SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission File No. 0-22049
S.W. LAM, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Nevada 62-1563911
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Unit 25-32, 2nd Floor, Block B, Focal Industrial Centre
21 Man Lok Street, Hunghom, Hong Kong
-----------------------------------------------
(Address of principal executive offices)
(852) 2766 3688
-----------------------------------------------
(Registrant's telephone number, including area code)
-----------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
As of February 1, 2002, 12,865,000 shares of Common Stock of the issuer
were outstanding.
S.W. LAM, INC.
--------------
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2001 and December 31, 2001........1
Consolidated Statements of Operations - For the three months and nine
months ended December 31, 2000 and December 31, 2001......................2
Consolidated Statements of Cash Flows - For the nine months ended
December 31, 2000 and December 31, 2001...................................3
Notes to Consolidated Financial Statements................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................8
Item 3. Quantitative and Qualitative Disclosure About Market Risk.........15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................16
SIGNATURES....................................................................16
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
S.W. LAM, INC.
CONSOLIDATED BALANCE SHEETS
(US$,000)
(Unaudited)
March 31, December 31,
ASSETS 2001 2001
------------ ------------
Cash and cash equivalents $ 0 $ 0
Investment in affiliates 20,369 21,541
------------ ------------
Total assets $ 20,369 $ 21,541
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liability:
Due to a director $ 303 $ 303
Stockholders' Equity:
Preferred stock 0 0
Common stock 13 13
Additional paid-in capital 528 528
Retained earnings 19,525 20,697
------------ ------------
Total stockholders' equity 20,066 21,238
------------ ------------
Total liabilities and stockholders' equity $ 20,369 $ 21,541
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
1
S.W. LAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------- ----------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Total revenues $ 0 $ 0 $ 43,502 $ 0
Cost of sales and services 0 0 (35,175) 0
------------ ------------ ------------ ------------
Gross profit 0 0 8,327 0
Selling, general and
administrative expenses (6) (16) (3,734) (47)
Interest expenses, net 0 0 (508) 0
Loss on dilution of equity interests
in subsidiaries 0 0 (1,157) 0
Share of profit (loss) of affiliates 892 356 (7,413) 1,355
------------ ------------ ------------ ------------
Income (loss) before income taxes
and minority interests 886 340 (4,485) 1,308
Provision for income taxes (81) (39) (421) (136)
------------ ------------ ------------ ------------
Income (loss) before minority interests 805 301 (4,906) 1,172
Minority interests 0 0 (1,785) 0
------------ ------------ ------------ ------------
Net income (loss) $ 805 $ 301 $ (6,691) $ 1,172
============ ============ ============ ============
Basic income (loss) per share $ 0.06 $ 0.02 $ (0.52) $ 0.09
============ ============ ============ ============
Weighted average shares
outstanding 12,800,000 12,865,000 12,800,000 12,865,000
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements
2
S.W. LAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$,000)
(Unaudited)
Nine Months Ended December 31,
------------------------------
2000 2001
-------- --------
Cash flows from operating activities:
Net income (loss) $ (6,691) $ 1,172
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of property, plant and equipment 3,549 0
Loss on dilution of interests in subsidiaries 1,157 0
Minority interest 1,785 0
Share of loss (profit) of affiliates net of taxes and
selling, general and administrative expense attributable
to affiliates 7,514 (1,172)
Decrease in operating assets:
Accounts receivable, net (3,741) 0
Inventories (10,131) 0
Prepayments and other current assets (621) 0
Increase in operating liabilities:
Accounts payable 597 0
Accrued liabilities 9 0
Due to affiliates 28 0
Due to a director 453 0
Income taxes payable 321 0
-------- --------
Net cash used in operating activities (5,771) 0
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (5,281) 0
Net cash outflow from disposal of subsidiaries (17,867) 0
-------- --------
Net cash used in investing activities (23,148) 0
-------- --------
Cash flows from financing activities:
Net increase in short-term bank borrowings 10,294 0
Repayment of capital element of capital lease obligations (736) 0
Decrease in long-term bank loans (110) 0
-------- --------
Net cash provided by financing activities 9,448 0
-------- --------
Net decrease in cash and cash equivalents (19,471) 0
Cash and cash equivalents, as of beginning of period 19,562 0
-------- --------
Cash and cash equivalents, as of end of period $ 91 $ 0
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
3
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2001
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. These statements include the
accounts of S.W. Lam, Inc. (the "Company") and its subsidiary, together
with the share of post acquisition results and reserves of its affiliates
under the equity method of accounting. The March 31, 2001 balance sheet
data was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. The
interim financial statements and notes thereto should be read in
conjunction with the financial statements and notes included in the
Company's Form 10-K for the year ended March 31, 2001. In the opinion of
management, the interim financial statements reflect all adjustments of a
normal recurring nature necessary for a fair statement of the results for
the interim periods presented. The current period results of operations are
not necessarily indicative of results which ultimately will be reported for
the full year ending March 31, 2002.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
A substantial portion of the sales, purchases and expenses of the Company's
affiliates are in Hong Kong dollars. Management believes that maintaining
books and records in Hong Kong dollars will enable financial results and
relationships to be measured with more relevance and reliability.
