SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________.
Commission File No. 0-22049
S.W. LAM, INC.
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(Name of registrant as specified in its charter)
Nevada 62-1563911
- -------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Unit 25-32, Second Floor, Block B, Focal Industrial Centre,
21 Man Lok Street, Hunghom, Hong Kong
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Registrant's telephone number, including area code: (852) 2766 3688
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past ninety (90) days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of July 23, 2001, 12,865,000 shares of common stock of the
Registrant were outstanding. As of such date, the aggregate market value of the
voting and non-voting common equity held by non-affiliates, based on the closing
price, was approximately $313,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS............................................. 1
ITEM 2. PROPERTIES........................................... 13
ITEM 3. LEGAL PROCEEDINGS.................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................. 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS...................... 13
ITEM 6. SELECTED FINANCIAL DATA.............................. 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............... 23
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
AND CONTROL PERSONS.................................. 23
ITEM 11. EXECUTIVE COMPENSATION............................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................ 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................................... 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................. 27
SIGNATURES........................................... 29
PART I
This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Factors that May
Affect Future Results" beginning on page 20 of this Form 10-K.
The Company operates through its present various affiliates, all of
which are located outside of the United States. Unless otherwise indicated or
the context otherwise requires, the term Company refers collectively to S.W.
Lam, Inc., where appropriate, and its subsidiaries or its affiliates. All
references to China or the PRC are to the Peoples' Republic of China.
The Company's functional currency is Hong Kong Dollars ("HK$"). For the
convenience of readers, unless otherwise indicated, all financial information
contained herein is presented in United States Dollars ("US$"). Translation of
amounts from HK$ into US$ has been made at the noon buying rate in New York City
for cable transfers in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York on March 31, 2001 of US$1.00 = HK$7.8. No
representation is made that the HK$ amounts could have been, or could be,
converted into US$ at that rate or at any other rate.
ITEM 1. BUSINESS
S.W. Lam, Inc. (the "Company"), a Nevada corporation, through its
present various affiliates, is engaged in the design, manufacturing and
marketing of a broad range of gold products, other precious metal products and
jewelry products to customers in Hong Kong, the People's Republic of China (the
"PRC" or "China") and other parts of the world. The Company's operations are
located in Hong Kong and the PRC.
History and Development of the Company
The Company's operations date to the formation of a jewelry
manufacturing and marketing business by Lam Sai Wing ("Mr. Lam") in the 1980's.
In the mid-1990's, Mr. Lam and his wife, Chan Yam Fai, Jane ("Ms. Chan"),
restructured substantially all of their jewelry operations by transferring those
operations to Hang Fung Jewellery Company Limited ("Hang Fung Jewellery") and
transferring Hang Fung Jewellery to Quality Prince Limited ("Quality Prince").
In December 1996, Quality Prince completed a "reverse acquisition" with
the Company (the "Exchange") pursuant to which the jewelry operations of Mr. Lam
and Ms. Chan were acquired by the Company, prior operations of the Company were
terminated, the Company assumed and carried on, through the operating
subsidiaries of Quality Prince (collectively the "Hang Fung Group"), the jewelry
operations and management of the Hang Fung Group assumed control of the Company.
In May of 1997, Quality Prince entered into an agreement with
Phenomenal Limited ("Phenomenal"), an unaffiliated third party, pursuant to
which Phenomenal loaned to Quality Prince $10,000,000 and Quality Prince issued
to Phenomenal a convertible promissory note (the "Note") and a non-detachable
warrant (the "Warrant") to subscribe for 5,263,158 shares of common stock of the
Company at an exercise price of $2.19 per share. In accordance with the term of
the agreement, the Warrant expired in May 1998. In June 1998, Phenomenal agreed
to extend the maturity date of the Note and waive its then entitlement to
interest accrued under the Note and the Company and Phenomenal agreed to
restructure and capitalize the Note into redeemable preferred stock of Hang Fung
Jewellery. As a result, on June 30, 1998, Hang Fung Jewellery issued 5,263,788
shares of redeemable preferred stock (the "Preferred Stock") at approximately
$1.90 per share to Phenomenal in replacement of the Note. In February 1999, the
Hang Fung Group effected a corporate reorganization (the "Group Reorganization")
with Hang Fung Gold Technology Limited ("Hang Fung Gold") becoming a holding
company, excluding Quality Prince, for the Hang Fung Group and, according to the
terms of the revised agreement with Phenomenal, Phenomenal's investment being
converted into common stock in Hang Fung Gold. Immediately prior to the
conversion, dividends on the Preferred Stock in the amount of $1,849,000 were
paid. Immediately following the restructuring of the Hang Fung Group, Hang Fung
Gold completed an offering of shares in Hong Kong raising approximately
HK$59,000,000 (the "Hong Kong Offering") and the shares of Hang Fung Gold were
listed and traded on The Stock Exchange of Hong Kong Limited (the "Hong Kong
Exchange") commencing on March 16, 1999.
1
Following the Group Reorganization and Hong Kong Offering, the Company
held, through Quality Prince, 53.145% of the issued capital stock of Hang Fung
Gold, whereas Phenomenal held 21.855% of the issued capital stock and the
investing public held the remaining 25% of the issued capital stock of Hang Fung
Gold.
Beginning in fiscal 1999, the Company implemented a number of
initiatives such as (1) product branding, (2) establishment of strategic
marketing alliances, (3) expansion of wholesale and retail distribution channels
in the PRC, and (4) contemplation of an Internet business strategy. In
connection with those initiatives, the Company began efforts to further expand
its production facilities and halted contract manufacturing for third parties in
order to devote its manufacturing capacity to production of its own products.
As part of the Hang Fung Group's Internet strategy, in August 2000,
Hang Fung Gold acquired 49.9% of the stock of New ePoch Information (BVI)
Company Limited ("New Epoch") in exchange for shares of common stock of Hang
Fung Gold (the "New Epoch Transaction") representing approximately 34.1% of the
capital stock of Hang Fung Gold as enlarged following the transaction. Under the
terms of the New Epoch Transaction, Hang Fung Gold has an option for a period of
three years to acquire the remaining shares of New Epoch. In conjunction with
the New Epoch Transaction, Hang Fung Gold entered into a Facility Agreement
pursuant to which Hang Fung Gold agreed to provide to New Epoch a credit
facility of up to the higher of (1) HK$50 million, or (2) two-thirds of the net
proceeds of equity or debt issuances by Hang Fung Gold from time to time after
closing of the acquisition. In August 2000, Hang Fung Gold completed a placement
of shares resulting in proceeds of HK$62.7 million (the "HFG Placement"). As a
result of the New Epoch Transaction and the HFG Placement, the Company's
ownership interest in Hang Fung Gold was reduced to 31.4%.
New Epoch is engaged in developing and facilitating e-commerce trading
facilities between the PRC and the rest of the world, using offline trading
services to complement its internet B2B platform. New Epoch, through a joint
venture with Infoshare of the China International Electronic Commerce Centre --
an information technology arm of the Ministry of Foreign Trade and Economic
Co-operation of the PRC, operates a portal under the domain name
www.chinatradeworld.com (the "ChinaTradeWorld portal"), a B2B site designed to
facilitate international trade with the PRC. Linking with the ChinaTradeWorld
portal would enhance the operations of, and accelerate deployment of, the
jewelry portal being established by Hang Fung Gold by providing access to an
established trading portal with "Supply Chain Management" and "Customer
Relationship Management" capabilities.
2
Company Structure
The following chart sets forth the organization of the Company and its
principal subsidiaries as of March 31, 2001:
S.W. Lam, Inc.
(incorporated in Nevada, US)
100%
Quality Prince Limited
(incorporated in British Virgin Islands)
31.4%
Hang Fung Gold Technology Limited
(incorporated in Bermuda)
100% 49.9%
Macadam Profits Limited New ePoch Information (BVI) Company Limited
(incorporated in the British Virgin Islands) (incorporated in the British Virgin Islands)
(E-commerce trading platform)
100% 100%
Hang Fung Jewellery Company Limited Kai Hang Jewellery Company Limited
(incorporated in Hong Kong) (incorporated in Hong Kong)
(Manufacturing and selling (Property holding)
of jewelry products)
100%
Hang Fung Jewellery (Shenzhen) Co., Ltd.
(established in the PRC)
(Manufacturing of
jewelry products)
3
Overview
The Company, prior to the New Epoch Transaction and the HFG Placement,
was a holding company with its operating subsidiaries principally engaged in the
design, manufacture and distribution of a broad range of gold products, other
precious metal products and jewelry products. All jewelry and precious metal
operations of the Company are carried out through the Hang Fung Group which is
owned, after the New Epoch Transaction and the HFG Placement, 31.4% by the
Company.
Manufacturing operations are carried on in Hong Kong and the PRC.
The Hang Fung Group presently markets its products throughout the world
including Hong Kong, the PRC, Southeast Asia, Europe and the United States. The
Hang Fung Group has increased its sales in recent years as a result of increased
marketing effort and competitive pricing strategy.
In August 2000, Hang Fung Gold acquired 49.9% of the equity interest of
an affiliate, New Epoch, which is engaged in developing and facilitating
e-commerce trading facilities between the PRC and the rest of the world, using
offline trading services to complement an internet B2B platform.
As a result of the reduction in the Company's ownership interest in its
operating subsidiaries following the New Epoch Transaction and the HFG
Placement, the results of those previous subsidiaries are no longer reported on
a consolidated basis by the Company but are accounted for under the equity
method of accounting.
