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 June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File No. 0-22049
S.W. LAM, INC.
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(Exact name of registrant as specified in its charter)
Nevada 62-1563911
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Unit 25-32, 2nd Floor, Block B, Focal Industrial Centre
21 Man Lok Street, Hunghom, Hong Kong
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(Address of principal executive offices)
(852) 2766 3688
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(Registrant's telephone number, including area code)
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(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 June 30, 2000, 12,800,000 shares of Common Stock of the issuer were
outstanding.
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S.W. LAM, INC. AND SUBSIDIARIES
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2000 and June 30,
2000.............................................................1
Consolidated Statements of Operations - For the three
months ended June 30, 1999 and June 30, 2000.....................2
Consolidated Statements of Cash Flows - For the three months
ended June 30, 1999 and June 30, 2000............................3
Notes to Consolidated Financial Statements.......................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................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, June 30,
ASSETS 2000 2000
Current assets:
Cash and cash equivalents $ 19,562 $ 17,996
Accounts receivable, net 19,450 21,665
Inventories 26,604 32,121
Prepayments and other current assets 391 788
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Total current assets 66,007 72,570
Property, plant and equipment, and capital leases, net 29,158 27,219
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Total assets $95,165 $99,789
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 28,485 $ 30,884
Long-term bank loans, current portion 273 206
Capital lease obligations, current portion 1,636 1,339
Accounts payable 3,668 4,564
Accrued liabilities 1,240 124
Income tax payable 5,177 5,382
Due to a director 568 1,008
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Total current liabilities 41,047 43,507
Long-term bank loans, non-current portion 805 792
Capital lease obligations, non-current portion 898 717
Deferred taxation 1,719 1,719
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Total liabilities 44,469 46,735
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Minority interests 23,885 24,990
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Stockholders' Equity:
Preferred stock 0 0
Common stock 13 13
Additional paid-in capital 508 508
Retained earnings 26,290 27,543
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Total stockholders' equity 26,811 28,064
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Total liabilities and stockholders' equity $95,165 $99,789
========= ========
The accompanying notes are an integral part of these consolidated
financial statements
1
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S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
Three Months Ended June 30,
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1999 2000
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Total revenues $ 24,524 $ 27,211
Cost of sales and services (17,758) (20,171)
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Gross profit 6,766 7,040
Selling, general and administrative expenses (3,311) (4,165)
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Operating income 3,455 2,875
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Other income (expense), net:
Interest expenses (456) (605)
Interest income 157 240
Other income 6 53
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Total other income (expense), net (293) (312)
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Income before income taxes and minority interests 3,162 2,563
Provision for income taxes (522) (205)
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Income before minority interests 2,640 2,358
Minority interests (1,237) (1,105)
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Net income $ 1,403 $ 1,253
========= =========
Basic income per share $ 0.11 $ 0.10
========= =========
Diluted income per share NA $ 0.10
========= =========
Weighted average shares outstanding 12,800,000 12,800,000
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements
2
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S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$,000)
(Unaudited)
<TABLE>
Three Months Ended June 30,
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1999 2000
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,403 $ 1,253
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 1,410 2,165
Minority interests 1,237 1,105
Increase in operating assets:
Accounts receivable, net (1,586) (2,215)
Inventories (2,986) (5,517)
Prepayments and other current assets (601) (397)
(Decrease) Increase in operating liabilities:
Accounts payable (410) 896
Accrued liabilities 350 (1,116)
Due to a director 0 440
Taxation payable 537 205
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Net cash used in operating activities (646) (3,181)
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Cash flows from investing activities:
Additions of property, plant and equipment (1,865) (226)
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Net cash used in investing activities (1,865) (226)
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Cash flows from financing activities:
Payment of dividends (878) 0
Net increase in short-term bank borrowings 2,811 2,399
Additions of capital lease obligations 375 0
Repayment of capital element of capital lease obligations (323) (478)
Repayment of long-term bank loans (89) (80)
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Net cash provided by financing activities 1,896 1,841
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Net decrease in cash and cash equivalents (615) (1,566)
Cash and cash equivalents, as of beginning of period 16,702 19,562
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Cash and cash equivalents, as of end of period $16,087 $ 17,996
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
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S.W. LAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000
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. (the "Company") and all of its wholly owned and
majority owned subsidiary companies. The March 31, 2000 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, 2000. 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, 2001.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
The translation of the financial statements of group companies into United
States Dollars is performed for balance sheet accounts using closing
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using average exchange rate during each reporting period.
The gains or losses resulting from translation are included in shareholders
equity separately as cumulative translation adjustments.