In the financial statements of the individual companies within the Group,
transactions in other currencies during the period are translated into Hong
Kong dollars at the applicable rates of exchange prevailing at the time of
the transactions. Monetary assets and liabilities denominated in other
currencies are translated into Hong Kong dollars at the applicable rates of
exchange in effect at the balance sheet date. All such exchange differences
are dealt with in the individual companies' statements of operations.
Translation of amounts from Hong Kong dollars ("HK$") to United States
dollars ("US$") is for the convenience of readers and has been made at US$1
= HK$7.8. No representation is made that the Hong Kong dollar amounts could
have been, or could be, converted into United States dollars at the rate or
at any other rate.
4
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
December 31, 2001
3. AFFILIATED COMPANY DISCLOSURE
a. Dilution of Interest in Operating Subsidiary
--------------------------------------------
On August 23, 2000, the Company's principal operating subsidiary, Hang
Fung Gold Technology Limited ("HFGTL") issued 1,632 million shares to
New ePoch Holdings International Limited ("NEH") in exchange for a
49.9% interest in New ePoch Information (BVI) Company Limited
("NEI")(the "New ePoch Transaction"). In conjunction with the New
ePoch Transaction, HFGTL also entered into a loan agreement for the
provision of an interest bearing secured loan facility to NEI of up to
the higher of (i) HK$50 million or (ii) the two-thirds of the amount
of the net proceeds of equity or debt issues of HFGTL. On August 28,
2000, HFGTL placed 550 million shares to independent investors for
HK$62.7 million (the "HFGTL Placement").
As a result of the New ePoch Transaction and the HFGTL Placement:
i. the Company's indirect ownership interest in HFGTL decreased from
53.145% to 35% and from 35% to 31.4%;
ii. HFGTL and its subsidiaries (including affiliates)(collectively
referred to as the "HFGTL Group") are classified as affiliates
following the New ePoch Transaction;
iii.the Company's consolidated statements of operations reflect the
Company's pre- transaction interest and post-transaction
proportionate interest in HFGTL Group;
iv. the Company's investment in HFGTL Group is reported on the
balance sheet under the equity method of accounting;
v. the loss, as adjusted, resulting from dilution of the Company's
interest in HFGTL amounted to approximately $2,034,000, which was
charged to the 2001 consolidated statement of operations.