Developments During Fiscal Year 2001
In August 2000, Hang Fung Gold completed the New Epoch Transaction and
the HFG Placement as a part of Hang Fung Group's Internet strategy to expand its
distribution channels. Hang Fung Group also began offering e-commerce facilities
and services to support e-commerce. As a result of the severe downturn in the
Internet market, development of the e-commerce business of Hang Fung Group and
of New Epoch has been substantially curtailed.
Gold, Jewelry and Precious Metal Products Operations
- - Products
The Hang Fung Group's products consist of a broad array of gold and silver
jewelry products, gold and silver decorative items, semi-precious stone ,jewelry
and other decorative products. The Hang Fung Group's products include, but are
not limited to, bracelets, chains, charms, rings, earrings, ornamental plaques,
serving sets and decorative pieces.
The Hang Fung Group classifies its products in the following four distinct
segments:
Gold Products
The principal product line of the Hang Fung Group consists of fine gold
jewelry and decorative ornaments which are manufactured using mainly fine gold
and karat gold. In order to cater to customer demands, gold products
manufactured and sold by the Hang Fung Group cover a wide range of weight,
ranging from approximately 0.5 grammes to 3,000 grammes (3 kg) and are priced at
a range of approximately HK$50 to HK$300,000 per piece of which the prices for
the most popular items range from approximately HK$50 to HK$3,000 per piece.
Fine gold jewelry items include bracelets, anklets, bangles, necklaces,
brooches, pendants, rings and earrings that are made of fine gold and karat
gold. The fine gold jewelry items manufactured and sold by the Hang Fung Group
include contemporary and innovative designs that are worn as fashion accessories
as well as traditional oriental designs that are commonly presented as wedding
and birthday gifts in the Asian community.
Gold ornaments, including statuettes, memento cards, key chains and
other decorative items, are mainly made of fine gold. Gold ornaments may take
various different forms and shapes such as cartoon characters, animals, signs of
the zodiac as well as religious figures and symbols. The Hang Fung Group also
manufactures customized gold memento cards and key chains for corporations as
souvenirs in their business promotions.
4
Other Precious Metal Products
Other precious metal products manufactured by the Hang Fung Group
include jewelry and decorative ornaments that are made of precious metals such
as silver and platinum. Depending on the weight and design of such products,
these products are sold in a price range of approximately HK$8 to HK$500,000 per
piece of which the prices for the most popular items range from approximately
HK$100 to HK$500 per piece.
Jewelry Products
Jewelry products manufactured by the Hang Fung Group are made up of
mainly precious stones and gems. Depending on the quality and weight of stones
and gems jewelry and design of such products, these products are sold in a price
range of approximately HK$200 to HK$200,000 per piece of which the prices for
the most popular items range from approximately HK$2,000 to HK$8,000 per piece.
Others
"Others" include mainly medals, coins and other miscellaneous items.
Depending on the weight, design and material used in such products, these
products are sold in a price range of approximately HK$50 to HK$4,000 per piece
of which the prices for the most popular items range from approximately HK$50 to
HK$300 per piece.
In US dollars, the Hang Fung Group's products range in wholesale price
from approximately $1 to over $65,000. The mean selling price of the Hang Fung
Group's products is between $200 and $280. The following table illustrates, in
US dollars, the typical range and average wholesale price of the Hang Fung
Group's products by segment:
Wholesale Average
Price Range Wholesale Price
------------- -----------------
Fine gold products...................... $10 to $38,000 $200
Other precious metal products........... $1 to $65,000 $40
Jewelry products........................ $25 to $26,000 $650
Others.................................. $6 to $100 $20
For the two years ended March 31, 2000 and 2001, sales of Hang Fung Group
by major product category and as a percentage of sales were as follows:
2000 2001
------------------- -----------------
Amount Amount
$'000 Percent $'000 Percent
------- ------- ------ -------
Fine gold products............... 71,133 57.8 129,744 76.3
Other precious metal products.... 30,753 25.0 16,583 9.7
Jewelry products................. 21,031 17.1 23,539 13.8
Others........................... 198 0.1 359 0.2
--------- ------ -------- ------
123,115 100.0 170,225 100.0
======== ===== ======== ======
- Product Design and Development
The Hang Fung Group currently maintains a team of approximately 10
qualified and experienced staff in its in-house product design and development
division in its Hong Kong office. The Hang Fung Group has been a pioneer in the
introduction of innovative product designs as well as in the development of new
production technology in the gold product industry. The product design and
development division continuously monitors market trends and consumer
preferences and participates in jewelry fairs, exhibitions and competitions to
stimulate new ideas. Employees are also encouraged to attend relevant courses
and workshops paid by the Hang Fung Group to strengthen their knowledge of
production technology for gold products. The product design and development
division currently creates over 2,000 new product designs on an annual basis.
5
In order to maintain its competitiveness in the gold product market,
the Hang Fung Group constantly introduces new products. Beginning in 1991, the
Hang Fung Group introduced fine gold ornaments such as gold memento cards, key
chains and electroformed products to the market. Some of the products of the
Hang Fung Group are also designed to suit different geographical market needs.
For example, the Chinese twelve signs of the zodiac ornaments and buddha
figurines are in high demand in the PRC and other countries in the Asia Pacific
region while cartoon characters and innovative jewelry items are in high demand
in Europe and the US.
- Purchasing
The primary raw material in the manufacture and assembly of the Hang
Fung Group's products is gold bullion. For the year ended March 31, 2001, the
cost of gold bullion accounted for approximately 79.9% of the Hang Fung Group's
total purchases.
The Hang Fung Group sources gold bullion primarily from suppliers in
Australia, England, Germany and Hong Kong. The Hang Fung Group mainly sources
gold bullion from gold bullion traders. Generally, the Hang Fung Group is able
to maintain a steady supply of gold bullion from its suppliers, with an average
of one day between the placing of an order and the receipt of the gold bullion.
Other materials, including silver and color stones, are purchased, primarily,
from suppliers in Hong Kong.
For the year ended March 31, 2001, purchases of gold from the Hang Fung
Group's five largest suppliers accounted for approximately 93.9% of the Hang
Fung Group's total purchases. The Hang Fung Group sources gold bullion regularly
from its major suppliers and has not experienced any difficulty in obtaining the
raw materials required in the past. The Hang Fung Group has been dealing with
its major suppliers for an average period of approximately ten years and
maintains a good business relationship with each of them.
As the price of precious metals, in particular the price of gold
bullion, has generally been decreasing in recent years and since there are
numerous alternative sources of gold bullion such as banks and gold bullion
dealers, the Hang Fung Group does not maintain any long-term contractual
arrangements with its suppliers. Management believes that the Hang Fung Group is
in an advantageous position to negotiate for better terms when sourcing gold
bullion, as compared to gold bullion suppliers, and that the absence of
established contractual relationships with any principal supplier will not have
a material adverse effect on the operations or the financial position of the
Hang Fung Group.
Based on the prevailing market situation with the price of gold bullion
remaining relatively steady and given the liquidity of gold bullion in the
market, the Hang Fung Group does not actively engage in hedging activities with
respect to possible fluctuations in gold prices. The Hang Fung Group's
management monitors the fluctuation of gold prices closely and should the need
for hedging arise in the future, the Hang Fung Group may engage in hedging
transactions. Moreover, the Hang Fung Group has been able to fix the purchase
price of gold with its largest supplier with reference to the market gold price
at the time the Hang Fung Group's gold products are sold to customers. By using
this arrangement, the price of gold payable to its largest supplier will be the
same as the price of gold charged by the Hang Fung Group to its customers,
thereby minimizing the effect of fluctuation of gold prices on the Hang Fung
Group.
- Manufacturing and Assembly
Production Facilities
At March 31, 2001, the Hang Fung Group operated production facilities
which are located in Hunghom in Hong Kong (the "Hunghom Facility"), and in Sha
Tau Kok in the PRC (the "Sha Tau Kok Facility"). The Hang Fung Group previously
operated production facilities in Beijing, Shanxi and Shenzhen under processing
agreements with PRC entities holding requisite permits.
6
- -- Production Facilities in the Hong Kong
Hunghom Facility
The Hunghom Facility was established in 1988 and is now equipped with
20 production lines which are used primarily for the production of molds, gold
memento cards and medals and the electroforming of fine gold and karat gold, as
well as the production of computer-scanned gold statuettes. The Hunghom Facility
is a vertically integrated facility capable of handling all aspects of the
production process, from product design to mold-making and from casting to
polishing as well as marketing to distribution.
The premises of the Hunghom Facility are leased from an independent
third party and have a total gross floor area of approximately 31,500 sq. ft.,
which are used as the Hang Fung Group's office, showroom, and warehouse as well
as production facilities.
- -- Production Facilities in the PRC
Sha Tau Kok Facility
The Sha Tau Kok Facility is operated by, and the premises at which it
is situated are leased by, Hang Fung Jewellery (Shenzhen) Co., Ltd., a
wholly-owned subsidiary of Hang Fung Jewellery. The Sha Tau Kok Facility is
located near the Sha Tau Kok customs office in Shenzhen, the PRC.
The Sha Tau Kok Facility was developed in two phases. Development of
the first phase was completed, and commercial production commenced, in July
1998. Development of the second phase was completed in November 1999, and
commercial production commenced in the same month. The Sha Tau Kok Facility now
houses 45 production lines primarily for the production of fine and karat gold
products and other precious metal products.
