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, 2000
[ ] 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.
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(Name of registrant as specified in its charter)
Nevada 62-1563911
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
Unit 25-32, Second Floor, Block B, Focal Industrial Centre, 21 Man Lok Street,
Hunghom, Hong Kong
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(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
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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(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 X No
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 July 1, 2000, 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 closing price, was
approximately $3,600,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended March 31, 2000 are
incorporated by reference into Part III.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS ................................................ 1
ITEM 2. PROPERTIES...............................................14
ITEM 3. LEGAL PROCEEDINGS........................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS......................................14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS..........................14
ITEM 6. SELECTED FINANCIAL DATA..................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............16
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...................24
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
AND CONTROL PERSONS......................................25
ITEM 11. EXECUTIVE
COMPENSATION.............................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT....................................25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.............................................25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K......................................25
SIGNATURES...............................................27
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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 20 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 functional currency is Hong Kong Dollars ("HK$"). For the
convenience of readers, unless otherwise indicated, all financial information
contained herein is presented in United States Dollars ("US$"). Translation of
amounts from HK$ into US$ has been made at the noon buying rate in New York City
for cable transfers in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York on March 31, 2000 of US$1.00 = HK$7.79. No
representation is made that the HK$ amounts could have been, or could be,
converted into US$ at that rate or at any other rate.
ITEM 1. BUSINESS
S.W. Lam, Inc. (the "Company"), a Nevada corporation, through its
subsidiaries, is engaged in the design, manufacturing and marketing of a broad
range of gold products, other precious metal products and 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 in the 1980's of an
unincorporated sole proprietorship by Lam Sai Wing ("Mr. Lam") to manufacture
and market jewelry. Subsequently, in 1988, Hang Fung Jewellery Company, a sole
proprietorship formed by Mr. Lam, established a modern manufacturing facility in
Shenzhen, the PRC (the "Shenzhen Facility"). In 1994, Hang Fung Jewellery
Company Limited, a limited company formed by Mr. Lam, entered into a
sino-foreign joint venture to manufacture and market jewelry at facilities in
Beijing, the PRC (the "Beijing Facility").
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 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. In September 1998, Quality Prince transferred all of its interest in
Priestgill to an independent third party. (Hang Fung Jewellery, Kai Hang
Jewellery, Macadam, Quality Prince and Soycue are collectively referred to
herein as the "Hang Fung Group").
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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 April of 1994 in the
State of Tennessee under the name New Wine, Inc. ("New Wine"). New Wine was
originally engaged in, and later discontinued its efforts, 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.
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, S.W. Lam, Inc. entered into an agreement
with the shareholders of Quality Prince pursuant to which S.W. Lam, Inc. 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, continued the operations of the Hang Fung
Group. In December of 1997, Quality Prince incorporated Hang Fung Gold
Technology Limited ("Hang Fung Gold") in Bermuda. Hang Fung Gold remained
inactive until February 1999.
In May of 1997, Quality Prince entered into an agreement with Phenomenal
Limited ("Phenomenal"), an unaffiliated third party, pursuant to which
Phenomenal loaned to Quality Prince $10,000,000 and Quality Prince issued to
Phenomenal a convertible promissory note (the "Note"). 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 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 and Ms. Chan and the 53.9% equity
interest in the Company owned by Mr. Lam and Ms. Chan. In accordance with the
term of the agreement, the Warrant expired in May 1998.
On June 4, 1998, Phenomenal agreed to extend the maturity date of the Note
from March 20, 1998 to June 4, 1998, and waived 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 Company and Phenomenal agreed to restructure
and capitalize the Note into redeemable preferred stock of Hang Fung Jewellery.
As a result, on June 30, 1998, Hang Fung Jewellery issued 5,263,788 shares of
redeemable preferred stock (the "Preferred Stock") at approximately $1.90 per
share to Phenomenal in replacement of the Note. Under the revised agreement,
Phenomenal was required to redeem the Preferred Stock and to subscribe for
common stock of Hang Fung Gold upon satisfaction of certain conditions.
Alternatively, Phenomenal had an option to require Hang Fung Jewellery to redeem
the Preferred Stock at a redemption amount as determined in accordance with a
pre-determined formula, or require Mr. Lam and Ms. Chan to purchase the
Preferred Stock held by Phenomenal in case Hang Fung Jewellery defaulted in
redeeming the Preferred Stock.
Pursuant to the revised agreement with Phenomenal, in February of 1999, the
Hang Fung Group effected a corporate reorganization (the "Group Reorganization")
with Hang Fung Gold becoming a holding company, excluding Quality Prince, for
the Hang Fung Group and Phenomenal's investment being converted into common
stock in Hang Fung Gold. Immediately prior to the conversion, dividends on the
Preferred Stock in the amount of $1,849,000 were paid. The dividend paid on the
Preferred Stock was included, in whole, in the minority interest in the
Company's consolidated statement of operations for fiscal 1999. Immediately
following the restructuring of the Hang Fung Group, Hang Fung Gold completed an
offering of shares in Hong Kong raising approximately HK$59,000,000 (the "Hong
Kong Offering") and the shares of Hang Fung Gold were listed on The Stock
Exchange of Hong Kong Limited (the "Hong Kong Exchange"). Trading of shares of
Hang Fung Gold on the Hong Kong Exchange commenced on March 16, 1999.
Following the Group Reorganization and Hong Kong Offering, the Company
holds, through Quality Prince, 53.145% of the issued capital stock of Hang Fung
Gold, whereas Phenomenal holds 21.855% of the issued capital stock and the
investing public holds the remaining 25% of the issued capital stock of Hang
Fung Gold.
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Company Structure
The following chart sets forth the organization of the Company and its
principal subsidiaries as of March 31, 2000:
S.W. Lam, Inc.
(incorporated in Nevada, US)
100%
Quality Prince Limited
(incorporated in the British Virgin Islands)
53.145%
Hang Fung Gold Technology Limited
(incorporated in Bermuda)
100%
Macadam Profits Limited
(incorporated in the British Virgin Islands)
(Investment holding)
100% 100%
Kai Hang Jewellery Company Limited
(incorporated in Hong Kong)
Hang Fung Jewellery Company Limited
(incorporated in Hong Kong)
(Manufacturing and selling (Property holding)
of jewelry products)
100%
Hang Fung Jewllery (Shenzhen) Co., Ltd.
(established in the PRC)
(Manufacturing of
jewelry products)
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Overview
The Company is principally engaged in the design, manufacture and
distribution of a broad range of gold products, other precious metal products
and jewelry products.
Manufacturing operations are carried on in Hong Kong and the PRC.
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 in recent years as a result of
increased marketing.
Developments During Fiscal Year 2000
Following the Group Reorganization and Hong Kong Offering during the fourth
quarter of fiscal 1999, the Company implemented a number of initiatives designed
to increase sales through (1) product branding, (2) establishment of strategic
marketing alliances, (3) expansion of wholesale and retail distribution channels
in the PRC, and (4) implementation of an Internet marketing strategy. In
connection with those initiatives, the Company began efforts to further expand
its production facilities and halted contract manufacturing for third parties in
order to devote its manufacturing capacity to production of its own products.
In January 2000, the Company formed an alliance with The Administration of
Shatoujiao Free Trade Zone of Shenzhen (the "Free Trade Administration") to
expand its marketing and distribution channels in China. Pursuant to that
alliance, the Company established relationships with approximately 1,000
additional wholesale customers in the PRC. At March 31, 2000, The Free Trade
Administration sourced and operated eight retail counters, which carry the brand
name of Hang Fung Gold, to sell Hang Fung Gold's "Hang Fung 3-D Gold" and "La
Milky Way 3-D Silver" branded products in Shenzhen and Hangzhou.
Under the terms of our alliance, the Free Trade Administration is entitled,
and responsible, to source and sell the Company's products at retail counters
carrying the Hang Fung brand name. The Company expects to invest approximately
$7.7 million to expand distribution channels and establish retail networks in
the PRC and has undertaken to invest approximately $2.6 million to expand its
Sha Tau Kok factory and to devote a portion of the production capacity from that
factory to supplying product to the PRC market. The Company also hired Mr. Chow
Shou Him as Executive Director of its China Business Division to manage
marketing and sales efforts in the PRC.
As part of the Company's commitment to expand distribution channels, the
Company's subsidiary will launch an Internet site in September 2000 to support
business-to-business sales of products as well as to promote the Company's brand
and support overall marketing efforts.
As part of the Company's Internet strategy, in June 2000, Hang Fung Gold
entered into a Sale and Purchase Agreement with New Epoch Holdings International
Limited. Under the terms of the Sale and Purchase Agreement, Hang Fung Gold will
acquire 49.9% of the stock of New Epoch Information (BVI) Limited ("New Epoch")
in exchange for shares of common stock of Hang Fung Gold representing
approximately 34.1% of the capital stock of Hang Fung Gold following the
transaction. Under the terms of the Sale and Purchase Agreement, Hang Fung Gold
has an option for a period of three years to acquire the remaining shares of New
Epoch. In conjunction with the proposed acquisition of New Epoch, Hang Fung Gold
entered into a Facility Agreement pursuant to which Hang Fung Gold agreed to
provide to New Epoch a credit facility of up to the higher of (1) HK$50 million,
or (2) two-thirds of the net proceeds of equity or debt issuances by Hang Fung
Gold from time to time after closing of the acquisition.
New Epoch is engaged in developing and facilitating e-commerce trading
facilities between the PRC and the rest of the world, using offline trading
services to complement its internet B2B platform. New Epoch, through a joint
venture with Infoshare of the China International Electronic Commerce Centre --
an information technology arm of the Ministry of Foreign Trade and Economic
Co-operation of the PRC, operates a portal under the domain name
www.chinatradeworld.com (the "ChinaTradeWorld portal"), a B2B site designed to
facilitate international trade with the PRC. Linking with the ChinaTradeWorld
portal would enhance the operations of, and accelerate deployment of, the
jewelry portal being established by Hang Fung Gold by providing access to an
established trading portal with "Supply Chain Management" and "Customer
Relationship Management" capabilities.
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Closing of the acquisition of New Epoch is subject to satisfaction of a
number of conditions, including completion of due diligence, receipt of relevant
governmental or regulatory authority's approvals, and approval of the
acquisition and the loan by the shareholders of Hang Fung Gold. There can be no
assurance that the conditions of closing will be satisfied and that the
acquisition of New Epoch will occur on the terms described, or at all. If the
acquisition of New Epoch is completed as described, the Company's ownership
interest in Hang Fung Gold will be reduced from approximately 53.1% to
approximately 35% (32.8% assuming conversion of all share options of the
employees). Further, if the acquisition of New Epoch is completed as described,
the scope of the Company's operations will expand beyond the jewelry industry to
include the trading and Internet activities currently conducted by New Epoch.
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. 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 the following four distinct
segments:
Gold Products
The principal product line of the Company consists of fine gold jewelry and
decorative ornaments which are manufactured using mainly fine gold and karat
gold. In order to cater to customer demands, gold products manufactured and sold
by the Company cover a wide range of weight, ranging from approximately 0.5
grammes to 3,000 grammes (3 kg) and are priced at a range of approximately HK$50
to HK$300,000 per piece of which the prices for the most popular items range
from approximately HK$50 to HK$3,000 per piece.
Fine gold jewelry items include bracelets, anklets, bangles, necklaces,
brooches, pendants, rings and earrings that are made of fine gold and karat
gold. The fine gold jewelry items manufactured and sold by the Company include
contemporary and innovative designs that are worn as fashion accessories as well
as traditional oriental designs that are commonly presented as wedding and
birthday gifts in the Asian community.
Gold ornaments, including statuettes, memento cards, key chains and other
decorative items, are mainly made of fine gold. Gold ornaments may take various
different forms and shapes such as cartoon characters, animals, signs of the
zodiac as well as religious figures and symbols. The Company also manufactures
customized gold memento cards and key chains for corporations as souvenirs in
their business promotions.
Other Precious Metal Products
Other precious metal products manufactured by the Company include jewelry
and decorative ornaments that are made of precious metals such as silver and
platinum. Depending on the weight and design of such products, these products
are sold in a price range of approximately HK$8 to HK$500,000 per piece of which
the prices for the most popular items range from approximately HK$100 to HK$500
per piece.