5
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
December 31, 2001
3. AFFILIATED COMPANY DISCLOSURE (Cont'd)
b. Pro Forma Information
---------------------
In connection with the New ePoch Transaction and the HFGTL Placement,
the Company has presented the following condensed pro forma
consolidated statement of operations reflecting the New ePoch
Transaction and the HFGTL Placement, as if both transactions had
occurred at April 1, 1999.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended December 31, 2001
US $000
(Unaudited)
Total revenues $ 0
Selling, general and administrative expenses (47)
-------
Operating loss (47)
Share of profit of affiliates 1,355
-------
Income before income taxes 1,308
Provision for income taxes (136)
-------
Net income 1,172
=======
c. Affiliate Operating Results
---------------------------
The Company's operations are conducted entirely through HFGTL Group
and NEI Group (NEI, its subsidiary and affiliate). As a result of the
New ePoch Transaction, from and after August 23, 2000, HFGTL is
accounted for as an affiliate of the Company and the operations of
HFGTL Group are no longer included in the consolidated results of the
Company.
6
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
December 31, 2001
3. AFFILIATED COMPANY DISCLOSURE (Cont'd)
c. Affiliate Operating Results (Cont'd)
---------------------------
The following table presents operating results of HFGTL Group and NEI
Group for the nine months ended December 31, 2001 (in US$,000):
HFGTL Group NEI Group
----------------- -----------------
Nine Months Ended Nine Months Ended
December 31, 2001 December 31, 2001
----------------- -----------------
Total revenues $ 124,163 $ 0
Cost of sales and service (105,851) 0
----------------- -----------------
Gross profit 18,312 0
Selling, general and
administrative expenses (10,466) (654)
----------------- -----------------
Operating income (loss) 7,846 (654)
Interest expense, net (2,443) (449)
Share of loss of affiliates (550) 0
Provision for amount
due from an affiliate (539) 0
----------------- -----------------
Income (loss) before income taxes 4,314 (1,103)
Provision for income taxes (432) 0
----------------- -----------------
Net income (loss) $ 3,882 $ (1,103)
================= =================
7
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of Securities Exchange
Act of 1934. Statements contained herein which are not historical facts are
forward-looking statements that involve risks and uncertainties. All phases of
the Company's operations are subject to a number of uncertainties, risks and
other influences. Therefore, the actual results of the future events described
in such forward- looking statements in this Form 10-Q could differ materially
from those stated in such forward- looking statements. Among the factors which
could cause the actual results to differ materially are the risks and
uncertainties described both in this Form 10-Q and the risks, uncertainties and
other factors set forth from time to time in the Company's other public reports,
filings and public statements. Many of these factors are beyond the control of
the Company, any of which, or a combination of which, could materially affect
the results of the Company's operations and whether the forward-looking
statements made by the Company ultimately prove to be accurate.
Dilution of Interest in Operating Subsidiary
On August 23, 2000, the Company's principal operating subsidiary, Hang Fung
Gold Technology Limited ("HFGTL") issued 1,632 million shares to New ePoch
Holdings International Limited ("NEH") in exchange for a 49.9% interest in New
ePoch Information (BVI) Company Limited ("NEI")(the "New ePoch Transaction"). On
August 28, 2000, HFGTL placed 550 million shares to independent investors for
HK$62.7 million (the "HFGTL Placement").
As a result of the New ePoch Transaction and the HFGTL Placement, the
Company's indirect ownership interest in HFGTL decreased from 53.145% to 35% and
from 35% to 31.4%; HFGTL and its subsidiary (including affiliates) are
classified as affiliates following the New ePoch Transaction; the Company's
consolidated statements of operations reflect the Company's pre-transaction
interest and post-transaction proportionate interest in HFGTL Group; the
Company's investment in HFGTL Group is reported on the balance sheet under the
equity method of accounting; during fiscal 2001, the Company reported a loss on
dilution of equity interest of HFGTL, which was charged to the 2001 consolidated
statement of operations.
Comparability of Financial Data
Prior to the New ePoch Transaction, HFGTL was the principal operating
subsidiary of the Company. After the New ePoch Transaction and the HFGTL
Placement, the Company's effective percentage of ownership in HFGTL was reduced
from 53.145% to 31.4% in August 2000, the accounting treatment of HFGTL and its
subsidiaries (including affiliates) changed from subsidiaries to affiliates of
the Company.
Because the financial statements for the three and nine months ended
December 31, 2001 account for HFGTL and its subsidiaries (including affiliates)
as affiliates of the Company, prior year comparative financial information may
be of limited value.
