<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 2000
--------------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
------------- -------------------
Commission File No. 0-26049
-----------------------
Supply Chain Services Inc.
--------------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 59-2159951
--------------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
8/F Guangdong Textile Centre, 22 Minden Avenue, Tsimshatsui, Kowloon,
Hong Kong or c/o Registered Agents, Ltd., 1220 North Market Street,
Suite 606, Wilmington, DE 19801
-------------------------------------------------------------------
(Address of principal executive offices)
(852) 2366-8312 or (302) 421-5750
-----------------------------------------
(Issuer's telephone number)
Paddington Inc.
Suite E, 15/F, Ho Lee Commercial Building, 40 D'Aguilar Street,
Central, Hong Kong or c/o Registered Agents, Ltd.,
1220 North Market Street, Suite 606, Wilmington, DE 19801
-----------------------------------------------------------------------
(Former name, former address and
former fiscal year, if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--------- ---------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date:
Common Stock outstanding at September 30, 2000: 33,333,333 shares of
$.0001 par value
<PAGE> 2
Transitional Small Business Disclosure Format (check one).
Yes No X
------------- ----------
SUPPLY CHAIN SERVICES INC.
[Formerly known as Paddington Inc.]
INDEX
PART I FINANCIAL INFORMATION
Item I Consolidated Condensed Balance Sheets as of
December 31, 1999 (audited) and as of
September 30, 2000 (unaudited) 2
Unaudited Consolidated Condensed Statements of Operations for
the three and nine months ended September 30, 1999 and 2000
Unaudited Consolidated Condensed Statements of
Cash Flows for the three and nine months ended
September 30, 1999 and 2000 4
Notes to Consolidated Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults upon Senior Securities
Item 4 Submission of Matters to a vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signature page
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUPPLY CHAIN SERVICES INC. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
DECEMBER 31, 1999 (AUDITED) AND SEPTEMBER 30, 2000
(UNAUDITED) (Amounts expressed in United States Dollars)
--------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(Unaudited)
$ $
<S> <C> <C>
ASSETS
Current assets:
Cash and bank deposits 55,099 --
Accounts receivable 35,563 58,774
Other receivable and prepayments 25,985 19,953
Deposits 7,247 13,438
Inventories -- --
------- --------
123,894 92,165
Total current assets
Furniture, fixtures, equipment
and capital lease, net 64,951 44,975
Deferred expenses, net 59,375 58,812
Deferred taxation -- 12,852
------- --------
Total assets 248,220 208,804
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Deficit cash balance -- 11,073
Capital lease obligations, current portion 16,129 16,129
Accounts payable -- 40,941
Other payable and accrued liabilities 31,661 21,514
Deposits from customers 3,029 17,786
Due to a shareholder 20,143 62,945
Provision for taxation 13,123 13,123
------- --------
84,085 183,511
Total current liabilities
Capital lease obligations, non-current portion 48,387 36,290
Deferred taxation 8,984 --
------- --------
Total liabilities 141,456 219,801
------- --------
Shareholders' equity:
Share capital 3,333 3,333
Retained earnings (deficit) 103,431 (14,330)
------- --------
Total shareholders' equity 106,764 (10,997)
------- --------
Total liabilities and shareholders' equity 248,220 208,804
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
SUPPLY CHAIN SERVICES INC. AND SUBSIDIARIES
-------------------------------------------
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
---------------------------------------------------------
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(Amounts expressed in United States Dollars)
---------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months ended September 30 Nine Months ended September 30
--------------------------------- -------------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
$ $ $ $
<S> <C> <C> <C> <C>
Sales and services 534,752 317,872 534,752 435,236
Cost of sales and services (471,757) (253,041) (471,757) (351,722)
----------- ----------- ----------- -----------
Gross profit 62,995 64,831 62,995 83,514
Commission income 5,415 3,372 5,415 6,217
Retainer fee 64,585 9,000 64,585 25,000
----------- ----------- ----------- -----------
132,995 77,203 132,995 114,731
Selling, General and
Administrative expenses (75,473) (62,160) (108,952) (205,373)
Depreciation and amortization (10,689) (16,751) (20,262) (46,052)
----------- ----------- ----------- -----------
Operating income (loss) 46,833 (1,708) 3,781 (136,694)
Other income -- -- -- 1
Interest expenses (310) (968) (953) (2,904)
----------- ----------- ----------- -----------
Income (loss) before income
taxes 46,523 (2,676) 2,828 (139,597)
Income taxes -- -- 2,169 21,836
----------- ----------- ----------- -----------
Net income (loss) 46,523 (2,676) 4,997 (117,761)
=========== =========== =========== ===========
Earnings (Loss) per common
shares 0.00140 (0.00008) 0.000150 (0.00353)
=========== =========== =========== ===========
Weighted average number
of common shares
outstanding 33,333,333 33,333,333 33,333,333 33,333,333
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
SUPPLY CHAIN SERVICES INC. AND SUBSIDIARIES
-------------------------------------------
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(Amounts expressed in United States Dollars)
------------------------------------------------
<TABLE>
<CAPTION>
Nine Months ended
September 30
--------------------------------
1999 2000
-------- --------
$ $
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) 4,997 (117,761)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 20,262 46,052
Income tax provision (2,169) (21,836)
Decrease/(Increase) in operating assets:
Accounts receivable (330,213) (23,211)
Other receivable and prepayments (25,160) 6,032
Deposits (331,848) (6,191)
Inventories -- --
Increase/(Decrease) in operating
liabilities:
Accounts payable 311,418 40,941
Other payable and accrued liabilities 46,603 (10,147)
Deposits from customers 419,981 14,757
Due to a shareholder 1,075 42,802
-------- --------
Net cash provided by operating
activities 114,946 (28,562)
-------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of furniture, fixtures and
equipment (16,983) (1,513)
Deferred expenses (52,250) (24,000)
-------- --------
Net cash used in investing activities (69,233) (25,513)
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
SUPPLY CHAIN SERVICES INC. AND SUBSIDIARIES
-------------------------------------------
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
---------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(Amounts expressed in United States Dollars)
<TABLE>
<CAPTION>
Nine Months ended
September 30
--------------------------
1999 2000
$ $
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Repayment of capital element of
capital lease obligations (3,601) (12,097)
------- -------
Net cash used in financing activities (3,601) (12,097)
------- -------
Net increase (decrease) in cash
and bank deposits 42,112 (66,172)
Cash and bank deposits as of
beginning of year/period 25,031 55,099
------- -------
Cash and bank deposits (deficits) as of
end of year/period 67,143 (11,073)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
SUPPLY CHAIN SERVICES INC. AND SUBSIDIARIES
----------------------------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Amounts expressed in United States Dollars unless otherwise indicated)
---------------------------------------------------------
(Information as of September 30, 2000 and for the three months and nine months
ended September 30, 2000, respectively is unaudited)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Supply Chain Services Inc. (formerly Paddington Inc., the "Company")
was incorporated in the State of Delaware, United States of America, on
March 29, 1999 to serve as a vehicle to effect a merger, exchange of
capital stock, asset acquisition, or other business combination with a
domestic or foreign private business. On August 28, 2000, the Company
acquired 100% equity interest in Supply Chain Services Limited ("SCSL")
and its wholly-owned subsidiary, Leader Industrial Group Limited
("LIGL"), in a transaction which is described below in this Note. With
effect from August 31, 2000, the Company changed its name from
Paddington Inc. to Supply Chain Services Inc., the present one.