Production Process
The Hang Fung Group combines traditional craftsmanship with advanced
computerized technology such as the application of the computerized faceting
machine and/or electroforming machine in the manufacturing process of gold
products. While faceting and electroforming are automated procedures, the
creation of product designs, the making of master wax models and master rubber
molds, the carving of individual wax models and the polishing of the finished
products are performed by skilled workers manually under the supervision of a
team of experienced technicians. The production cycle for gold products takes
approximately 7 to 30 days to complete, depending on complexity of product
design, any specific requirements of the product, and production volume.
- -- Chain Jewelry
Chain jewelry manufacturing begins with the melting of gold or silver
into bars which are rolled and elongated on a press. The process is repeated a
number of times until the bar is reduced to wire of approximately 20mm in
diameter. The wire is then stretched to produce a finer wire which is then cut
and swirled to form a spiral. The spiral is then cut to rings, which are sized
and graded and soldered together afterwards to form a chain.
- -- Ornaments
Manufacturing of other jewelry items, including gold ornaments which
may be attached to chains, typically involves some, or all, of the following
processes:
7
Design and Mold Making
The Hang Fung Group's in-house design team begins drawing the design by
using computer-aided design software. The data for the design are then
electronically transmitted to a computerized mold making machine and a master
wax model is produced automatically. The master wax model is of prime importance
as its degree of perfection determines the quality of the master rubber mold. A
master rubber mold is then constructed by pouring liquified rubber over the
master wax model (the "lost wax casting method"). The master rubber mold can be
used to produce numerous replica wax models.
Waxing
Wax is injected into a master rubber mold to obtain the required number
of wax models. After final carving, trimming and filing the surfaces and details
of individual wax models, the wax models are attached to a metal stem to enable
them to be handled without depositing fingerprints and grease on them, which
would hinder metal deposition.
Electroforming
The wax models are then submerged in an electrolyte solution where gold
ions are deposited onto the wax models by passing an electric current through
the electrolyte solution. The entire process is controlled by computers and the
processing time can be adjusted to achieve different thickness of gold layers.
Extraction of Wax Models
The wax models cast with a layer of gold are then heated in a furnace
at a pre-set temperature. The wax model underneath the gold layer melts and is
extracted from the gold object.
Filing and Tumbling
The gold ornaments are then individually hand-filed by skilled workers
to ensure smooth contours and surfaces. The base of each gold ornament is also
checked and flattened to ensure that the ornament can stand upright.
Stone Setting
Stones are set using a variety of methods, including the "claw",
"channel", "pave" or "bezel" setting methods, as determined by product design
and setting requirements.
Polishing
Jewelry items are again polished automatically by polishing machines.
Final Design and Assembly
Designs or impressions are affixed to appropriate component parts by
stamping, cutting or grinding. Component parts are shaped and assembled to
specifications in accordance with the product design.
- Manufacturing Technology and Development
The Hang Fung Group continuously seeks to improve and modify its
production technology and facilities in order to achieve better product quality
and higher profit margin. Traditionally, the manufacture of gold products has
been labor intensive and, therefore, product quality and production time may
vary for each production. The Hang Fung Group has successfully combined
traditional manual craftsmanship with advanced computerized technology to mass
produce quality gold products in a cost efficient manner.
8
The Hang Fung Group has committed to invest in developing the
technology and improvement in product quality. As one of the first gold product
manufacturers to have successfully implemented electro-forming technology, the
Hang Fung Group is able to produce gold decorative ornaments of the same size as
those produced using the traditional methods, but using less gold and therefore
reducing costs. By adopting this new technology in the production of gold
products, gold is more evenly spread on the wax model resulting in smoother
contours and better appearance.
In September 1998, the Hang Fung Group was granted a short-term patent
of up to 8 years in Hong Kong in relation to the production technology for the
computer-scanned gold statuette, a newly-launched product of the Hang Fung
Group. Gold statuettes are produced by scanning the object to be reproduced,
particularly busts, by a computerized scanner. Details of the contours of the
bust are scanned and are stored as codes on electronic media. The codes can then
be sent electronically to one of the production facilities of the Hang Fung
Group and finally to the rapid prototyping system for further production of fine
gold busts with the exact features of the scanned object. Besides offering a
high degree of resemblance to the original object, the advantage of this
production technology is that the amount of manual craftsmanship and production
time can be significantly reduced.
The Hang Fung Group has also obtained other patents in Hong Kong for
other production methods.
The Hang Fung Group used advanced electro-forming technologies to
successfully manfacture the world's tallest one-piece electro-formed fine gold
statue - the Goddess Kuan Yan and became the only manufacturer capable of
producing one-piece electro-formed products in such size. The statue weighs
approximately 168kg and is 273cm high with an estimated worth of HK$15 million.
The Hang Fung Group has applied for inclusion of the statue in the Guinness Book
of World Records.
- Quality Control
The Hang Fung Group's quality control team consists of 20 persons and
is committed to ensure that the products meet the Hang Fung Group's quality
standards.
All incoming raw materials, such as gold bullion, are inspected by the
quality control team for purity before being used in the production process.
Quality control checks are also conducted at various stages of production to
ensure that product specifications are met. In addition, the Hang Fung Group has
trained its production workers to closely inspect products during production.
Defective products are either rejected or subject to refinements before entering
the next stage of the production process. The production process is also closely
monitored by trained technicians. All finished products are subject to final
inspection before they are packed and delivered to customers. The Hang Fung
Group's marketing staff also check the quality of finished products upon receipt
of products before distribution.
Hang Fung Jewellery (Shenzhen) Co. Ltd., a wholly-owned subsidiary of the
Hang Fung Group, which operates the Sha Tau Kok Facility, has been granted the
ISO 9001 certification.
The Hang Fung Group is preparing to apply for ISO 9001 certification
for its Hunghom Facility.
- Inventory Policy and Control
For gold bullion, in general, it is the Hang Fung Group's policy to
maintain a stock holding period of approximately 70 days to 80 days. The Hang
Fung Group had a stock level at the year ended March 2001 of approximately 1,900
kg of gold reserves for production use. The stock level is monitored by the
senior manager of the gold and jewelry division who coordinates the transfer of
raw materials and finished goods between the production facilities and the sales
and marketing department. Stock movements from the safe or storeroom of each of
the production facilities are recorded in the respective stock ledgers and stock
movement reports are examined on a regular basis and are submitted to the
accounting department of the Hong Kong head offices for consolidation and
reconciliation. All movements of stock must be justified by the person making
the stock withdrawal. Details, such as stock code, quantity and weight, are
completed by the person making the withdrawal on the withdrawal note which will
be passed to the senior manager of the gold and jewelry division for approval
before the stock withdrawal takes place. The person making the withdrawal,
accompanied by another member of staff, must sign the stock withdrawal note to
acknowledge receipt of the stock. The person making the withdrawal, the senior
manager and the accounting department each respectively keeps one copy of the
signed withdrawal note. Goods are stored in safes and storerooms that are
installed with a wide range of anti-theft devices. At the production line level,
the stock retrieved by a production line supervisor from the storeroom at a
production facility is distributed to workers at the production line. The
supervisor keeps a record stating particulars such as type and weight of stock
distributed to each worker. At the end of each working day, each worker stores
his/her stock in a safety box and the locked safety box is returned to the
production line supervisor. The supervisor then stores the safety boxes
collected from the workers in a subsection designated for the production line in
the storeroom master safe. At the end of a production cycle, the workers return
the stock to the production line supervisors who will check against their
records to ensure that the stock returned matches with the particulars stated in
the records. Stock counts are performed on a monthly and ad hoc basis by the
accounting department and the results of the stock counts are checked against
the stock ledger.
9
- Sales and Marketing
The Hang Fung Group's marketing and sales activities are carried out by
a team of approximately 90 staff members. The Hang Fung Group's marketing and
sales staff carries out marketing and sales activities under the guidance of
senior management which oversees the sales staff and overall marketing strategy.
The Hang Fung Group's marketing and sales staff is responsible for establishing
and maintaining relations with third party sales representatives and customers
as well as marketing the Hang Fung Group's products to customers. The marketing
and sales executives regularly attend trade fairs, seminars and exhibitions in
Hong Kong and overseas in order to keep abreast of new product developments and
market trends, to maintain regular contact with existing customers and to meet
potential customers. Through participation in exhibitions, the Hang Fung Group
is able to promote its corporate image, increase public awareness of its
products and strengthen its competitive position in the gold products market.
The Hang Fung Group had a showroom at its head office in Hunghom, Hong
Kong where its wide range of products were displayed and sold. As a result of
its unique design and excellent product quality, the products of the Hang Fung
Group are very popular among customers. As the previous showroom for business
with tourists was typically over-crowded, the Hang Fung Group has relocated to
expand the showroom by opening of the 3D-Gold Tourism Exhibition Hall (the
"Exhibition Hall") built to meet the increasing business generated by tourists.
The Exhibition Hall is located at the ground floor, 28 Man Lok Street, Hunghom,
Kowloon and occupies a gross floor area of approximately 20,000 square feet. The
Exhibition Hall reinforces the Hang Fung Group's determination to manufacture
gold and jewellery products with innovative technology. The Exhibition Hall
displays various scenes such as the Fine Gold Kuan Yan Statue, the Worlds'
Largest Fresh Water Pearl, Super Star Wax Models and the 12 Zodiac of the Yuan
Ming Yuan. Each scene has special characteristics. The Exhibition Hall expands
the Hang Fung Group's customer base and revenue base and promotes Hong Kong's
tourism industry with the development of a new and innovative tourist
destination.
