SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission File No. 0-22049
S.W. LAM, INC.
(Exact name of registrant as specified in its charter)
Nevada 62-1563911
- -------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Unit 25-32, 2nd Floor, Block B, Focal Industrial Centre
Man Lok Street, Hunghom, Hong Kong
-------------------------------------------------------
(Address of principal executive offices)
(852) 2766 3688
--------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of September 30, 1998, 12,800,000 shares of Common Stock of the issuer
were outstanding.
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
-------------------------------
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 and
March 31, 1998.................................................. 1
Consolidated Statements of Operations - For the three
months and six months ended September 30, 1998 and 1997......... 2
Consolidated Statements of Cash Flows - For the six
months ended September 30, 1998 and 1997........................ 3
Notes to Consolidated Financial Statements...................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 5
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 9
SIGNATURES................................................................. 10
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US$,000)
(Unaudited)
March 31, September 30,
ASSETS 1998 1998
--------- -------------
Current assets:
Cash and cash equivalents $ 2,094 $ 4,739
Accounts receivable, net 10,248 11,483
Inventory 13,077 14,818
Due from a director - 669
Prepayments and other current assets 395 677
------- -------
Total current assets 25,814 32,386
Property, plant and equipment, and capital
leases, net 19,853 19,736
------- -------
Total assets $45,667 $52,122
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 5,618 $ 9,753
Long-term bank loans, current portion 293 253
Capital lease obligations, current portion 1,106 1,178
Accounts payable 2,880 3,161
Accrued liabilities 4,880 4,992
Convertible short term loan 10,000 -
Income tax payable 1,173 1,736
Due to director 1,034 -
------- -------
Total current liabilities 26,984 21,073
Long-term bank loans, non-current portion 1,189 1,073
Capital lease obligations, non current portion 1,933 1,457
Deferred taxation 1,283 1,283
------- -------
Total liabilities 31,389 24,886
------- -------
Stockholders' Equity:
Preferred stock 0 0
Common stock 13 13
Additional paid-in capital 511 511
Minority interest 0 10,000
Retained earnings 13,628 16,563
Cumulative translation adjustments 126 149
------- -------
Total stockholders' equity 14,278 27,236
------- -------
Total liabilities and stockholders' equity $45,667 $52,122
======= =======
The accompanying notes are an integral part of these financial statements
1
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- -----------------------
1997 1998 1997 1998
------ ------- ------ -------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 14,107 $ 15,460 $ 26,459 $ 31,463
Subcontracting fees 1,352 717 2,927 1,196
------- ------- ------- -------
Total revenues 15,459 16,177 29,386 32,659
Cost of sales and services (11,982) (11,755) (22,309) (24,355)
------- ------- ------- -------
Gross profit 3,477 4,422 7,077 8,304
Selling, general and
administrative expenses (1,750) (2,835) (3,159) (4,188)
------- ------- ------- -------
Operating income 1,727 1,587 3,918 4,116
------- ------- ------- -------
Other income (expense), net:
Interest expenses (212) (377) (741) (715)
Interest income 65 109 72 175
Other income 22 (98) 83 (78)
Total other income ------- ------- ------- -------
(expense), net (125) (366) (586) (618)
------- ------- ------- -------
Income before income taxes 1,602 1,221 3,332 3,498
Provision for income taxes (134) (149) (276) (563)
------- ------- ------- -------
Net income $ 1,468 $ 1,072 $ 3,056 $ 2,935
======= ======= ======= =======
Basic income per share $ 0.11 $ 0.08 $ 0.24 $ 0.23
======= ======= ======= =======
Weighted average shares
outstanding 12,800,000 12,800,000 12,800,000 12,800,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
2
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$,000)
(Unaudited)
<TABLE>
Six Months Ended September 30,
------------------------------
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income 3,056 2,935
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation of property, plant and equipment 1,044 1,786
(Increase) Decrease in operating assets -
Accounts receivable, net (638) (1,235)
Inventories (1,869) (1,741)
Prepayments and other current assets (1,505) (282)
Due from a director (317) (1,703)
(Decrease) Increase in operating liabilities -
Accounts payable 140 281
Deposits from customers (1,013) -
Accrued liabilities 20 112
