EXHIBIT 32.2
6 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of ACL Semiconductors Inc. (the
"Company") on Form 10-K for the year ended December 31, 2005 filed with the
Securities and Exchange Commission (the "Report"), I, Kenneth Lap-Chan, Chief
Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S. C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the consolidated financial condition of the Company
as of the dates presented and the consolidated result of operations of
the Company for the periods presented.
Date: April 17, 2006 /s/ Kenneth Lap-Yin Chan
------------------------
Kenneth Lap-Yin Chan
Chief Financial Officer of
ACL Semiconductors Inc.
This certification has been furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
A signed original of this written statement required by Section 906 has been
provided to ACL Semiconductors, Inc. and will be retained by ACL Semiconductors
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
-41-
SCHEDULE II
ACL SEMICONDUCTORS INC. AND SUBSDIARIES
Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 2005, 2004 and 2003
Balance Charged Balance
at the Beginning to Costs at the End
of the Year and Expenses Deductions of the Year
---------------- ------------ ---------- -----------
Allowance for Doubtful Accounts:
Year ended December 31, 2003 $ - $ 128,598 $ 128,598 $ -
Year ended December 31, 2004 $ - $ - $ - $ -
Year ended December 31, 2005 $ - $ 6,200 $ 6,200 $ -
Inventory Obsolescence Reserve:
Year ended December 31, 2003 $ 100,000 $ 50,590 $ - $ 150,590
Year ended December 31, 2004 $ 150,590 $ 3,256 $ - $ 153,846
Year ended December 31, 2005 $ 153,846 $ - $ - $ 141,026
Valuation Allowance for Deferred Tax
Assets:
Year ended December 31, 2003 $ - $ 513,544 $ - $ 513,544
Year ended December 31, 2004 $ 513,544 $ 291,909 $ - $ 805,453
Year ended December 31, 2005 $ 805,453 $ 109,293 $ - $ 914,746
S-1
ACL Semiconductors Inc. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2005 and December 31, 2004 and
the Years Ended December 31, 2005, 2004 and 2003
WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-43-
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5 - F-6
Consolidated Statements of Cash Flows F-7 - F-9
Notes to Consolidated Financial Statements F-9 - F-33
-44-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
ACL Semiconductors Inc.
Kowloon, Hong Kong
We have audited the accompanying consolidated balance sheets of ACL
Semiconductors Inc. and subsidiaries as of December 31, 2005 and 2004, and the
related consolidated statements of operations, stockholders' equity (deficit),
cash flows and financial statement schedule for each of the three years in the
period ended December 31, 2005, as listed in the index appearing under Item
15(a)(1) and (2) of this Annual Report on Form 10-K. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, 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 the Company as of
December 31, 2005 and 2004, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, the Company
has had numerous significant transactions with businesses and affiliates
controlled by, and with persons who are related to, the officers and directors
of the Company.
As discussed in Note 7 to the consolidated financial statements, the Company is
dependent on one single vendor to supply its inventories and this single vendor
provided the majority of the Company's inventory purchases during the years
ended December 31, 2005, 2004, and 2003. The Company's non-exclusive
distributorship agreement with this supplier expired on March 1, 2006. The
Company is still in negotiation with the supplier regarding the renewal terms of
the agreement, and such an agreement has not yet been renewed. Termination of
such distributorship agreement by the supplier would have a material adverse
effect on the operations of the Company.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Central, Hong Kong
April 12, 2006, except for Note 13,
for which the date is April 13, 2006
F-1
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
2005 2004
------------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,537,799 $ 512,548
Restricted cash 769,231 -
Accounts receivable, net of allowance
for doubtful accounts of $0 for 2005 and 2004 515,557 1,088,751
Accounts receivable, related parties 2,175,737 4,727,517
Loans receivable, related parties - 930,429
Inventories, net 1,087,752 1,520,117
Refundable deposits 1,000,000 -
Other current assets 263,300 80,802
------------------- ------------------
Total current assets 8,349,376 8,860,164
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net of
accumulated depreciation and amortization 102,037 55,819
ACQUISITION DEPOSITS - 1,000,000
OTHER DEPOSITS 381,044 350,000
------------------- ------------------
$ 8,832,457 $ 10,265,983
=================== ==================
F-2
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2005 2004
------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,495,819 $ 5,065,965
Accrued expenses 272,782 456,676
Lines of credit and loan facilities 2,842,285 3,469,632
Current portion of long-term debt - 286,032
Convertible note payable - 150,000
Payable related to debt settlement 76,088 -
Income tax payable 217,453 145,050
Due to shareholders for converted pledged collateral 112,385 112,385
Other current liabilities 55,019 13,610
------------------- ------------------
Total current liabilities 8,071,831 9,699,350
Long-term debt, less current portion - 65,522
------------------- ------------------
Total liabilities 8,071,831 9,764,872
------------------- ------------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock - $0.001 par value, 50,000,000 shares
authorized, 27,829,936 issued and outstanding 27,830 27,830
Additional paid-in capital 3,360,405 3,360,405
Amount due from stockholder/director (102,936) (102,936)
Accumulated deficit (2,524,673) (2,784,188)
------------------- ------------------
Total stockholders' equity
760,626 501,111
------------------- ------------------
$ 8,832,457 $ 10,265,983
=================== ==================
The accompanying notes form an integral part of
these consolidated financial statements
F-3
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31,
2005 2004 2003
-------------------- ------------------- -------------------
NET SALES:
Related parties $ 26,772,046 $ 51,203,860 $ 21,983,894
Other 83,538,221 82,158,559 50,840,352
Less discounts to customers (102,524) (118,729) (151,449)
-------------------- ------------------- -------------------
110,207,743 133,243,690 72,672,797
COST OF SALES 107,004,491 130,130,674 68,214,587
-------------------- ------------------- -------------------
GROSS PROFIT 3,203,252 3,113,016 4,458,210
OPERATING EXPENSES:
Selling 745,755 453,862 149,364
General and administrative 2,059,150 2,618,810 2,571,147
Merger cost - - 2,753,620
-------------------- ------------------- -------------------
INCOME (LOSS) FROM OPERATIONS 398,347 40,344 (1,015,921)
OTHER INCOME (EXPENSES):
Rental income 3,502 - -
Interest expense (203,192) (402,412) (166,509)
Gain on disposal of property and equipment - 128 7,228
Miscellaneous 184,093 (6,252) 3,398
-------------------- ------------------- -------------------
INCOME (LOSS) BEFORE INCOME TAXES 382,750 (368,192) (1,171,804)
INCOME TAXES 123,235 85,814 265,866
-------------------- ------------------- -------------------
NET INCOME (LOSS) $ 259,515 $ (454,006) $ (1,437,670)
==================== =================== ===================
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ 0.01 $ (0.02) $ (0.06)
==================== =================== ===================
WEIGHTED AVERAGE NUMBER OF SHARES -
BASIC AND DILUTED 27,829,936 27,829,936 23,753,682
==================== =================== ===================
The accompanying notes form an integral part of these consolidated financial
statements
F-4
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Total
Common stock Additional Due from stockholders'
---------------------------- paid-in stockholder/ Accumulated Equity
Shares Amount capital director deficit (deficit)
------------- ------------ ------------ ------------ -------------- -------------
Balance at December 31, 2002 22,380,000 $ 22,380 $ 362,235 $(624,351) $ (379,691) $ (619,427)
Reverse acquisition between
ACL Semiconductors Inc.