Jewelry Products
Jewelry products manufactured by the Company are made up of mainly precious
stones and gems. Depending on the quality and weight of stones and gems jewelry
and design of such products, these products are sold in a price range of
approximately HK$200 to HK$200,000 per piece of which the prices for the most
popular items range from approximately HK$2,000 to HK$8,000 per piece.
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Others
"Others" include mainly medals, coins and other miscellaneous items.
Depending on the weight, design and material used in such products, these
products are sold in a price range of approximately HK$50 to HK$4,000 per piece
of which the prices for the most popular items range from approximately HK$50 to
HK$300 per piece.
In US dollars, 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 $280. The following table illustrates, in US
dollars, the typical range and average wholesale price of the Company's products
by segment:
Wholesale Average
Price Range Wholesale Price
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Fine gold products................... $10 to $38,000 $200
Other precious metal products........ $1 to $65,000 $40
Jewelry products..................... $25 to $26,000 $650
Others............................... $6 to $100 $20
For the two years ended March 31, 2000, sales by major product category and
as a percentage of sales (excluding subcontracting fees) were as follows:
1999 2000
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Amount Amount
$'000 Percent $'000 Percent
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Fine gold products................ 49,927 58.8 71,133 57.8
Other precious metal products..... 21,625 25.4 30,753 25.0
Jewelry products.................. 13,272 15.6 21,031 17.1
Others............................ 181 0.2 198 0.1
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85,005 100.0 123,115 100.0
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Product Design and Development
The Company currently maintains a team of approximately 10 qualified and
experienced staff in its in-house product design and development division in its
Hong Kong office. The Company has been a pioneer in the introduction of
innovative product designs as well as in the development of new production
technology in the gold product industry. The product design and development
division continuously monitors market trends and consumer preferences and
participates in jewelry fairs, exhibitions and competitions to stimulate new
ideas. Employees are also encouraged to attend relevant courses and workshops
paid by the Company to strengthen their knowledge of production technology for
gold products. The product design and development division currently creates
over 2,000 new product designs on an annual basis.
In order to maintain its competitiveness in the gold product market, the
Company constantly introduces new products. Beginning in 1991, the Company
introduced fine gold ornaments such as gold memento cards, key chains and
electroformed products to the market. Some of the products of the Company are
also designed to suit different geographical market needs. For example, the
Chinese twelve signs of the zodiac ornaments and buddha figurines are in high
demand in the PRC and other countries in the Asia Pacific region while cartoon
characters and innovative jewelry items are in high demand in Europe and the US.
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Purchasing
The primary raw material in the manufacture and assembly of the Company's
products is gold bullion. For the year ended March 31, 2000, the cost of gold
bullion accounted for approximately 80.9% of the Company's total purchases.
The Company sources gold bullion primarily from seven suppliers in
Australia, England, Germany and Hong Kong. The Company mainly sources gold
bullion from gold bullion traders. Generally, the Company is able to maintain a
steady supply of gold bullion from its suppliers, with an average of one day
between the placing of an order and the receipt of the gold bullion. Other
materials, including silver and color stones, are purchased, primarily, from
suppliers in Hong Kong.
For the year ended March 31, 2000, purchases of gold from the Company's
five largest suppliers accounted for approximately 78.9% of the Company's total
purchases. The Company sources gold bullion regularly from its seven suppliers
and has not experienced any difficulty in obtaining the raw materials required
in the past. The Company has been dealing with its major suppliers for an
average period of approximately ten years and maintains a good business
relationship with each of them.
As the price of precious metals, in particular the price of gold bullion,
has generally been decreasing in recent years and since there are numerous
alternative sources of gold bullion such as banks and gold bullion dealers, the
Company does not maintain any long-term contractual arrangements with its
suppliers. Management believes that the Company is in an advantageous position
to negotiate for better terms when sourcing gold bullion, as compared to gold
bullion suppliers, and that the absence of established contractual relationships
with any principal supplier will not have a material adverse effect on the
operations or the financial position of the Company.
Based on the prevailing market situation with the price of gold bullion
remaining relatively steady and given the liquidity of gold bullion in the
market, the Company does not engage in any hedging activities with respect to
possible fluctuations in gold prices. The Company's management monitors the
fluctuation of gold prices closely and should the need for hedging arise in the
future, the Company may engage in hedging transactions. Moreover, the Company
has been able to fix the purchase price of gold with its largest supplier with
reference to the market gold price at the time the Company's gold products are
sold to customers. By using this arrangement, the price of gold payable to its
largest supplier will be the same as the price of gold charged by the Company to
its customers, thereby minimizing the effect of fluctuation of gold prices on
the Company.
Manufacturing and Assembly
Production Facilities
At March 31, 2000, the Company operated production facilities which are
located in Hunghom in Hong Kong (the "Hunghom Facility"), and in Sha Tau Kok in
the PRC (the "Sha Tau Kok Facility"). The Company previously operated production
facilities in Beijing, Shanxi and Shenzhen under processing agreements with PRC
entities holding requisite permits.
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-- Production Facilities in the Hong Kong
Hunghom Facility
The Hunghom Facility was established in 1988 and is equipped with 12
production lines which are used primarily for the production of molds, gold
memento cards and medals and the electroforming of fine gold and karat gold, as
well as the production of computer-scanned gold statuettes. The Hunghom Facility
is a vertically integrated facility capable of handling all aspects of the
production process, from product design to mold-making and from casting to
polishing as well as marketing to distribution.
The premises at which the Hunghom Facility are leased from an independent
third party and have a total gross floor area of approximately 31,500 sq. ft.,
which are used as the Company's office, showroom, and warehouse as well as
production facilities.
-- Production Facilities in the PRC
Sha Tau Kok Facility
The Sha Tau Kok Facility is operated by, and the premises at which its is
situated are leased by, Hang Fung Jewellery (Shenzhen) Co., Ltd., a wholly-owned
subsidiary of Hang Fung Jewellery. The Sha Tau Kok Facility is located near the
Sha Tau Kok customs office in Shenzhen, the PRC.
The Sha Tau Kok Facility was developed in two phases. Development of the
first phase was completed, and commercial production commenced, in July 1998.
Development of the second phase was completed in November 1999, and commercial
production commenced in the same month. The Sha Tau Kok Facility houses 30
production lines primarily for the production of fine and karat gold products
and other precious metal products.
Production Process
The Company combines traditional craftsmanship with advanced computerized
technology such as the application of the computerized faceting machine and/or
electroforming machine in the manufacturing process of gold products. While
faceting and electroforming are automated procedures, the creation of product
designs, the making of master wax models and master rubber molds, the carving of
individual wax models and the polishing of the finished products are performed
by skilled workers manually under the supervision of a team of experienced
technicians. The production cycle for gold products takes approximately 7 to 30
days to complete, depending on complexity of product design, any specific
requirements of the product, and production volume.
-- Chain Jewelry
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.
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-- Ornaments
Manufacturing of other jewelry items, including gold ornaments which may be
attached to chains, typically involves some, or all, of the following processes:
Design and Mold Making
The Company's in-house design team begins drawing the design by using
computer-aided design software. The data for the design are then electronically
transmitted to a computerized mold making machine and a master wax model is
produced automatically. The master wax model is of prime importance as its
degree of perfection determines the quality of the master rubber mold. A master
rubber mold is then constructed by pouring liquified rubber over the master wax
model (the "lost wax casting method"). The master rubber mold can be used to
produce numerous replica wax models.
Waxing
Wax is injected into a master rubber mold to obtain the required number of
wax models. After final carving, trimming and filing the surfaces and details of
individual wax models, the wax models are attached to a metal stem to enable
them to be handled without depositing fingerprints and grease on them, which
would hinder metal deposition.
Electroforming
The wax models are then submerged in an electrolyte solution where gold
ions are deposited onto the wax models by passing an electric current through
the electrolyte solution. The entire process is controlled by computers and the
processing time can be adjusted to achieve different thickness of gold layers.
Extraction of Wax Models
The wax models cast with a layer of gold are then heated in a furnace at a
pre-set temperature. The wax model underneath the gold layer melts and is
extracted from the gold object.
Filing and Tumbling
The gold ornaments are then individually hand-filed by skilled workers to
ensure smooth contours and surfaces. The base of each gold ornament is also
checked and flattened to ensure that the ornament can stand upright.
Stone Setting
Stones are set using a variety of methods, including the "claw", "channel",
"pave" or "bezel" setting methods, as determined by product design and setting
requirements.
Polishing
Jewelry items are again polished automatically by polishing machines.
Final Design and Assembly
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.
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Manufacturing Technology and Development
The Company continuously seeks to improve and modify its production
technology and facilities in order to achieve better product quality and higher
profit margin. Traditionally, the manufacture of gold products has been labor
intensive and, therefore, product quality and production time may vary for each
production. The Company has successfully combined traditional manual
craftsmanship with advanced computerized technology to mass produce quality gold
products in a cost efficient manner.
Since 1993, the Company has invested significant resources in developing
the technology for the electroforming method in the production of fine gold
products such as gold decorative ornaments. As one of the first gold product
manufacturers to have successfully implemented this new technology, the Company
is able to produce gold decorative ornaments of the same size as those produced
using the traditional methods, but using less gold and therefore reducing costs.
By adopting this new technology in the production of gold products, gold is more
evenly spread on the wax model resulting in smoother contours and better
appearance.
In September 1998, the Company was granted a short-term patent of up to 8
years in Hong Kong in relation to the production technology for the
computer-scanned gold statuette, a newly-launched product of the Company. Gold
statuettes are produced by scanning the object to be reproduced, such as human
features, by a computerized scanner. Details of the contours of the object are
scanned and are stored as codes on electronic media. The codes can then be sent
electronically to one of the production facilities of the Company and finally to
the rapid prototyping system for further production of gold statuettes with the
exact features of the scanned object. Besides offering a high degree of
resemblance to the original object, the advantage of this production technology
is that the amount of manual craftsmanship and production time can be
significantly reduced.
The Company has also obtained other patents in Hong Kong for other
production methods.
Quality Control
The Company's quality control team consists of 12 persons and is committed
to ensure that the products meet the Company's quality standards.
All incoming raw materials, such as gold bullion, are inspected by the
quality control team for purity before being used in the production process.
Quality control checks are also conducted at various stages of production to
ensure that product specifications are met. In addition, the Company has trained
its production workers to closely inspect products during production. Defective
products are either rejected or subject to refinements before entering the next
stage of the production process. The production process is also closely
monitored by trained technicians. All finished products are subject to final
inspection before they are packed and delivered to customers. The Company's
marketing staff also check the quality of finished products upon receipt of
products before distribution. Moreover, the quality control workers who work at
the facilities made available to the Company in the PRC under processing
agreements are also trained by the Company to adhere to similar stringent
quality control procedures.
The Company intends to apply for ISO 9000 certification for its production
facilities in the near future.
10
<PAGE>
Inventory Policy and Control
For gold bullion, in general, it is the Company's policy to maintain a
stock holding period of approximately 80 days. The Company generally has a stock
level of approximately 1,000 kg of gold reserves for production use. The stock
level is monitored by the senior manager of the gold and jewelry division who
coordinates the transfer of raw materials and finished goods between the
production facilities and the sales and marketing department. Stock movements
from the safe or storeroom of each of the production facilities are recorded in
the respective stock ledgers and stock movement reports are examined on a
regular basis and are submitted to the accounts department of the Hong Kong head
offices for consolidation and reconciliation. All movements of stock must be
justified by the person making the stock withdrawal. Details, such as stock
code, quantity and weight, are completed by the person making the withdrawal on
the withdrawal note which will be passed to the senior manager of the gold and
jewelry division for approval before the stock withdrawal takes place. The
person making the withdrawal, accompanied by another member of staff, must sign
the stock withdrawal note to acknowledge receipt of the stock. The person making
the withdrawal, the senior manager and the accounting division each respectively
keeps one copy of the signed withdrawal note. Goods are stored in safes and
storerooms that are installed with a wide range of anti-theft devices. At the
production line level, the stock retrieved by a production line supervisor from
the storeroom at a production facility is distributed to workers at the
production line. The supervisor keeps a record stating particulars such as type
and weight of stock distributed to each worker. At the end of each working day,
each worker stores his/her stock in a safety box and the locked safety box is
returned to the production line supervisor. The supervisor then stores the
safety boxes collected from the workers in a subsection designated for the
production line in the storeroom master safe. At the end of a production cycle,
the workers return the stock to the production line supervisors who will check
against their records to ensure that the stock returned matches with the
particulars stated in the records. Stock counts are performed on a monthly and
ad hoc basis by the accounting division and the results of the stock counts are
checked against the stock ledger.