Income taxes payable 276 563
------- -------
Net cash provided by operating activities (806) 716
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (6,965) (1,669)
------- -------
Net cash used in investing activities (6,965) (1,669)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of preference share by a subsidiary - 10,000
Net increase in short-term bank borrowings 2,861 4,135
Net (decrease) increase in convertible short-term loan 10,000 (10,000)
Additions of capital lease obligations 92 2,138
Repayment of capital element of capital lease obligations (237) (2,542)
Additions of long-term bank loans 388 -
Repayment of long-term bank loans (147) (156)
------- -------
Net cash provided by financing activities 12,957 3,575
------- -------
Effect of exchange rate changes in cash 4 23
------- -------
Net increase in cash 5,190 2,645
Cash and cash equivalents, as of beginning of period 94 2,094
------- -------
Cash and cash equivalents, as of end of period $ 5,284 $ 4,739
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE>
S.W. LAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These statements include the
accounts of S.W. Lam, Inc. and all of its wholly owned and majority owned
subsidiary companies. The March 31, 1998 balance sheet data was derived
from audited financial statements but does not include all disclosures
required by generally accepted accounting principles. The interim financial
statements and notes thereto should be read in conjunction with the
financial statements and notes included in the Company's Form 10-K for the
year ended March 31, 1998. In the opinion of management, the interim
financial statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for the interim periods
presented. The current period results of operations are not necessarily
indicative of results which ultimately will be reported for the full year
ending March 31, 1999.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
The translation of the financial statements of group companies into United
States Dollars is performed for balance sheet accounts using closing
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using average exchange rate during each reporting period.
The gains or losses resulting from translation are included in shareholders
equity separately as cumulative translation adjustments.
4
<PAGE>
Item 2. Management's Discussion and Analysis Of Financial Condition And Results
Of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of Securities Exchange
Act of 1934. Statements contained herein which are not historical facts are
forward-looking statements that involve risks and uncertainties. All phases of
the Company's operations are subject to a number of uncertainties, risks and
other influences. Therefore, the actual results of the future events described
in such forward-looking statements in this Form 10-Q could differ materially
from those stated in such forward-looking statements. Among the factors which
could cause the actual results to differ materially are the risks and
uncertainties described both in this Form 10-Q and the risks, uncertainties and
other factors set forth from time to time in the Company's other public reports,
filings and public statements. Many of these factors are beyond the control of
the Company, any of which, or a combination of which, could materially affect
the results of the Company's operations and whether the forward-looking
statements made by the company ultimately prove to be accurate.
Results Of Operations
The following table sets forth, for the periods indicated, certain items
from the Consolidated Statements of Operations expressed as a percentage of
total revenues.
Quarter Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
1997 1998 1997 1998
---- ---- ---- ----
Net sales 91.3 % 95.6 % 90.0 % 96.3 %
Subcontracting fees 8.7 4.4 10.0 3.7
Total revenues 100.0 100.0 100.0 100.0
Cost of sales 77.5 72.7 75.9 74.6
Gross profit 22.5 27.3 24.1 25.4
Operating expenses 11.3 17.5 10.8 12.8
Income from operations 11.2 9.8 13.3 12.6
Other income (expense), net (0.8) (2.3) (2.0) (1.9)
Income before income taxes 10.4 7.5 11.3 10.7
Income taxes 0.9 0.9 0.9 1.7
Net income 9.5 6.6 10.4 9.0
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Revenues and Gross Profit. Total revenues increased $0.7 million, or 4.6%,
to $16.2 million for the quarter ended September 30, 1998 from $15.5 million for
the quarter ended September 30, 1997. Sales of Company products were up 9.6% to
$15.5 million during the current period compared to $14.1 million during the
same period in the prior fiscal year. Subcontracting fees decreased by 46.9% to
$0.7 million in the current period from $1.4 million during the same period in
the prior fiscal year.