During the period from March 29, 1999 (date of incorporation) to August
28, 2000 (date of acquisition of SCSL and its wholly-owned subsidiary,
LIGL by the Company), the Company's sole asset was cash on hand in the
amount of $600 and the Company was considered as a development stage
enterprise.
Acquisition of SCSL and its wholly-owned subsidiary LIGL
On August 28, 2000, the Company consummated a stock-for-stock merger
transaction whereby the Company acquired, for an aggregate price of
$2,733.33, 10,000 shares of common stock, par value HK$1 each,
representing all of the issued and outstanding shares of SCSL in
exchange for the issuance by the Company of 27,333,333 shares of its
common stock to Gi-Tech Developments Limited ("Gi-Tech") and Miss
Pauline Wai Man Chu ("the SCSL shareholders"), and a designee of
Gi-Tech pursuant to the Share Exchange Agreement signed on the same
date by and amongst the Company, SCSL and the SCSL shareholders.
Gi-Tech is a company incorporated in the British Virgin Islands and Mr.
Thomas Yan Chuen Chu ("Mr. Chu") is the beneficial owner of all of its
issued and outstanding common stock, and as such is the beneficial
owner of all 25,299,999 shares of the Company now owned by Gi-Tech. In
connection with the transaction, Gi-Tech designated Mr. Tze Tat Fung to
receive 666,667 shares of common stock of the Company. Miss Pauline Wai
Man Chu received 1,366,667 shares of the Company in connection with the
transaction.
LIGL was incorporated in Hong Kong on September 10, 1997 and commenced
business mainly in the trading of toys in April 1998. All the then
issued and outstanding common shares of LIGL were owned by Gi-Tech
which was 100% beneficially owned by Mr. Chu.
On March 12, 1999, SCSL was incorporated in Hong Kong. 95% of the
issued and outstanding common shares of SCSL were owned by Gi-Tech and
were therefore beneficially owned by Mr. Chu. 5% of the issued and
outstanding common shares of SCSL were owned by Miss Pauline Wai Man
Chu. SCSL commenced business as a supply chain management services
provider in April 1999. In April 1999, SCSL acquired the entire issued
and outstanding common shares of LIGL. After the acquisition, Gi-Tech,
which remained to be 100% beneficially owned by Mr. Chu, owned directly
95% of the issued and outstanding common shares of SCSL and Miss
Pauline Wai Man Chu became a 5% beneficial shareholder of SCSL.
The headquarters of SCSL is situated in Hong Kong and it also maintains
representative offices in the People's Republic of China ("PRC") and
Taiwan.
6
<PAGE> 8
2. BASIS OF PRESENTATION
The acquisition of SCSL and its wholly-owned subsidiary, LIGL, by the
Company on August 28, 2000 has been treated as a reverse acquisition
since SCSL is the continuing entity in substance as a result of the
stock-for-stock merger transaction as described above in Note 1 to the
accompanying financial statements. On this basis, the historical
financial statements prior to August 28, 2000 represent the
consolidated condensed financial statements of SCSL and LIGL.
The historical shareholders' equity accounts of the Company as of
December 31, 1999 has been retroactively restated to reflect the
issuance of 27,333,333 shares of common stock of par value $0.0001 each
in connection with the acquisition.
3. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company
are collectively referred to as "the Group") as of September 30, 2000
were as follows:
<TABLE>
<CAPTION>
Percentage of
Place of equity interest
Name Incorporation Held Principal activities
------------------------------- ------------- --------------- -------------------------
<S> <C> <C> <C>
Supply Chain Services Limited Hong Kong 100% Provision of supply chain
management
Services
Leader Industrial Group Limited Hong Kong 100% Toy trading
</TABLE>
7
<PAGE> 9
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All material intercompany transactions
and balances within the Group have been eliminated on consolidation.
Inventories
Inventories are stated at the lower of cost, on a first-in first-out
basis, and market value.
Furniture, Fixtures, Equipment and Capital Leases
Furniture, fixtures, 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 from
three to five years. All ordinary repair and maintenance costs are
expensed as incurred.
Deferred Expenses
Advertising subsidies granted to customers for the promotion of the
Group's products are capitalized as deferred expenses and are amortized
on the straight-line method by reference to the period over which the
related products are expected to be marketed but not exceeding three
years.
Revenue Recognition
Sales are recognized upon delivery of goods and passage of title to
customers.
Deposits or advanced payments from customers prior to delivery of goods
and passage of title of goods are recorded as deposits from customers.
Service income is recognized when the related services are rendered.
Income Taxes
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Deferred income taxes are provided using the
liability method. Under the liability method, deferred income taxes are
recognized for all significant temporary differences between the tax
and financial statement bases of assets and liabilities.
Operating Leases
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.
8
<PAGE> 10
Foreign Currency Translation
Transactions in foreign currencies are recorded at the applicable
exchange rates ruling at the transaction dates. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date
are translated at the applicable exchange rates ruing at that date.
Exchange differences are included in the results of operations.
The translation of the financial statements of subsidiaries into United
States dollars is performed for balance sheet accounts using the
closing exchange rate in effect at the balance sheet dates and for
revenue and expense accounts using an average exchange rate during each
reporting period. The gains or losses resulting from translation are
included in shareholders' equity separately as cumulative translation
adjustments.