Other promotional activities undertaken by the Hang Fung Group include
the placing of advertisements in trade magazines, journals and other public
media as well as direct mailing of product catalogues to existing and potential
customers and maintenance of an Internet web site which provides comprehensive
product information.
In the PRC, potential customers have historically been referred to the
Hang Fung Group by existing customers or learn about the Hang Fung Group's
products from other sources such as advertisements. Customers may place orders
to the Hang Fung Group's Hong Kong office by fax, telex, telephone or e-mail. In
any event, all deliveries pursuant to confirmed orders from PRC customers are
made in Hong Kong to the party designed by the PRC customers located in Hong
Kong. The Hang Fung Group does not hold a PRC license to distribute its products
in the PRC to customers in the PRC. The Hang Fung Group's PRC customers (being
customers who have invoicing addresses in the PRC, and which are believed to be
either wholesale distributors or retailers) are responsible for arranging the
importation of the products in the PRC.
Through an alliance with the The Administration of Shatoujiao Free
Trade Zone of Shenzhen (the "Free Trade Administration"), Hang Fung branded
products are sold through ten retail chain stores. Pursuant to the alliance, the
Hang Fung Group, jointly with the Free Trade Administration, developed the
wholesale and retail business in the PRC by establishing and selling products
under its own "3D-Gold" and "La Milky Way" brands.
The Hang Fung Group has established solid business relationships with
its customers and many of them have in turn introduced new customers to the Hang
Fung Group. The Hang Fung Group also sponsors selected customers to attend major
gold jewelry trade shows so as to further promote market awareness of the Hang
Fung Group's products.
10
The principal markets to which the Hang Fung Group's products are
distributed are the PRC, South East Asia, Hong Kong, the United States and
Europe. Sales by region (excluding Subcontracting fees) for the three years
ended March 31, 2001 have been as follows:
1999 2000 2001
----------------- ---------------- ------------------
Amount Amount Amount
$,000 Percent $,000 Percent $,000 Percent
-------- ------- ------- -------- --------- --------
PRC and Hong Kong.......... 22,915 26.9 51,605 41.9 98,408 57.8
Southeast Asia............. 16,562 19.5 17,268 14.0 30,524 17.9
United States.............. 13,920 16.4 19,179 15.6 18,065 10.6
Europe..................... 17,661 20.8 24,142 19.6 15,129 8.9
Others..................... 13,947 16.4 10,921 8.9 8,099 4.8
------ ------ -------- ------- -------- -------
Total................... 85,005 100.0 123,115 100.0 170,225 100.0
====== ====== ======== ======= ======== =======
The Hang Fung Group generally adopts a tight credit policy and grants
credit only to selected customers depending on their business relationship with
the Hang Fung Group. Sales to customers in Hong Kong and overseas, other than
the PRC, are mainly settled on an open account basis, with credit periods
ranging from seven days to ninety days. All Hong Kong and overseas customers
generally settle their accounts on time and no material default has been
encountered by the Hang Fung Group. As for the PRC customers, owing to the
different business practices prevailing in the PRC, customers normally settle
their accounts at a slower pace up to 180 days after sales. Despite the slower
payment pattern, the Hang Fung Group has experienced no significant bad debt
problems and management believes there are no material collectibility problems.
- Customers
Products manufactured by the Hang Fung Group are principally sold to
wholesale distributors or retail chain operators of gold, other precious metal
and jewelry products.
At March 31, 2001, the Hang Fung Group had approximately 300 regular
customers. The Hang Fung Group estimates that, through customers and their
extensive distribution networks, the products manufactured by the Hang Fung
Group are sold in approximately 2,000 retail outlets worldwide.
For the year ended March 31, 2001, the Hang Fung Group five largest
customers accounted for approximately 12.2% of sales. During fiscal 2001, no
customers accounted for more than 5% of the Hang Fung Group's revenues. The Hang
Fung Group has no long term contracts with any customers. The Hang Fung Group's
top five customers have each had a business relationship with the Hang Fung
Group for over five years.
- Competition
The jewelry industry is highly fragmented, with little significant brand
name recognition or consumer loyalty. Selection is generally a function of
design appeal, perceived high value and quality in relation to price.
While many competitors in the wholesale jewelry manufacturing and
distribution business may have a wider selection of products or greater
financial resources, the Hang Fung Group believes its competitive position is
enhanced by the Hang Fung Group's broad customer base, experienced management
team, advanced technology and capital investment in continuous product
development and product design and the Hang Fung Group's close relationship with
its customers and vendors. Therefore, although the competition is intense,
management believes that the Hang Fung Group is well positioned to compete in
the jewelry industry.
Internet Operations
In August 2000, the Hang Fung Group acquired 49.9% of the stock of New
ePoch Information (BVI) Company Limited ("New Epoch"). New Epoch is engaged in
developing and facilitating e-commerce trading facilities between China and the
rest of the world using offline trading services to complement its Internet B2B
platform.
11
New Epoch is actively seeking cooperation with entities in China in various
industries to explore and pioneer opportunities in China and will be the
investment and business development arm of the Hang Fung Group in China. As a
result of the severe downturn of the Internet business, New Epoch has curtailed
its developing of e-commerce trading facilities.
In August 2000, New Epoch signed a memorandum of understanding ("MOU") with
the California Association of Hong Kong Limited ("CAHK") to foster business
between China and California. Under the MOU, New Epoch will assist CAHK members
and investors from California to develop business with China by providing
current market and investment information through New Epoch's network in China,
its Internet trading platforms and trade enabling facilities. New Epoch will
identify potential agents, distributors, importers, manufacturers or end-users
in China for products, services and technologies from California and will also
source the same in California for raw materials, goods and products from China.
In addition, New Epoch will identify prospective funding sources in China for
investment projects or joint ventures in California.
CAHK will assist New Epoch by generating and promoting awareness of New
Epoch's services to CAHK members and California businesses via a series of
promotional and marketing programs.
Staff
As of March 31, 2001, the Hang Fung Group had approximately 1,120
employees, including 12 executive officers, 25 other management personnel, 27
persons in administration, 896 persons in manufacturing and production and 160
persons in sales and marketing and New Epoch had under its direct employment
approximately 10 employees. Of the Hang Fung Group's employees, approximately
250 staff members are located in Hong Kong with the remaining employees being
located in the PRC. None of the Hang Fung Group's or New Epoch's employees is
governed by collective bargaining agreements and the Hang Fung Group and New
Epoch each consider its relations with its employees to be satisfactory.
Certain Foreign Operation Considerations
The operations of the Hang Fung Group are conducted in Hong Kong and the
PRC. As a result, the Hang Fung Group's business, financial condition and
results of operations may be influenced by the political, economic and legal
environments in Hong Kong and the PRC, and by the general state of the Hong Kong
and the PRC economies.
On July 1, 1997, sovereignty over Hong Kong transferred from the United
Kingdom to the PRC, and Hong Kong became a Special Administrative Region of the
PRC (a "SAR"). As provided in the Sino-British Joint Declaration relating to
Hong Kong and the Basic Law of the Hong Kong SAR, the Hong Kong SAR will have
full economic autonomy and its own legislative, legal and judicial systems for
fifty years. The Company's management does not believe that the transfer of
sovereignty over Hong Kong will have an adverse impact on the Hang Fung Group's
financial and operating environments. There can be no assurance, however, that
changes in political or other conditions will not result in such an adverse
impact.
The Hang Fung Group's operations in the PRC are subject to special
considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated
with, among other, the political, economic and legal environments and foreign
currency exchange. The Hang Fung Group's results may be adversely affected by
changes in the political and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulation on the import and
export of gold, inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things. Additionally, a
portion of the revenues of the Hang Fung Group is denominated in Renminbi
("Rmb") which must be converted into other currencies before remittance outside
the PRC. Both the conversion of Renminbi into foreign currencies and the
remittance of foreign currencies abroad require approvals of the PRC government.
12
ITEM 2. PROPERTIES
Both the Company's and Hang Fung Group's executive offices are located at
Unit 25-32, Second Floor, Focal Industrial Centre, 21 Man Lok Street, Hunghom,
Hong Kong. This facility consists of approximately 31,500 square feet of office
space, and is leased by the Hang Fung Group from an unaffiliated third party for
approximately HK$2,289,000 (US$293,000) per year pursuant to four leases which
range in expiration from November 1999 to March 2001. This office space also
houses certain marketing, product design and high quality gold production
operations.
The Hang Fung Group's principal production operations are conducted at
facilities located in Sha Tau Kok, the PRC. The Hang Fung Group's principal
production facilities are described in "Item 1. Business" under the heading
"Manufacturing and Assembly, Production Facilities."
The Company believes that its existing facilities will be adequate to
support the Company's operations for the foreseeable future. ITEM 3. LEGAL
PROCEEDINGS
The Company is from time to time a party to lawsuits incidental to its
business. The Company and its management are not presently aware of any pending
or threatened proceedings which, individually or in the aggregate, are believed
to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended March 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
While the Company's Common Stock is listed on the OTC Electronic Bulletin
Board under the symbol "CHRM.OB", there is no established trading market in the
Company's Common Stock and trading therein is sporadic. The last reported price
of the Company's Common Stock, as of July 15, 2001, was $0.20.
Holders
At July 15, 2001, there were approximately 110 record holders of the
Company's Common Stock.