5
<PAGE>
The increase in sales for the quarter ended September 30, 1998 was
attributable to the introduction of new products and increased marketing
efforts. Net sales for the quarter ended September 30, 1998 declined 3.4% from
the prior fiscal quarter level and year-over-year sales growth declined during
the quarter ended September 30, 1998 to 10.9% from 58.4% during the prior fiscal
quarter. The decrease in net sales and growth rate during the latest quarter
when compared to the prior quarter was attributable to adverse economic
conditions during the quarter in the Asia Pacific region. The decrease in
subcontracting fees for the quarter was attributable to increased concentration
on the manufacturing of products designed by the Group as opposed to products
manufactured on a subcontract basis in order to raise the Group's brand name
recognition.
Geographically, within Southeast Asia (including Hong Kong and the PRC) the
Company's sales decreased 12.9% to $7.4 million during the quarter ended
September 30, 1998 from $8.5 million during the same period in the prior year.
Sales within Southeast Asia accounted for 48% of total sales during the quarter
as compared to 59.9% during the same period in the prior year. Sales within the
region were adversely impacted by continuing economic weakness in Southeast Asia
during the period, which weakness was partially offset by increased marketing
efforts. Sales in Hong Kong declined approximately 55.1% to $1.1 million for the
quarter ended September, 30, 1998 from $2.4 million for the same period of the
prior year. Sales in the PRC were up during the quarter ended September 30, 1998
due to stable economic conditions relative to the region, increasing
approximately 19.2% to $3.8 million for the quarter ended September 30, 1998
from $3.2 million in the same period of the prior year. Sales in Southeast Asia
(not including Hong Kong and the PRC) during the quarter ended September 30,
1998 were down due to adverse economic conditions, decreasing 12.5% to $2.5
million for the quarter ended September 30, 1998 from $2.8 million in the same
period of the prior year.
Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 42.6% increase in sales with these sales accounting for
52% of total sales in the quarter ended September 30, 1998 as compared to 40.1%
of total sales in the same period of the prior year. The increase in sales
outside of Asia was driven by increased marketing efforts and strong product
demand which accompanied strong economic conditions in those regions. Sales in
Europe increased approximately 192.2% to $3.7 million for the quarter ended
September 30, 1998 from $1.3 million in the same period of the prior year. Sales
in the Middle East were down during the quarter ended September 30, 1998,
decreasing approximately 19.6% to $1.7 million from $2.1 million in the same
period of the prior year. Sales in the United States increased approximately
16.7% to $2.6 million during the quarter ended September 30, 1998 from $2.3
million in the same period of the prior year.
Gross profits increased by 27.2% to $4.4 million during the quarter ended
September 30, 1998 from $3.5 million during the same period in the prior fiscal
year. Gross margins increased from 22.5% of revenues during the quarter ended
September 30, 1997 to 27.3% during the quarter ended September 30, 1998. The
increase in gross profits was principally attributable to the increase in net
sales. The increase in gross profit percentage during the quarter ended
September 30, 1998 was primarily attributable to cost control measures
implemented by management.
Operating Expenses. Operating expenses totaled $2.8 million during the
quarter ended September 30, 1998, up 62%, from $1.7 million during the same
period in the prior fiscal year. The principal components of the increase in
operating expenses during the quarter were marketing expenses, depreciation,
salary and wages to support planned sales growth.