8
Results of Operations
Following the New ePoch Transaction and HFGTL Placement, the operations of
HFGTL Group are no longer consolidated but are reported as a share of profit in
affiliates. For purposes of comparability, the discussion herein includes (1)
consolidated results of operations as reported, (2) pro forma consolidated
results of operations reflecting the New ePoch Transaction and HFGTL Placement
as if those transactions had occurred at April 1, 1999, and (3) operating
results of the Company's affiliates, HFGTL Group and NEI Group, which results
are not included in the consolidated results of operations of the Company.
Quarter Ended December 31, 2000 Compared to Quarter Ended December 31, 2001
Pro Forma
HFGTL Group NEI Group Consolidated Consolidated
-------------------- -------------------- -------------------- --------------------
Quarter Ended December 31, 2000 2001 2000 2001 2000 2001 2000 2001
-------- -------- -------- -------- -------- -------- -------- --------
Revenues $ 47,714 $ 44,913 $ -- $ -- $ -- $ -- $ -- $ --
Cost of sales and services (41,250) (38,288) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 6,464 6,625 -- -- -- -- -- --
Selling, general and
administrative expenses (2,438) (4,303) (460) (200) (6) (16) (6) (16)
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) 4,026 2,322 (460) (200) (6) (16) (6) (16)
Interest expense, net (695) (821) (25) (168) -- -- -- --
Provision for amount
due from an affiliate -- (184) -- -- -- -- -- --
Share of profit (loss)
of affiliates (497) (183) (514) -- 892 356 889 356
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes 2,834 1,134 (999) (368) 886 340 883 340
Provision for income taxes (256) (124) -- -- (81) (39) (80) (39)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 2,578 $ 1,010 $ (999) $ (368) $ 805 $ 301 $ 803 $ 301
======== ======== ======== ======== ======== ======== ======== ========
Revenues and Gross Profit. Consolidated revenues for the quarter ended
December 31, 2001 were nil as compared to nil for the quarter ended December 31,
2000. The lack of consolidated revenues was attributable to the reclassification
of HFGTL Group as affiliates following the New ePoch Transaction in August 2000.
Pro forma consolidated revenues were nil for both the 2000 and 2001 quarters.
Consolidated gross profit for the quarter ended December 31, 2001 was nil
as compared to nil for the quarter ended December 31, 2000. The lack of
consolidated gross profit was attributable to the reclassification of HFGTL
Group as an affiliate following the New Epoch Transaction in August 2000. Pro
forma consolidated gross profit was nil for both the 2000 and 2001 quarters.
HFGTL Group. Total revenues of HFGTL Group were $44.9 million for the
quarter ended December 31, 2001, a decrease of 5.9% from $47.7 million for the
quarter ended December 31, 2000. The decrease in revenues of HFGTL Group for the
quarter was primarily attributable to the continued poor economic environment
following the events of September 11, particularly outside of Asia, which was
partially offset by increased marketing efforts and adoption of a more
competitive pricing strategy.
9
Geographically, within Southeast Asia (including Hong Kong and the PRC)
sales by HFGTL Group decreased 3% to $36.2 million during the quarter ended
December 31, 2001 from $37.3 million during the same period in the prior year.
Sales within Southeast Asia accounted for 80.5% of total sales during the
current period as compared to 78.2% during the same period in the prior year.
Sales in Southeast Asia (not including Hong Kong and the PRC) during the quarter
ended December 31, 2001 decreased 48.5% to $3.5 million from $6.8 million for
the same period in the prior year due to a shift of marketing efforts to the
regions of Hong Kong and the PRC.
Outside of Asia (mainly in the United States and Europe), HFGTL Group
experienced a 16% decrease in sales with these sales accounting for 19.5% of
total sales in the quarter ended December 31, 2001 as compared to 21.8% of total
sales in the same period of the prior year. The decrease in sales outside of
Asia was attributable to a shift in marketing resources and efforts to, and
strong product demand in Hong Kong and the PRC. Sales in Europe decreased
approximately 47.8% to $2.4 million for the quarter ended December 31, 2001 from
$4.6 million in the same period of the prior year. Sales in the United States
increased approximately 10.8% to $4.1 million during the quarter ended December
31, 2001 from $3.7 million in the same period of the prior year.
