - 137
====== ====== ======

c. During the years ended March 31, 1996, 1997 and 1998, capital lease
obligations of approximately $151,000, $871,000 and $3,825,000,
respectively, were incurred to finance the Group's additions of new
machinery and equipment.

F-21
<PAGE>

22. OTHER SUPPLEMENTAL INFORMATION
------------------------------

1996 1997 1998
------ ------ ------
$'000 $'000 $'000

Depreciation of property, machinery and
equipment
- owned assets 663 826 2,018
- assets held under capital leases 15 205 970

Provision for bad and doubtful debts 114 - -

Interest expenses for
- bank overdrafts and loans 397 352 577
- capital lease obligations 6 37 134

Operating lease rentals for
- premises 257 285 612

Repairs and maintenance expenses 45 46 86

Net foreign exchange gain (loss) 1 (2) (2)

Interest income from bank deposits 11 - 137
===== ===== =====

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 2,094
<SECURITIES> 0
<RECEIVABLES> 10,700
<ALLOWANCES> 452
<INVENTORY> 13,077
<CURRENT-ASSETS> 25,814
<PP&E> 25,448
<DEPRECIATION> 5,595
<TOTAL-ASSETS> 45,667
<CURRENT-LIABILITIES> 26,984
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 14,265
<TOTAL-LIABILITY-AND-EQUITY> 45,667
<SALES> 57,994
<TOTAL-REVENUES> 62,302
<CGS> 47,159
<TOTAL-COSTS> 47,159
<OTHER-EXPENSES> 6,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 711
<INCOME-PRETAX> 7,571
<INCOME-TAX> 1,286
<INCOME-CONTINUING> 6,285
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,285
<EPS-PRIMARY> .49
<EPS-DILUTED> .49

</TABLE>