Earnings (Loss) per Common Share
Earning (Loss) per common share is computed in accordance with
Statement of Financial Accounting Standards No.128 by dividing net
income (loss) for each year/period by the weighted average number of
shares of common stock outstanding during the years/periods, as if the
common stock issued for the acquisition of SCSL and LIGL (see Note 1).
The weighted average number of shares used to compute earnings (loss)
per common share is 33,333,333 for each year/period.
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 would affect certain
reported amounts and disclosures. Accordingly, actual financial results
of the Group could differ materially from the estimates provided by the
Company.
5. DEPOSITS
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- ------------------
(unaudited)
$ $
<S> <C> <C>
Deposits comprised:
Deposits to suppliers 304 6,495
Rental and utility deposits 6,943 6,943
----------------- ------------------
7,247 13,438
================= ==================
</TABLE>
9
<PAGE> 11
6. INVENTORIES
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- ------------------
(unaudited)
$ $
<S> <C> <C>
Inventories comprised:
Finished goods - -
================= ==================
</TABLE>
7. FURNITURE, FIXTURES, EQUIPMENT AND CAPITAL LEASE
Furniture, fixtures, equipment and capital lease comprised:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- ------------------
(unaudited)
$ $
<S> <C> <C>
Furniture, fixtures and equipment:
Furniture and fixtures 1,885 2,797
Office equipment 14,023 14,624
Leasehold improvements 4,104 4,104
Capital lease:
Motor vehicle 73,935 73,935
-------------- --------------
Total cost 93,947 95,460
Less: Accumulated depreciation
Furniture, fixtures and
Equipment (4,351) (7,356)
Capital lease (24,645) (43,129)
-------------- --------------
Furniture, fixtures, equipment and
capital lease, net 64,951 44,975
============== ==============
</TABLE>
10
<PAGE> 12
8. DEFERRED EXPENSES
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- ------------------
(Unaudited)
$ $
<S> <C> <C>
Advertising subsidies, cost 90,250 114,250
Less: Accumulated amortization (30,875) (55,438)
-------------- ---------------
Deferred expenses, net 59,375 58,812
============== ===============
</TABLE>
9. CAPITAL LEASE OBLIGATIONS
Future minimum lease payments under capital lease, together with the
present value of the minimum lease payments, are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(Unaudited)
$ $
<S> <C> <C>
Payable:
Within one year 20,000 20,000
In the second year 20,000 20,000
In the third to fourth years (inclusive) 40,002 25,324
------------ -------------
80,002 65,324
Less: Imputed interest (15,486) (12,905)
------------ -------------
Present value of minimum lease payments 64,516 52,419
Less: Current portion (16,129) (16,129)
------------ -------------
Non-current portion 48,387 36,290
============ =============
</TABLE>
11
<PAGE> 13
10. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an
equity basis on income arising in or derived from the tax jurisdiction
in which they operate. The Company did not commence any business
operations up to and until August 31, 2000 and is therefore not subject
to any income taxes. The Hong Kong subsidiaries are subject, however,
to Hong Kong profits tax at a rate of 16%.
Income tax credit (charge) comprised:
<TABLE>
<CAPTION>
Three Months ended September 30 Nine Months ended September 30
------------------------------------ ------------------------------------
1999 2000 1999 2000
----------------- ----------------- ----------------- -----------------
$ $ $ $
<S> <C> <C> <C> <C>
Hong Kong profits tax:
Current - - (317) -
Deferred - - 2,486 21,836
----------------- ----------------- ----------------- -----------------
- - 2,169 21,836
================= ================= ================= =================
</TABLE>
Components of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- ------------------
(Unaudited)
$ $
<S> <C> <C>
Cumulative tax losses 2,234 23,609
Accumulated differences between
taxation allowances and
depreciation/amortization
expenses of:
Furniture, fixtures and equipment (1,718) (1,347)
Deferred expenses (9,500) (9,410)
-------------- --------------
(8,984) 12,852
============== ==============
</TABLE>
The tax loss carry forwards have no expiration date.
12
<PAGE> 14
11. SHARE CAPITAL
Preferred stock
The Company is authorized to issue 20,000,000 shares of preferred stock
with a par value of $0.0001 each, with such designations, voting and
other rights and preferences as may be determined from time to time by
the Board of Directors.
Common stock
The Company is authorized to issue 120,000,000 shares of common stock
with a par value of $0.0001 each. During the period from March 29, 1999
(date of incorporation) to September 3, 2000, the Company had 6,000,000
shares of issued and outstanding common stock. On September 4, 2000,
the Company issued 27,333,333 shares of common stock of par value
$0.0001 each to the SCSL shareholders and a designee of one of the SCSL
shareholders in connection with its acquisition of SCSL as described in
Notes 1 and 2 to the accompanying financial statements.
12. OPERATING LEASE COMMITMENTS
The Group has an operating lease agreement for office premises which
extends through May 2001.
Future minimum rental payments under the non-cancellable operating
lease are as follows:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- ------------------
(unaudited)
$ $
<S> <C> <C>
Payable:
Within one year 35,226 14,678
In the second year 5,871 -
----------------- ----------------
41,097 14,678
================= ================
</TABLE>
13. RELATED PARTY TRANSACTIONS
Details of the amount due to a shareholder of the Company are as
follows:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- ------------------
(unaudited)
$ $
<S> <C> <C>
Gi-Tech Developments Limited 20,143 62,945
================= ==================
</TABLE>
The amount due is unsecured, non-interest bearing and without
pre-determined repayment terms.