Gross profit of HFGTL Group increased by 2.5% to $6.6 million during the
current period from $6.5 million during the same period in the prior fiscal
year. Gross margin increased to 14.8% in the current period from 13.5% in the
prior fiscal year period. The increase in gross profit percentage during the
current period was primarily attributable to improving sales of higher margin
products which was partially offset by increased competition, the adoption of a
more competitive pricing strategy and the increased sales of gold products of
relatively lower profit margin.
NEI Group. Total revenues of NEI Group were nil during the current period
and the prior year period. NEI Group operations during the current quarter were
focused on developing and operating e-commerce trading facilities between the
PRC and the rest of the world.
Operating Expenses. Consolidated operating expenses for the quarter ended
December 30, 2001 were $16,000 as compared to $6,000 for the quarter ended
December 30, 2000. The consolidated operating expenses were minimal as a result
of the reclassification of HFGTL Group as affiliates following the New ePoch
Transaction in August 2000. Pro forma consolidated operating expenses were
$16,000 for the current period and $6,000 for the prior year period.
HFGTL Group. Total operating expenses of HFGTL Group were $4.3 million for
the quarter ended December 31, 2001, an increase of 76.5% from $2.4 million for
the quarter ended December 31, 2000. The increase in operating expenses of HFGTL
Group for the quarter was primarily attributable to increased selling expenses
to support business expansion in Hong Kong and the PRC.
NEI Group. Total operating expenses of NEI Group were $200,000 for the
quarter ended December 31, 2001, a decrease of 56.5% from $460,000 for the
quarter ended December 31, 2000.
10
Interest Expense, Net. Consolidated interest expense, net, for the quarter
ended December 31, 2001 was nil as compared to nil for the quarter ended
December 31, 2000. The lack of consolidated net interest expense was
attributable to the reclassification of HFGTL Group as affiliates following the
New ePoch Transaction in August 2000. Pro forma consolidated net interest
expense were nil for the 2001 quarter and 2000 quarter.
HFGTL Group. Net interest expense of HFGTL Group was $821,000 for the
quarter ended December 31, 2001, an increase of 18.1% from $695,000 for the
quarter ended December 31, 2000. The increase in net interest expense of HFGTL
Group for the quarter was primarily attributable to increased short-term bank
borrowings to support business expansion in Hong Kong and the PRC.
Share of Profit (Loss) of Affiliates. Consolidated share of profit of
affiliates totaled $356,000 during the quarter ended December 31, 2001 as
compared to $892,000 during the quarter ended December 31, 2000. Consolidated
share of profit of affiliates represents the Company's 31.4% interest in HFGTL
Group, including a 49.9% interest in NEI Group owned by HFGTL. Pro forma
consolidated share of profit of affiliates totaled $356,000 for the quarter
ended December 31, 2001 and $889,000 for the quarter ended December 31, 2000.
Income Taxes. Consolidated income taxes for the quarter ended December 31,
2001 was $39,000 as compared to $81,000 for the quarter ended December 31, 2000.
Pro forma consolidated income tax expense were $39,000 for the 2001 quarter and
$80,000 for the 2000 quarter.
HFGTL Group. Income tax expense of HFGTL Group was $124,000 for the quarter
ended December 31, 2001, a decrease of 51.6% from $256,000 for the quarter ended
December 31, 2000. The decrease in income tax expense of HFGTL Group for the
quarter was primarily attributable to reduced taxable income during the current
period.