Dividends
The Company has not paid any dividends since its inception and presently
anticipates that all earnings, if any, will be retained for development of the
Company's business and that no dividends on the shares of Common Stock will be
declared in the foreseeable future. Any future dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, the operating and financial condition of the Company,
its capital requirements, general business conditions and other pertinent facts.
Therefore, there can be no assurance that any dividends on the Common Stock will
be paid in the future.
Sales of Unregistered Securities
In January 2001, the Company issued 65,000 shares of Common Stock to a
consultant for marketing and promotion services. The shares were issued without
a public offering pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933 and the certificates evidencing the
shares bear a legend restricting transfer of the shares.
13
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected historical consolidated financial
data of the Company derived from the consolidated financial statements of the
Company which appear elsewhere herein. The following data should be read in
conjunction with the consolidated financial statements of the Company included
elsewhere herein.
Year Ended March 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- --------- --------- ---------- ---------
(amounts stated in US$,000, except per share data)
Income Statement Data (1):
Net sales.............................. $36,825 $57,994 $ 85,005 $ 123,115 $ 47,645
Subcontracting fees.................... 4,133 4,308 2,195 - -
-------- ------- --------- -------------- -------------
Total revenues....................... 40,958 62,302 87,200 123,115 47,645
Gross profit........................... 10,971 15,143 17,705 23,655 8,408
Operating income....................... 5,838 8,145 11,120 12,886 4,621
Interest expense, net.................. ( 389) (574) (1,078) (1,704) (523)
Share of losses of affiliates.......... - - - - (6,670)
Loss on dilution of equity interests in
subsidiaries.......................... - - (271) - (2,034)
Income (loss) before taxes............. 5,449 7,571 9,771 11,182 (4,606)
Minority interests..................... -- -- (2,013) (5,997) (1,805)
Net income............................. $ 4,475 $ 6,285 $ 5,856 $ 6,781 $ (6,732)
======= ======= ======= ======= =========
Net income per share (2)............... $ 0.40 $ 0.49 $ 0.46 $ 0.53 $ (0.53)
======== ======== ======== ======== ==========
Weighted average shares
outstanding (2).......................11,075,000 12,800,000 12,800,000 12,800,000 12,814,000
========== ========== ========== ========== ==========
Balance Sheet Data (1):
Working capital........................ $ 2,768 $(1,170) $ 19,555 $ 24,960 $ (303)
Total assets........................... 21,409 45,667 73,698 95,165 20,369
Long-term debt, less
current portion....................... 1,834 4,405 3,363 3,422 -
Stockholders' equity................... 8,017 14,278 20,134 26,811 20,069
(1) The Company's functional currency is Hong Kong Dollars ("HK$").
Translation of amounts from HK$ into US$ is for the convenience of
readers and has been made at the noon buying rate in New York City for
cable transfers in foreign currencies as certified for customs purposes
by the Federal Reserve Bank of New York on March 31, 2001 of US$1.00 =
HK$7.8. No representation is made that the HK$ amounts could have been,
or could be, converted into US$ at that rate or at any other rate.
(2) Net income per share is computed assuming (i) the 10,500,000 shares
issued pursuant to the Exchange were outstanding for all periods
presented, (ii) the 1,275,000 shares issued in connection with initial
formation of New Wine were issued December 31, 1996 and (iii) the
225,000 shares issued by New Wine pursuant to a Rule 504 offering were
issued December 31, 1996.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Factors that May
Affect Future Results" beginning on page 20.
General
The following discussion should be read in conjunction with the
Company's financial statements appearing elsewhere herein.
- - Corporate Structure
On December 31, 1996, the Company acquired the Hang Fung Group, and
entered into the jewelry manufacturing and distribution business. The
acquisition of the Hang Fung Group has been accounted for as a reorganization of
entities under common control, similar to a pooling of interests. The Company
does not consider the operations prior to the acquisition of the Hang Fung Group
to be material to an understanding of the Company. Accordingly, this discussion
relates to the operations of the Hang Fung Group, for all periods presented,
excluding the former operations of New Wine, Inc.
In May of 1997, Quality Prince, a wholly-owned subsidiary of the
Company, entered into an agreement with Phenomenal, an unaffiliated third party,
pursuant to which Phenomenal loaned to Quality Prince $10,000,000 and Quality
Prince issued to Phenomenal a convertible promissory note (the "Note"). The Note
bore interest at 3% per month, and was repayable in a lump sum payment on March
20, 1998. As one of the conditions for the lending, the Company issued a
non-detachable warrant (the "Warrant") to Phenomenal to subscribe for 5,263,158
shares of common stock of the Company at an exercise price of $2.19 per share.
The Note was secured by personal guarantees provided by Mr. Lam and Ms. Chan and
the 53.9% equity interest in the Company owned by Mr. Lam and Ms. Chan. In
accordance with the term of the agreement, the Warrant expired in May 1998.
On June 4, 1998, Phenomenal agreed to extend the maturity date of the
Note from March 20, 1998 to June 4, 1998, and waive its entitlement to interest
accrued under the Note during the period from May 20, 1997 (date of issue of the
Note) to June 4, 1998. Also, the Company and Phenomenal agreed to restructure
and capitalize the Note into redeemable preferred stock of Hang Fung Jewellery
Company, a wholly owned intermediate subsidiary of the Company. As a result, on
June 30, 1998, Hang Fung Jewellery issued 5,263,788 shares of redeemable
preferred stock (the "Preferred Stock") at approximately $1.90 per share to
Phenomenal in replacement of the Note. Under the revised agreement, Phenomenal
was required to redeem its interest in the Preferred Stock and to subscribe for
the common stock of Hang Fung Gold, upon satisfaction of certain conditions.
Alternatively, Phenomenal had an option to require Hang Fung Jewellery to redeem
the Preferred Stock at a redemption amount as determined in accordance with a
pre-determined formula, or require Mr. Lam and Ms. Chan to purchase the
Preferred Stock held by Phenomenal in case Hang Fung Jewellery defaulted in
redeeming the Preferred Stock.
Pursuant to the revised agreement with Phenomenal, in February 1999,
the Hang Fung Group effected a corporate reorganization (the "Group
Reorganization") with Hang Fung Gold becoming a holding company for the Hang
Fung Group, excluding Quality Prince, and Phenomenal redeemed its interest in
the Preferred Stock and subscribed for the common stock in Hang Fung Gold.
Immediately following the restructuring of the Hang Fung Group, Hang Fung Gold
completed an offering of securities in Hong Kong raising approximately
HK$59,000,000 (the "Hong Kong Offering") and the shares of Hang Fung Gold were
listed on The Stock Exchange of Hong Kong Limited (the "Hong Kong Exchange").
Trading of shares of Hang Fung Gold on the Hong Kong Exchange commenced on March
16, 1999.
Following the Group Reorganization and Hong Kong Offering, the Company
holds, through Quality Prince, 53.145% of the issued capital stock of Hang Fung
Gold, whereas Phenomenal holds 21.855% of the issued capital stock and the
investing public holds the remaining 25% of the issued capital stock of Hang
Fung Gold.
15
On August 23, 2000, the Company's principal operating subsidiary, Hang
Fung Gold Technology Limited ("HFGTL" or "Hang Fung Gold") 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 ("New Epoch")(the
"New Epoch Transaction"). On August 28, 2000, HFGTL placed 550 million shares to
individual investors for HK$62.7 million (the "HFG Placement").
As a result of the New Epoch Transaction and the HFG Placement, the
Company's indirect ownership interest in HFGTL decreased from 53.145% to 35% and
from 35% to 31.4% and the Company's interest in HFGTL and its subsidiaries
(including affiliates) are classified as affiliates. The Company's consolidated
statements of operations reflect the Company's proportionate interest in HFGTL
prior to and subsequent to the New Epoch Transaction and the HFG Placement. As
at March 31, 2001, the Company's investment in HFGTL is reported on the balance
sheet under the equity method of accounting. The Company reported a loss on
dilution of equity interests in subsidiaries relating to the decrease in the
Company's ownership percentage in HFGTL based on the difference in the Company's
interest in the net assets value of HFGTL prior to and after the New Epoch
Transaction and the HFG Placement.
- - Operations
Following the New Epoch Transaction and HFG Placement, the Company
conducts no operations which are reported on a consolidated basis. Instead, the
Company holds indirect, less than 50%, interests in the Hang Fung Group and New
Epoch.
Hang Fung Group's operations consist of designing, manufacturing and
distributing a full range of gold and silver jewelry products and other
ornamental products on a wholesale basis to customers in Hong Kong, China,
Europe, Southeast Asia, and the United States. Revenues from such operations are
generated through the manufacturing and wholesaling of jewelry products, and,
beginning from May 1999, retail sales from showrooms. Prior to fiscal 2000, Hang
Fung Group conducted subcontract jewelry manufacturing for selected customers
and received fees in connection with the subcontract manufacturing
("Subcontracting fees").
The primary cost of operating Hang Fung Group's jewelry business is the
raw material cost of gold and jewelry. Hang Fung Group assembles or manufactures
the products which it sells, other than sales made as agent for certain business
partners. Hang Fung Group constantly compares costs and quality of jewelry raw
materials to assure that it is obtaining the best purchase price and quality
available. The cost of such raw materials and products varies with currency
fluctuations and other factors beyond Hang Fung Group's control. While any
fluctuations in cost of acquiring raw materials may adversely affect Hang Fung
Group's profit margins, Hang Fung Group has historically been able to pass such
cost fluctuations on to its customers. See ITEM 1. "Business - Purchasing".