Sales and Marketing
The Company's marketing and sales activities are carried out by a team of
approximately 90 staff members. The Company's sales staff 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 marketing and sales executives regularly attend trade
fairs, seminars and exhibitions in Hong Kong and overseas in order to keep
abreast of new product developments and market trends, to maintain regular
contact with existing customers and to meet potential customers. Through
participation in exhibitions, the Company is able to promote its corporate
image, increase public awareness of its products and strengthen its competitive
position in the gold products market.
The Company currently has a showroom at its head office in Hunghom, Hong
Kong where its wide range of products are displayed and sold. Other promotional
activities undertaken by the Company include the placing of advertisements in
trade magazines, journals and other public media as well as direct mailing of
product catalogues to existing and potential customers and maintenance of an
Internet web site which provides comprehensive product information.
In the PRC, potential customers have historically been referred to the
Company by the respective PRC parties to the processing agreements or learn
about the Company's products from other sources such as advertisements.
Customers may place orders to the Company's Hong Kong office by fax, telex,
telephone or e-mail. In any event, all deliveries pursuant to confirmed orders
from PRC customers are made in Hong Kong to the party designed by the PRC
customers located in Hong Kong. The Company does not hold a PRC license to
distribute its products in the PRC to customers in the PRC. The Company's PRC
customers (being customers who have invoicing addresses in the PRC, and which
are believed to be either wholesale distributors or retailers) are responsible
for arranging the importation of the products in the PRC.
11
<PAGE>
Through the alliance with the Free Trade Administration, the Company's
products are sold through eight retail counters sources and operated by the Free
Trade Administration in Shenzhen and Hangzhou. Pursuant to the alliance with the
Free Trade Administration, the Company focused its sales and marketing efforts
in the PRC on expansion of its distribution channels in the PRC, including
accessing wholesale customers, establishing its own brands and promotion of
sales through its Internet web site.
The Company has established solid business relationships with its customers
and many of them have in turn introduced new customers to the Company. The
Company also sponsors selected customers to attend major gold jewelry trade
shows so as to further promote market awareness of the Company's products.
The principal markets to which the Company's products are distributed are
the PRC, South East Asia, Hong Kong, the United States, the Middle East and
Europe. Sales by region (excluding Subcontracting fees) for the three years
ended March 31, 2000 have been as follows:
<TABLE>
1998 1999 2000
Amount Amount Amount
$,000 Percent $,000 Percent $,000 Percent
------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Southeast Asia................. 12,232 21.1 16,562 19.5 17,268 14.0
United States.................. 10,211 17.6 13,920 16.4 19,179 15.6
PRC............................ 10,000 17.2 15,827 18.6 32,659 26.5
Middle East.................... 9,317 16.1 13,947 16.4 10,921 8.9
Europe......................... 5,886 10.2 17,661 20.8 24,142 19.6
Hong Kong...................... 10,348 17.8 7,088 8.3 18,946 15.4
-------- ------- -------- ------- --------- -------
Total....................... 57,994 100.0 85,005 100.0 123,115 100.0
======== ======= ======== ======= ========= =======
</TABLE>
The Company generally adopts a tight credit policy and grants credit only
to selected customers depending on their business relationship with the Company.
Sales to customers in Hong Kong and overseas, other than the PRC, are mainly
settled on an open account basis, with credit periods ranging from seven days to
ninety days. All Hong Kong and overseas customers generally settle their
accounts on time and no material default has been encountered by the Company. As
for the PRC customers, owing to the different business practices prevailing in
the PRC, customers normally settle their accounts at a slower pace up to 180
days after sales. Despite the slower payment pattern, the Company has
experienced no significant bad debt problems and management believes there are
no material collectibility problems.
Customers
Products manufactured by the Company are principally sold to wholesale
distributors or retail chain operators of gold, other precious metal and jewelry
products.
At March 31, 2000, the Company had approximately 190 regular customers. The
Company estimates that, through customers and their extensive distribution
networks, the products manufactured by the Company are sold in approximately
2000 retail outlets worldwide.
For the year ended March 31, 2000, the Company five largest customers
accounted for approximately 17.1% of sales. During fiscal 2000, the Company had
no customers which accounted for more than 5% of the Company's revenues. The
Company has no long term contracts with any customers. The Company's top five
customers have each had a business relationship with the Company for over five
years.
12
<PAGE>
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, advanced
technology and capital investment in continuous product development and product
design 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.
Staff
As of March 31, 2000, the Company had approximately 1050 employees,
including 10 executive officers, 25 other management personnel, 25 persons in
administration, 900 persons in manufacturing and production and 90 persons in
sales and marketing. Of the Company's employees, approximately 190 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 (a "SAR"). As provided in the Sino-British Joint Declaration relating to
Hong Kong and the Basic Law of the Hong Kong SAR, 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 regulation on the import and export of gold, inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things. Additionally, 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.
13
<PAGE>
ITEM 2. PROPERTIES
The Company's executive offices are located at Unit 25-32, Second Floor,
Focal Industrial Centre, 21 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$2,289,000 (US$293,000) per year
pursuant to four leases which range in expiration from November 1999 to March
2001. This office space also houses certain marketing, product design and high
quality gold production operations.
The Company's principal production operations are conducted at facilities
located in Sha Tau Kok, the PRC. The Company's principal production facilities
are described in Item 1. Business under Manufacturing and Assembly, Production
Facilities.
The Company believes that its existing 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, 2000.
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.OB", 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 July 7, 2000, was $1.875.
Holders
At July 7, 2000, there were approximately 110 record holders of the
Company's Common Stock.
Dividends
While the Hang Fung Group paid a one-time dividend of approximately $5
million during fiscal 1996, prior to the Exchange, the Company has not paid any
dividends since its inception and presently anticipates that all earnings, if
any, will be retained for development of the Company's business and that no
dividends on the shares of Common Stock will be declared in the foreseeable
future. Any future dividends will be subject to the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
the operating and financial condition of the Company, its capital requirements,
general business conditions and other pertinent facts. Therefore, there can be
no assurance that any dividends on the Common Stock will be paid in the future.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical consolidated financial
data derived from the consolidated financial statements of the Company which
appear elsewhere herein. Quality Prince was acquired by the Company in December
of 1996 in a transaction accounted for as a recapitalization of Quality Prince
with Quality Prince as the acquirer (a "reverse acquisition"). On this basis,
the historical consolidated financial statements of the Company prior to
December 31, 1996 are those of Quality Prince and its subsidiaries and the
historical shareholders' equity of the Company as of March 31,1996 has been
retroactively restated to reflect the equivalent number of shares of the Company
issued for such acquisition. The acquisition of the various members of the Hang
Fung Group by Quality Prince in December of 1996 has been accounted for as a
reorganization of entities under common control, similar to a pooling of
interests. The following data should be read in conjunction with the
consolidated financial statements of the Company included elsewhere herein.
<TABLE>
Year Ended March 31,
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
(amounts stated in US$,000, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data (1):
Net sales............................... $22,903 $36,825 $57,994 $ 85,005 $ 123,115
Subcontracting fees..................... 3,965 4,133 4,308 2,195 -
-------- -------- -------- --------- ---------
Total revenues........................ 26,868 40,958 62,302 87,200 123,115
Gross profit............................ 8,046 10,971 15,143 22,117 27,996
Operating income........................ 4,402 6,190 8,207 11,341 13,312
Other income (expense), net............. (329) ( 741) (636) (1,570) (2,130)
Income before taxes..................... 4,073 5,449 7,571 9,771 11,182
Minority interests...................... -- -- -- (2,013) (5,997)
Net income.............................. $ 3,393 $ 4,475 $ 6,285 $ 5,856 $ 6,781
========= ========= ======== ========= ==========
Net income per share (2)................ $ 0.32 $ 0.40 $ 0.49 $ 0.46 $ 0.53
========= ========= ======== ========= ==========
Weighted average shares
outstanding (2)........................ 10,500,000 11,075,000 12,800,000 12,800,000 12,800,000
=========== ============ =========== =========== ============
Balance Sheet Data (1):
Working capital......................... $ 613 $ 2,768 $ (1,170) $ 19,555 $ 24,960
Total assets............................ 15,676 21,409 45,667 73,698 95,165
Long-term debt, less
current portion........................ 879 1,834 4,405 3,363 3,422
Stockholders' equity (3)................ 3,038 8,017 14,278 20,134 26,811
</TABLE>
-------------
(1) The Company's functional currency is Hong Kong Dollars ("HK$"). Translation
of amounts from HK$ into US$ is for the convenience of readers and has been
made at the noon buying rate in New York City for cable transfers in
foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York on March 31, 2000 of US$1.00 = HK$7.79. No representation
is made that the HK$ amounts could have been, or could be, converted into
US$ at that rate or at any other rate.
(2) 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.
(3) 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.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 20.
General
The following discussion should be read in conjunction with the Company's
financial statements appearing elsewhere herein.
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.
In May of 1997, Quality Prince, a wholly-owned subsidiary of the Company,
entered into an agreement with Phenomenal, an unaffiliated third party, pursuant
to which Phenomenal loaned to Quality Prince $10,000,000 and Quality Prince
issued to Phenomenal a convertible promissory note (the "Note"). 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 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 and Ms. Chan and
the 53.9% equity interest in the Company owned by Mr. Lam and Ms. Chan. In
accordance with the term of the agreement, the Warrant expired in May 1998.
On June 4, 1998, Phenomenal 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 Company and Phenomenal agreed to restructure
and capitalize the Note into redeemable preferred stock of Hang Fung Jewellery
Company, a wholly owned intermediate subsidiary of the Company. As a result, on
June 30, 1998, Hang Fung Jewellery issued 5,263,788 shares of redeemable
preferred stock (the "Preferred Stock") at approximately $1.90 per share to
Phenomenal in replacement of the Note. Under the revised agreement, Phenomenal
was required to redeem its interest in the Preferred Stock and to subscribe for
the common stock of Hang Fung Gold, upon satisfaction of certain conditions.
Alternatively, Phenomenal had an option to require Hang Fung Jewellery to redeem
the Preferred Stock at a redemption amount as determined in accordance with a
pre-determined formula, or require Mr. Lam and Ms. Chan to purchase the
Preferred Stock held by Phenomenal in case Hang Fung Jewellery defaulted in
redeeming the Preferred Stock.
Pursuant to the revised agreement with Phenomenal, in February of 1999, the
Hang Fung Group effected a corporate reorganization (the "Group Reorganization")
with Hang Fung Gold becoming a holding company for the Hang Fung Group,
excluding Quality Prince, and Phenomenal redeemed its interest in the Preferred
Stock and subscribed for the common stock in Hang Fung Gold. Immediately
following the restructuring of the Hang Fung Group, Hang Fung Gold completed an
offering of securities in Hong Kong raising approximately HK$59,000,000 (the
"Hong Kong Offering") and the shares of Hang Fung Gold were listed on The Stock
Exchange of Hong Kong Limited (the "Hong Kong Exchange"). Trading of shares of
Hang Fung Gold on the Hong Kong Exchange commenced on March 16, 1999.
Following the Group Reorganization and Hong Kong Offering, the Company
holds, through Quality Prince, 53.145% of the issued capital stock of Hang Fung
Gold, whereas Phenomenal holds 21.855% of the issued capital stock and the
investing public holds the remaining 25% of the issued capital stock of Hang
Fung Gold.
16
<PAGE>
Hang Fung Group's operations consist of designing, manufacturing 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, and, beginning from May 1999, retail sales from
showrooms. Prior to fiscal 2000, Hang Fung Gold conducted subcontract jewelry
manufacturing for selected customers and received fees in connection with the
subcontract manufacturing ("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.
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,
--------------------------------
1998 1999 2000
------ ------ ------
Net sales............................. 93.1% 97.5% 100.0%
Subcontracting fees................... 6.9 2.5 0.0
Total revenues...................... 100.0 100.0 100.0
Cost of sales......................... 75.7 74.6 77.3
Gross profit.......................... 24.3 25.4 22.7
Operating expenses.................... 11.1 12.4 11.9
Income from operations................ 13.2 13.0 10.8
Other income (expense)................ (1.0) (1.8) (1.7)
Income before income taxes............ 12.2 11.2 9.1
Income taxes.......................... (2.1) (2.2) 1.3
Minority interest..................... 0.0 (2.3) (4.9)
Net income............................ 10.1 6.7 5.5
Year Ended March 31, 2000 Compared to Year Ended March 31, 1999
Revenues and Gross Profit. Operating revenues increased by 41.2% to $123.1
million for the year ended March 31, 2000 as compared to $87.2 million for
fiscal 1999. Sales of Company products were up 44.8% to $123.1 million during
fiscal 2000 as compared to $85.0 million during fiscal 1999. Subcontracting fees
decreased from $2.2 million during fiscal 1999 to nil during fiscal 2000.