Nine Months Ended December 31, 2000 Compared to Nine Months Ended December 31,
2001
Pro Forma
HFGTL Group NEI Group Consolidated Consolidated
---------------------- ---------------------- ---------------------- ----------------------
Nine Months Ended December 31, 2000 2001 2000 2001 2000 2001 2000 2001
--------- --------- --------- --------- --------- --------- --------- ---------
Revenues $ 102,929 $ 124,163 $ -- $ -- $ 43,502 $ -- $ -- $ --
Cost of sales and services (85,742) (105,851) -- -- (35,175) -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit 17,187 18,312 -- -- 8,327 -- -- --
Selling, general and
administrative expenses (31,619) (10,466) (891) (654) (3,734) (47) (28) (47)
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss) (14,432) 7,846 (891) (654) 4,593 (47) (28) (47)
Interest expense, net (1,669) (2,443) (33) (449) (508) -- -- --
Loss on dilution of
equity interests
in subsidiaries -- -- -- -- (1,157) -- -- --
Provision for amount
due from an affiliate -- (539) -- -- -- -- -- --
Share of profit (loss) of
affiliates (592) (550) (966) -- (7,413) 1,355 2,222 1,355
--------- --------- --------- --------- --------- --------- --------- ---------
income taxes (16,693) 4,314 (1,890) (1,103) (4,485) 1,308 2,194 1,308
Provision for income taxes (641) (432) -- -- (421) (136) (201) (136)
Minority interest -- -- -- -- (1,785) -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (17,334) $ 3,882 $ (1,890) $ (1,103) $ (6,691) $ 1,172 $ 1,993 $ 1,172
========= ========= ========= ========= ========= ========= ========= =========
11
Revenues and Gross Profit. Consolidated revenues for the nine months ended
December 31, 2001 were nil as compared to $43.5 million for the nine months
ended December 31, 2000. The decrease in consolidated revenues was attributable
to the reclassification of HFGTL Group as affiliates following the New ePoch
Transaction in August 2000. Pro forma consolidated revenues were nil for both
the 2000 and 2001 periods.
Consolidated gross profit for the nine months ended December 31, 2001 was
nil as compared to $8.3 million for the nine months ended December 31, 2000. The
decrease in consolidated gross profit was attributable to the reclassification
of HFGTL Group as an affiliate following the New Epoch Transaction in August
2000. Pro forma consolidated gross profit was nil for both the 2000 and 2001
periods.
HFGTL Group. Total revenues of HFGTL Group were $124.2 million for the nine
months ended December 31, 2001, an increase of 20.6% from $102.9 million for the
nine months ended December 31, 2000. The increase in revenues of HFGTL Group for
the period was primarily attributable to increased marketing efforts and
adoption of a more competitive pricing strategy, which was partially offset by
weekness during the third fiscal quarter discussed above.
Geographically, within Southeast Asia (including Hong Kong and the PRC)
sales by HFGTL Group increased 30.8% to $100.6 million during the nine months
ended December 31, 2001 from $76.9 million during the same period in the prior
year. Sales within Southeast Asia accounted for 81% of total sales during the
current period as compared to 74.7% during the same period in the prior year.
Sales within the region increased due to increased marketing efforts in the
region, particularly in the PRC, during the current period. Sales in Southeast
Asia (not including Hong Kong and the PRC) during the nine months ended December
31, 2001 increased 11.8% to $16.1 million from $14.4 million for the same period
in the prior year.
Outside of Asia (mainly in the United States and Europe), HFGTL Group
experienced a 9.4% decrease in sales with these sales accounting for 19% of
total sales in the nine months ended December 31, 2001 as compared to 25.3% of
total sales in the same period of the prior year. The decrease in sales outside
of Asia was attributable to a shift in marketing resources and efforts to, and
strong product demand in Hong Kong and the PRC. Sales in Europe decreased
approximately 25.3% to $7.4 million for the nine months ended December 31, 2001
from $9.9 million in the same period of the prior year. Sales in the United
States increased approximately 3.1% to $10.1 million during the nine months
ended December 31, 2001 from $9.8 million in the same period of the prior year.