13
<PAGE> 15
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest and income taxes comprised:
<TABLE>
<CAPTION>
Nine Months ended September 30
------------------------------
1999 2000
------------- --------------
$ $
<S> <C> <C>
Interest 953 2,904
============= ==============
Income taxes - -
============= ==============
</TABLE>
Supplemental disclosure of investing activities:
During the year ended December 31, 1999, the Group entered into capital
lease arrangements to purchase a motor vehicle with a capital value of
$64,516. (Period ended September 30, 2000: Nil)
15. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated condensed
statements of operations:
<TABLE>
<CAPTION>
Three Months ended September 30 Nine Months ended September 30
------------------------------- ------------------------------
1999 2000 1999 2000
---------- ---------- ---------- ------------
$ $ $ $
<S> <C> <C> <C> <C>
Amortization of deferred 7,521 9,521 13,854 24,563
expenses
Depreciation of furniture,
fixture and equipment
- owned assets 1,664 1,069 1,896 3,005
- assets held under capital
lease 1,504 6,161 4,512 18,484
Interest expenses for capital
lease obligations 309 968 953 2,904
Operating lease rentals for
premises, net of sub-rental
income 3,409 4,403 3,409 13,210
Net foreign exchange loss (gain) (173) (874) (147) (1,386)
Repairs and maintenance 143 264 143 458
</TABLE>
14
<PAGE> 16
16. SEGMENTAL ANALYSIS
Major Customers
Details of individual customers accounting for more than 5% of the
Group's sales and services are as follows:
<TABLE>
<CAPTION>
Three Months ended September 30 Nine Months ended September 30
------------------------------------- ----------------------------------
1999 2000 1999 2000
------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sears, Roebuck & Co. 23.6% 27.4% 23.6% 19.4%
Rumpus Corporation 63.0% 57.1% 63.0% 51.6%
Plymouth Trading Co. Inc. 6.8% -- 6.8% 5.3%
Sports Manufacturers
International Inc. -- -- -- 7.6%
North America Bear Co. Inc. -- 6.2% -- 5.4%
</TABLE>
Major Suppliers
Details of individual suppliers accounting for more than 5% of the
Group's purchases and services are as follows:
<TABLE>
<CAPTION>
Three Months ended September 30 Nine Months ended September 30
------------------------------------- ----------------------------------
1999 2000 1999 2000
-------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Pelagie Industrial Ltd 65.6% 82.7% 65.6% 68.8%
Mutual Fit Company Limited 24.2% -- 24.2% --
Winch Printers Ltd -- 8.5% -- 6.1%
Winfaith Shipping Ltd -- -- -- 9.1%
Zui Fat Industrial Ltd -- 8.6% -- 6.2%
</TABLE>
15
<PAGE> 17
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. Forward-Looking Statements
The statements contained in this Report on Form 10-QSB that are not
historical facts are "forward-looking statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995) that involve risks
and uncertainties. Such forward-looking statements may be identified by,
among other things, the use of forward-looking terminology such as
"believes", "expects", "may", "should" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. From time to
time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in various filings made by the Company with the
Securities and Exchange Commission (the "SEC"), or press releases or oral
statements made by or with the approval of an authorized executive officer
of the Company. These forward-looking statements, such as statements
regarding anticipated future revenues, capital expenditures, Year 2000
compliance and other statements regarding matters that are not historical
facts, involve predictions. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements. Potential risks and
uncertainties that could affect the Company's future operating results
include, but are not limited to: (i) political and economic conditions,
including economic conditions related to entry into any new business
venture; (ii) the availability of equipment from the Company's vendors at
current prices and levels; (iii) the intense competition in the markets for
the Company's new products and services; (iv) the Company's ability to
integrate acquired companies and businesses in a cost-effective manner; (v)
the Company's ability to effectively implement its branding strategy; and
(vi) the Company's ability to develop, market, provide, and achieve market
acceptance of new service offerings to new and existing clients.
2. Organization and Principal Activities
The Company was incorporated in the State of Delaware, United States of
America, on March 29, 1999 to serve as a vehicle to effect a merger,
exchange of capital stock, asset acquisition, or other business combination
with a domestic or foreign private business. On August 28, 2000, the
Company acquired 100% equity interest in SCSL and its wholly-owned
subsidiary, LIGL, in a transaction which is described below in this Note.
With effect from August 31, 2000, the Company changed its name from
Paddington Inc. to Supply Chain Services Inc, the present one.
During the period from March 29, 1999 (date of incorporation) to August 28,
2000 (date of acquisition of SCSL and its wholly-owned subsidiary, LIGL by
the Company), the Company's sole asset was cash on hand in the amount of
$600 and the Company was considered as a development stage enterprise.
16
<PAGE> 18
Acquisition of SCSL and its wholly-owned subsidiary, LIGL
On August 28, 2000, the Company consummated a stock-for-stock merger
transaction whereby the Company acquired, for an aggregate price of
$2,733.33, 10,000 shares of common stock, par value HK$1 each, representing
all of the issued and outstanding shares of SCSL in exchange for the
issuance by the Company of 27,333,333 shares of its common stock to Gi-Tech
and Miss Pauline Wai Man Chu ("the SCSL shareholders"), and a designee of
Gi-Tech pursuant to the Share Exchange Agreement signed on the same date by
and amongst the Company, SCSL and the SCSL shareholders. Gi-Tech is a
company incorporated in the British Virgin Islands and Mr. Thomas Yan Chuen
Chu is the beneficial owner of all of its issued and outstanding common
stock, and as such is the beneficial owner of all 25,299,999 shares of the
Company now owned by Gi-Tech. In connection with the transaction, Gi-Tech
designated Mr. Tze Tat Fung to receive 666,667 shares of common stock of
the Company. Miss Pauline Wai Man Chu received 1,366,667 shares of the
Company in connection with the transaction.
LIGL was incorporated in Hong Kong on September 10, 1997 and commenced
business mainly in the trading of toys in April 1998. All the then issued
and outstanding common shares of LIGL were owned by Gi-Tech which was 100%
beneficially owned by Mr. Thomas Yan Chuen Chu.
On March 12, 1999, SCSL was incorporated in Hong Kong. 95% of the issued
and outstanding common shares of SCSL were owned by Gi-Tech and were
therefore beneficially owned by Mr. Thomas Yan Chuen Chu. 5% of the issued
and outstanding common shares of SCSL were owned by Miss Pauline Wai Man
Chu. SCSL commenced business as a supply chain management services provider
in April 1999. In April 1999, SCSL acquired the entire issued and
outstanding common shares of LIGL. After the acquisition, Gi-Tech, which
remained to be 100% beneficially owned by Mr. Thomas Yan Chuen Chu, owned
directly 95% of the issued and outstanding common shares of SCSL and Miss
Pauline Wai Man Chu became a 5% beneficial shareholder of SCSL.
The headquarters of SCSL is situated in Hong Kong and it maintains
representative offices in the PRC and Taiwan.
3. Management of the Company
From March 29, 1999 (date of incorporation of the Company) to September 4,
1999, the Company's Directors and Officers were Messr. Hardy Kung Chin Lok,
Richard Che Keung Wong and King Kwok Yu. Mr. Hardy Kung Chin Lok was the
Company's Director and Chairman of the Board. Mr. Richard Che Keung Wong
was the Company's Director and Vice-Chairman of the Board. Mr. King Kwok Yu
was the Company's Director, President, Treasurer, Secretary and Controller.