(formerly Print Data Corp.)
and Atlantic Components Ltd. 2,829,936 2,830 (2,830) - - -
Issuance of common stock to
consultants related to
reverse-acquisition 2,620,000 2,620 2,751,000 - - 2,753,620
Dividend declared - - - - (512,821) (512,821)
Intrinsic value for beneficial
conversion feature on
convertible note payable - - 250,000 - - 250,000
Net decrease in due from
stockholder/director - - - 521,415 - 521,415
Net loss - - - - (1,437,670) (1,437,670)
------------- ------------ ------------ ------------ -------------- -------------
Balance at December 31, 2003 27,829,936 $ 27,830 $3,360,405 $ (102,936) $ (2,330,182) $955,117
Net loss - - - - (454,006) (454,006)
------------- ------------ ------------ ------------ -------------- -------------
F-5
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Total
Common stock Additional Due from stockholders'
---------------------------- paid-in stockholder/ Accumulated Equity
Shares Amount capital director deficit (deficit)
------------- ------------ ------------ ------------ -------------- -------------
Balance at December 31, 2004 27,829,936 $ 27,830 $ 3,360,405 $(102,936) $ (2,784,188) $ 501,111
Net income - - - - 259,515 259,515
------------- ------------ ------------ ------------ -------------- -------------
Balance at December 31, 2005 27,829,936 27,830 $ 3,360,405 $(102,936) $ (2,524,673) $ 760,626
============= ============ ============ ============ ============== =============
The accompanying notes form an integral part of these consolidated financial
statements
F-6
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31,
------------------------------------------------------------
2005 2004 2003
----------------- ------------------ ----------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ 259,515 $ (454,006) $(1,437,670)
----------------- ------------------ ----------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 29,236 23,032 15,230
Bad debt 6,200 - 128,598
Change in inventory reserve (12,821) 3,256 50,590
Gain on disposal of property and equipment - (128) (7,228)
Merger cost - - 2,753,620
Amortization of convertible note payable discount - 250,000 -
Reduction of receivable due from stockholder/
Director as additional compensation - - 624,462
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS
Accounts receivable - other 566,994 (208,390) 75,157
Accounts receivable - related parties 2,551,780 753,675 (2,661,158)
Inventories 445,186 (196,253) (1,075,621)
Other current assets (182,498) (70,123) 421
Other asssets (31,044) - -
INCREASE (DECREASE) IN LIABILITIES
Accounts payable (570,146) 28,661 1,221,659
Accrued expenses (183,894) 328,692 (18,780)
Income tax payable 72,403 (32,595) 118,707
Other current liabilities 41,409 (8,945) (4,138)
----------------- ------------------ ----------------
Total adjustments 2,732,805 870,882 1,221,519
----------------- ------------------ ----------------
Net cash provided by (used for)
operating activities 2,992,320 416,876 (216,151)
----------------- ------------------ ----------------
F-7
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31,
------------------------------------------------------------
2005 2004 2003
----------------- ------------------ ----------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
(Loans) to/repayments from stockholders - - 807,724
Increase in restricted cash (769,231) - -
Loan to related party - (930,429) -
Repayments from related party 930,429 - -
Proceeds received from sale of fixed assets - 128 25,641
Purchases of property, equipment and improvements (75,454) (24,469) (42,724)
----------------- ------------------ ----------------
Net cash provided by (used for)
investing activities 85,744 (954,770) 790,641
----------------- ------------------ ----------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds (repayments) on lines of credit and
notes payable (627,347) 1,310,648 166,410
Cash proceeds from issuance of convertible
note payable - - 250,000
Payments related to debt settement (73,912) - -
Principal payments on long-term debt (351,554) (727,280) (702,763)
----------------- ------------------ ----------------
Net cash provided by (used for)
financing activities (1,052,813) 583,368 (286,353)
----------------- ------------------ ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,025,251 45,474 288,137
CASH AND CASH EQUIVALENTS, beginning of year 512,548 467,074 178,937
----------------- ------------------ ----------------
CASH AND CASH EQUIVALENTS, end of year $ 2,537,799 $ 512,548 $ 467,074
================= ================== ================
F-8
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31,
------------------------------------------------------------
2005 2004 2003
----------------- ------------------ ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 203,192 $ 152,412 $ 166,509
================= ================== ================
Income tax paid $ 50,832 $ 118,409 $ 147,159
================= ================== ================
NON-CASH ACTIVITIES:
Reduction of accounts receivable from related party as
acquisition deposits $ - $ - $ 1,000,000
================= ================== ================
Reduction of accounts receivable from related parties
for assumed liability due stockholder/director $ - $ - $ 1,423,592
================= ================== ================
Dividend to stockholder of Atlantic Components Ltd.
prior to reverse-acquisition to increase payable to
stockholder/director $ - $ - $ 512,821
================= ================== ================
Conversion of convertible debenture to due to
shareholders for shares pledged as collateral $ - $ 100,000 $ -
================= ================== ================
Reclassification of convertible debenture to payable
related to debt settlement $ 150,000 $ - $ -
================= ================== ================
The accompanying notes form an integral part of these consolidated financial
statements
F-9
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION:
On September 8, 2003, ACL Semiconductors Inc. (formerly Print
Data Corp.) ("ACL") entered into a Share Exchange and
Reorganization Agreement with Atlantic Components Ltd.
("Atlantic"), a Hong Kong based company, and Mr. Chung-Lun
Yang ("Mr. Yang"), the then sole beneficial stockholder of
Atlantic. Under the terms of the agreement, ACL issued
22,380,000 of its shares to Mr. Chung-Lun Yang and 2,620,000
of its shares to certain financial advisors in exchange for
100% of the issued and outstanding shares of Atlantic's
capital stock. The Company recorded an expense of $2,753,620
related to the issuance of 2,620,000 shares of its common
stock to these advisors, which was computed based on the
quoted market price of $1.05 on September 30, 2003, the
effective date of the merger and was classified as merger cost
in the accompanying consolidated statements of operations for
the year ended December 31, 2003.
The share exchange agreement closed and became effective on
September 30, 2003. Upon the completion of this transaction,
Atlantic became the wholly owned subsidiary of ACL, and Mr.
Yang became the owner of approximately 80% of ACL's issued and
outstanding shares of common stock. In addition, ACL's
directors and officers resigned and were replaced by directors
and officers of Atlantic. For accounting purposes, the
acquisition was accounted for as a recapitalization whereby
Atlantic was deemed to have acquired ACL. Because the
acquisition was accounted for as a purchase of ACL, the
historical financial statements of Atlantic became the
historical financial statements of ACL after this transaction.
The accompanying consolidated statements of operations for the
year ended December 31, 2003 include the operating results of
Atlantic up to September 30, 2003, the closing date of the
acquisition, and the operating results of ACL from October 1,
2003 to December 31, 2003. In accounting for this transaction:
o Atlantic is deemed to be the purchaser and surviving
company for accounting purposes. Accordingly, due to the
acquisition, its net assets have been included in the
consolidated balance sheets at their historical book
values and the results of operations of Atlantic have
been presented for the comparative prior years ended
December 31, 2002.
o Control of the net assets and operations of ACL was
acquired effective September 30, 2003. The Company
accounted for this transaction as a purchase of the
assets and liabilities of ACL. The historical cost of the
net assets assumed was $0.