The increase in sales during fiscal 2000 was attributable to increased
product volumes resulting from an increase in production capacity, the
introduction of new products and investments in marketing efforts across
geographical regions. As part of our commitment to expand distribution channels,
our Hang Fung group plans to launch an Internet site in Hong Kong to support
business-to-business sales of our products as well as to promote our brand and
support our overall marketing efforts.
The decrease in Subcontracting fees was attributable to a determination to
concentrate on the manufacturing of products designed by the Company as opposed
to products manufactured on a subcontract basis in order to raise the Company's
brand name recognition.
17
<PAGE>
Geographically, within Southeast Asia (including Hong Kong and the PRC) the
Company's sales increased 74.4% to $68.9 million in fiscal 2000 from $39.5
million in fiscal 1999. Sales within Southeast Asia accounted for 55.9% of total
sales during fiscal 2000 as compared to 46.4% in fiscal 1999. Percentage of
total sales of the region were favorably impacted by renewed economic strength
in Southeast Asia during fiscal 2000 and increased marketing efforts in the
region. Sales in Hong Kong increased 166.2% to $18.9 million during fiscal 2000
from $7.1 million during fiscal 1999. Sales in the PRC were up during fiscal
2000 due to a substantial increase in our marketing efforts in the region,
increasing 107% to $32.7 million from $15.8 during fiscal 1999. Sales in
Southeast Asia (not including Hong Kong and the PRC) during fiscal 2000 were up
due to strong regional demand accompanying renewed economic strength in the
region, increasing 4.2% to $17.3 million from $16.6 million during fiscal 1999.
Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 19.1% increase in sales with these sales accounting for
44.1% of total sales in fiscal 2000 as compared to 53.6% of total sales in
fiscal 1999. 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 36.2% to
$24.1 million in fiscal 2000 from $17.7 million in fiscal 1999. Sales in the
Middle East were down during fiscal 2000, due to concentration of efforts on
expansion of the Company's market in Southeast Asia, decreasing approximately
21.6% to $10.9 million from $13.9 million in fiscal 1999. Sales in the United
States increased approximately 38.1% to $19.2 million during fiscal 2000 from
$13.9 million in fiscal 1999.
Gross profits increased by 26.7% to $28 million in fiscal 2000 from $22.1
million during fiscal 1999. The increase in gross profits was mainly
attributable to increased sales across geographic regions which were partially
offset by a reduction in gross margins. Gross margins decreased to 22.7% in
fiscal 2000 from 25.4% in fiscal 1999. The decrease in gross profit percentage
during fiscal 2000 was primarily attributable to adoption of a more competitive
pricing strategy to enhance competitiveness and revenue.
Operating Expenses. Operating expenses totaled $14.7 million during fiscal
2000, an increase of 36.1% from $10.8 million in fiscal 1999. 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 2000
and 1999 consisted of a loss on reduction in equity interest in a subsidiary
associated with the Group Reorganization and Hong Kong Offering of Hang Fung
Gold during fiscal 1999, bank charges, and interest income and interest expense.
Net other expenses increased approximately 31.2% to $2.1 million during fiscal
2000 from $1.6 million during fiscal 1999. The increase was primarily
attributable to (1) an increase in interest expense during the fiscal year of $1
million which resulted from an increase in banking facilities to support the
business expansion during fiscal 2000, and (2) an adverse swing in other
expenses of $205,000 which resulted mainly from increases in bank charges during
fiscal 2000; which was partially offset by a $383,000 increase in interest
income during fiscal 2000 attributable to increased cash generated by operations
and a $271,000 loss during fiscal 1999 attributable to the dilution of the
Company's ownership interest in Hang Fung Gold from 100% to 53.15% as a result
of the Group Reorganization and Hong Kong Offering.
Minority Interest. Minority interest of $6.0 million was reported during
fiscal 2000 and $2.0 million was reported during fiscal 1999. Minority interest
reflects the Group Reorganization, including the conversion of the Note of
Phenomenal into shares in the Company's previously wholly-owned subsidiary, Hang
Fung Gold (including a dividend of $1,849,000 paid to Phenomenal with respect to
the Preferred Stock), and the Hong Kong Offering pursuant to which additional
shares of Hang Fung Gold were sold in fiscal 1999. Minority interest reflects
the proportionate interest in the earnings of the Hang Fung Group not owned by
the Company from February 27, 1999, the date of the Group Reorganization.
Income Taxes. The Company reported a tax benefit of $1.6 million in fiscal
2000 compared to income tax expense of $1.9 million in fiscal 1999. The tax
benefit reported during fiscal 2000 was attributable to the favorable settlement
of a "50:50 offshore claim" in Hong Kong pursuant to which the Company recovered
a $2.7 million tax provision previously recorded for Hong Kong profits tax after
resolution of the Company's claim.
18
<PAGE>
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998
Revenues and Gross Profit. Operating revenues increased by 40.0% to $87.2
million for the year ended March 31, 1999 as compared to $62.3 million for
fiscal 1998. Sales of Company products were up 46.6% to $85.0 million during
fiscal 1999 as compared to $58.0 million during fiscal 1998. Subcontracting fees
decreased by 49.0% to $2.2 million during fiscal 1999 from $4.3 million during
fiscal 1998.
The increase in sales during fiscal 1999 was attributable to increased
product volumes resulting from an increase in production capacity, the
introduction of new products and investments in marketing efforts across
geographical regions. The decrease in Subcontracting fees was attributable to
increased concentration on the manufacturing of products designed by the Company
as opposed to products manufactured on a subcontract basis in order to raise the
Company's brand name recognition.
Geographically, within Southeast Asia (including Hong Kong and the PRC) the
Company's sales increased 21.2% to $39.5 million in fiscal 1999 from $32.6
million in fiscal 1998. Sales within Southeast Asia accounted for 46.4% of total
sales during fiscal 1999 as compared to 56.2% in fiscal 1998. Percentage of
total sales of the region were adversely impacted by continuing economic
weakness in Southeast Asia during the second half of fiscal 1998 and all of
fiscal 1999, which weakness was offset by increased marketing efforts. Sales in
Hong Kong declined 31.4% to $7.1 million during fiscal 1999 from $10.3 million
during fiscal 1998. Sales in the PRC were up during fiscal 1999 due to stable
economic conditions relative to the region, increasing 58.2% to $15.8 million
from $10.0 during fiscal 1998. Sales in Southeast Asia (not including Hong Kong
and the PRC) during fiscal 1999 were up due to strong demand in the Taiwan
market, increasing 35.5% to $16.6 million from $12.2 million during fiscal 1998.
Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 79.2% increase in sales with these sales accounting for
53.6% of total sales in fiscal 1999 as compared to 43.8% of total sales in
fiscal 1998. 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 200% to
$17.7 million in fiscal 1999 from $5.9 million in fiscal 1998. Sales in the
Middle East were up during fiscal 1999, increasing approximately 49.8% to $13.9
million from $9.3 million in fiscal 1998. Sales in the United States increased
approximately 36.3% to $13.9 million during fiscal 1999 from $10.2 million in
fiscal 1998.
Gross profits increased by 46.1% to $22.1 million in fiscal 1999 from $15.1
million during fiscal 1998. 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
increased to 25.4% in fiscal 1999 from 24.3% in fiscal 1998. The increase in
gross profit percentage during fiscal 1999 was primarily attributable to cost
control measures implemented by management.
Operating Expenses. Operating expenses totaled $10.8 million during fiscal
1999, an increase of 56% from $6.9 million in fiscal 1998. 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 1999
and 1998 consisted of a loss on reduction in equity interest in a subsidiary
associated with the Group Reorganization and Hong Kong Offering of Hang Fung
Gold during fiscal 1999, bank charges, and interest income and interest expense.
Net other expenses increased approximately 146.9% to $1.6 million during fiscal
1999 from $0.6 million during fiscal 1998. The increase was primarily
attributable to (1) an increase in interest expense during the fiscal year of
$784,000 which resulted from an increase in banking facilities to support the
business expansion during fiscal 1999, (2) an adverse swing in other expenses of
$159,000 which resulted from increases in bank charges during fiscal 1999 and
the recognition of the nonrecurring gain from an insurance claim during fiscal
1998, and (3) a $271,000 loss during fiscal 1999 attributable to the dilution of
the Company's ownership interest in Hang Fung Gold from 100% to 53.15% as a
result of the Group Reorganization and Hong Kong Offering; which was partially
offset by a $280,000 increase in interest income during fiscal 1999 attributable
to increased cash generated by operations.
19
<PAGE>
Minority Interest. Minority interest of $2.0 million was reported during
fiscal 1999. No minority interest was reported during fiscal 1998. Minority
interest reflects the Group Reorganization, including the conversion of the Note
of Phenomenal into shares in the Company's previously wholly-owned subsidiary,
Hang Fung Gold (including a dividend of $1,849,000 paid to Phenomenal with
respect to the Preferred Stock), and the Hong Kong Offering pursuant to which
additional shares of Hang Fung Gold were sold. Minority interest reflects the
proportionate interest in the earnings of the Hang Fung Group not owned by the
Company from February 27, 1999, the date of the Group Reorganization, through
March 31, 1999.
Income Taxes. Income taxes increased by 48.0% from approximately $1.3
million in fiscal 1998 to $1.9 million in fiscal 1999. The increase in income
taxes during the period was primarily attributable to the increase in 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,
(3) the Company's ability to sell adequate volumes of product at sufficient
profit margins in the PRC to recoup the Company's substantial investment plan in
expanding distribution channels in the PRC and (4) the Company's ability to
manage projected revenue growth.
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 manufacturing arrangements in the PRC 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 manufacturing
activities in the PRC or 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 opening of the Sha Tau Kok
Facility. The Company has also invested substantial amounts to expand marketing
efforts in the PRC, 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 in the PRC. The
Company previously secured $10 million of funding through the sale of the Note
to Phenomenal and subsequent Group Reorganization and secured an additional $7.6
million of funding through the Hong Kong Offering. While funding from those
sources was adequate to support planned facility expansions and increased
marketing efforts, there can be no assurance that the Company will not require
additional funding to support future planned expansion. See "-- Liquidity and
Capital Resources."
As a result of the Group Reorganization and Hong Kong Offering, the
Company's ownership interest in the Hang Fung Group (where substantially all of
the Company's operations are conducted and revenues generated) has decreased
from 100% to approximately 53%. For periods subsequent to the Group
Reorganization and Hong Kong Offering, the Company's operating results will
reflect minority interest relating to the interest in the Hang Fung Group not
owned by the Company. Thus, while the Company's consolidated revenues may
continue to grow at a rapid rate, the minority interest will effectively remove
approximately 47% of the future earnings of the Hang Fung Group from the
Company's future net income. Accordingly, in order for the Company to maintain
its current level of net earnings, the Hang Fung Group must approximately double
its existing earnings.
20
<PAGE>
The Company has formed an alliance with the Free Trade Administration
pursuant to which the Company has committed to devote substantial resources and
efforts to increasing distribution channels in the PRC. Countries in the Asia
Pacific region experienced significant weaknesses in their currency, banking and
equity markets in 1996 through 1998. While those economies have since recovered,
because those economies are less mature than western economies, they remain
subject to higher risk than western economies and any future weakness in the
region, and the PRC in particular, 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. In addition, the
Company's interest income and expense is sensitive to fluctuations in the
general level of Hong Kong interest rates. Any regional weakness, particularly
in the PRC, could adversely impact the results of the Company's efforts to
increase distribution channels in the PRC and could lead to our inability to
recoup the investment in that regard.
The Company has invested heavily in increasing production capacity and
distribution channels in an effort to rapidly grow its revenues. While the
anticipated revenue growth is subject to various risks discussed herein, even if
the Company is successful in growing its revenues as anticipated, there is no
assurance that the Company has adequate management and other resources to manage
that growth. Failure to satisfactorily manage the revenue growth could result in
poor customer service and low levels of retention of customers which could in
turn depress future revenues.