In conjunction with the Company's acquisition of SCSL and its wholly-owned
subsidiary, LIGL, on August 28, 2000, there were changes in the members
constituting the Company's Board of Directors. On September 4, 2000,
Messrs. King Kwok Yu and Richard Che Keung Wong resigned their position as
17
<PAGE> 19
Directors of the Company, and Mr. Thomas Yan Chuen Chu and Miss Pauline Wai
Man Chu were appointed as Directors of the Company. On the same day, Mr.
King Kwok Yu also resigned his position as President of the Company. Mr.
King Kwok Yu remains to act as the Company's Treasurer, Secretary and
Controller. Mr. Richard Che Keung Wong presently is the Vice President -
Corporate Development of the Company. On September 4, 2000, Mr. Thomas Yan
Chuen Chu was also appointed as President of the Company. Mr. Hardy Kung
Chin Lok remains as a Director of the Company.
Set forth below are summary descriptions containing the names of the past
and present Directors and Officers of the Company, and the commercial and
educational experience of each during at least the past five (5) years:
RICHARD CHE KEUNG WONG received a Diploma in Youth and Community Services
in 1971 from the Jordanhill College of Education, Glasgow, Scotland and a
Bachelor of Arts in Economics from York University (Canada) in 1976. Mr.
Wong received a Fellowship from the Institute of Canadian Bankers
(F.I.C.B.) in 1980. From 1964 to 1974, Mr. Wong was an Assistant Community
& Youth Officer with the Hong Kong Government Social Welfare Department,
Group and Community Work Division. From 1976 to 1979, Mr. Wong was
Officer-in-Training/Assistant Accountant with the Canadian Imperial Bank of
Commerce. From 1979 to 1980, Mr. Wong was Administration Officer to Toronto
Dominion (H.K.) Limited. From 1980 to 1984, Mr. Wong served as Vice
President and General Manager of the Seattle-First National Bank, Hong Kong
Branch. From 1984 to 1986, Mr. Wong was Vice President of BA-Asia Limited,
a merchant banking subsidiary of Bank of America N.T. & S.A. From 1986 to
1989, Mr. Wong served as Vice President and Country Manager of Bank of
America N.T. & S.A. From 1989 to 1990, Mr. Wong served as Regional Director
(Asia) of Tyndall Bank International Plc. From 1990 to 1992, Mr. Wong was
Finance Director to Tak Wing Investments (Holdings) Ltd. From 1992 to 1994,
Mr. Wong was Director and Chief Operating Officer of Cathay International
Holdings Plc. In 1994, Mr. Wong served as Director to Merrywise Company
Limited. From 1994 to 1997, Mr. Wong served as Director and Chief Executive
Officer of Faulding China Limited, HK and Chairman and Chief Executive
Officer of Foshan Faulding Pharmaceutical Co. Ltd., P.R.C. From 1997 to the
present, Mr. Wong has been a Director of Richard King & Company Limited. At
present, Mr. Wong is also a Director of several property holding companies
in Hong Kong and of a company listed on the Stock Exchange of Hong Kong
Limited. During the past five years, Mr. Wong has also served as a Director
to several other Hong Kong companies, all of which have not carried out any
business activities in the last five years, and all of which remain
inactive as of the date of filing of this Registration Statement.
KING KWOK YU received a Bachelor of Arts in Economics from York University
(Canada) in 1976, a Master of Arts in Economics from University of
California, Santa Barbara in 1977 and a Masters in Business Administration
in Accounting from Golden Gate University in San Francisco, California in
1979. Mr. Yu registered as a Certified Public Accountant with the Board of
Accountancy of the State of California in 1982 and now holds an inactive
Certified Public Accountant status. In 1984, Mr. Yu became an Associate
Member of the Hong Kong Society of Accountants. From 1979 to 1984, Mr. Yu
was Staff Auditor/Audit Supervisor to Oppenheim, Appel, Dixon & Co. (which
included the practice of Robinson, Sain, Snyder & Reiss) in San Francisco
and Los Angeles, California. From 1984 to 1987, Mr. Yu was Audit
Supervisor/Assistant Audit Manager to the Hong Kong offices of Ernst &
Whitney and Spicer & Oppenheim. From 1987 to 1988, Mr. Yu served as Group
18
<PAGE> 20
Financial Controller to Glynhill International Limited in Hong Kong. From
1988 to 1990, Mr. Yu was Group Chief Accountant to Polly Peck International
(Hong Kong) Limited. In 1991, Mr. Yu was Director to PHINA Corporate
Finance Services (Asia) Limited in Hong Kong. From 1992 to 1994, Mr. Yu was
Group Finance Director to Cathay International Group based in Hong Kong.
From 1992 to 1994, Mr. Yu also provided professional advisory services to
Cathay International Group through D.M. Forant Inc., a company incorporated
in the State of Delaware and to which Mr. Yu was the sole stockholder,
director and officer. D.M. Forant Inc. did not render professional advisory
services to any other entities, and has not carried out any activities
since 1995. From 1994 to 1997, Mr. Yu served as Director and Chief
Financial Officer to Pharmaceutical China Inc., British Virgin Islands,
Faulding China Limited, Hong Kong, and Foshan Faulding Pharmaceutical Co.
Ltd., P.R.C. From 1997 to 1998, Mr. Yu served as Executive Director to
Richard King & Company Limited, of which he had been a Director since 1991.
From February 1999 to April 1999, Mr. Yu has served as a Consultant and
Associate Director to Hantec Asia Alliance Capital (China) Limited. In
March 1999, Mr. Yu formed Paddington Inc. with Messrs. Richard Che Keung
Wong and Hardy Kung Chin Lok. Paddington Inc. was a "blank check" company
with common stock registered under the Securities Exchange Act of 1934. As
defined in Section 7(b)(3) of the Securities Act of 1933, a "blank check"
company is a development stage company that has no specific business plan
or purpose or has indicated that its business plan is to engage in a merger
or acquisition with an unidentified company or companies and is issuing
"penny stock" securities as defined in Rule 3a51-1 of the Securities
Exchange Act of 1934. From March 1999 to September 2000, Mr. Yu served as a
Director to Paddington Inc. Mr. Yu resigned as a Director to Paddington
Inc. in September 2000 after Paddington Inc. effected a merger with Supply
Chain Services Limited in August 2000. From March 1999 to present, Mr. Yu
has been an Officer of Paddington Inc. serving as Treasurer, Secretary and
Controller and as President from March 1999 to August 2000. Mr. Yu also
serves as a Director to several other Hong Kong and US companies, all of
which have not carried out any business activities in the last five years,
and all of which remain inactive as of the date of filing of this
Registration Statement.