F-10
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:
In connection with this transaction, ACL entered into a
Conveyance Agreement on September 30, 2003 with New Print Data
Corp. ("NewCo"). Under the terms of this agreement, effective
September 30, 2003, ACL conveyed its historic operations of
providing supplies used in a computer or office environment to
NewCo, by assigning all of the assets and liabilities related
to such operations to NewCo which accepted the assignment and
assumed all such liabilities in exchange for 1,000,000 shares
of common stock of NewCo.
On October 1, 2003, Print Data Corp. entered into a Securities
Purchase Agreement with the holders of Print Data Corp.'s
Series A Preferred Stock. Under the terms of this agreement,
Print Data Corp. sold its 1,000,000 shares of NewCo common
stock in exchange for the cancellation of the issued and
outstanding 500,400 shares of ACL's Series A Preferred Stock
(representing 100% of Print Data Corp.'s issued and
outstanding preferred stock previously held by three preferred
stockholders). This transaction was reflected in the
accompanying consolidated balance sheet as if the transaction
took place on September 30, 2003.
On December 16, 2003, Print Data Corp. filed a Certificate of
Amendment with the Secretary of State of the State of Delaware
changing its name from Print Data Corp. to ACL Semiconductors
Inc.
On December 31, 2004, ACL entered into a Stock Purchase
Agreement with Classic Electronics Ltd., a Hong Kong
corporation ("Classic") and the stockholders of Classic,
pursuant to which ACL would purchase all of the outstanding
shares of capital stock of Classic from its two selling
stockholders (the "Selling Stockholders") for an aggregate
purchase price of 12,000,000 shares of common stock, par value
$0.001 per share, of the Company, to be issued to the Selling
Stockholders pro rata based on their ownership percentages of
Classic, the cancellation of $4.0 million of indebtedness owed
by the Selling Stockholders to Classic, which consideration is
in addition to the $1.0 million paid to Classic by ACL in
December 2003 as an irrevocable deposit towards the
acquisition through the cancellation of accounts receivable
then owing by Classic to ACL. Mr. Ben Wong, a director of ACL,
is a 99.9% shareholder of Classic. The remaining 0.1% of
Classic is owned by a non-related party.
As of April 8, 2005, the due diligence procedures were not yet
been completed by both entities and the closing date of the
acquisition was postponed to a date when such due diligence
procedures are completed and the related results are
satisfactory for both parties. Accordingly, the accompanying
consolidated financial statements do not include the financial
statements of Classic as the transaction has not been
effectively consummated because the considerations have not
yet been exchanged between the two entities and effective
control of Classic has not transferred to the Company.
F-11
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
BUSINESS ACTIVITY:
On December 30, 2005, the Company entered into a Stock Purchase
Agreement with the stockholders of Classic ("Sellers") to
acquire 100% of Classic through the cancellation of an
aggregate of approximately $4.0 million of indebtedness owed by
the Sellers, plus $1.0 million previously paid by Purchaser to
Classic on December 29, 2003 as a non-refundable deposit
towards the consummation of the sale of Classic to the
Purchaser through cancellation of accounts receivable then
payable by Classic to Purchaser.
Classic was unable to provide certain information requested by
the Company on a timely manner. On April 13, 2006, both parties
entered into a Rescission Agreement to rescind the original
Stock Purchase Agreement entered on December 30, 2005. The
seller agreed to fully refund the acquisition deposits of $1.0
million during 2006. See Note 13.
Accordingly, the accompanying consolidated financial statements
did not include the accounts of Classic due to this rescission.
ACL Semiconductors Inc. ("Company" or "ACL") was incorporated
under the State of Delaware on September 17, 2002. Through a
reverse-acquisition of Atlantic Components Ltd., a Hong Kong
based company, effective September 30, 2003, the Company's
principal activities are distribution of electronic components
under the "Samsung" brandname which comprise DRAM and graphic
RAM, FLASH, SRAM and MASK ROM for the Hong Kong and Southern
China markets. Atlantic Components Ltd., its wholly owned
subsidiary, was incorporated in Hong Kong on May 30, 1991 with
limited liability. On October 2, 2003, the Company set up a
wholly-owned subsidiary, Alpha Perform Technology Limited
("Alpha"), a British Virgin Islands company, to provide
services on behalf of the Company in jurisdictions outside of
Hong Kong. Effective January 1, 2004, the Company has ceased
the operations of Alpha and all the related activities are
consolidated with those of Atlantic.
CURRENCY REPORTING:
Amounts reported in the accompanying consolidated financial
statements and disclosures are stated in U.S. Dollars, unless
stated otherwise. The functional currency of the Company,
which accounted for most of the Company's operations, is
reported in Hong Kong dollars ("HKD"). Foreign currency
transactions (outside Hong Kong) during the years ended
December 31, 2005, 2004, and 2003 are translated into HKD
according to the prevailing exchange rate at the transaction
dates. Assets and liabilities denominated in foreign
currencies at the balance sheet dates are translated into HKD
at year-end exchange rates.
F-12
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
For the purpose of preparing these consolidated financial
statements, the financial statements of Atlantic reported in
HKD have been translated into United States Dollars at
US$1.00=HKD7.8, a fixed exchange rate maintained between the
two countries.
CONSOLIDATION POLICY:
The consolidated financial statements include the financial
statements of ACL Semiconductors Inc. and its wholly owned
subsidiaries, Atlantic Components Ltd., and Alpha Perform
Technology Limited. All significant intercompany accounts and
transactions have been eliminated in preparation of the
consolidated financial statements.
REVENUE RECOGNITION:
Product sales are recognized when products are shipped to
customers, title passes and collection is reasonably assured.
Provisions for discounts to customers, estimated returns and
allowances and other price adjustments are provided for in the
same periods the related revenue is recorded which are
deducted from the gross sales.
USE OF ESTIMATES:
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, revenue
recognition, allowance for doubtful accounts, long lived
assets impairment, inventories, and disclosure of contingent
assets and liabilities, at the date of the consolidated
financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
CASH AND CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows,
cash equivalents include all highly liquid debt instruments
with original maturities of three months or less which are not
securing any corporate obligations. The Company had no cash
equivalents at December 31, 2005 or 2004.
SEGMENT REPORTING:
The Company's sales are generated from Hong Kong and the rest
of China and substantially all of its assets are located in
Hong Kong.
F-13
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
ACCOUNTS RECEIVABLE:
The Company provides an allowance for doubtful accounts equal
to the estimated uncollectible amounts. The Company's estimate
is based on historical collection experience and a review of
the current status of trade accounts receivable. It is
reasonably possible that the Company's estimate of the
allowance for doubtful accounts will change in the near
future. The Company did not provide an allowance for doubtful
accounts as of December 31, 2005 and 2004.
INVENTORIES:
Inventories are stated at the lower of cost or market and are
comprised of purchased computer technology resale products.
Cost is determined using the first-in, first-out method. The
reserve for obsolescence was decrease by $12,821 for 2005 and
increased by $3,256 for 2004. Inventory obsolescence reserve
totaled $141,025 and $153,846 as of December 31, 2005 and
2004, respectively.
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Property and equipment are valued at cost. Depreciation and
amortization are provided over the estimated useful lives of
three to five years using the straight-line method. Leasehold
improvements are amortized on a straight-line basis over the
shorter of the economic lives or the lease terms.
The estimated service lives of property, equipment and
improvements are as follows:
Automobile 3 1/3 years
Office equipment 5 years
Leasehold improvements 5 years
Computers 5 years
F-14
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
LONG-LIVED ASSETS:
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," long-lived assets to be held and used
are analyzed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. SFAS No. 144 relates to assets that
can be amortized and the life can be determinable. The Company
evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment.