6
<PAGE>
Other Expense, Net. Other expenses, net of other income, increased during
the quarter ended September 30, 1998 to $366,000 from $125,000 in the same
period during the prior year. The increase in net other expenses was
attributable to (1) an increase in interest expense during the period of
$165,000 which resulted from a higher level of bank borrowings during the
quarter, and (2) an adverse swing in other income of $120,000 which resulted
from an increase in bank charges during the current period and the recognition
of a nonrecurring gain from an insurance claim during the prior period; which
were partially offset by an increase in interest income of $44,000 which
resulted from an increase in cash generated by operations.
Income Taxes. Income taxes increased by 11.2% to $149,000 during the
quarter ended September 30, 1998 from $134,000 during the same period in the
prior year. The increase in income taxes during the period was primarily
attributable to provision for a higher effective tax rate for the current period
in Hong Kong pending the resolution of the Company's offshore claims with
respect to prior periods.
Six Months Ended September 30, 1998 Compared to Six Months Ended September 30,
1997
Revenues and Gross Profit. For the six months ended September 30, 1998,
total revenues increased $3.3 million, or 11.1%, to $32.7 million as compared to
total revenues of $29.4 million during the six months ended September 30, 1997.
Sales of Company products were up 18.9% to $31.5 million during the six months
ended September 30, 1998 compared to $26.5 million during the six months ended
September 30, 1997. Subcontracting fees decreased by 59.1% to $1.2 million
during the six months ended September 30, 1998 compared to $2.9 million during
the six months ended September 30, 1997.
The increase in sales for the six months ended September 30, 1998 was
attributable to the introduction of new products and increased marketing
efforts. The decrease in subcontracting fees for the period was attributable to
increased concentration on the manufacturing of products designed by the Group
as opposed to products manufactured on a subcontract basis in order to raise the
Group's brand name recognition.
Geographically, within Southeast Asia (including Hong Kong and the PRC) the
Company's sales decreased 2.9% to $15.4 million during the six months ended
September 30, 1998 from $15.9 million during the same period in the prior year.
Sales within Southeast Asia accounted for 49% of total sales during the period
as compared to 60% during the same period in the prior year. Sales within the
region were adversely impacted by continuing economic weakness in Southeast Asia
during the period, which weakness was partially offset by increased marketing
efforts. Sales in Hong Kong declined approximately 44% to $2.5 million for the
six months ended September, 30, 1998 from $4.5 million for the same period of
the prior year. Sales in the PRC were up during the six months ended September
30, 1998 due to stable economic conditions relative to the region, increasing
approximately 24.1% to $7.6 million for the six months ended September 30, 1998
from $6.1 million in the same period of the prior year. Sales in Southeast Asia
(not including Hong Kong and the PRC) were unchanged at $5.1 million during both
the six months ended September 30, 1998 and September 30, 1997
7
<PAGE>
Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 51.6% increase in sales with these sales accounting for
51% of total sales in the six months ended September 30, 1998 as compared to 40%
of total sales in the same period of the prior year. The increase in sales
outside of Asia was driven by increased marketing efforts and strong product
demand which accompanied strong economic conditions in those regions. Sales in
Europe increased approximately 217.1% to $7.6 million for the six months ended
September 30, 1998 from $2.4 million in the same period of the prior year. Sales
in the Middle East were down during the six months ended September 30, 1998,
decreasing approximately 12.8% to $3.5 million from $4.0 million in the same
period of the prior year. Sales in the United States increased approximately
18.9% to $5 million during the six months ended September 30, 1998 from $4.2
million in the same period of the prior year.
For the six months ended September 30, 1998, gross profits increased 17.3%
to $8.3 million from $7.1 million during the same period in the prior fiscal
year. Gross margins increased from 24.1% of revenues during the six months ended
September 30, 1997 to 25.4% during the six months ended September 30, 1998. The
increase in gross profits was mainly attributable to the increase in net sales.
The increase in gross profit percentage during the six month period ended
September 30, 1998 was primarily attributable to cost control measures
implemented by management.