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 the
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.
Potential Acquisition of New Epoch
As part of the Company's Internet strategy, in June 2000, Hang Fung Gold
entered into a Sale and Purchase Agreement with New Epoch Holdings International
Limited. Under the terms of the Sale and Purchase Agreement, Hang Fung Gold will
acquire 49.9% of the stock of New Epoch Information (BVI) Limited ("New Epoch")
in exchange for shares of common stock of Hang Fung Gold representing
approximately 34.1% of the capital stock of Hang Fung Gold following the
transaction. Under the terms of the Sale and Purchase Agreement, Hang Fung Gold
has an option for a period of three years to acquire the remaining shares of New
Epoch. In conjunction with the proposed acquisition of New Epoch, Hang Fung Gold
entered into a Facility Agreement pursuant to which Hang Fung Gold agreed to
provide to New Epoch a credit facility of up to the higher of (1) HK$50 million,
or (2) two-thirds of the net proceeds of equity or debt issuances by Hang Fung
Gold from time to time after closing of the acquisition.
21
<PAGE>
New Epoch is engaged in developing and facilitating e-commerce trading
facilities between the PRC and the rest of the world, using offline trading
services to complement its internet B2B platform. New Epoch, through a joint
venture with Infoshare of the China International Electronic Commerce Centre --
an information technology arm of the Chinese Ministry of Foreign Trade and
Economic Co-operation of the PRC, operates the ChinaTradeWorld portal, a B2B
site designed to facilitate international trade with the PRC. Linking with the
ChinaTradeWorld portal would enhance the operations of, and accelerate
deployment of, the jewelry portal being established by Hang Fung Gold by
providing access to an established trading portal with "Supply Chain Management"
and "Customer Relationship Management" capabilities.
Closing of the acquisition of New Epoch is subject to satisfaction of a
number of conditions, including completion of due diligence, receipt of relevant
governmental or regulatory authority's approvals, and approval of the
acquisition and the loan by the shareholders of Hang Fung Gold. There can be no
assurance that the conditions of closing will be satisfied and that the
acquisition of New Epoch will occur on the terms described, or at all. If the
acquisition of New Epoch is completed as described, the Company's ownership
interest in Hang Fung Gold will be reduced from approximately 53.1% to
approximately 35% (32.8% assuming conversion of all share options to emloyees).
Further, if the acquisition of New Epoch is completed as described, the scope of
the Company's operations will expand beyond the jewelry industry to include the
trading and Internet activities currently conducted by New Epoch.
With the potential acquisition of New Epoch, the Company would add revenue
streams from the trading and distribution operations of New Epoch outside of the
Company's traditional revenues from jewelry operations. The Company would also
add operating expenses associated with New Epoch. It is possible that New Epoch
will incur substantial operating losses which could materially offset operating
profits from the Company's jewelry operations.
In addition to the potential adverse impact on the Company's operating
results from the proposed acquisition of New Epoch, as a result of the reduction
in the Company's ownership interest in Hang Fung Gold following the acquisition
of New Epoch, following the acquisition, the Company's financial results will
reflect a larger minority interest which will reduce reported net operating
results in future periods.
There can be no assurance that the acquisition of New Epoch will be
completed as contemplated.
Year 2000 Issue
The Company experienced no material failures or expenses as a result of the
Year 2000 Issue and does not expect to incur any material failures or expenses
in that regard in the future.
Liquidity and Capital Resources
At March 31, 2000, the Company had cash balances totaling $19.6 million and
working capital of $24.9 million. This compares to a cash balance of $16.7
million and a working capital balance of $19.6 million at March 31, 1999. The
increase in cash and in working capital were primarily attributable to the net
income for the year.
Cash provided by operations decreased to $5.4 million during fiscal 2000
from $6.0 million during fiscal 1999. The decrease in cash provided by
operations was primarily due to (1) a substantial increase in inventories, and
(2) a decrease in taxation payable. The Company's accounts receivable increased
to $19.5 million, or approximately 15.8% of fiscal 2000 revenues, as compared to
$15.7 million, or approximately 18.0% of fiscal 1999 revenues. The increase in
accounts receivable during fiscal 2000 was attributable to increased sales. Days
sales outstanding in receivables decreased to 54 days for fiscal 2000, from 57
days for fiscal 1999. Inventories increased to $26.6 million at March 31, 2000
from $16.9 million at March 31, 1999. The increase in year end inventories was
required to support growing sales.
The Company used $10.7 million, $8.7 million and $11.9 million for
investing activities respectively in fiscal 2000, 1999 and 1998. 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.
22
<PAGE>
Financing activities provided $8.2 million in fiscal 2000 as compared to
$17.3 million in fiscal 1999. Cash generated from financing activities in fiscal
2000 consisted primarily of increased bank borrowing which was partially offset
by repayments of obligations and payment of preferred stock dividends to
Phenomenal. Cash generated from financing activities in fiscal 1999 consisted
primarily of the proceeds from the Hong Kong Offering pursuant to which the
Company's subsidiary, Hang Fung Gold, sold common equity in an amount equal to
25% of the post-offering shares outstanding for net proceeds of $7.6 million.
The Company's primary liquidity needs are to fund accounts receivable and
inventories as well as to fund periodic purchases of machinery, equipment and
expansion of production facilities. Prior to Phenomenal's investment in Hang
Fung Group and receipt of proceeds from the Hong Kong Offering, 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, 2000, the Company had no material capital commitments.
However, the Company intends to use available funds as needed to (1) expand its
production capacity and jewelry distribution operations in Europe, the Middle
East and the United States, (2) invest up to $7.7 million in the expansion of
distribution channels and establishment of retail networks in the PRC, (3)
invest approximately $2.6 million to expand the Sha Tau Kok Facility, and (4)
establish a credit facility for New Epoch, discussed below.
At March 31, 2000, 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, 2000 were approximately $35.9 million of which approximately $31.0
million had been used at such date.
At March 31, 2000, 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, 2000, the Company's capital lease obligations totaled
$2.5 million of which $1.6 million was attributable to current lease
obligations. Obligations under operating leases require minimum annual rental
payments by the Company of approximately $303,000 in fiscal 2001.
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.
In addition to its normal financing requirements, the Company's subsidiary,
Hang Fung Gold, has undertaken to establish a credit facility for New Epoch, in
connection with Hang Fung Gold's agreement to acquire New Epoch, of the greater
of (1) HK$50 million, or (2) two-thirds of all net proceeds of equity or debt
issuances by Hang Fung Gold from time to time following closing of the
acquisition of the shares of New Epoch. There is no assurance that Hang Fung
Gold will be able to establish and maintain the required credit facility for New
Epoch or that the establishment of such a credit facility will not adversely
impact the ability of Hang Fung Gold to finance, and grow, its existing jewelry
operations.
Seasonality
The jewelry business is highly seasonal, with the third and fourth calendar
quarters (second and third fiscal quarters), which includes the Christmas
shopping season, historically contributing the highest sales. Seasonality cannot
be predicted or counted upon, and the results of any interim period are not
necessarily indicative of the results that might be expected during a full
fiscal year.
23
<PAGE>
The following table sets forth the Company's unaudited net sales for the
periods indicated:
<TABLE>
Fiscal Year Ended March 31,
---------------------------------------------------------
1998 1999 2000
(US$,000) (US$,000) (US$,000)
Amount % Amount % Amount %
---------- ------ --------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter (4/1-6/30) $13,926 22.4 $ 16,482 18.9 $24,398 19.8
2nd Quarter (7/1-9/30) 15,458 24.8 16,177 18.6 28,892 23.5
3rd Quarter (10/1-12/31) 17,706 28.4 28,331 32.5 31,098 25.3
4th Quarter (1/1-3/31) 15,212 24.4 26,210 30.0 38,727 31.4
------- ----- ------- ------ -------- -----
Total $ 62,302 100.0 $ 87,200 100.0 $123,115 100.0
======= ===== ======= ====== ======== =====
</TABLE>
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
The Company's sales are denominated in Renminbi (the "Rmb"), U.S. dollars
or Hong Kong dollars. Any material fluctuation in the value of the Rmb, the Hong
Kong dollars relative to the U.S. dollars would have significant impact on the
Company's operating results.
In order to minimize the Company's exposure to fluctuations in the exchange
rate of Rmb, the Company utilities its Rmb revenue to settle the expenses
denominated in Rmb incurred in the purchase of raw materials and its production
facilities in the PRC. Only the unused Rmb may be subjected to exchange risk. In
addition, the Company's currency risk in fiscal 2000 was immaterial as a result
of the "peg" of Hong Kong dollars to the U.S. dollars and therefore no
derivative contracts such as forward contracts and options to hedge against
foreign exchange fluctuations was considered or made.
The Company's interest expense is subject to the fluctuations of Hong Kong
interest rates. The interest rates on the bank installment loans of the Company,
in the principal amount of approximately $2.6 million, ranged from Hong Kong
prime lending rate plus 0.25% to 3.25% in fiscal 2000. The Company does not
currently hedge its interest rate exposure as the Company believes that there
are (i) no significant changes in Hong Kong interest rates in the foreseeable
future, and (ii) no adversely effects on its operation and cash flow even if the
applicable interest rate is increased by 1% in Hong Kong prime lending rate.
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-24 of
this report. See Index to Financial Statements on page 28 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
24
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.
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 28 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)
25
<PAGE>
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 Sai 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)
10.12++ Employment Agreement between Hang Fung Gold and Lam Sai Wing dated
February 27, 1999 (4)
10.13++ Employment Agreement between Hang Fung Gold and Chan Yam Fai, Jane
dated February 27, 1999 (4)
10.14++ Employment Agreement between Hang Fung Gold and Ng Yee Mei dated
February 27, 1999 (4)
10.15* Agreement between Hang Fung Gold Technology Limited, New Epoch
Holdings International Limited, and Quality Prince Limited dated
June 24, 2000
10.16* Facility Agreement between Hang Fung Gold Technology Limited and
New Epoch Information (BVI) Limited dated June 24, 2000
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
(4) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended March 31, 1999
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2000.
26
<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: July 14, 2000
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 July 14, 2000
Lam Sai Wing (Principal Executive Officer) and
Chairman of the Board
/s/ Chan Yam Fai
----------------------- Vice President, Chief Financial July 14, 2000
Chan Yam Fai, Jane Officer (Principal Accounting
and Financial Officer) and Director
/s/ Ng Yee Mei
----------------------- Vice President and Director July 14, 2000
Ng Yee Mei
/s/ Cheng Wa On
----------------------- Director July 14, 2000
Cheng Wa On
27
<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, 1999 and 2000........... F-2
Consolidated Statements of Operations for the Years ended March
31, 1998, 1999 and 2000.......................................... F-3
Consolidated Statements of Cash Flows for the Years ended March
31, 1998, 1999 and 2000.......................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for
the Years ended March 31, 1998, 1999 and 2000.................... F-5
Notes to Consolidated Financial Statements.......................... F-6
28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the 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, the United States of America; "the
Company") and Subsidiaries ("the Group") as of March 31, 1999 and 2000, and the
related consolidated statements of operations, cash flows and changes in
shareholders' equity for the years ended March 31, 1998, 1999 and 2000. 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, 1999 and 2000, and the results of their operations
and their cash flows for the years ended March 31, 1998, 1999 and 2000, in
conformity with generally accepted accounting principles in the United States of
America.
ARTHUR ANDERSEN & CO
Certified Public Accountants
Hong Kong
Hong Kong,
July 14, 2000.