If there are indications of impairment, the Company uses
future undiscounted cash flows of the related asset or asset
grouping over the remaining life in measuring whether the
assets are recoverable. In the event such cash flows are not
expected to be sufficient to recover the recorded asset
values, the assets are written down to their estimated fair
value. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value of asset less the cost
to sell. The Company determined that there was no impairment
of long-lived assets as of December 31, 2005 and 2004.
ADVERTISING:
The Company expenses advertising costs when incurred.
Advertising expense totaled $2,164, $8,851, and $3,567 for the
years ended December 31, 2005, 2004, and 2003, respectively.
INCOME TAXES:
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. Deferred income tax expense represents the
change during the period in the deferred tax assets and
deferred tax liabilities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics. Realization of
the deferred tax asset is dependent on generating sufficient
taxable income in future years. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
F-15
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of the Company's cash and cash
equivalents, accounts receivable, lines of credit, convertible
debt, accounts payable, accrued expenses, and long-term debt
approximates their estimated fair values due to the short-term
maturities of those financial instruments.
COMPREHENSIVE INCOME:
SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive
income and its components in the financial statements. For the
years ended December 31, 2005, 2004, and 2003, the Company has
no items that represent other comprehensive income and,
therefore, has not included a schedule of comprehensive income
in the consolidated financial statements.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
In accordance with SFAS No. 128, "Earnings Per Share," the
basic earnings (loss) per common share is computed by dividing
net earnings (loss) available to common stockholders by the
weighted average number of common shares outstanding. Diluted
earnings (loss) per common share is computed similarly to
basic earnings (loss) per common share, except that the
denominator is increased to include the number of additional
common shares that would have been outstanding if the
potential common shares had been issued and if the additional
common shares were dilutive. For the years ended December 31,
2005 and 2004, the Company has 0 and 517,241 shares of common
stock equivalents upon conversion of the convertible note
payable based on the quoted market price at the end of each
reporting years. These common stock equivalents were excluded
from the computation of diluted loss per share as their effect
is antidilutive for 2004 and 2003.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2004
consolidated financial statements to conform to the 2005
presentation.
F-16
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS:
In March 2005, the SEC released Staff Accounting Bulletin No.
107, "Share-Based Payment" ("SAB 107"), which provides
interpretive guidance related to the interaction between SFAS
123(R) and certain SEC rules and regulations. It also provides
the SEC staff's views regarding valuation of share-based
payment arrangements. In April 2005, the SEC amended the
compliance dates for SFAS 123(R), to allow companies to
implement the standard at the beginning of their next fiscal
year, instead of the next reporting period beginning after
June 15, 2005. Management is currently evaluating the impact
SAB 107 will have on the financial statements.
In May 2005, the FASB issued FASB Statement No. 154,
ACCOUNTING CHANGES AND ERROR CORRECTIONS. This new standard
replaces APB Opinion No. 20, ACCOUNTING CHANGES, and FASB
Statement No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM
FINANCIAL STATEMENTS, and represents another step in the
FASB's goal to converge its standards with those issued by the
IASB. Among other changes, Statement 154 requires that a
voluntary change in accounting principle be applied
retrospectively with all prior period financial statements
presented on the new accounting principle, unless it is
impracticable to do so. Statement 154 also provides that (1) a
change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting
principle, and (2) correction of errors in previously issued
financial statements should be termed a "restatement." The new
standard is effective for accounting changes and correction of
errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting
changes and correction of errors made in fiscal years
beginning after June 1, 2005. Management believes that changes
resulting from adoption of the FASB will not have a material
effect on the financial statements taken as a whole.
In June 2005, the EITF reached a consensus on Issue 05-6,
"Determining the Amortization Period for Leasehold
Improvements," which requires that leasehold improvements
acquired in a business combination or purchased subsequent to
the inception of a lease be amortized over the lesser of the
useful life of the assets or a term that includes renewals
that are reasonably assured at the date of the business
combination or purchase. EITF 05-6 is effective for periods
beginning after June 29, 2005. Earlier application is
permitted in periods for which financial statements have not
been issued. The adoption of this Issue did not have an impact
on the Company's financial statements.
F-17
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In February 2006, the Financial Accounting Standards Board
issued SFAS No. 155, "Accounting for Certain Hybrid Financial
Instruments -- an amendment of FASB Statements No. 133 and
140." SFAS No. 155 simplifies the accounting for certain
hybrid financial instruments, eliminates the FASB's interim
guidance which provides that beneficial interests in
securitized financial assets are not subject to the provisions
of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and eliminates the restriction on the
passive derivative instruments that a qualifying
special-purpose entity may hold. SFAS No. 155 is effective for
all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after
September 15, 2006, however, early adoption is permitted for
instruments acquired or issued after the beginning of an
entity's fiscal year in 2006. The Company is evaluating the
impact of this new pronouncement to its financial position and
results of operations or cash flows.
(2) PROPERTY, EQUIPMENT AND IMPROVEMENTS:
A summary is as follows:
2005 2004
---- ----
Office equipment $ 95,399 $ 68,376
Leasehold improvements 46,015 4,346
Furniture and fixtures 10,606 3,843
Automobile 33,333 33,333
-------------- --------------
185,353 109,898
Less accumulated
depreciation and
amortization 83,316 54,079
-------------- --------------
$ 102,037 $ 55,819
============== ==============
Depreciation and amortization expense for property, equipment, and
improvements amounted to $29,236, $23,032, and $15,230, for the years
ended December 31, 2005, 2004, and 2003, respectively.
F-18
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(3) REVOLVING LINES OF CREDIT AND LOAN FACILITIES:
The Company has available to it a $1,641,025 revolving line of credit
with Dah Sing Bank with an outstanding balance of $1,641,025 at
December 31, 2005 and $2,050,000 at December 31, 2004. For borrowings
in Hong Kong dollars, the line of credit bears interest at the greater
of (1) Hong Kong dollar prime rate or (2) 1% over the Hong Kong
Interbank Offer Rate ("HIBOR".), or 5% as of December 31, 2005 and
2004, respectively. Weighted average interest rate approximated 6% for
2005 and 5% for 2004. For borrowings in foreign currency, the line of
credit carries interest of 0.5% over the Base Rate. The line matures on
September 30, 2006.
The Company has available to it a line for overdraft with Dah Sing Bank
with an outstanding balance of $0 at December 31, 2005 and $137,632 at
December 31, 2004. The line of credit bears interest at the greater of
(1) 0.5% over Hong Kong dollar prime rate or (2) 1% over HIBOR, or 5.5%
as of December 31, 2004. Weighted average interest rate approximated
5.5% for 2004.
The Company has available to it a $1,282,051 revolving line of credit
with DBS Bank with an outstanding balance of $1,201,260 at December 31,
2005 and $0 at December 31, 2004. The line of credit bears interest at
a rate of Hong Kong prime rate less 0.5% as of December 31, 2005.
Weighted average interest rate approximated 5.5% for 2005.
The Company has available to it import loan facilities totaling
$1,282,051 with HSBC with an outstanding balance of $0 at December 31,
2005 and $1,282,000 at December 31, 2004. For borrowings in Hong Kong
dollars, the import loan facilities bear interest at 0.5% per annum
over the bank's best lending rate and are payable monthly, or 5.5% as
of December 31, 2005 and 2004, respectively. Weighted average interest
rate approximated 6.0% for 2005 and 5.5% for 2004. This loan is due on
demand.