HARDY KUNG CHIN LOK received a Bachelor of Science in Civil Engineering
from the City University of Manchester (U.K.) - Institute of Science &
Technology in 1972. From 1972 to 1976, Mr. Lok was an Engineer with Scott
Wilson Kirkpatrick & Partners in the United Kingdom. From 1976 to the
present, Mr. Lok has been with John Lok & Partners, Ltd. and The Sun
Company, Ltd., both in Hong Kong, and is currently serving as Managing
Director of both entities. Mr. Lok is a Corporate Member of both the
Institution of Civil Engineers and the Hong Kong Institution of Engineers.
At present, Mr. Lok also serves as a Director to several property and
construction companies in Hong Kong, a consulting and advisory services
company in Hong Kong and a cold storage company in Hong Kong.
THOMAS YAN CHUEN CHU joined TCA (Hong Kong) Limited and TCA Group Inc. of
Massachusetts, USA in 1984 as the President and Chief Executive Officer of
the group. TCA (Hong Kong) Limited and TCA Group Inc. were principally
involved in toy design, marketing and distribution in the U.S.A. and in the
manufacturing of toys in China. In 1993, Mr. Chu became the President of
High Progress Limited, a Hong Kong-based company engaged in the
manufacturing, marketing and distribution of toys. From 1994 to 1996, Mr.
Chu became Senior Vice President of Pam & Frank Industrial Limited, a
company listed on the Stock Exchange of Hong Kong, with the
responsibilities of overseeing China operations and supervising US
operations, including warehousing, distribution and national sales and
marketing. Pam & Frank Industrial Limited was a company engaged in the
manufacturing and exporting of sporting goods. In May 1996, Mr. Chu became
the Vice President of the Hong Kong operations of United States
Consolidation Limited, a logistics service provider. In late 1997, Mr. Chu
was named the Chief Financial Officer of United States Consolidation
Limited, and in 1998, Mr. Chu became Executive Vice President of Asia. Mr.
Chu was responsible for management of the Asian operations, encompassing
trucking, warehousing, consolidation and other logistics activities. In
September 2000, Mr. Chu joined Supply Chain Services Inc. as a Director and
President. In October 2000, Mr. Chu joined Supply Chain Services Limited
and Leader Industrial Group Limited as Managing Director on a full-time
basis.
PAULINE WAI MAN CHU graduated with a Bachelor of Arts Degree and Cum Laude
Distinction in Economics from Wellesley College in Massachusetts in 1992.
In July 1992, Ms. Chu joined the Hong Kong branch of Citibank N.A. as a
Management
<PAGE> 21
Associate in the Treasury Department. In 1993, Ms. Chu was promoted to
Assistant Manager in the Treasury Marketing Division where she provided
advisory services on foreign exchange investments to high net-worth clients
in Hong Kong, Singapore and Philippines. From December 1994 to June 1996,
Ms. Chu was employed by the Hong Kong offices of Ernst & Young as Analyst
in their Corporate Advisory Services Department. From June 1996 to June
1998, Ms. Chu joined the Hong Kong branch of Banco Santander as Associate
of the Structured Finance Department. At Banco Santander, Ms. Chu
participated in mergers & acquisitions, convertible bond issuance, project
finance and syndication loans for companies in Taiwan, Hong Kong, Indonesia
and China. During her employment with Banco Santander, Ms. Chu was
transferred to the head office in Madrid, Spain for 6 months, where Ms. Chu
acted as coordinator of Asian business and participated in direct
investment projects in Latin America. In 1998, Ms. Chu joined Leader
Industrial Group Limited as Business Development Manager, responsible for
all day-to-day activities of its toy trading business. In March 1999, Ms.
Chu became a shareholder and director of Supply Chain Services Limited upon
its incorporation. In April 1999, Ms. Chu became General Manager of both
Leader Industrial Group and Supply Chain Services Limited. Subsequent to
the merger between Supply Chain Services Inc. (formerly Paddington Inc.)
and Supply Chain Services Limited, Ms. Chu also became the Director of
Supply Chain Services Inc. Ms. Chu is responsible for all day-to-day
operations for the group, including merchandising, customer service and
marketing.
4. Basis of Presentation
As described above in Notes 1 and 2 to the Consolidated Condensed Financial
Statements, the acquisition of SCSL and its wholly-owned subsidiary, LIGL,
by the Company on August 28, 2000 has been treated as a reverse acquisition
since SCSL is the continuing entity in substance as a result of the
stock-for-stock merger transaction. Accordingly, the financial statements
included in this Form 10-QSB and the discussion that follows relate to the
business of SCSL and its wholly-owned subsidiary, LIGL. SCSL is a provider
of supply chain management services and LIGL's principal activities are in
toy trading.
5. Business Overview.
Supply Chain Services Inc. is a holding company with its operations being
carried out through its wholly-owned subsidiaries, SCSL and LIGL, both of
which are companies incorporated in Hong Kong.
Supply Chain Services Inc. believes it offers a "one-stop" solution to
customers by providing Supply Chain Management services through working
closely with manufacturers/suppliers, wholesalers, retailers as well as
logistic services providers in order to implement each process in the
supply chain, which involves sourcing of suppliers, product development,
procurement, production and logistics planning and execution. All of the
Company's operations, including sourcing, procurement, production and other
supply chain related services, sales, marketing and other corporate
activities are conducted through the Company's wholly-owned subsidiaries.
The Company's executive and administrative headquarters are in Hong Kong
and its representative offices are located in Shanghai, PRC and Taipei,
Taiwan Republic of China. The Company also has a sales representation
network covering specific regions in the United States with 7 sales
representatives carrying out marketing activities on a commission basis.
The Company believes that it has assembled a management team, which it
believes is one of the few present in Hong Kong possessing full
understanding of supply chain management practices. The management
understands that timeliness of delivery, varieties of choices, quality
standard of merchandises, communication capabilities and cost effectiveness
are their customers' key concerns. The Company maintains a database of
suppliers in a number of product categories, provides useful reporting to
clients on regular basis and endeavors to execute each supply chain process
in a systematic manner. Furthermore, the Company is in the process of
developing its own proprietary supply chain software based on the
management's experience in manufacturing in Asia and its exposure to
marketing in North America. With its own proprietary supply chain software,
the Company believes that it offers extensive information flow and enhances
process control to its clients. By working to expand its
supplier/manufacturing resources, offering competitive prices, broadening
its network of business alliance partners and developing an internet-
<PAGE> 22
based supply chain software, the Company believes that its services can
help its customers enhance efficiency and achieve cost effectiveness.