Hang Fung Group's other significant operating expenses are marketing
costs, including participation in advertising programs, customer support,
inventory and quality control, jewelry design and general corporate overhead.
New Epoch's operations consist of trading and developing and operating
e-commerce trading facilities between the PRC and the rest of the world. No
revenues of a material amount from such operations have been generated through
March 31, 2001.
The primary cost of operating New Epoch's business is salaries and
recurring database maintenance expense.
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 HFG
Placement, the Company's effective percentage of ownership in HFGTL was reduced
from 53.145% to 31.4%, the Company's interest in HFGTL and its subsidiaries
(including affiliates) changed from subsidiaries to affiliates of the Company.
As the March 31, 2001 period accounts for HFGTL and its subsidiaries
(including affiliates) from the date of the New Epoch Transaction as affiliates
of the Company, prior year comparative financial information may be of limited
value.
16
Results of Operations
Following the New Epoch Transaction and HFG Placement, the operations
of HFGTL Group are no longer consolidated but are accounted for under the equity
method of accounting. For purposes of comparability, the discussion herein
includes (1) consolidated results of operations as reported, (2) pro forma
consolidated results of operations as if the New Epoch Transaction and HFG
Placement had occurred at April 1, 1999, and (3) operating results of the
Company's affiliates, HFGTL Group and New Epoch.
Year Ended March 31, 2001 Compared to Year Ended March 31, 2000
Pro Forma
HFGTL Group New Epoch Consolidated Consolidated
--------------- ----------------- ---------------- ------------------
Year ended March 31, 2000 2001 2000 2001 2000 2001 2000 2001
------ ------ ------ ------ ------ ------ ------ ------
(in US`000s)
Revenues $123,115 $ 170,225 $ - $ 33 $ - $ - $ 123,115 $ 47,645
Cost of sales and services (99,460) (143,907) - (32) - - (99,460) (39,237)
---------- ---------- --------- -------- -------- ------- --------- -----------
Gross profit 23,655 26,318 - 1 - - 23,655 8,408
Selling, general and
administrative expenses (10,748) (13,861) (111) (1,041) (22) (56) (10,770) (3,787)
---------- ---------- --------- -------- -------- ------- --------- -----------
Operating income (loss) 12,907 12,457 (111) (1,040) (22) (56) 12,885 4,621
Interest expense, net (1,704) (2,741) - (191) - - (1,704) (523)
Share of profits (losses) of
affiliates- (791) (63) (1,231) (4,136) 2,358 - - (6,670)
Write-back of (provision for)
amount due from affiliates - (1,063) (305) 176 - - - -
Gain (loss) on dilution of
equity interests in subsidiaries - - - - 1,585 - - (2,034)
----------- ---------- ---------- -------- -------- -------- --------- -----------
(2,034)
Income (loss) before income taxes 11,203 7,862 (479) (2,286) (2,573) 2,302 11,181 (4,606)
Reversal of (provision for)
income taxes 1,596 (1,174) - - 501 (369) 1,596 (321)
Minority interests - - - - - - (5,997) (1,805)
----------- ---------- ---------- -------- -------- -------- --------- -----------
(1,805)
Net income (loss) $ 12,799 $ 6,688 $ (479) $(2,286) $(2,072) $ 1,933 $ 6,780 $ (6,732)
=========== ========== ========== ========= ======== ======== ========= ==========
Revenues and Gross Profit. Consolidated revenues for the year ended
March 31, 2001 were $47.7 million as compared to $123 million for the year ended
March 31, 2000. The decrease in consolidated revenues was attributable to the
dilution of equity interest in HFGTL from 53.145% to 31.4% following the New
Epoch Transaction and HFG Placement in August 2000. As a consequence, HFGTL was
no longer a subsidiary and has become an affiliate. Pro forma consolidated
revenues were nil for both the 2000 fiscal year and the 2001 fiscal year.
HFGTL Group. Total revenues of HFGTL Group were $170.2 million for the
year ended March 31, 2001, an increase of 38.3% from $123.1 million for the year
ended March 31, 2000. The increase in revenues of HFGTL Group for the year was
primarily attributable to expansion of production facilities to meet increasing
demand, new products design, increased marketing efforts and adoption of more
competitive pricing strategy.
Geographically, within Southeast Asia (including Hong Kong and the PRC)
sales by HFGTL Group increased 87.1% to $128.9 million during the year ended
March 31, 2001 from $68.9 million during the prior year. Sales within Southeast
Asia accounted for 75.7% of total sales during the current period as compared to
55.9% during the same period in the prior year. Sales within the region
increased due to improving economic conditions and extra marketing effort in
particular in the PRC during the year following an extended period of weakness
from late 1997 to early 1999 which was partially offset by pricing competition
and additional sales during the 1999 period relating to the Millennium. Sales in
Hong Kong and the PRC increased approximately 90.7% to $98.4 million for the
year ended March 31, 2001 from $51.6 million for the prior year. Sales in
Southeast Asia (not including Hong Kong and the PRC) during the year ended March
31, 2001 increased 76.3% to $30.5 million from $17.3 million for the same period
in the prior year.
Outside of Asia (mainly in the United States and Europe), HFGTL Group
experienced a 23.9% decrease in sales with these sales accounting for 24.3% of
total sales in the 2001 fiscal year as compared to 44.1% of total sales in the
prior year. The decrease in sales outside of Asia was attributable to increased
marketing efforts and strong product demand which accompanied improved economic
conditions in Southeast Asia regions and deteriorating macroeconomic conditions
worldwide. Sales in Europe decreased approximately 37.3% to $15.1 million for
the 2001 fiscal year from $24.1 million in the prior year. Sales in the United
States decreased approximately 5.7% to $18.1 million during the 2001 fiscal year
from $19.2 million in the prior year.
17
Gross profit of HFGTL Group increased by 11% to $26.3 million during
the current period from $23.7 million during the prior fiscal year. The increase
in gross profit was mainly attributable to the increase in net sales. Gross
margin decreased to 15.5% in the current period from 19.2% in the prior fiscal
year period. The decrease in gross profit percentage during the current period
was primarily attributable to adoption of a more competitive pricing strategy
and the increase in proportion of sales of gold products of relatively lower
profit margin.
New Epoch. Total revenues of New Epoch were $33,000 during fiscal 2001
and nil during fiscal 2000. New Epoch operations during the year 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 fiscal 2001
were $3.8 million as compared to $10.8 million for the prior fiscal year. The
decrease in consolidated operating expenses was attributable to the fact that
HFGTL has become an affiliate following the New Epoch Transaction and HFG
Placement in August 2000. Pro forma consolidated operating expenses were $56,000
for the 2001 fiscal year and $22,000 for the prior year.
HFGTL Group. Total operating expenses of HFGTL Group were $13.9 million
for fiscal 2001, an increase of 28.7% from $10.8 million for the prior year. The
increase in operating expenses of HFGTL Group for the year was primarily
attributable to increased staff salary and selling expenses to support increased
business operations.
New Epoch. Total operating expenses of New Epoch were $1,041,000 for
fiscal 2001, an increase of 837.8% from $111,000 for the prior year. The
increase in operating expenses of New Epoch for the year was primarily
attributable to the limited operations conducted by New Epoch in the prior year
following the formation of New Epoch in November 1999.
Interest Expense, Net. Consolidated interest expense, net, for fiscal
2001 was $523,000 as compared to $1.7 million for the prior year. The decrease
in consolidated net interest expense was attributable to the fact that HFGTL has
become an affiliate following the New Epoch Transaction and HFG Placement in
August 2000. Pro forma consolidated net interest expense was nil for both fiscal
2001 and fiscal 2000.
HFGTL Group. Net interest expense of HFGTL Group was $2.7 million for
fiscal 2001, an increase of 58.8% from $1.7 million for fiscal 2000. The
increase in net interest expense of HFGTL Group was primarily attributable to
increased trust receipt bank loans and long term bank loans.
Share of Profit/(Losses) of Affiliates. Consolidated share of losses of
affiliates totaled $6.7 million during fiscal 2001 as compared to nil during
fiscal 2000. Consolidated share of losses of affiliates represents the Company's
31.4% interest in HFGTL, including a 49.9% interest in New Epoch owned by HFGTL.
Pro forma consolidated share of profits of affiliates totaled $2.4 million for
fiscal 2001 and pro forma consolidated share of losses of affiliates totaled
$4.1 million for fiscal 2000.
Loss on Dilution of Equity Interest in Subsidiaries. Loss on dilution
of equity interest in subsidiaries totaled $2 million during fiscal 2001 as
compared to nil during fiscal 2000. Loss on dilution of equity interest in
subsidiaries represents the loss attributable to the reduction in the Company's
ownership interest in HFGTL from 53.145% to 31.4% as a result of the New Epoch
Transaction and HFG Placement.
Income Taxes. Consolidated income taxes, including share of affiliates'
income tax, for fiscal 2001 was $321,000 as compared to a tax benefit of $1.6
million for fiscal 2000. The change in consolidated income tax expense was
attributable to the fact that HFGTL has become an affiliate following the New
Epoch Transaction and HFG Placement in August 2000 and finalization of offshore
claims in computing Hong Kong profit tax in fiscal 2000. Pro forma consolidated
income tax expense were $369,000 for fiscal 2001 and a tax benefit of $501,000
for fiscal 2000.
HFGTL Group. Income tax expense of HFGTL Group was $1.2 million for
fiscal 2001, as compared to a tax benefit of $1.6 million for fiscal 2000.