See Note 5 for the details for the security, collateral and guarantees
under the debenture deed dated April 20, 2001.
(4) CONVERTIBLE NOTE PAYABLE:
On December 31, 2003, the Company issued a 12% subordinated convertible
note in the amount of $250,000 to Professional Traders Fund, Inc.
("PTF"). The borrowing amount is due and payable on December 31, 2004.
The interest is payable in arrears on March 31, June 30, September 30,
and December 31, 2004. The Company is in default at December 31, 2004
and accordingly, interest is accrued at a rate of 15% on and after the
date of the default, and the Company is obligated to pay a default
penalty equal to 30% of the unpaid principal and interest. At the
option of the debt holder, such unpaid principal, interest and default
penalty can be paid with shares of the Company's common stock at
conversion price, which is defined in the following paragraph.
F-19
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(4) CONVERTIBLE NOTE PAYABLE, CONTINUED:
The holder of this note, at its option, can convert the outstanding
balance of the debt into shares of common stock at the conversion
price, which is defined as 40% of the average closing price of the
stock three trading days immediately prior to the Notice of Conversion
date or the interest payment date or the debt maturity date. The
conversion price shall not in any case exceed $1 per share.
In addition, since this debt is convertible into equity at the option
of the note holder at beneficial conversion rates, an embedded
beneficial conversion feature was recorded as a debt discount and
amortized using the effective interest method over the life of the debt
in accordance with Emerging Issues Task Force No. 00-27, "Application
of Issue No. 98-5 to Certain Convertible Instruments." Since the
intrinsic value of the beneficial conversion feature exceeds the
proceeds of the convertible debt, the amount of the discount assigned
to the beneficial conversion feature is limited to the amount of the
proceeds of the convertible debt. Therefore, the Company recorded a
discount of $250,000, the face value of the debt in 2003. The Company
fully amortized the discount of $250,000 during the year ended December
31, 2004.
Pursuant to the terms of a Limited Guarantee and Security Agreement,
the debt is guaranteed by 1.2 million shares of the Company's common
stock beneficially owned by three shareholders of which 700,000 are
restricted shares and 500,000 are freely traded shares.
The Company has agreed to file a registration statement for the
conversion shares within 60 days of the funding of the note and agreed
to use reasonable efforts to cause such registration statement to be
declared effective within 150 days of the funding of the note. If the
Company fails to meet either of such timelines, a 1% penalty per month
on the funded amount of the note will be levied against the Company.
Accordingly, the Company is incurring a 1% penalty per month on the
funded amount of the note.
During the year ended December 31, 2004, PTF converted principal note
balance of $100,000 into 222,980 shares of common stock and outstanding
accrued interest of $12,385 into 29,579 shares of common stock through
the shares pledged by three shareholders. Accordingly, the Company's
shareholders issued directly to PTF a total of 252,559 common shares.
The value of the converted principal and accrued interest, totaling
$112,385 at December, has been recorded as a liability to the
shareholders in the accompanying consolidated balance sheet. As of
December 31, 2004 and 2003, the gross outstanding balance of this note
totaled $150,000 and $250,000, respectively.
On May 25, 2005, a Default Judgment was issued by United States
District Court, Southern District of New York that the Company is
demanded to pay PTF totally US$255,292 which comprises of principal
amounting to US$150,000; interest amounting to US$10,541; penalties
amounting to US$85,350; attorney fees amounting to US$4,781; and costs
and disbursements of taking action against the Company amounting to
US$4,620. The Company accrued the entire claimed amount as of September
30, 2005.
F-20
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(4) CONVERTIBLE NOTE PAYABLE, CONTINUED:
On August 16, 2005, the Company entered into a settlement agreement
with PTF. The settlement amount of $255,292 covers the outstanding loan
balance, unpaid interest and penalties and will be repaid in seven
installments through February 28, 2006.Up to December 31, 2005, the
Company had been paid $179,204 to PTF and the balance of $76,088 was
reclassified in payable related to debt settlement. The final
installment was fully paid on February, 2006.
(5) LONG-TERM DEBT:
A summary is as follows as of December 31:
2005 2004
---- ----
Installment loan carrying an interest of 0.75% over Hong Kong
dollar Prime Rate (5.75% at December 31, 2004 and 2003) to Dah
Sing Bank payable in monthly installments of $4,535 including
interest through April 2005 $ - $ 114,602
Term loan carrying an interest of 0.75% over the bank's best
lending rate (5.75% at December 31, 2004 and 2003) to HSBC payable
in monthly installments of $35,897 including interest through June
2005 - 38,322
Accrued interest on previous term loan which was converted to a
term loan carrying 0% to HSBC, unpaid amount due June 2005 - 156,825
Term loan carrying an interest of 0.75% over Hong Kong dollar
Prime Rate (5.75% at December 31, 2004 and 2003) to DBS Bank
payable in monthly installments including interest at the
following schedule: $16,410 from May 2002 to April 2003, $19,103
from May 2003 to April 2004, $21,923 from May 2004 to March 2005,
and the remaining balance due April 2005 - 41,805
------------- -------------
- 351,554
Less current maturities - 286,032
-------------- --------------
$ - $ 65,522
============== ==============
F-21
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(5) LONG-TERM DEBT, CONTINUED:
With respect to all of the above referenced debt and credit
arrangements in Note 3, pursuant to a debenture deed dated April 20,
2001, the Company pledged its assets as collateral collectively to a
bank group in Hong Kong comprised of Dah Sing Bank Limited, The Hong
Kong and Shanghai Banking Corporation Limited, and DBS Bank (Hong Kong)
Ltd. (formerly Overseas Trust Bank Limited) for all current and future
borrowings from the bank group by the Company. In addition to the above
pledged collateral, the debt is also secured by:
1. a personal guarantee given by Mr. Alan Chung-Lun Yang ("Mr. Yang")
limited to approximately US$6,900,000 to The Hong Kong and
Shanghai Banking Corporation Limited;
2. a fixed cash deposit of $769,231 (HK$6,000,000) as collateral for
loans from Dah Sing Bank Limited;
3. a personal guarantee given by Mr. Yang for unlimited amount
together with a key man life insurance policy on Mr. Yang for
$500,000 and a personal guarantee to Dah Sing Bank Limited.
During 2005, this debenture deed has been terminated with this banking
group.