Gross profit of HFGTL Group increased by 6.5% to $18.3 million during the
current period from $17.2 million during the same period in the prior fiscal
year. The increase in gross profit was mainly attributable to the increase in
revenues. Gross margin decreased to 14.7% in the current period from 16.7% in
the prior fiscal year period. The decrease in gross profit percentage during the
current period was primarily attributable to increased competition, the adoption
of a more competitive pricing strategy and the increased sales of gold products
of relatively lower profit margin which was partially offset by the improving
sales of higher margin products.
12
NEI Group. Total revenues of NEI Group were nil during the current period
and the prior year period. NEI Group operations during the current period were
focused on developing and operating e-commerce trading facilities between the
PRC and the rest of the world.
Operating Expenses. Consolidated operating expenses for the nine months
ended December 31, 2001 were $47,000 as compared to $3.7 million for the nine
months ended December 31, 2000. The decrease in consolidated operating expenses
was attributable to the reclassification of HFGTL Group as affiliates following
the New ePoch Transaction in August 2000. Pro forma consolidated operating
expenses were $47,000 for the current period and $28,000 for the prior year
period.
HFGTL Group. Total operating expenses of HFGTL Group were $10.5 million for
the nine months ended December 31, 2001, a decrease of 66.9% from $31.6 million
for the nine months ended December 31, 2000. The decrease in operating expenses
of HFGTL Group for the period was primarily attributable to the adoption of new
Statements of Standard Accounting Practice in Hong Kong. As a result, goodwill
arising on the New ePoch transaction of approximately $24.1 million, which was
eliminated against HFGTL's reserve in August 2000, is reinstated and an
impairment loss of approximately $24.1 million has been recognized in the
statement of operations for the quarter ended September 30, 2000. It was
partially offset by the increased selling expenses to support business expansion
in Hong Kong and the PRC.
NEI Group. Total operating expenses of NEI Group were $654,000 for the nine
months ended December 31, 2001, a decrease of 26.6% from $891,000 for the nine
months ended December 31, 2000.
Interest Expense, Net. Consolidated interest expense, net, for the nine
months ended December 31, 2001 was nil as compared to $508,000 for the nine
months ended December 31, 2000. The decrease in consolidated net interest
expense was attributable to the reclassification of HFGTL Group as affiliates
following the New ePoch Transaction in August 2000. Pro forma consolidated net
interest expense were nil for the 2001 period and 2000 period.
HFGTL Group. Net interest expense of HFGTL Group was $2.4 million for the
nine months ended December 31, 2001, an increase of 46.4% from $1.7 million for
the nine months ended December 31, 2000. The increase in net interest expense of
HFGTL Group for the period was primarily attributable to increased short-term
bank borrowings to support business expansion in Hong Kong and the PRC.
Loss on Dilution of Equity Interests in Subsidiaries. The Company reported
a loss during the nine month period ended December 31, 2000 in the amount of
$1.2 million on the dilution of the Company's effective ownership interest in
HFGTL from 53.145% to 35% as a result of the New ePoch Transaction.
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Share of Profit (Loss) of Affiliates. Consolidated share of profit of
affiliates totaled $1.4 million during the nine months ended December 31, 2001
as compared to a loss of $7.4 million during the nine months ended December 31,
2000. Consolidated share of profit of affiliates represents the Company's 31.4%
interest in HFGTL Group, including a 49.9% interest in NEI Group owned by HFGTL.
Pro forma consolidated share of profit of affiliates totaled $1.4 million for
the nine months ended December 31, 2001 and $2.2 million for the nine months
ended December 31, 2000.
Income Taxes. Consolidated income taxes for the nine months ended December
31, 2001 was $136,000 as compared to $421,000 for the nine months ended December
31, 2000. The decrease in consolidated income tax expense was attributable to
the reclassification of HFGTL Group as affiliates following the New ePoch
Transaction in August 2000. Pro forma consolidated income tax expense were
$136,000 for the 2001 period and $201,000 for the 2000 period.
HFGTL Group. Income tax expense of HFGTL Group was $432,000 for the nine
months ended December 31, 2001, a decrease of 32.6% from $641,000 for the nine
months ended December 31, 2000. The decrease in income tax expense of HFGTL
Group for the period was primarily attributable to a decrease in taxable income
for the current period compared with the corresponding period in the prior year.