3. POTENTIAL JOINT VENTURE - INTERNET TRADING PORTAL
In June 2000, Hang Fung Gold Technology Limited ("HFGTL"), a 53.2% owned
subsidiary of the Company, was involved in negotiation to enter into a
joint venture agreement with a company related to Phenomenal Limited, a
minority shareholder of HFGTL, and an independent third party to establish
an Internet portal for trading in gold, other precious metals and jewellery
products. Pursuant to the negotiation, each of HFGTL and the two venture
partners would own a 33.33% interest in the joint venture. In addition,
HFGTL has agreed to provide the joint venture a loan of HK$7,000,000 for
the development of its Internet business. The loan is unsecured,
non-interest bearing and subordinated to other third party liabilities of
the joint venture.
4
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4. POTENTIAL ACQUISITION OF NEW EPOCH
In June, 2000, HFGTL entered into an agreement with New Epoch Holdings
International Limited ("NEHIL"), an independent third party, whereby HFGTL
agreed to acquire a 49.9% interest in New Epoch Information (BVI) Limited
("NEIBVI"), a company engaged in the development of Internet portals for
online trading ("the Acquisition"). The purchase price for the 49.9%
interest in NEIBVI amounted to approximately HK$186,000,000, which would be
satisfied by the issue of 1,632,000,000 new shares of HFGTL at HK$0.114
each. Upon completion of the Acquisition, NEHIL will own approximately
34.1% of the issued voting shares of HFGTL and the Company's interest in
HFGTL will be reduced to approximately 35%.
In addition, HFGTL has agreed to provide NEIBVI a loan facility upon
completion of the Acquisition. The amount of the loan facility is the
higher of (i) HK$50,000,000 and (ii) two- thirds of the amount of the net
proceeds of equity or debt issue of HFGTL from time to time subsequent to
the Acquisition. The loan facility bears interest at Hong Kong prime
lending rate plus 2.5% and will be used for developing the Internet
business of NEIBVI.
5. EARNINGS PER SHARE
On June 9, 2000, HFGTL granted a total of 315,000,000 options to its
employees. The options are exercisable at HK$0.109 per share. The options
will have a dilutive effect on the earnings per share of HFGTL and the
Company for the three months ended June 30, 2000, assuming all options are
exercised.
Diluted earnings per share of the Company for the three months ended June
30, 2000 was computed by dividing net income (after adjustment to reflect
the Company's reduced interest in HFGTL's earnings assuming the exercise of
the options) for the period by the weighted average number of shares of
common stock outstanding during the period. Revised net income for the
three months ended June 30, 2000, after giving effect to the reduction in
the Company's interest in HFGTL assuming exercise of the options, totaled
$1,237,886. Weighted average shares outstanding for the three months ended
June 30, 2000, after giving effect to the assumed exercise of the options,
was unchanged at 12,800,000.
5
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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.
Three Months Ended June 30,
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1999 2000
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Total revenues 100.0% 100.0%
Cost of sales and services 72.4 74.1
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Gross profit 27.6 25.9
Operating expenses 13.5 15.3
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Income from operations 14.1 10.6
Other expense, net 1.2 1.1
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Income before income taxes and minority interests 12.9 9.5
Income taxes 2.1 0.8
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Income before minority interests 10.8 8.7
Minority interests 5.0 4.1
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Net income 5.8 4.6
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Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues and Gross Profit. Total revenues increased $2.7 million, or 11%,
to $27.2 million for the three months ended June 30, 2000 from $24.5 million for
the three months ended June 30, 1999.
The increase in sales for the period was attributable to increased product
volumes resulting from an increase in production capacity, the introduction of
new products and investments in, and concentration of, marketing efforts in
Asia.
6
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Geographically, within Asia the Company's sales increased 122.1% to $19.1
million during the three months ended June 30, 2000 from $8.6 million during the
same period in the prior year. Sales within Asia accounted for 70% of total
sales during the current period as compared to 35% during the same period in the
prior year. Sales within the region increased due to improving economic
conditions in Asia during the period following an extended period of weakness
from late 1997 to early 1999. Sales in Hong Kong increased approximately 108% to
$5.2 million for the three months ended June 30, 2000 from $2.5 million for the
same period of the prior year. Sales in the PRC were up due to a substantial
increase in marketing efforts in the PRC, increasing approximately 156.7%, to
$9.5 million for the three months ended June 30, 2000 from $3.7 million for the
same period in the prior year. Sales in Asia (not including Hong Kong and the
PRC) during the three months ended June 30, 2000 increased 76% to $4.4 million
from $2.5 million for the same period in the prior year. The increase in sales
in Asia, excluding Hong Kong and the PRC, was attributable to improving demand
accompanying renewed economic strength in the region.
Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 48.8% decrease in sales with these sales accounting for
30% of total sales in the three months ended June 30, 2000 as compared to 65% of
total sales in the same period of the prior year. The decrease in sales outside
of Asia was due to concentration of marketing efforts in the Asia region. Sales
in Europe decreased approximately 59.1% to $2.7 million for the three months
ended June 30, 2000 from $6.6 million in the same period of the prior year.
Sales in the Middle East were up during the three months ended June 30, 2000,
increasing approximately 10% to $2.2 million from $2.0 million in the same
period of the prior year. Sales in the United States decreased approximately 52%
to $3.3 million during the three months ended June 30, 2000 from $6.9 million in
the same period of the prior year.
Gross profits increased by 4% to $7 million during the current period from
$6.8 million during the same period in the prior fiscal year. The increase in
gross profits was mainly attributable to the increase in net sales. Gross
margins decreased to 25.9% in the current period from 27.6% in the prior fiscal
year period. The decrease in gross profit percentage during the current period
was primarily attributable to a combination of product mix, with increased sales
of lower margin products arising from a concentration of marketing efforts in
Asia, and adoption of a more competitive pricing strategy to enhance
competitiveness and market expansion. The Company believes that the decrease in
gross margins is temporary in nature.
Operating Expenses. Operating expense totaled $4.2 million during the
current period, an increase of 25.8% from $3.3 million during the same period in
the prior fiscal year. The increase in operating expense 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 Expense, Net. Other expenses, net of other income, increased during
the current period to $312,000 from $293,000 in the same period during the prior
year. The increase in net other expense was attributable to an increase in
interest expense of $149,000 which was partially offset by an increase in
interest income of $83,000 and an increase in miscellaneous income of $47,000.
The increase in interest expense is mainly attributable to an increase in trust
receipt bank loans.
7
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Income Taxes. Income taxes decreased by 60.7% to $205,000 during the
current period from $522,000 during the same period in the prior year. The
decrease in income taxes during the period was primarily attributable to
decreased income and a 50:50 offshore claim in reporting its Hong Kong profit
tax which resulted in decreased tax expense during the period under review.
Minority Interests. Minority interests of $1.1 million was reported during
the current period and $1.2 million was reported during the 1999 period.
Minority interests reflects the proportionate interests in the earnings of HFGTL
not owned by the Company.
Financial Condition, Liquidity and Capital Resources
The Company had a cash balance of $18.0 million and working capital of
$29.1 at June 30, 2000 compared to a cash balance of $19.6 million and working
capital of $25.0 million at March 31, 2000. The increase in working capital was
attributable to net income during the period and normal changes in current
assets and liabilities.
For the three months ended June 30, 2000 net cash used in operating
activities amounted to $3.2 million as compared to net cash used in operating
activities of $0.6 million for the corresponding period of the prior year. This
change resulted primarily from a combination of increases in accounts receivable
and inventories associated with higher sales and more favorable credit terms and
a decrease in accrued liabilities which was partially offset by increases in
accounts payable and loans from a director. The Company's accounts receivable at
June 30, 2000 increased to $21.7 million, or approximately 11.4%, from $19.5
million at March 31, 2000. Days sales outstanding in receivables increased to 68
days at June 30, 2000 compared to 52 days at March 31, 2000. Inventories
increased to $32.1 million at June 30, 2000 from $26.6 million at March 31,
2000.
Net cash used in investing activities totaled $0.2 million during the three
months ended June 30, 2000 compared with $1.9 million during the three months
ended June 30, 1999. This decrease was attributable to the acquisition during
the 1999 period of machinery and equipment to support expanded operations.
Net cash provided by financing activities remained steady at $1.8 million
during the three months ended June 30, 2000 compared to $1.9 million during the
three months ended June 30, 1999.
At June 30, 2000, the proposed acquisition (the "Acquisition") of New Epoch
Information (BVI) Limited ("NEIBVI") by HFGTL had not as yet been completed. If
the acquisition of NEIBVI is completed, HFGTL will be required to establish a
credit facility for NEIBVI in an amount equal to the higher of (1) HK$50
million, or (2) two-thirds of the amount of the net proceeds of equity or debt
issue by HFGTL from time to time. Additionally, completion of the Acquisition
would reduce the Company's ownership interest in HFGTL to approximately 35%.
There can be no assurance if or when the Acquisition will be completed.
Management believes that the Company's cash and working capital is
sufficient to meet the Company's anticipated needs for at least the next twelve
months.
8
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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
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
S.W. LAM, INC.
Dated: August 14, 2000 By: /s/ Lam Sai Wing
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Lam Sai Wing, President and
Chief Executive Officer
Dated: August 14, 2000 By: /s/ Chan Yam Fai, Jane
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Chan Yam Fai, Jane
Chief Financial Officer
10