(6) INCOME TAXES:
Income tax expense amounted to $123,235 for 2005, $85,814 for 2004, and
$265,866 for 2003 (an effective rate of 32% for 2005, 23% for 2004, and
23% for 2003). A reconciliation of the provision for income taxes with
amounts determined by applying the statutory federal income tax rate of
34% to income before income taxes is as follows:
F-22
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(6) INCOME TAXES, CONTINUED:
2005 2004 2003
---- ---- ----
Computed tax at federal statutory rate $ 130,135 $ (125,185) $ (398,414)
Non-deductible merger cost - - 422,687
Tax rate differential on foreign earnings of
Atlantic Components Ltd. ("Atlantic"), a Hong Kong
based company (116,193) (80,910) (89,247)
Earnings on Alpha Perform Technology Limited
("Alpha"), a British Virgin Islands ("BVI") Company
not subject to corporate income tax - - (353,914)
Net operating loss carryforward 109,293 291,909 513,544
Provision for tax liabilities on procurement service
fee income to Alpha - - 150,000
Other - - 21,210
-------------- -------------- --------------
$ 123,235 $ 85,814 $ 265,866
============== ============== ==============
The income tax provision consists of the following components:
2005 2004 2003
---- ---- ----
Federal $ - $ - $ -
Foreign 123,235 85,814 265,866
-------------- -------------- --------------
$ 123,235 $ 85,814 $ 265,866
============== ============== ==============
The Components of the deferred tax assets and liabilities are as follows:
2005 2004 2003
---- ---- ----
Net operating losses $ 914,746 $ 805,453 $ 513,544
---------------- ---------------- ----------------
Total deferred tax assets $ 914,746 $ 805,453 $ 513,544
Less valuation allowance (914,746) (805,453) (513,544)
---------------- ---------------- ----------------
$ - $ - $ -
================ ================ ================
F-23
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(6) INCOME TAXES, CONTINUED:
In 2003, the Company's Hong Kong subsidiary, Atlantic, paid a
procurement fee to the Company's subsidiary, Alpha in BVI, and
allocated certain expenses incurred outside Hong Kong. Procurement fee
income net of such expenses totaled approximately $1,000,000, which is
not subject to corporate tax in Hong Kong or BVI. However, such
procurement service fee income or income net of related expenses may be
subject to corporate income tax in the People's Republic of China.
Based on the analysis of its tax counsel, the Company accrued
approximately $150,000 for such potential tax liabilities as of
December 31, 2003. The Company has not paid any of this tax in 2005 or
2004 and the amount remained to be included in the income tax payable
as of December 31, 2005.
Effective January 1, 2004, the Company has ceased the operations of
Alpha and all the related activities are consolidated with those of
Atlantic.
(7) CONCENTRATIONS:
The Company has a non-exclusive Distributorship Agreement with Samsung
Electronics Hong Kong Co., Ltd. ("Samsung"), which was initially
entered into in May 1993 and has been renewed annually. Under the terms
of the agreement, Samsung appointed the Company on a non-exclusive
basis as Samsung's distributor to distribute and market its products in
the designated territory. The Company has the right to market and sell
the products of other manufacturers and render service related to such
activities, unless such activities result in the Company's inability to
fulfill its obligations under the Agreement. However, the Company shall
not purchase to sell any of the same product lines as Samsung produces
and deals in from any other Korean manufacturer during the term of this
Agreement. The most recent renewal of the Distributorship Agreement
expired on March 1, 2006. As of April 1, 2006, Samsung has verbally
confirmed the annual renewal of such agreement for one year.
The Company's distribution operations are dependent on the availability
of an adequate supply of electronic components under the "Samsung"
brand name which have historically been principally supplied to the
Company by the Hong Kong office of Samsung. The Company purchased 76%,
80%, and 84% of materials from Samsung for the years ended December 31,
2005, 2004, and 2003, respectively. However, there is no written supply
contract between the Company and Samsung and, accordingly, there is no
assurance that Samsung will continue to supply sufficient electronic
components to the Company on terms and prices acceptable to the Company
or in volumes sufficient to meet the Company's current and anticipated
demand, nor can assurance be given that the Company would be able to
secure sufficient products from other third party supplier(s) on
acceptable terms. In addition, the Company's operations and business
viability are to a large extent dependent on the provision of
management services and financial support by Mr. Yang. See Note 5 for
details for Mr. Yang's support of the Company's banking facilities. At
December 31, 2005 and 2004, included in accounts payable were
$3,253,239 and $2,921,612, respectively, to Samsung. Termination of
such distributorship by Samsung will significantly impair and adversely
affect the continuation of the Company's business.
F-24
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(7) CONCENTRATIONS, CONTINUED:
During the years ended December 31, 2005, 2004, and 2003, 17%, 31%, and
21%, respectively, of the Company's sales were generated from Classic
Electronic Ltd. ("Classic"), a related party (see Note 10 for
additional discussion of related party transactions). As of December
31, 2005 and 2004, accounts receivable, related parties included
$2,175,737 and $4,714,057, respectively, due from Classic, which
represented 81% and 81%, respectively, of the total accounts receivable
due from related and unrelated parties.
As of December 31, 2005 and 2004, Samsung has withheld a total of
$350,000 commission due to the Company as deposits. Per a letter sent
by Samsung on May 1, 2001, the deposits will be released upon further
agreement between Samsung and the Company. Subsequent to this letter,
no further discussion regarding this matter was made. The Company
believes the amount is fully recoverable.
(8) RETIREMENT PLAN:
Under the Mandatory Provident Fund ("MPF") Scheme Ordinance in Hong
Kong, the Company is required to set up or participate in an MPF scheme
to which both the Company and employees must make continuous
contributions throughout their employment based on 5% of the employees'
earnings, subject to maximum and minimum level of income. For those
earning less than the minimum level of income, they are not required to
contribute but may elect to do so. However, regardless of the
employees' election, their employers must contribute 5% of the
employees' income. Contributions in excess of the maximum level of
income are voluntary. All contributions to the MPF scheme are fully and
immediately vested with the employees' accounts. The contributions must
be invested and accumulated until the employees' retirement. The
Company contributed and expensed $18,385 for 2005, $14,396 for 2004 and
$16,129 for 2003.
(9) COMMITMENTS:
The Company leases its facilities. The following is a schedule by years
of future minimum rental payments required under operating leases that
have noncancellable lease terms in excess of one year as of December
31, 2005:
Related Party Other Total
------------- ------------- -------------
Year ending December 31,
2006 $ 116,475 $ 23,077 $ 139,552
2007 92,308 $ 9,057 $ 101,365
Thereafter 23,077 - 23,077
------------- ------------- -------------
Total $ 231,860 $ 32,134 $ 263,994
============= ============= =============
F-25
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(9) COMMITMENTS, CONTINUED:
See Note 10 for related party leases. All leases expire prior to
December 31, 2006. Real estate taxes, insurance, and maintenance
expenses are obligations of the Company. It is expected that in the
normal course of business, leases that expire will be renewed or
replaced by leases on other properties; thus, it is anticipated that
future minimum lease commitments will likely be more than the amounts
shown for 2005. Rent expense for the years ended December 31, 2005,
2004, and 2003 totaled $135,063, $111,214, and $106,612, respectively.
(10) RELATED PARTY TRANSACTIONS:
TRANSACTIONS WITH MR. YANG
--------------------------
As of December 31, 2005 and 2004, the Company had an outstanding
receivable from Mr. Yang, the President and Chairman of the Board of
Directors of the Company, totaling $102,936 at the end of each of
respective years. These advances bear no interest and are payable on
demand.
For the years ended December 31, 2005, 2004, and 2003, the Company
recorded compensation to Mr. Yang of $226,922, $233,590, and $716,770,
respectively, and paid $226,922, $233,590, and $92,308, respectively,
to Mr. Yang as compensation to him. The respective unpaid amounts are
included in the amount due from stockholder/director as of December 31,
2005 and 2004.
During each of the years ended December 31, 2005, 2004, and 2003, the
Company paid rent of $92,308, $82,692, and $53,846, respectively, for
Mr. Yang's personal residency as fringe benefits to him, and paid
housing allowance to him in the amount of $12,308, $12,308, and
$12,308, respectively. All such payments have been recorded as
compensation expense in the accompanying financial statements.
TRANSACTIONS WITH CLASSIC ELECTRONIC LTD.