The Company currently has approximately 10 customers consisting primarily
of US- based retail stores/chains, trading companies, distributors and
product development companies, including Sears Roebuck & Co., Rumpus
Corporation, North American Bear Company and Plymouth Trading Inc. Though
the management team has experience in a number of product categories, they
are currently focusing their efforts on working with companies in
developing and manufacturing toys, cut & sew products (luggage sets and
stuffed toys), trim-a-tree decorations and ornaments as well as home
improvement hardware manufactured in Asia, particularly in the PRC.
Management believes its experience in the manufacturing environment of
these products and extensive knowledge in the logistics infrastructure in
China enable them to fulfill their customers' orders effectively,
efficiently and economically. With what they believe is sound strategy,
extensive experience and strong technological support, the current
management team believes the Company is positioned to become a serious
competitor in the supply chain management industry in Hong Kong.
6. Results of operations for the three months ended September 30, 1999 as
compared to the results of operations for the three months ended September
30, 2000
The following discussion sets forth information for the three months ended
September 30, 2000 compared with the three months ended September 30, 1999.
This information has been derived from unaudited interim financial
statements of the Company contained elsewhere in the quarterly report and
reflects, in the Management's opinion, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results of operations for these periods. Results of operations for any
interim period are not necessarily indicative of results to be expected
from the full fiscal year.
Sales and Services
The Company's sales and services for the three months ended September 30,
2000 were $317,872, as compared to $534,752 for the three months ended
September 30, 1999. The decrease in sales and services was mainly due to
some special orders received in 1999 which were non-recurring in 2000.
Gross Profit
Gross profit for the three months ended September 30, 2000 was $64,831, as
compared to $62,995 for the three months ended September 30, 1999. The
increase in gross profit was a result of improvements on the gross profit
margin in 2000.
Commission Income
Commission income for the three months ended September 30, 2000 was $3,372,
as compared to $5,415 for the three months ended September 30, 1999. The
decrease in commission income was due to the decrease in sales and
services.
Retainer Fee
Retainer fee for the three months ended September 30, 2000 was $9,000 as
compared to $64,585 for the three months ended September 30, 1999. The
decrease was a result of re-negotiations with customers for higher
commissions instead of charging a retainer fee.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 2000 was $62,160, as compared to $75,473 for the three months
ended September 30, 1999. The decrease in selling, general and
administrative expenses was primarily due to slow down in selling and
marketing activities in the three months end September 30, 2000.
Depreciation and Amortization
Depreciation and amortization for the three months ended September 30, 2000
was $16,751, as compared to $10,689 for the three months ended September
30, 1999. The
<PAGE> 23
increase in depreciation and amortization was due to the purchase of a
motor vehicle with a capital value of $64,516.
Operating Income (Loss)
Operating loss for the three months ended September 30, 2000 was $1,708, as
compared to an operating profit of $46,833 for the three months ended
September 30, 1999. The operating loss arose from the decrease in sales and
services and commission income.
Interest Expense
Interest expense for the three months ended September 30, 2000 was $968, as
compared to $310 for the three months ended September 30, 1999. The
increase in interest expenses was a result of the capital lease
arrangements to purchase a motor vehicle with a capital value of $64,516.
Income (Loss) before Income Taxes
Loss before income taxes for the three months ended September 30, 2000 was
$2,676, as compared to income before income taxes of $46,523 for the three
months ended September 30, 1999. The loss was primarily attributable to the
decrease in sales and services and commission income.
Income Taxes
Income taxes were insignificant and were not provided for the three months
ended September 30, 2000 and for the three months ended September 30, 1999.
Net Income (Loss)
Net loss for the three months ended September 30, 2000 was $2,676, as
compared to net income of $46,523 for the three months ended September 30,
1999. The net loss was mainly a result of decrease in sales and services
and commission income.
7. Results of operations for the nine months ended September 30, 1999 as
compared to the results of operations for the nine months ended September
30, 2000
The following discussion sets forth information for the nine months ended
September 30, 2000 compared with the nine months ended September 30, 1999.
This information has been derived from unaudited interim financial
statements of the Company contained elsewhere in the quarterly report and
reflects, in the Management's opinion, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results of operations for these periods. Results of operations for any
interim period are not necessarily indicative of results to be expected
from the full fiscal year.
Sales and Services
The Company's sales and services for the nine months ended September 30,
2000 were $435,236, as compared to $534,752 for the nine months ended
September 30, 1999. The decrease in sales and services was mainly due to
some special orders received in 1999 which were non-recurring in 2000.
Gross Profit
Gross profit for the nine months ended September 30, 2000 was $83,514, as
compared to $62,995 for the nine months ended September 30, 1999. The
increase in gross profit was a result of improvements on the gross profit
margin in 2000.
Commission Income
Commission income for the nine months ended September 30, 2000 was $6,217,
as compared to $5,415 for the nine months ended September 30, 1999. The
decrease in commission income was due to the decrease in sales and
services.
Retainer Fee
<PAGE> 24
Retainer fee for the nine months ended September 30, 2000 was $25,000 as
compared to $64,585 for the nine months ended September 30, 1999. The
decrease was a result of re-negotiations with customers for higher
commissions instead of charging a retainer fee.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended
September 30, 2000 was $205,373, as compared to $108,952 for the nine
months ended September 30, 1999. The increase in selling, general and
administrative expenses was primarily due to increase in the Company's
marketing activities to build up business for 2001.
Depreciation and Amortization
Depreciation and amortization for the nine months ended September 30, 2000
was $46,052, as compared to $20,262 for the nine months ended September 30,
1999. The increase in depreciation and amortization was due to the purchase
of a motor vehicle with a capital value of $64,516.
Operating Income (Loss)
Operating loss for the nine months ended September 30, 2000 was $136,694,
as compared to an operating profit of $3,781 for the nine months ended
September 30, 1999. The operating loss arises from the decrease in sales
and services and commission income and increase in selling, general and
administrative expenses.