Minority Interest. Consolidated minority interest totaled $1.8 million
during fiscal 2001 as compared to $6 million during fiscal 2000. The decrease in
minority interest was attributable to the fact that HFGTL has become an
affiliate following the New Epoch Transaction and HFG Placement. Pro forma
consolidated minority interest was nil for both fiscal 2001 and fiscal 2000.
18
Year Ended March 31, 2000 Compared to Year Ended March 31, 1999
Revenues and Gross Profit. Operating revenues increased by 41.2% to
$123.1 million for the year ended March 31, 2000 as compared to $87.2 million
for fiscal 1999. Sales of products were up 44.8% to $123.1 million during fiscal
2000 as compared to $85 million during fiscal 1999. Subcontracting fees
decreased from $2.2 million during fiscal 1999 to nil during fiscal 2000.
The increase in sales during fiscal 2000 was attributable to increased
product volumes resulting from an increase in production capacity, the
introduction of new products and investments in marketing efforts across
geographical regions. As part of our commitment to expand distribution channels,
Hang Fung Group plans to launch an Internet site in Hong Kong to support
business-to-business sales of products as well as to promote its brands and
support its overall marketing efforts.
The decrease in subcontracting fees was attributable to a determination
to concentrate on the manufacturing of products designed by the Company as
opposed to products manufactured on a subcontract basis in order to raise the
Company's brand name recognition.
Geographically, within Southeast Asia (including Hong Kong and the PRC)
the Company's sales increased 74.4% to $68.9 million in fiscal 2000 from $39.5
million in fiscal 1999. Sales within Southeast Asia accounted for 55.9% of total
sales during fiscal 2000 as compared to 46.4% in fiscal 1999. Percentage of
total sales of the region were favorably impacted by renewed economic strength
in Southeast Asia during fiscal 2000 and increased marketing efforts in the
region. Sales in Hong Kong and the PRC increased 125.3% to $51.6 million during
fiscal 2000 from $22.9 million during fiscal 1999. Sales in Southeast Asia (not
including Hong Kong and the PRC) during fiscal 2000 were up due to strong
regional demand accompanying renewed economic strength in the region, increasing
4.2% to $17.3 million from $16.6 million during fiscal 1999.
Outside of Asia (mainly in the United States and Europe), the Company
experienced a 19.1% increase in sales with these sales accounting for 44.1% of
total sales in fiscal 2000 as compared to 53.6% of total sales in fiscal 1999.
The increase in sales outside of Asia was driven by increased marketing efforts
and strong product demand which accompanied strong economic conditions in those
regions. Sales in Europe increased approximately 36.2% to $24.1 million in
fiscal 2000 from $17.7 million in fiscal 1999. Sales in the United States
increased approximately 38.1% to $19.2 million during fiscal 2000 from $13.9
million in fiscal 1999.
Gross profits increased by 33.9% to $23.7 million in fiscal 2000 from
$17.7 million during fiscal 1999. The increase in gross profits was mainly
attributable to increased sales across geographic regions which were partially
offset by a reduction in gross margins. Gross margins decreased to 19.2% in
fiscal 2000 from 20.8% in fiscal 1999. The decrease in gross profit percentage
during fiscal 2000 was primarily attributable to adoption of a more competitive
pricing strategy to enhance competitiveness and revenue.
Operating Expenses. Operating expenses totaled $10.8 million during
fiscal 2000, an increase of 63.6% from $6.6 million in fiscal 1999. The increase
in operating expenses during the period was primarily attributable to increased
marketing expenses associated with the expanded selling efforts, increased
corporate overhead to support the increase in sales volumes.
Interest Expense, Net. Net interest expense was $1.7 million for fiscal
2000, an increase of 54.5% from 1.1 million in fiscal 1999. The increase was
primarily attributable to increased bank facilities to support the business
expansion during fiscal 2000.
Loss on Dilution of Equity Interest in Subsidiaries. Loss on dilution
of equity interest in subsidiaries totaled $271,000 during fiscal 1999 as
compared to nil during fiscal 2000. Loss on dilution of equity interest in
subsidiaries during fiscal 1999 was attributable to the dilution of the
Company's ownership interest in Hang Fung Gold from 100% to 53.15% as a result
of the Group Reorganization and Hong Kong Offering.
19
Minority Interest. Minority interest of $6.0 million was reported
during fiscal 2000 and $2.0 million was reported during fiscal 1999. Minority
interest reflects the Group Reorganization, including the conversion of the Note
of Phenomenal into shares in the Company's previously wholly-owned subsidiary,
Hang Fung Gold (including a dividend of $1,849,000 paid to Phenomenal with
respect to the Preferred Stock), and the Hong Kong Offering pursuant to which
additional shares of Hang Fung Gold were sold in fiscal 1999. Minority interest
reflects the proportionate interest in the earnings of the Hang Fung Group not
owned by the Company from February 27, 1999, the date of the Group
Reorganization.
Income Taxes. The Company reported a tax benefit of $1.6 million in
fiscal 2000 compared to income tax expense of $1.9 million in fiscal 1999. The
tax benefit reported during fiscal 2000 was attributable to the favorable
settlement of a "50:50 offshore claim" in Hong Kong pursuant to which the
Company recovered a $2.7 million tax provision previously recorded for Hong Kong
profits tax after resolution of the Company's claim.
Factors that May Affect Future Results
The Company's quarterly and annual operating results have been, and
will continue to be, affected by a wide variety of factors that could have a
material adverse effect on revenues and profitability of Hang Fung Group and New
Epoch during any particular period, including the level of orders which are
received and can be shipped in a quarter, the rescheduling or cancellation of
orders by its customers, competitive pressures on selling prices, changes in
product or customer mix, availability and cost of raw materials, loss of any
strategic relationships, the ability of Hang Fung Group to introduce new
products and implement new or expanded manufacturing technologies on a timely
basis, new product introductions by competitors, the ability of New Epoch to
commence revenue producing operations and generate sufficient revenues to
operate profitably, fluctuations in exchange rates, changes in consumer tastes
and spending patterns and general economic conditions, among others.
Hang Fung Group's future operating results are particularly dependent
upon several specific factors, in addition to the general factors noted above,
including (1) substantial dependence upon manufacturing and, to a certain
extent, marketing arrangements in the PRC, (2) ability to secure adequate
financing to support planned increases in production and marketing of products,
(3) Hang Fung Group's ability to sell adequate volumes of product at sufficient
profit margins in the PRC to recoup Hang Fung Group's substantial investment
plan in expanding distribution channels in the PRC and (4) Hang Fung Group's
ability to manage projected revenue growth.
Management believes that Hang Fung Group's ability to sustain its
current margins and level of profitability is due, to a significant degree, to
its establishment of favorable manufacturing arrangements in the PRC and
marketing arrangements in the PRC with PRC government authorized entities. If,
for any reason, Hang Fung Group were to be unable to continue its existing
manufacturing activities in the PRC or contractual relationships in the PRC, or
to replace those relationships with similar arrangements, it is possible that
Hang Fung Group's operating costs could increase reducing both Hang Fung Group's
margins and profitability.
Management believes that Hang Fung Group's recent growth, and
anticipated future growth, is a result of investments, and planned investments,
in new and expanded production capacity and expanded marketing efforts. Hang
Fung Group has invested substantial amounts in new machinery and the opening of
the Sha Tau Kok Facility. Hang Fung Group has also invested substantial amounts
to expand marketing efforts in the PRC, the United States, and Europe. In order
to continue to grow revenues and profitability, Hang Fung Group plans to invest
substantial additional funds to expand production capacity further and to
support further increases in marketing efforts, particularly in the PRC. The
Company previously secured $10 million of funding through the sale of the Note
to Phenomenal and subsequent Group Reorganization and secured an additional $7.6
million of funding through the Hong Kong Offering. While funding from those
sources was adequate to support planned facility expansions and increased
marketing efforts, there can be no assurance that Hang Fung Group will not
require additional funding to support future planned expansion. See "--
Liquidity and Capital Resources."
As a result of the New Epoch Transaction and the HFG Placement, the
Company's ownership interest in the Hang Fung Group (where substantially all of
the Company's operations are conducted and revenues generated) has decreased
from 53.145% to approximately 31.4%. For periods subsequent to the New Epoch
Transaction and the HFG Placement, the Company's operating results will reflect
only the Company's percentage ownership in the operations of Hang Fung Group and
New Epoch as affiliates and the the revenues and other operating items will not
be reported on a consolidated basis.
20
Hang Fung Group has formed an alliance with The Administration of
Shatonjiao Free Trade Zone of Shenzhen pursuant to which Hang Fung Group has
committed to devote substantial resources and efforts to increasing distribution
channels in the PRC. Countries in the Asia Pacific region experienced
significant weaknesses in their currency, banking and equity markets in 1996
through 1998. A global economic slowdown during the second half of 2000 and the
first half of 2001 have again adversely affected those economies. Because those
economies are less mature than western economies, they remain subject to higher
risk than western economies and any future weakness in the region, and the PRC
in particular, could adversely affect, among other things, consumer demand for
luxury goods in the region (perhaps including Hang Fung Group's products which
may be considered luxury consumer goods), and the U.S. dollar value of Hang Fung
Group's foreign currency denominated sales. In addition, Hang Fung Group's
interest income and expense is sensitive to fluctuations in the general level of
Hong Kong interest rates. Any regional weakness, particularly in the PRC, could
adversely impact the results of Hang Fung Group's efforts to increase
distribution channels in the PRC and could lead to our inability to recoup the
investment in that regard.