-----------------------------------------
During the years ended December 31, 2005, 2004, and 2003, the Company
sold $18,780,971, $40,885,565, and $15,224,745, respectively, to
Classic Electronic Ltd. ("Classic"). The Company has not experienced
any bad debt from this customer in the past. Pursuant to a written
personal guarantee agreement, Mr. Yang personally guarantees to the
Company's lenders up to $10 million of the outstanding accounts
receivable from Classic.
During the years ended December 31, 2005, 2004, and 2003, the Company
purchased inventory of $6,007,185, $5,867,150, and $4,159,300,
respectively, from Classic, which offset the outstanding accounts
receivable from Classic. As of December 31, 2005 and 2004, the Company
had net outstanding accounts receivable from Classic totaling
$2,175,736 and $4,714,057, respectively.
F-26
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
The Company leased one of its facilities and Mr. Yang's personal
residency from Classic. Lease agreements for the two facilities expire
on November 30, 2006 while the lease agreement for Mr. Yang's personal
residency expires on March 31, 2008. Monthly lease payments for these 2
leases totaled $6,684. The Company incurred and paid rent expense of
$83,250, $88,462, and $56,731 to Classic for the years ended December
31, 2005, 2004, and 2003, respectively.
During the years ended December 31, 2004 and 2003, certain Classic's
employees performed work on behalf of Atlantic and their salaries were
allocated to Atlantic's operations and charged to expenses in the
accompanying consolidated financial statements. Such expenses
approximated $57,820 for 2005, $0 for 2004, and $248,000 for 2003.
In December 2003, the Company relieved its account receivable from
Classic by transferring $1,048,604 of outstanding amounts to its
stockholder/director as payment.
Mr. Ben Wong, a director of the Company, is a 99.9% shareholder of
Classic. The remaining 0.1% of Classic is owned by a non-related party.
TRANSACTIONS WITH ACL TECHNOLOGY PTE LTD.
-----------------------------------------
During the years ended December 31, 2005, 2004, and 2003, the Company
sold $0, $0, $901,430, respectively, to ACL Technology Pte Ltd.
("ACLT"). Outstanding accounts receivable totaled $0 as of December 31,
2005 and 2004, respectively. The Company has not experienced any bad
debt from this customer in the past.
During the years ended December 31, 2005, 2004, and 2003, the Company
purchased inventories of $0, $2,049,474, and $700,126, respectively,
from ACLT. As of December 31, 2005 and 2004, there were no outstanding
accounts payable to ACLT.
In December 2003, the Company relieved its account receivable from ACLT
by transferring $374,988 of outstanding amounts it owed to its
stockholder/director.
In 2004, the Company paid a commission of $392,434 to ACLT related to
sales brought in by this entity.
In 2004, the Company loaned $318,983 to ACLT, which is classified as
loans receivable from related parties in the accompanying consolidated
balance sheet. The loan is unsecured, bears no interest and fully
repaid in 2005.
Mr. Ben Wong, a director of the Company, is a 99% shareholder of ACLT.
The remaining 1% of ACLT is owned by a non-related party.
F-27
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
TRANSACTIONS WITH KADATCO COMPANY LTD.
--------------------------------------
During the years ended December 31, 2005, 2004, and 2003, the Company
sold $5,072,858, $166,152, and $0, respectively, to Kadatco Company
Ltd. ("Kadatco"). Outstanding accounts receivable totaled $0 as of
December 31, 2005 and 2004. The Company has not experienced any bad
debt from this customer in the past.
Mr. Yang is the sole beneficial owner of the equity interest of
Kadatco.
TRANSACTIONS WITH RAMBO TECHNOLOGIES LTD.
-----------------------------------------
During the years ended December 31, 2005, 2004, and 2003, the Company
sold $165,225, $7,682,072, and $5,134,160, respectively, to Rambo
Technologies Ltd. ("Rambo"). Outstanding accounts receivable totaled $0
as of December 31, 2005 and 2004. The Company has not experienced any
bad debt from this customer in the past.
During the years ended December 31, 2005, 2004, and 2003, the Company
purchased $874,553, $339,605, and $229,781, respectively, from Rambo.
Outstanding accounts payable due to Rambo totaled $0 and $61,360 as of
December 31, 2005 and 2004, respectively.
Mr. Ben Wong, a director of the Company, is a 60% shareholder of Rambo.
The remaining 40% of Rambo is owned by a non-related party. Mr. Yang is
a director of Rambo.
TRANSACTIONS WITH ARISTO COMPONENTS LTD.
----------------------------------------
During the years ended December 31, 2005, 2004, and 2003, the Company
sold $71,402, $90, and $62,268, respectively, to Aristo Components Ltd.
("Aristo"). There was no outstanding accounts receivable as of December
31, 2005 and 2004. The Company has not experienced any bad debt from
this customer in the past.
During the years ended December 31, 2005, 2004, and 2003, the Company
purchased $0, $500, and $28,053, respectively, from Aristo. There are
no outstanding accounts payable due to Aristo as of December 31, 2005
and 2004, respectively.
Mr. Ben Wong, a director of the Company, is a 90% shareholder of
Aristo. The remaining 10% of Aristo is owned by a non-related party.
Mr. Yang is a director of Aristo.
F-28
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
TRANSACTIONS WITH ATLANTIC NETCOM LTD.
--------------------------------------
During the years ended December 31, 2005, 2004, and 2003, the Company
sold $1,652, $14,985, and $0, respectively, to Atlantic Netcom Ltd.
("Atlantic Netcom"). Outstanding accounts receivable totaled $0 as of
December 31, 2005 and 2004, respectively. The Company has not
experienced any bad debt from this customer in the past.
Mr. Alan Yang, the Company's Chief Executive Officer, majority
shareholder and a director, is a 60% shareholder and director of
Atlantic Netcom. The remaining 40% of Atlantic Netcom is owned by a
non-related party.
TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD.
-----------------------------------------------------
During the years ended December 31, 2005, 2004, and 2003, the Company
sold $55,122, $513,698, and $523,809, respectively, to Solution
Semiconductor (China) Ltd. ("Solution"). Outstanding accounts
receivable totaled $0 as of December 31, 2005 and 2004. The Company has
not experienced any bad debt from this customer in the past.
During the years ended December 31, 2005, 2004, and 2003, the Company
purchased $22,019, $8,387, and $0, respectively, from Solution. There
are no outstanding accounts payable due to Solution as of December 31,
2005 and 2004.
Mr. Ben Wong, a director of the Company, is a 99% shareholder of
Solution. The remaining 1% of Solution is owned by a non-related party.
TRANSACTIONS WITH SYSTEMATIC INFORMATION LTD.
---------------------------------------------
During the years ended December 31, 2005, 2004, and 2003, the Company
sold $61,910, $1,941,298, and $137,482, respectively, to Systematic
Information Ltd. ("Systematic Information"). There are no outstanding
accounts receivable due from Systematic Information as of December 31,
2005 and 2004.
The Company has not experienced any bad debt from this customer in the
past.
During the years ended December 31, 2005, 2004, and 2003, the Company
purchased $0, $154,460, and $0, respectively, from Systematic. There
are no outstanding accounts payable due to Systematic as of December
31, 2005 and 2004.
F-29
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
On April 1, 2005, the Company entered into a lease agreement with
Systematic Information pursuant to which the Company leases one
residential property for Mr. Yang's personal use for a monthly lease
payment of $3,205 per month. The lease agreement for this residency
expires on September 30, 2008. Monthly lease payment for this lease
totaled $3,205. The Company incurred and paid an aggregate rent expense
of $38,462 and $28,846 to Systematic Information during the years ended
December 31, 2005 and 2004.