Operating Expenses. Operating expenses totaled $4.2 million during the six
months ended September 30, 1998, up 32.6%, from $3.2 million during the same
period in the prior fiscal year. The principal components of the increase in
operating expenses during the period were marketing expense, depreciation,
salary and wages to support planned sales growth.
Other Expense, Net. Other expenses, net of other income, increased during
the six months ended September 30, 1998 to $618,000 from $586,000 in the same
period during the prior year. The increase in net other expenses was
attributable to an adverse swing in other income of $161,000 which resulted from
an increase in bank charges during the current period and the recognition of a
nonrecurring gain from an insurance claim during the prior period; which were
partially offset by (1) a decrease in interest expense during the period of
$26,000 which resulted from the maturity of a convertible loan on March 19,
1998, and (2) an increase in interest income of $103,000 which resulted from an
increase in cash generated by operations.
Income Taxes. Income taxes increased by 104% to $563,000 during the six
month period ended September 30, 1998 from $276,000 during the same period in
the prior year. The increase in income taxes during the period was primarily
attributable to provision for a higher effective tax rate for the current period
in Hong Kong pending the resolution of the Company's offshore claims with
respect to prior periods.
Financial Condition, Liquidity and Capital Resources
The Company had a cash balance of $4.7 million and working capital of $11.3
at September 30, 1998 compared to a cash balance of $2.1 million and a deficit
in working capital of $1.2 million at March 31, 1998. The increase in cash is
attributable to a combination of the income during the period and increases in
short-term bank borrowing. The increase in working capital was attributable to
restructuring and capitalization of the convertible note into redeemable
preferred share capital of a subsidiary of the Company.
8
<PAGE>
For the six months ended September 30, 1998 net cash provided in operating
activities amounted to $0.7 million as compared to net cash used by operating
activities of $0.8 million for the corresponding period of the prior year. This
change resulted from a smaller increase in prepayments and other current assets
during the current period and a smaller decrease in customer deposits which was
partially offset by increases in accounts receivable and amounts due from a
director.
Net cash used in investing activities decreased to $1.7 million during the
six months ended September 30, 1998 from $7 million during the six months ended
September 30, 1997. This decrease was attributable to a decrease in acquisition
of machinery and equipment during the current period.
Net cash provided by financing activities decreased to $3.6 million during
the six months ended September 30, 1998 from $13 million during the six months
ended September 30, 1997. This decrease was attributable to the conversion to
preferred stock of the convertible loan of $10 million during prior year while
such loan does not reoccur during the six months ended September 30, 1998.
At September 30, 1998, the Company had long term debt totaling $3.8 million
compared to long term debt at March 31, 1998 of $4.4 million. The decrease in
long term debt was primarily attributable to the repayment of the principal of
the loan while no new long term bank loan was acquired during the six months
ended September 30, 1998 .
Management believes that based on its current financial condition, the
Company's cash and working capital is sufficient to meet the Company's
anticipated needs for at least the next twelve months.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
S.W. LAM, INC.
Dated: February 2, 1999 By: /s/ Lam Sai Wing
---------------------------
Lam Sai Wing, President and
Chief Executive Officer
Dated: February 2, 1999 By: /s/ Chan Yam Fai, Jane
---------------------------
Chan Yam Fai, Jane
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,739
<SECURITIES> 0
<RECEIVABLES> 11,483
<ALLOWANCES> 0
<INVENTORY> 14,818
<CURRENT-ASSETS> 32,386
<PP&E> 19,736
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,122
<CURRENT-LIABILITIES> 21,073
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 27,223
<TOTAL-LIABILITY-AND-EQUITY> 52,122
<SALES> 31,463
<TOTAL-REVENUES> 32,659
<CGS> 24,355
<TOTAL-COSTS> 24,355
<OTHER-EXPENSES> 4,188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 715
<INCOME-PRETAX> 3,498
<INCOME-TAX> 563
<INCOME-CONTINUING> 2,935
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,935
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