F-1
<PAGE>
S. W. LAM, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND 2000
<TABLE>
Note 1 9 9 9 2 0 0 0
------ --------- ---------------------
HK$'000 HK $'000 US $'000
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and bank deposits 17 129,444 152,385 19,562
Accounts receivable, net 5 121,328 151,517 19,450
Prepayments and deposits 6 4,644 3,048 391
Inventories, net 7 131,513 207,249 26,604
--------- --------- --------
Total current assets 386,929 514,199 66,007
Property, machinery and equipment and 8 184,227 227,137 29,158
capital leases, net --------- --------- --------
Total assets 571,156 741,336 95,165
========= ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Short-term bank borrowings 9 128,066 221,898 28,485
Long-term bank loans, current portion 10 2,812 2,123 273
Capital lease obligations, current portion 11 9,487 12,747 1,636
Accounts payable 26,639 28,579 3,668
Accrued liabilities 12 6,672 9,657 1,240
Due to a director 18 3,101 4,426 568
Taxation payable 13 58,604 40,326 5,177
--------- --------- --------
Total current liabilities 235,381 319,756 41,047
Long-term bank loans, non-current portion 10 8,390 6,272 805
Capital lease obligations, non-current portion 11 7,727 6,993 898
Deferred taxation 13 9,945 13,394 1,719
--------- --------- --------
Total liabilities 261,443 346,415 44,469
--------- --------- --------
Minority interests 153,672 186,060 23,885
--------- --------- --------
Shareholders' equity:
Common stock, par value US$0.001 each:
- authorized - 25,000,000 shares
- outstanding and fully paid - 12,800,000 101 101 13
shares
Preferred stock, par value US$0.001 each:
- authorized - 25,000,000 shares
- outstanding and fully paid - Series A - - -
preferred stock - 100,000 shares
Additional paid-in capital 3,960 3,960 508
Retained earnings 151,980 204,800 26,290
--------- --------- --------
Total shareholders' equity 156,041 208,861 26,811
--------- --------- --------
Total liabilities and shareholders' equity 571,156 741,336 95,165
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Hong Kong dollars ("HK$") into United States dollars
("US$") is for the convenience of readers and has been made at the noon buying
rate in New York City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York on March 31, 2000 of
US$1.00 = HK$7.79. No representation is made that the Hong Kong dollars amounts
could have been, or could be, converted into United States dollars at that rate
or at any other rate. S. W. LAM, INC.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
<TABLE>
Note 1 9 9 8 1 9 9 9 2 0 0 0
------ ---------- ---------- ----------------------
HK$'000 HK$'000 HK $'000 US $'000
<S> <C> <C> <C> <C> <C>
Revenues
Net sales 19.a 449,236 658,790 959,070 123,115
Contract processing fees 33,360 17,012 - -
--------- --------- --------- ---------
Total revenues 482,596 675,802 959,070 123,115
Cost of sales and services (365,249) (504,391) (740,978) (95,119)
--------- --------- --------- ---------
Gross profit 117,347 171,411 218,092 27,996
Selling, general and (53,540) (83,508) (114,390) (14,684)
administrative expenses
Interest expense (5,513) (11,588) (19,492) (2,502)
Interest income 1,065 3,234 6,216 798
Other income (expenses), net (480) (1,716) (3,322) (426)
Loss on reduction in equity - (2,100) - -
interest in a subsidiary14 --------- --------- --------- ---------
Income before income 58,879 75,733 87,104 11,182
taxes
Provision for income taxes 13 (9,963) (14,747) 12,432 1,596
--------- --------- --------- ---------
Income before 48,916 60,986 99,536 12,778
minority interests
Minority interests - (15,601) (46,716) (5,997)
--------- --------- --------- ---------
Net income and 48,916 45,385 52,820 6,781
comprehensive ========= ========= ========= =========
income
Earnings per common stock HK$ 3.82 HK$ 3.55 HK$ 4.13 US$ 0.53
=========== ========== ========== ==========
Weighted average number of 12,800,000 12,800,000 12,800,000 12,800,000
common stocks ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Hong Kong dollars ("HK$") into United States dollars
("US$") is for the convenience of readers and has been made at the noon buying
rate in New York City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York on March 31, 2000 of
US$1.00 = HK$7.79. No representation is made that the Hong Kong dollars amounts
could have been, or could be, converted into United States dollars at that rate
or at any other rate.
F-3
<PAGE>
S. W. LAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
<TABLE>
1 9 9 8 1 9 9 9 2 0 0 0
--------- --------- -----------------------------
HK$'000 HK$'000 HK $'000 US $'000
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 48,916 45,385 52,820 6,781
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation of property, machinery and 23,147 39,605 55,580 7,135
equipment
Loss on disposal of fixed assets - 49 - -
Loss on reduction in equity interest in a - 2,100 - -
subsidiary
Minority interests - 15,601 46,716 5,997
(Increase) Decrease in operating assets -
Accounts receivable, net (39,851) (41,907) (30,189) (3,876)
Prepayments and deposits (1,961) (1,580) 1,596 205
Inventories, net (35,402) (30,368) (75,736) (9,722)
Due from a director 3,681 - - -
Increase (Decrease) in operating liabilities -
Accounts payable 9,773 4,318 1,940 249
Deposits from customers (9,107) - - -
Accrued liabilities 977 3,764 2,985 383
Due to a director 8,014 (4,909) 1,325 170
Taxation payable (1,442) 14,600 (18,278) (2,346)
Deferred taxation 7,742 - 3,449 443
-------- -------- ---------- ---------
Net cash provided by operating activities 14,487 46,658 42,208 5,419
-------- -------- ---------- ---------
Cash flows from investing activities:
Additions to property, machinery and (92,465) (67,781) (83,420) (10,709)
equipment -------- -------- ---------- ---------
Cash flows from financing activities:
Dividend paid to a minority shareholder of a - - (14,328) (1,839)
subsidiary
Net proceeds from issuance of convertible note 77,500 - - -
Cash proceeds received from minority interests - 58,671 - -
(Decrease) Increase in bank overdrafts (434) 1,538 (1,953) (251)
Increase in trust receipts bank loans 26,342 80,988 85,785 11,012
New short-term bank loans - 2,000 12,000 1,540
Repayment of short-term bank loans - - (2,000) (257)
New long-term bank loans 2,155 2,000 - -
Repayment of long-term bank loans (2,193) (2,288) (2,807) (360)
Repayment of capital element of capital lease (9,881) (8,559) (12,544) (1,610)
obligations -------- -------- ---------- ---------
Net cash provided by financing activities 93,489 134,350 64,153 8,235
-------- -------- ---------- ---------
Net increase in cash and bank deposits 15,511 113,227 22,941 2,945
Cash and bank deposits, as of beginning of year 706 16,217 129,444 16,617
-------- -------- ---------- ---------
Cash and bank deposits, as of end of year 16,217 129,444 152,385 19,562
======== ======== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Hong Kong dollars ("HK$") into United States dollars
("US$") is for the convenience of readers and has been made at the noon buying
rate in New York City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York on March 31, 2000 of
US$1.00 = HK$7.79. No representation is made that the Hong Kong dollars amounts
could have been, or could be, converted into United States dollars at that rate
or at any other rate. S. W. LAM, INC.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
<TABLE>
Common Stock Series A Preferred Stock
Number of Number of Additional Retained
shares Amount Shares Amount paid-in-capital earnings
'000 HK$'000 '000 HK$'000 HK$'000 HK$'000
----------- -------- ---------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of March 31, 1997 12,800 101 100 - 3,960 57,679
Net income - - - - - 48,916
-------- ----- ----- ------ ------- ---------
Balance as of March 31, 1998 12,800 101 100 - 3,960 106,595
Net income - - - - - 45,385
-------- ----- ----- ------ ------- ---------
Balance as of March 31, 1999 12,800 101 100 - 3,960 151,980
Net income - - - - - 52,820
-------- ----- ----- ------ ------- ---------
Balance as of March 31, 2000 12,800 101 100 3,960 204,800
======== ===== ===== ====== ======= =========
</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
-------------------------------------------------
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, the United States of
America. On October 10, 1996, the Company effected a change of domicile by
reincorporating in the State of Nevada, the United States of America, and
changed its name from New Wine Inc. to S.W. Lam, Inc. The Directors consider
Good Day Holdings Limited, a company incorporated in the British Virgin Islands,
to be the ultimate holding company.
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.
Prior to April 1, 1999, the Group's business activities in the PRC were
conducted through a series of contract processing arrangements with China
National Pearl, Diamond, Gem and Jewellery Import and Export Corporation
("CNPIEC"), Tai Yuan Jewellery Crafts Factory ("TYJCF") and Shenzhen Jia Yi
Jewellery Co., Ltd. ("SJYJC"), which are among the few entities authorized to
engage in the production and trading of gold and silver products in the PRC.
Pursuant to the contract processing agreements with CNPIEC and TYJCF, the Group
operated production plants in Beijing and Tai Yuan, the PRC, to produce
jewellery products. The Beijing and Tai Yuan plants also provided contract
processing services to PRC customers at the instruction and on behalf of CNPIEC
and TYJCF, and shared a portion of the contract processing fees received by
them. In accordance with the contract processing agreements, CNPIEC and TYJCF
have undertaken to pay for all of the Group's PRC tax liabilities, if any,
relating to the Group's operations under the above-mentioned activities. In
addition, the Group entered into an agreement with SJYJC for the production of
gold and silver products in Shenzhen, the PRC. During the year ended March 31,
2000, the Group ceased to conduct business activities in the PRC through the
contract processing agreements with CNPIEC, TYJCF and SJYJC.
On May 28, 1998, the Group established its own production facility in Sha Tau
Kok, Shenzhen, the PRC ("the Sha Tau Kok Facility"). The Sha Tau Kok Facility
was operated by Hang Fung Fung Jewellery (Shenzhen) Co., Ltd. ("HFJSC"), a
wholly owned subsidiary of the Company. The Sha Tau Kok Facility commenced
commercial production in July 1998.
On December 4, 1997, Hang Fung Gold Technology Limited ("HFGTL") was
incorporated as an exempted company under the Companies Act 1981 of Bermuda (as
amended) and became a wholly owned subsidiary of the Company. On February 27,
1999, HFGTL became the holding company of the subsidiaries of the Company,
except for Quality Prince Limited, pursuant to a group reorganization scheme
which included exchanges of shares. On March 16, 1999, HFGTL was listed on The
Stock Exchange of Hong Kong Limited.
F-6
<PAGE>
2. BASIS OF PRESENTATION
---------------------
Since HFGTL and the subsidiaries of the Company were owned by the same
shareholders immediately before and after the reorganization, it has been
accounted as a reorganization of entities under common control similar to a
pooling of interest.
3. SUBSIDIARIES
------------
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of March 31, 2000 were as follows:
<TABLE>
Place of Percentage of
incorporation/ equity interest Principal
Name operations held activities
------ -------------- --------------- -------------
<S> <C> <C> <C>
Quality Prince Limited British Virgin 100% Investment
Islands holding
Hang Fung Gold Technology Bermuda 53.145% Investment
Limited holding
Hang Fung Jewellery Company Hong Kong 53.145% Production and
Limited selling of jewellery
products
Hang Fung Jewellery The PRC 53.145% Processing of
(Shenzhen) Co., Limited jewellery products
Kai Hang Jewellery Company Hong Kong 53.145% Property
Limited holding
Macadam Profits Limited British Virgin 53.145% Investment
Islands holding
Soycue Limited British Virgin 53.145% Inactive
There is no restriction on the distribution of the subsidiaries' retained
earnings.
</TABLE>
F-7
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of consolidation
----------------------
The consolidated financial statements include the accounts of the Company
and its subsidiaries. The results of subsidiaries acquired or disposed of
during the year are recorded from or to their effective dates of
acquisition or disposal. All material intra-group transactions and balances
have been eliminated on consolidation.
b. Subsidiaries
------------
A subsidiary is a company in which the Company holds, directly or
indirectly, more than 50% of its voting share capital for the long term.
c. 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.
d. 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
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, 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.
e. 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, (ii) contract processing fees,
which are recognized when the contract processing service is rendered, and
(iii) rental income, which is recognized on a straight-line basis over the
period of the relevant lease.
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.
F-8
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------
f. Advertising and promotion costs
-------------------------------
The costs of advertising and promotion are expensed in the period in which
they are incurred.
g. Staff retirement benefits
-------------------------
Costs of staff retirement benefits are recognized as an expense in the
period in which they are incurred.
h. Borrowing costs
---------------
Borrowing costs are recognized as an expense in the period in which they
are incurred.
i. 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 temporary differences between the tax and financial statement bases
of assets and liabilities.
j. Leases
------
Capital 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 capital 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 balance.
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.
k. Off-balance-sheet instruments
-----------------------------
Off-balance-sheet instruments arise from futures, forward, swap and option
transactions undertaken by the Group in the foreign exchange, interest
rate, commodity and equity markets. The accounting for these instruments is
dependent upon whether the transactions are undertaken for speculative or
hedging purposes.
Financial instruments undertaken for speculative purposes are marked to
market and any gain or loss is recognized in the statements of operations.