Mr. Alan Yang, the Company's Chief Executive Officer, majority
shareholder and a director, is a director and shareholder of Systematic
with a total of 100% interest.
TRANSACTIONS WITH ARISTO TECHNOLOGIES LTD.
------------------------------------------
During the years ended December 31, 2005, 2004, and 2003, we sold
$2,544,995, $0, and $0, respectively, to Aristo Technologies Ltd.
("Aristo"). Outstanding accounts receivable totaled $0 as of December
31, 2005 and 2004, respectively. We have not experienced any bad debt
from this customer in the past.
During the years ended December 31, 2005, 2004, and 2003, we purchased
inventories of $100,822, $0, and $0, respectively, from Aristo. As of
December 31, 2005 and 2004, there were no outstanding accounts payable
to Aristo.
Mr. Alan Yang, the Company's Chief Executive Officer, majority
shareholder and a director, is a director and the sole beneficial owner
of Aristo.
TRANSACTIONS WITH GLOBAL MEGA DEVELOPMENT LTD.
----------------------------------------------
During the years ended December 31, 2005, 2004, and 2003, we sold
$19,074, $427,004, and $0, respectively, to Global Mega Development
Ltd. ("Global"). Outstanding accounts receivable totaled $0 as of
December 31, 2005 and 2004, respectively. We have not experienced any
bad debt from this customer in the past.
During the years ended December 31, 2005, 2004, and 2003, we received
management fee $2,564, $0, and $0, respectively, from Global. As of
December 31, 2005 and 2004, there were no outstanding accounts
receivable from Global.
Mr. Alan Yang, the Company's Chief Executive Officer, majority
shareholder and a director, is the sole beneficial owner of the equity
interest of Global.
F-30
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
TRANSACTIONS WITH TFT TECHNOLOGIES LTD.
---------------------------------------
During the years ended December 31, 2005, 2004, and 2003, we sold
$1,460, $0, and $0, respectively, to TFT Technologies Ltd. ("TFT").
Outstanding accounts receivable totaled $0 as of December 31, 2005 and
2004, respectively. We have not experienced any bad debt from this
customer in the past.
Mr. Alan Yang the Company's Chief Executive Officer, majority
shareholder and a director, is a director and 51% shareholder of TFT.
The remaining 49% of TFT is owned by a non-related party.
TRANSACTIONS WITH INTELLIGENT NETWORK TECHNOLOGY LTD.
-----------------------------------------------------
During the years ended December 31, 2005, 2004, and 2003, we received
management fee $2,564, $0, and $0, respectively, from Intelligent
Network Technology Ltd. ("Intelligent"). As of December 31, 2005 and
2004, there were no outstanding accounts receivable from Intelligent.
Mr. Alan Yang the Company's Chief Executive Officer, majority
shareholder and a director, is a director and 80% shareholder of
Intelligent. The remaining 20% of Intelligent is owned by a non-related
party.
TRANSACTIONS WITH SYSTEMATIC SEMICONDUCTOR LTD.
-----------------------------------------------
During the years ended December 31, 2005, 2004, and 2003, we received
management fee $2,564, $0, and $0, respectively, from Systematic
Semiconductor Ltd. ("Systematic"). As of December 31, 2005 and 2004,
there were no outstanding accounts receivable from Systematic.
Mr. Alan Yang the Company's Chief Executive Officer, majority
shareholder and a director, is the sole beneficial owner of the equity
interest of Systematic.
TRANSACTIONS WITH FIRST WORLD LOGISTICS LTD.
--------------------------------------------
During the years ended December 31, 2005, 2004, and 2003, we purchased
inventories $306,432, $0, and $0, respectively, from First World
Logistic Ltd. ("First"). As of December 31, 2005 and 2004, there were
no outstanding accounts receivable from First.
Mr. Alan Yang the Company's Chief Executive Officer, majority
shareholder and a director, is the sole beneficial owner of the equity
interest of First.
F-31
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
TRANSACTIONS WITH CITY ROYAL LTD.
---------------------------------
In August 2004, the Company was in negotiation with The Dah Sing Bank
Limited (the "DahSing Bank") for an additional amount of its available
line of credit. As a condition to the extension of additional credit to
the Company, DahSing Bank requested additional collateral to secure the
increased amount on the line. In order to meet the increased security
requirement, the Company loaned $611,446 to City Royal Limited to pay
off the mortgage loan on a residential property owned by City Royal
Limited and pledged to DahSing Bank as collateral to secure the
Company's borrowings from DahSing Bank. In consideration thereof,
DahSing Bank made available additional borrowings of HK$10 million
(approximately US$1,282,000). The loan is unsecured and bears no
interest. In February 2005, City Royal Limited sold the residential
property and has repaid the loan through transferring the entire
proceeds from the sale of HK$8,000,000 (approximately $1,025,641) to
DahSing Bank as collateral for the Company's line.
The loan to City Royal Limited is non-interest bearing, in
consideration of which City Royal Limited did not charge an arrangement
fee to the Company in respect of the security pledge in favor of Dah
Sing Bank. The primary purpose of the loan, from the Company's
perspective, was to advance the business of the Company by enabling it
to secure additional lines of financing in excess of the loan amount
from DahSing Bank. The Company settled this loan in February 2005 and
received payment in the full amount of $611,446. The Company believes
that the above-referenced loan does not violate the general prohibition
against loans made by publicly-traded companies to its directors and
executive officers set forth in Section 402 of the Sarbanes-Oxley Act
of 2002 ("Section 402") as its primary purpose was to advance the
business of the Company. However, no assurance can be given that the
Securities and Exchange Commission or U.S. federal government will
agree with the Company's position and, in the event such loan is
determined to be a violation of Section 402, the criminal penalties of
the Securities Exchange Act of 1934, as amended, could apply.
Mr. Yang's wife and Mr. Yang's mother-in-law are shareholders of City
Royal Limited with a total of 100% interest.
F-32
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005 AND 2004 AND
THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(12) QUARTERLY INFORMATION (UNAUDITED):
The summarized quarterly financial data presented below reflects all
adjustments, which in the opinion of management, are of a normal and
recurring nature necessary to present fairly the results of operations
for the periods presented.
(dollars in thousands except per share data)
-------------------------------------------------------------------
TOTAL FOURTH THIRD SECOND FIRST
2005
----
Total net sales $110,208 $26,251 $28,810 $26,501 $28,646
Gross profit $3,203 $1,184 $805 $251 $963
Net income (loss) $260 $257 $109 $(297) $191
Net income (loss) per share:
basic and diluted $0.01 $0.01 $0.00 ($0.01) $0.01
2004
----
Total net sales $133,244 $35,695 $34,715 $33,284 $29,550
Gross profit $3,113 $750 $595 $491 $1,277
Net income (loss) $(454) $(303) $(361) $(111) $321
Net income (loss) per share:
basic and diluted $(0.02) $(0.01) $(0.01) $(0.00) $0.01
(13) SUBSEQUENT EVENT (UNAUDITED):
On April 13, 2006, the Company entered into a Rescission Agreement with
the seller of Classic Electronics Ltd. to rescind the original Stock
Purchase Agreement entered on December 30, 2005. The seller agreed to
fully refund the acquisition deposits of $1.0 million during 2006.
F-33