Interest Expense
Interest expense for the nine months ended September 30, 2000 was $2,904,
as compared to $953 for the nine months ended September 30, 1999. The
increase in interest expenses was a result of the capital lease
arrangements to purchase a motor vehicle with a capital value of $64,516.
Income (Loss) before Income Taxes
Loss before income taxes for the nine months ended September 30, 2000 was
$139,597, as compared to income before income taxes of $2,828 for the nine
months ended September 30, 1999. The loss was primarily a result of
decrease in sales and services and commission income and increase in
selling, general and administrative expenses.
Income Taxes
Income tax credit for the nine months ended September 30, 2000 was $21,836,
as compared to income tax credit of $2,169 for nine months ended September
30, 1999. The increase in income tax credit was due to the occurrence of a
loss before income taxes for the nine months ended September 30, 2000.
Net Income (Loss)
Net loss for the nine months ended September 30, 2000 was $117,761, as
compared to net income of $4,997 for the nine months ended September 30,
1999. The loss was mainly attributable to decrease in sales and services
and commission income and increase in selling, general and administrative
expenses.
8. Liquidity and capital resources.
The Company's net cash provided by operating activities was $114,946 for
the nine months ended September 30, 1999, as compared to net cash applied
to operating activities of $28,562 for the nine months ended September 30,
2000. This net outflow was primarily due to net loss arising from the
reduction in sales revenues and increase in operating costs.
The Company's cash balance was $67,143 for the nine months ended September
30, 1999, as compared to cash deficit of $11,073 for the nine months ended
September 30, 2000. This deficit was mainly due to increase in financing
activities arising from the capital lease obligations associated with the
purchase of a motor vehicle.
<PAGE> 25
Management believes that current cash flows are insufficient to meet the
present growth strategies and related working capital and capital
expenditure requirements. Management currently anticipates the need to
raise additional capital. The Company cannot be certain that additional
funds will be available on satisfactory terms when needed, if at all. If
the Company is unable to raise additional capital in the future, the
Company may be required to curtail its operations significantly. Raising
additional equity capital would have a dilutive effect on the existing
shareholders.
The Company does not intend to pay cash dividends with respect to capital
stock in the foreseeable future.
Foreign Exchange
All of the Company's sales are denominated either in U.S. Dollars or Hong
Kong Dollars. The largest portion of the Company's expenses are denominated
in Hong Kong Dollars, followed by Renminbi (the official currency of the
PRC). The Company is subject to a variety of risks associated with changes
among the relative values of the U.S. Dollar, the Hong Kong Dollar and
Renminbi. The Company does not currently hedge its foreign exchange
positions. Since 1983, the Hong Kong government has maintained a policy of
linking the U.S. Dollar and the Hong Kong Dollar at an exchange rate of
approximately HK$7.75 to US$1.00. There can be no assurance that such link
will be continued, although the Company is not aware of any intention of
the Hong Kong government to abandon such link. The PRC government sets the
exchange rate between the Renminbi and all other currencies. Over the last
five years, the Renminbi has experienced significant devaluation against
most major currencies. If the value of the Renminbi or the Hong Kong Dollar
decreases relative to the US Dollar, such fluctuations may have a positive
effect on the Company's results of Renminbi relative to the U.S. Dollar
would increase the Company's expenses and therefore would have a material
adverse effect on the Company's business, financial condition and results
of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
At its Special Meeting of the Stockholders held on August 23, 2000 (the
"Meeting"), the following matters were submitted for voting by the
Company's stockholders and were unanimously adopted during the Meeting:
(a) Approval of a Reverse Merger between the Company and Supply Chain
Services Limited (the "Reverse Merger");
(b) Grant of approval and authorization to the Company's Directors to
issue new shares of Common Stock of the Company in connection
with the Reverse Merger;
(c) Appointment of Mr. Thomas Chu Yan Chuen and Ms. Pauline Chu Wai
Man, both Directors of Supply Chain Services Limited, as
Directors of the Company immediately after the execution of the
Share Exchange Agreement for the Reverse Merger;
(d) Grant of approval on the change of the name of the Company from
Paddington Inc. to a new company name as designated by the Board
of Directors immediate after the execution of the Share Exchange
Agreement for the Reverse Merger;
<PAGE> 26
(e) Removal of Arthur Andersen & Co as Auditors and appointment of
Areson & Company as Auditors immediate after the execution of the
Merger Agreement for The Reverse Merger; and
(f) Grant of approval and authorization to the Company's Directors to
issue, at their discretion, up to 20 million authorized but
as-yet unissued shares of Common Stock of the Company in addition
to those to be issued in connection with the Reverse Merger.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a)
Exhibits
Exhibit 2.1 Share Exchange Agreement dated August 28, 2000, between
Registrant, Supply Chain Services Limited, Gi-Tech
Developments Limited and Miss Pauline Wai Man Chu,
incorporated by reference to Registrant's Form 8-K
report filed on September 11, 2000 as amended by the
Registrant's Form 8-K/A report filed on November 9,
2000.
b)
Reports on Form 8-K
The Registrant filed a Form 8-K report on September 11, 2000, as
amended by the Registrant's Form 8-K/A report on November 9, 2000, both of which
are incorporated by reference herein. The Registrant reported on the following
Items:
Item 1 Changes in Control of Registrant
Item 2 Acquisition or Disposition of Assets
Item 4 Changes in Registrant's Certifying Accountant
Item 5 Other Events
Item 6 Resignations and Appointment of Registrant's Directors and
Officers
Item 7 Financial Statements, Pro Forma Financial Information and
Exhibits (filed after current quarter with Form 8-K/A on
November 11, 2000)
<PAGE> 27
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Supply Chain Services Inc.(Registrant)
Date: November 14, 2000 By: /s/ Thomas Yan Chuen Chu
----------------------------------
Director, Chairman of the Board
and President
<PAGE> 28
INDEX TO EXHIBITS
Exhibit 2.1 Share Exchange Agreement dated August 28, 2000, between
Registrant, Supply Chain Services Limited, Gi-Tech
Developments Limited and Miss Pauline Wai Man Chu,
incorporated by reference to Registrant's Form 8-K report
filed on September 11, 2000 as amended by the Registrant's
Form 8-K/A report filed on November 9, 2000.
Exhibit 3 Articles of Incorporation and By-Laws of the Registrant,
incorporated by reference to the Registrant's Form 10-SB
filing on May 12, 1999, as amended by the Registrant's Form
10-SB/A filed on June 1, 1999.
Exhibit 27.1 FINANCIAL DATA SCHEDULE