F-9
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------
l. Comprehensive income
--------------------
The Group has adopted Statement of Financial Accounting Standard No. 130,
which establishes guidance for the reporting and display of comprehensive
income and its components. The purpose of reporting comprehensive income is
to report a measure of all changes in equity that resulted from recognized
transactions and other economic events of the period other than
transactions with shareholders. Adoption of the standard had no impact on
the Group's consolidated financial position, results of operations or cash
flows since the Group had no items of other comprehensive income other than
those recorded in the consolidated statements of operations.
m. Foreign currency translation
----------------------------
A substantial portion of the Group's sales, purchases and expenses are in
Hong Kong dollars. Management believes that maintaining books and records
in Hong Kong dollars will enable financial results and relationships to be
measured with more relevance and reliability.
In the financial statements of the individual companies, transactions in
other currencies during the year are translated into Hong Kong dollars at
the applicable rates of exchange prevailing at the time of the
transactions. Monetary assets and liabilities denominated in other
currencies are translated into Hong Kong dollars at the applicable rates of
exchange in effect at the balance sheet date. All such exchange differences
are dealt with in the individual companies' statements of operations. The
net (loss) gain from foreign currency transactions included in the
statements of operations was approximately HK$(12,000), HK$149,000 and
HK$127,000 for the years ended March 31, 1998, 1999 and 2000, respectively.
n. Earnings per common stock
-------------------------
Basic earnings per common stock 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. The numerator in calculating basic earnings per common share for
each year is the reported net income. The denominator is based on the
weighted average number of common stocks of 12,800,000 shares for the years
ended March 31, 1998, 1999 and 2000.
o. 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.
p. Fair value of financial instruments
-----------------------------------
All financial instruments of the Group are carried at cost, which
approximate their fair values.
F-10
<PAGE>
5. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable consisted of:
1 9 9 9 2 0 0 0
----------- -----------------------
HK $'000 HK $'000 US $'000
Trade receivables 127,354 159,017 20,413
Less: Allowance for bad (6,026) (7,500) (963)
and doubtful accounts --------- --------- ---------
Accounts receivable, net 121,328 151,517 19,450
========= ========= =========
a: During the year ended March 31, 2000, the Group wrote off trade receivables
of approximately HK$3,526,000, which was charged against allowance for bad
and doubtful accounts.
6. PREPAYMENTS AND DEPOSITS
------------------------
Prepayments and deposits consisted of:
1 9 9 9 2 0 0 0
---------- ----------------------------
HK $'000 HK $'000 US $'000
Deposits for acquisition of
raw materials and
equipment 3,709 2,115 272
Rental and utility deposits 513 515 66
Prepayments 219 137 17
Others 203 281 36
------- ------- -------
4,644 3,048 391
======= ======= =======
F-11
<PAGE>
7. INVENTORIES
-----------
Inventories consisted of:
1 9 9 9 2 0 0 0
-------- -----------------------
HK $'000 HK $'000 US $'000
Raw materials 58,734 86,937 11,160
Finished goods 74,779 122,312 15,701
--------- --------- --------
133,513 209,249 26,861
Less: Allowance for obsolete (2,000) (2,000) (257)
and slow-moving --------- --------- --------
inventories
Inventories, net 131,513 207,249 26,604
========= ========= ========
As of March 31, 1999 and 2000, inventories of approximately HK$121,542,000 and
HK$207,327,000, respectively, were held under trust receipts bank loans.
8. PROPERTY, MACHINERY AND EQUIPMENT AND CAPITAL LEASES
----------------------------------------------------
Property, machinery and equipment and capital leases consisted of:
1 9 9 9 2 0 0 0
---------- -----------------------
HK $'000 HK $'000 US $'000
Property, machinery and
equipment:
Leasehold land & building 1,973 1,973 253
Machinery &equipment 186,081 240,784 30,910
Motor vehicles 920 920 118
Furniture, fixtures &
officer equipment 39,540 64,682 8,303
Capital leases:
Machinery & equipment 38,178 56,823 7,295
--------- --------- --------
Cost 266,692 365,182 46,879
Less Accumulated depreciation
Property, machinery
& equipment (65,499) (112,053) (14,384)
Capital leases (16,966) (25,992) (3,337)
Property, machinery and --------- --------- --------
equipment and capital
leases, net 184,227 227,137 29,158
========= ========= ========
As of March 31, 1999 and 2000, all of the Group's leasehold land and building
was situated in Hong Kong and were held under a long-term lease.
F-12
<PAGE>
8. PROPERTY, MACHINERY AND EQUIPMENT AND CAPITAL LEASES (Cont'd)
----------------------------------------------------
As of March 31, 1999 and 2000, leasehold land and building with a net book value
of approximately HK$1,973,000 and HK$1,973,000, respectively, were mortgaged and
machinery and equipment with a net book value of approximately HK$1,395,000 and
HK$1,116,000, respectively, were pledged as collateral of certain of the Group's
banking facilities.
9. SHORT-TERM BANK BORROWINGS
--------------------------
Short-term bank borrowings comprised:
1 9 9 9 2 0 0 0
--------- -------------------------------
HK $'000 HK $'000 US $'000
Bank overdrafts 4,524 2,571 330
Short-term bank loans 2,000 12,000 1,540
Trust receipts bank loans 121,542 207,327 26,615
--------- --------- ---------
128,066 221,898 28,485
========= ========= =========
Short-term bank borrowings were denominated in Hong Kong dollars, and bore
interest at the Hong Kong prime lending rate to Hong Kong prime lending rate
plus 3.5%, which ranged from 8.75% to 12.25% per annum as of March 31, 1999 and
8.25% to 12.25% per annum as of March 31, 2000. Refer to Note 17 for details of
the Group's banking facilities.
Supplemental information with respect to short-term bank borrowings for the
years ended March 31, 1999 and 2000 is as follows:
<TABLE>
Maximum Average Weighted Weighted
amount amount average interest average interest
outstanding outstanding rate at rate
during the year during the year the end of the year during the year
--------------- --------------- ------------------- ----------------
HK $'000 HK $'000
<S> <C> <C> <C> <C>
Year ended March 31,
1999
Bank overdrafts 9,800 8,713 10.93% 11.73%
======== ======== ======== ========
Short-term bank loans 2,000 667 8.75% 8.81%
======== ======== ======== ========
Trust receipts bank
loans 123,500 80,914 9.33% 10.12%
======== ======== ======== ========
Year ended March 31,
2000
Bank overdrafts 9,951 7,388 10.77% 11.84%
======== ======== ======== ========
Short-term bank loans 12,000 7,000 9.13% 9.23%
======== ======== ======== ========
Trust receipts bank
loans 213,004 166,946 8.95% 9.10%
======== ======== ======== ========
</TABLE>
F-13
<PAGE>
10. 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 0.25% to 3.25%, which ranged from 9% to
11.75% per annum as of March 31, 1999 and 8.5% to 11.5% per annum as of March
31, 2000. Refer to Note 17 for details of the Group's banking facilities.
Aggregate maturities of long-term bank loans are as follows:
1 9 9 9 2 0 0 0
----------------------------------------
HK $'000 HK $'000 US $'000
---------- ---------- ----------
Payable during the following
periods
- Within one year 2,812 2,123 273
- Over one year but not 2,137 1,033 133
exceeding two years
- Over two years but not 1,043 1,149 147
exceeding three years
- Over three years but not 1,153 1,278 164
exceeding four years
- Over four years but not 1,274 1,421 182
exceeding five years
- Over five years 2,783 1,391 179
-------- -------- --------
Total bank loans 11,202 8,395 1,078
Less: Current portion (2,812) (2,123) (273)
-------- -------- --------
Non-current portion 8,390 6,272 805
======== ======== ========
11. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under the capital leases, together with the
present value of the minimum lease payments, were:
1 9 9 9 2 0 0 0
-------- -----------------------
HK $'000 HK $'000 US $'000
Payable during the following
periods
- Within one year 10,780 14,253 1,830
- Over one year but not 7,477 5,271 676
exceeding two years
- Over two years but not 693 2,267 291
exceeding three years
Total minimum lease payments 18,950 21,791 2,797
Less: Amount representing (1,736) (2,051) (263)
future interest -------- --------- ---------
Present value of minimum 17,214 19,740 2,534
lease
Less: Current portion (9,487) (12,747) (1,636)
-------- --------- ---------
Non-current portion 7,727 6,993 898
======== ========= =========
F-14
<PAGE>
12. ACCRUED LIABILITIES
-------------------
Accrued liabilities comprised:
1 9 9 9 2 0 0 0
----------- -------------------------
HK $'000 HK $'000 US $'000
Accruals for operating expenses
- Professional fees 680 833 107
- Workers' wages & bonus 2,716 3,473 446
- Management bonus 3,100 3,950 507
- Rental expenses 150 324 41
- Others 26 184 24
Accrued interest expense - 893 115
------- -------- -------
6,672 9,657 1,240
======= ======== =======
13. PROVISION FOR INCOME TAXES
---------------------------
Provision for income taxes consisted of the following:
1 9 9 8 1 9 9 9 2 0 0 0
------- ------- ----------------------
HK$'000 HK$'000 HK$'000 US$'000
Current tax
- Hong Kong profits tax (2,212) (13,000) (5,217) (670)
- PRC business tax and
enterprise income tax (a) (6,477) (4,253) - -
Over - provision in prior years
- Hong Kong profits tax (b) - - 21,098 2,709
- PRC business tax and
enterprise income tax (a) 6,477 2,506 - -
Deferred tax (7,751) - (3,449) (443)
---------- -------- --------- -------
(9,963) (14,747) 12,432 1,596
========== ======== ========= =======
Notes -
a: Prior to April 1, 1999, the Group received contract processing fees based
on the utilization of equipment and technology provided by the Group to its
PRC contracting partners. Provision for PRC taxes in relation to these fees
had been made for periods prior to April 1, 1999.
F-15
<PAGE>
13. PROVISION FOR INCOME TAXES (Cont'd)
--------------------------
b: A substantial portion of the Group's business activities were conducted in
the PRC. Accordingly, the Group was entitled to a 50 : 50 offshore claim in
reporting its Hong Kong profits tax, under which the profit attributable to
the Group's PRC activities is exempted from Hong Kong profits tax. Prior to
April 1, 1999, the Group's 50 : 50 offshore claim was under review by the
Hong Kong Inland Revenue Department ("the IRD") and a provision for Hong
Kong profits tax in respect of the Group's offshore profit was recorded.
During the year ended March 31, 2000, the Group's 50 : 50 offshore claim
was agreed by the IRD and Hong Kong profits tax in respect of the Group's
offshore profit was exempted. In addition, excess provision for Hong Kong
profits tax recorded prior to April 1, 1999 amounting to approximately
HK$21,098,000 was written back in the year March 31, 2000.
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% for the year ended March 31, 1998 and 16% for the
years ended March 31, 1999 and 2000. 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
Islands 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. Hang Fung Jewellery
(Shenzhen) Co., Ltd., a company established and operated in the PRC, is subject
to enterprise income tax at the rate of 33% (30% state income tax and 3% local
income tax). However, it is exempted from PRC state income tax and local income
tax for two years starting from the first year of profitable operations,
followed by a 50% reduction for the following three years. No PRC enterprise
income tax was provided as Hang Fung Jewellery (Shenzhen) Co., Ltd. was in a
loss position.
The reconciliation of the Hong Kong statutory 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:
1 9 9 8 1 9 9 9 2 0 0 0
--------- --------- ---------
Hong Kong statutory income
tax rate 16.5% 16.0% 16.0%
Non-taxable income arising
from activities which
qualified as offshore - - (8.0%)
General provision on tax
charged in foreign
jurisdiction 11.4% 6.8% -
Over-provision of taxation
in prior years (11.0%) (3.3%) (24.2%)
Deferred tax assets for
which no benefits have
been recognized due to
the establishment of
valuation allowance - - 2.8%
Other deductible activities - - (0.9%)
--------- ---------- ------------
16.9% 19.5% (14.3%)
========= ========== ============
F-16
<PAGE>
13. PROVISION FOR INCOME TAXES (Cont'd)
--------------------------
Components of deferred tax balances as of March 31, 1999 and 2000 are as
follows:
1 9 9 9 2 0 0 0
------- ---------------------
HK$'000 HK$'000 US$'000
Tax effect of accumulated
difference between
taxation allowance and
deprecation expenses 9,945 13,394 1,719
Loss of a subsidiary to be
utilized for offsetting future
taxable income - (2,470) (317)
-------- --------- --------
9,945 10,924 1,402
Valuation allowance - 2,470 317
-------- --------- --------
9,945 13,394 1,719
======== ========= ========
The retained earnings of the foreign subsidiaries would be subject to additional
taxation if distributed. In the opinion of the Directors these retained earnings
are, at the present time, required to finance the continuing operation of the
subsidiaries and, accordingly, no provision for additional taxation has been
made.