Minority Interest. Consolidated minority interest was nil during the nine
months ended December 31, 2001 as compared to $1.8 million during the nine
months ended December 31, 2000. The decrease in minority interest was
attributable to reclassification of HFGTL Group from as subsidiaries to become
affiliates following the New ePoch Transaction. Pro forma consolidated minority
interest was nil for the periods ended December 31, 2001 and 2000.
Financial Condition, Liquidity and Capital Resources
The Company had no cash balance and had a working capital deficit of
$303,000 at both December 31, 2001 and March 31, 2001. Because of the
reclassification of HFGTL Group as affiliates, the Company's balance sheet does
not include any of the assets and liabilities of HFGTL Group.
For the nine months ended December 31, 2001 no cash was used in operating
activities as compared to net cash used in operating activities of $5.8 million
for the corresponding period of the prior year. This change resulted from the
reclassification of HFGTL Group as affiliates.
No cash was used in investing activities during the nine months ended
December 31, 2001 compared with $23.1 million used in investing activities
during the nine months ended December 31, 2000. This change resulted from the
reclassification of HFGTL Group as affiliates.
No cash was provided by financing activities during the nine months ended
December 31, 2001 compared with $9.4 million provided during the nine months
ended December 31, 2000. This change resulted from the reclassification of HFGTL
Group as affiliates.
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The Company had no long term debt at both December 31, 2001 and March 31,
2001. This was attributable to the reclassification of HFGTL Group from as
consolidated subsidiaries to become as affiliates.
As the Company has no operations other than those conducted by its
affiliates, HFGTL Group, the Company has limited liquidity and capital resource
requirements. Management believes that its current financial condition is
sufficient to meet the Company's anticipated needs for at least the next twelve
months and HFGTL Group's cash and working capital is sufficient to meet its
anticipated needs for at least the next twelve months.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company has no material market risk.
Sales of the Company's affiliates, HFGTL Group, are denominated in Renminbi
(the "Rmb"), U.S. dollars or Hong Kong dollars. Any material fluctuation in the
value of the Rmb, the Hong Kong dollars relative to the U.S. dollars would have
significant impact on HFGTL Group's operating results.
In order to minimize its exposure to fluctuations in the exchange rate of
Rmb, HFGTL Group utilities its Rmb revenue to settle the expenses denominated in
Rmb incurred in the purchase of raw materials and its production facilities in
the PRC. Only the unused Rmb may be subjected to exchange risk. In addition,
HFGTL Group's currency risk during the nine months ended December 31, 2001 was
immaterial as a result of the "peg" of Hong Kong dollars to the U.S. dollars and
therefore no derivative contracts such as forward contracts and options to hedge
against foreign exchange fluctuations was considered or made.
HFGTL Group's interest expense is subject to the fluctuations of Hong Kong
interest rates. The interest rates on the bank loans of HFGTL Group, in the
principal amount of approximately $11.7 million, ranged from Hong Kong prime
lending rate less 1.75% to Hong Kong prime lending rate plus 3.5% during the
nine months ended December 31, 2001. HFGTL Group does not currently hedge its
interest rate exposure as HFGTL Group considers that there are (i) no
significant changes in Hong Kong interest rates in the foreseeable future, and
(ii) no adversely effects on its operation and cash flow even if the applicable
prime lending interest rate is increased by 1% in Hong Kong.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K, dated December 7, 2001, reporting under Item 9 - Regulation
FD Disclosure, the issuance of a press release disclosing the
operating results of its affiliate, Hang Fung Gold Technology Limited.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
S.W. LAM, INC.
Dated: March 21, 2002 By: /s/ Lam Sai Wing
---------------------------
Lam Sai Wing, President and
Chief Executive Officer
Dated: March 21, 2002 By: /s/ Chan Yam Fai, Jane
---------------------------
Chan Yam Fai, Jane
Chief Financial Officer
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