14. LOSS ON REDUCTION IN EQUITY INTEREST IN A SUBSIDIARY
----------------------------------------------------
On February 27, 1999, Hang Fung Jewellery Company Limited, a subsidiary of the
Company, redeemed its redeemable preferred stocks and Phenomenal Limited, the
redeemable preferred stock holder applied the redeemed proceeds, US$10,000,000
to subscribe for 582,800 shares of common stock of HFGTL, a then wholly owned
subsidiary of the Company, at US$17.16 each. On March 9, 1999, HFGTL sold
78,750,000 common stock at HK$0.9 in a public offering, receiving a net cash
proceeds of HK$58,671,000, after deducting the common stock issuance
expenditure. Immediately after the public offering, HFGTL capitalized share
premium of approximately HK$23,425,000 for the issuance of 234,250,000 shares on
a pro rata basis to the shareholders of HFGTL before the public offering. Thus,
after the share subscription and the capitalization, Phenomenal Limited holds
68,843,250 shares of HFGTL. These equity transactions resulting in a dilution of
the Company's effective percentage of shareholding of HFGTL from 100% to
53.145%. The loss resulting from reduction of the Company's equity interest in
HFGTL of approximately HK$2,100,000 was charged to the consolidated statements
of operations for the year ended March 31,1999.
F-17
<PAGE>
15. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------
a. Capital commitments
As of March 31, 1999 and 2000, the Group had capital commitments for
acquisition of machinery and equipment amounting to approximately
HK$1,535,000 and HK$1,675,000, 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 to September 2006. Rental expenses for the
years ended March 31, 1998, 1999 and 2000 were approximately HK$4,745,000,
HK$4,523,000 and HK$3,836,000 respectively. As of March 31, 1999 and 2000,
future rental payments under agreements classified as operating leases with
non-cancellable terms are as follows:
1 9 9 9 2 0 0 0
--------- --------------------------
HK$'000 HK$'000 US$'000
Payable during the
following periods:
- Within one year 2,951 2,364 303
- Over one year but not 2,229 504 65
exceeding two years
- Over two years but not 504 495 64
exceeding three years
- Over three years but not 495 448 57
exceeding four years
- Over four years but not 448 460 59
exceeding five years
- More than five years 1,163 701 90
------- ------- ------
7,790 4,972 638
======= ======= ======
c. Contingent liabilities
Contingent liabilities not provided in the financial statements were:
1 9 9 9 2 0 0 0
--------- ------------------------
HK$'000 HK$'000 US$'000
Discounted bills with recourse 2,605 1,798 231
======= ======= ======
F-18
<PAGE>
16. RETIREMENT PLAN
The Group's employees in the PRC are all employed on a contract 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 twelve
month's service may join the Group's defined contribution pension 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, 1998, 1999 and 2000 was approximately HK$145,000, HK$93,000 and
HK$184,000, respectively.
As of March 31, 1999 and 2000, certain employees of the Group have completed the
required number of years of service under the Hong Kong Employment Ordinance
("the Ordinance") to be eligible for long service payments on termination of
their employment. The Group is only liable to make such payments when the
termination meets the circumstances specified in the Ordinance. If the
termination of employment of all these employees meets the circumstances
specified by the Ordinance, the Group's liability as of March 31, 1999 and 2000
would be as follows:
1 9 9 9 2 0 0 0
--------- --------------------------
HK$'000 HK$'000 US$'000
Amount not provided in the
financial statements 231 123 16
===== ===== =====
17. BANKING FACILITIES
------------------
As of March 31, 1999 and 2000, the Group had aggregate banking facilities of
approximately HK$184,807,000 and HK$279,315,000, respectively, from several
banks for bank overdrafts, loans and trade financing. Unused facilities as of
the same date amounted to approximately HK$27,926,000 and HK$37,736,000,
respectively. These facilities were secured by:
a. pledge of machinery and equipment with an aggregate net book value of
approximately HK$1,395,000 and HK$1,116,000 as of March 31, 1999 and 2000,
respectively;
b. mortgage over the Group's leasehold land and building with a net book value
of approximately HK$1,973,000 and HK$1,973,000 as of March 31, 1999 and
2000, respectively;
c. the Group's inventories held under trust receipts bank loans;
F-19
<PAGE>
17. BANKING FACILITIES (Cont'd)
-------------------
d. pledges of the Group's bank deposits of HK$60,150,000 and HK$117,575,000 as
of March 31, 1999 and 2000, respectively;
e. guarantee from the Government of the Hong Kong Special Administrative
Region under the Special Finance Scheme for Small and Medium Enterprises
amounting to Nil and HK$2,000,000 as of March 31, 1999 and 2000,
respectively;
f. mortgages over certain leasehold land and buildings owned by Mr. Lam Sai
Wing and Ms. Chan Yam Fai, Jane, directors of the Company;
g. personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai,
Jane;
h. assignment of the benefits in respect of the keyman insurance for Mr. Lam
Sai Wing, a director of the Company, amounting to Nil and HK$20,000,000 as
of March 31, 1999 and 2000, respectively; and
i. corporate guarantee provided by the Company.
In addition, the Group has undertaken to comply with restrictive covenants
imposed by a bank.
18. RELATED PARTY TRANSACTIONS
--------------------------
a. The Group entered into the following transactions with related parties:
1 9 9 8 1 9 9 9 2 0 0 0
--------- --------- --------------------
HK$'000 HK$'000 HK$'000 US$'000
Rental paid to Ms. Chan Yam 1,350 - - -
Fai, Jane
Rental paid to Mr. Lam Sai - 162 324 42
Wing ======= ======= ====== ======
b. The Group had the following outstanding balances with a director:
1 9 9 9 2 0 0 0
--------- ---------------------
HK$'000 HK$'000 US$'000
Due to a director
- Mr. Lam Sai Wing 3,101 4,426 568
======= ======= ======
The balances due 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, Jane and personal guarantees provided by Mr. Lam Sai Wing and Ms.
Chan Yam Fai, Jane.
F-20
<PAGE>
19. SEGMENT INFORMATION
-------------------
a. Revenue
<TABLE>
1 9 9 8 1 9 9 9 2 0 0 0
--------- --------- -----------------------
HK$'000 HK$'000 HK$'000 US$'000
<S> <C> <C> <C> <C>
Hong Kong operation -
Sales of jewellery products to
customers in
- Hong Kong 80,058 54,929 147,592 18,946
- The PRC 77,527 122,659 254,418 32,659
- Middle East 72,161 108,086 85,073 10,921
- South East Asia 94,739 128,352 134,517 17,268
- Europe 45,614 136,880 188,065 24,142
- United States of America 79,137 107,884 149,405 19,179
--------- --------- --------- ---------
449,236 658,790 959,070 123,115
========= ========= ========= =========
The PRC operation -
Contract processing fees 33,360 17,012 - -
========= ========= ========= =========
</TABLE>
b. Operating profit *
------------------
1 9 9 8 1 9 9 9 2 0 0 0
--------- --------- --------------------
HK$'000 HK$'000 HK$'000 US$'000
Hong Kong operation 27,103 69,943 103,702 13,312
The PRC operation 36,704 17,960 - -
-------- -------- --------- -------
Total 63,807 87,903 103,702 13,312
======== ======== ========= =======
* Operating profit represents gross profit less selling, general and
administrative expenses.
c. Identifiable assets
-------------------
1 9 9 9 2 0 0 0
--------- ------------------------
HK$'000 HK$'000 US$'000
Hong Kong 417,179 636,947 81,765
The PRC 153,977 104,389 13,400
--------- --------- --------
Total 571,156 741,336 95,165
========= ========= ========
F-21
<PAGE>
19. SEGMENT INFORMATION (Cont'd)
-------------------
d. Major customers
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
1 9 9 8 1 9 9 9 2 0 0 0
--------- --------- ---------
Chow Tai Fook Jewellery
Company Limited 5.9% 2.0% 2.9%
Sam Ming Tong Jewellery
Company Limited 5.5% 4.9% 3.8%
====== ====== ======
e. Major suppliers
Details of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
1 9 9 8 1 9 9 9 2 0 0 0
--------- --------- ----------
Heraeus Limited -
supplied gold bullion 44.3% 62.9% 67.4%
AGR Hong Kong Limited 7.5% 3.6% 2.3%
Degussa China Limited 6.9% 4.6% 3.2%
Chinese Wall
Technology Company
Limited - - 7.8%
Johnson Matthey Hong
Kong Limited 3.3% 2.0% 5.8%
====== ====== ======
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. As provided in the Basic Law of the Hong
Kong, Hong Kong 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.
F-22
<PAGE>
20. OPERATING RISKS (Cont'd)
b. Concentration of credit risk
----------------------------
Concentration of accounts receivable as of March 31, 1999 and 2000 is as
follows:
1 9 9 9 2 0 0 0
--------- ----------
Five largest accounts receivable 18.5% 21.6%
======= =======
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.
c. 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, 1998,
1999 and 2000 is as follows:
1 9 9 8 1 9 9 9 2 0 0 0
--------- --------- --------
Purchases from five largest suppliers 66.2% 77.0% 89.0%
======= ======= =======
21. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
a. Cash paid for interest and income taxes are as follows:
<TABLE>
1 9 9 8 1 9 9 9 2 0 0 0
------- ------- ---------------------
HK$'000 HK$'000 HK$'000 US$'000
<S> <C> <C> <C> <C>
Interest paid 5,513 11,588 18,599 2,387
======= ======== ======== =======
Income taxes 3,664 147 2,397 308
======= ======== ======== =======
</TABLE>
b. Cash received for interest income are as follows:
<TABLE>
1 9 9 8 1 9 9 9 2 0 0 0
------- ------- ------------------
HK$'000 HK$'000 HK$'000 US$'000
<S> <C> <C> <C> <C>
Interest received 1,065 3,234 6,216 798
======= ======= ======= =====
</TABLE>
c. Non-cash investing activities
During the years ended March 31, 1998, 1999 and 2000, capital lease
obligations of approximately HK$29,644,000, HK$2,234,000 and HK$15,070,000,
respectively, were incurred to finance the Group's additions of new
machinery and equipment.
F-23
<PAGE>
22. OTHER SUPPLEMENTAL INFORMATION
<TABLE>
1 9 9 8 1 9 9 9 2 0 0 0
--------- --------- ----------------------
<S> <C> <C> <C>
HK$'000 HK$'000 HK$'000 US$'000
Depreciation of property, machinery and
equipment
- owned assets 15,634 31,970 44,215 5,676
- assets held under capital leases 7,513 7,635 11,365 1,459
Loss on disposal of property, machinery
and equipment - 49 - -
Allowance for bad and doubtful accounts - 2,500 5,000 642
Allowance for obsolete and slow-moving
inventories - 2,000 - -
Derivative trading loss * - - 497 64
Interest expenses for
- bank overdrafts and loans 4,475 9,585 17,636 2,264
- capital lease obligations 1,038 2,003 1,856 238
Operating lease rentals for
- premises 4,745 4,443 3,754 482
- machinery & equipment - 80 82 11
Advertising and promotion expenses 1,331 1,154 804 103
Repairs and maintenance expenses 667 721 774 99
Rental income 55 101 48 6
Net foreign exchange (loss) gain (12) 149 127 16
Interest income from bank deposits 1,065 3,234 6,216 798
======= ======= ======= ======
</TABLE>
* During the year ended March 31, 2000, the Group entered into forward
contracts for trading of gold, resulting in a loss of approximately
HK$497,000. There was no outstanding forward contract as of March 31, 1999
and 2000.
23. SUBSEQUENT EVENTS
-----------------
The following significant events took place subsequent to March 31, 2000:
a. The Group is under negotiation to enter into a joint venture agreement with
a company related to Phenomenal Limited, a minority shareholder of the
HFGTL, and an independent third party to establish an internet portal for
trading in gold, other precious metal and jewellery products. According to
the negotiation, each of the Group and the two venture partners would own a
33.33% interest in the joint venture. In addition, the Group 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.
b. In June, 2000, the Group 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 portal 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 Group'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.
F-24