Hang Fung Group's policy is to denominate all its sales and assets in
U.S. dollars or Hong Kong dollars. The Hong Kong Government has, throughout
fiscal 1998 and since the beginning of fiscal 1999, repeatedly assured the
public that the "peg" of Hong Kong dollar to the U.S. dollar will not be changed
and the Hong Kong dollar will not be devalued. Similarly, the governor of the
PRC's central bank has reassured the public that the Renminbi will not be
devalued. Therefore, based on information available to management at this time,
management does not anticipate significant fluctuations in the exchange rate
between the U.S. dollar and the Hong Kong dollar in the foreseeable future. As
Hang Fung Group makes its purchases of raw materials in local currencies, and
those currencies have generally exhibited weakness since mid-1997 when compared
to the U.S. dollar, management does not believe Hang Fung Group is exposed to
undue amount of risk arising from fluctuations of the exchange rates between
those currencies and the U.S. dollar.
Hang Fung Group does not enter into foreign exchange forward contracts
or currency options to hedge against foreign exchange fluctuations or interest
rate swaps, interest rate forward contracts and other derivatives to hedge
against interest rate exposures. Hang Fung Group monitors its exchange and
interest rate risks on a continuous basis, both on a stand-alone basis and in
conjunction with each other, from both an accounting and an economic
perspective. Given the horizons of Hang Fung Group's risk management activities,
there may be adverse financial impacts resulting from unfavorable movements in
either foreign exchange or interest rates.
Liquidity and Capital Resources
At March 31, 2001, the Company had no cash balances and a working
capital deficit of $303,000. This compares to a cash balance of $19.6 million
and a working capital balance of $24.9 million at March 31, 2000. The decrease
in cash and in working capital were attributable to the fact that Hang Fung
Group has become an affiliate during fiscal 2001. At March 31, 2001, Hang Fung
Group had cash balances of $14.2 million and working capital of $24.5 million
and New Epoch had cash balances of $3.9 million and working capital of $4
million.
For fiscal 2001, net cash used in operating activities amounted to $9.2
million as compared to net cash provided by operating activities of $5.4 million
for the prior year. This change resulted primarily from a combination of
decreased net income before minority interest attributable to the
reclassification of Hang Fung Group after the New Epoch Transaction and an
increase in inventories which was partially set off by loss on dilution of
equity interests of subsidiaries. Hang Fung Group had cash flows from operations
of $1.4 million during fiscal 2001. New Epoch used $928,000 of cash in operating
activities during fiscal 2001.
Net cash used in investing activities totaled $20 million during fiscal
year 2001 compared with $10.7 during fiscal 2000. This increase was attributable
to net cash outflow from dilution of equity interests in subsidiaries as a
result of the New Epoch Transaction. Net cash used in investing activities by
Hang Fung Group totaled $28.9 million during fiscal 2001, and were primarily
attributable to increased investment in machinery and equipment and advances to
New Epoch. Net cash used in investing activities by New Epoch totaled $1.7
million during fiscal 2001 and were primarily attributable to acquisitions of
affiliates.
Net cash provided by financing activities increased to $9.6 million
during fiscal 2001 from $8.2 million during fiscal 2000. The increase was
primarily attributable to net variance in bank borrowings and capital lease
obligations. Net cash provided by financing activities for Hang Fung Group
totaled $11.8 million during fiscal 2001 and were primarily attributable to the
HFG Placement and increased bank loans. Net cash provided by financing
activities for New Epoch totaled $6.5 million during fiscal 2001 and were
primarily attributable to loans from Hang Fung Group.
21
At March 31, 2001, the Company had no long term debt compared to long
term debt as at March 31, 2000 of $3.4 million. The decrease in long term debt
was primarily attributable to the change of Hang Fung Group from a subsidiary to
become affiliates. Hang Fung Group had long term debt of $9.4 million at March
31, 2001 and New Epoch had long term debt of $6.4 million at March 31, 2001.
The Company has limited direct liquidity requirements. The primary
liquidity needs of Hang Fung Group are to fund accounts receivable and
inventories as well as to fund periodic purchases of machinery, equipment and
expansion of production facilities. Prior to Phenomenal's investment in Hang
Fung Group and receipt of proceeds from the Hong Kong Offering, Hang Fung Group
had historically funded its operations through a combination of internally
generated cash, short-term borrowings under bank lines of credit and hire
purchase financing. New Epoch's primary liquidity needs are to fund daily
operating expenses and recurring database maintenance expenses.
At March 31, 2001, the Company had no material capital commitments.
Hang Fung Group intends to use available funds as needed to expand its wholesale
and retail business. New Epoch intends to use available funds to develop and
maintain its e-commerce trading facilities.
At March 31, 2001, the Company had no material capital resources and
Hang Fung Group's capital resources consisted of various bank credit facilities
and certain capital leases, in addition to funds on hand. Hang Fung Group's bank
credit facilities consist of a combination of term loans, lines of credit,
letters of credit, overdraft, revolving and similar credit facilities generally
utilized in the jewelry industry. Hang Fung Group's bank credit facilities are
used to fund purchases of raw materials and inventory and to finance accounts
receivable and overdrafts. Such facilities are consistent with credit facilities
generally available to operators in the jewelry industry in terms of interest
rates and fees, collateral, repayment terms, and renewal. Hang Fung Group's
total available bank credit facilities at March 31, 2001 were approximately
$55.4 million of which approximately $50.5 million had been used at such date.
At March 31, 2001, Hang Fung Group also had a number of capital leases
and operating leases pursuant to which Hang Fung Group holds various facilities
and equipment. At March 31, 2001, Hang Fung Group's capital lease obligations
totaled $4 million of which $1.7 million was attributable to current lease
obligations. Obligations under operating leases require minimum annual rental
payments by Hang Fung Group of approximately $229,000 in fiscal 2002.
The Company believes that Hang Fung Group's available trade credit,
bank credit facilities, funds on hand and funds generated from operations, will
be sufficient to satisfy Hang Fung Group's bank credit needs and anticipated
working capital requirements for at least the next 12 months, including the
needs of New Epoch.
Seasonality
The jewelry business is highly seasonal, with the third and fourth
calendar quarters (second and third fiscal quarters), which includes the
Christmas shopping season, historically contributing the highest sales.
Seasonality cannot be predicted or counted upon, and the results of any interim
period are not necessarily indicative of the results that might be expected
during a full fiscal year.
The following table sets forth Hang Fung Group's unaudited net sales
for the periods indicated:
Fiscal Year Ended March 31,
-----------------------------------------------------
1999 2000 2001
(US$,000) (US$,000) (US$,000)
--------- --------- ---------
Amount % Amount % Amount %
--------- --- --------- --- ------ ---
1st Quarter (4/1-6/30) $ 16,482 18.9 $ 24,398 19.8 $ 27,211 16.0
2nd Quarter (7/1-9/30) 16,177 18.6 28,892 23.5 28,075 16.5
3rd Quarter (10/1-12/31) 28,331 32.5 31,098 25.3 47,776 28.1
4th Quarter (1/1-3/31) 26,210 30.0 38,727 31.4 67,163 39.4
------- ----- --------- ----- -------- -----
Total $ 87,200 100.0 $123,115 100.0 $170,225 100.0
======== ===== ======== ===== ======== =====
22
Inflation
Inflation has historically not had a material effect on the Hang Fung
Group's operations. When the price of gold or other raw materials has increased,
these costs historically have been passed on to the customer. Furthermore, as
Hang Fung Group does not have either long-term supply contracts or long-term
contracts with customers, prices are quoted based on the prevailing prices for
semi-precious gemstones or metals. Accordingly, the Company believes inflation
will not have a material effect on Hang Fung Group's future operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Hang Fung Group's sales are denominated in Renminbi (the "Rmb"),
U.S. dollars or Hong Kong dollars. Any material fluctuation in the value of the
Rmb, the Hong Kong dollars relative to the U.S. dollars would have significant
impact on the Hang Fung Group's operating results.
In order to minimize the Hang Fung Group's exposure to fluctuations in
the exchange rate of Rmb, the Hang Fung 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, the Hang Fung Group's currency risk in fiscal
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.
The Hang Fung Group's interest expense is subject to the fluctuations
of Hong Kong interest rates. The interest rates on the bank installment loans of
the Hang Fung Group, in the principal amount of approximately $9.5 million,
ranged from Hong Kong prime lending rate less 1.75% to Hong Kong prime lending
rate plus 3.5% in fiscal 2001. The Hang Fung Group does not currently hedge its
interest rate exposure as the Hang Fung Group believes that there are (i) no
significant changes in Hong Kong interest rates in the foreseeable future, and
(ii) no adversely effects on its operation and cash flow even if the applicable
interest rate is increased by 1% in Hong Kong prime lending rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements respectively of the Company and
Hang Fung Gold, together with the independent auditors' report thereon of Arthur
Andersen & Co ("Arthur Andersen"), Certified Public Accountants, appears
following the Index to Financial Statements on page 30 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Identification of Directors, Executive Officers and Certain Significant
Employees
The following table sets forth certain information regarding the
directors and executive officers of the Company.
Name Age Position
- ---- ----- ---------
Lam Sai Wing........ 46 Chairman, Chief Executive Officer and President
Chan Yam Fai, Jane.. 38 Vice President, Chief Financial Officer and Director
Ng Yee Mei.......... 39 Vice President and Director
Cheng Wa On......... 38 Director
23
Terms of Office
The directors of the Company hold office until the next annual meeting of
stockholders of the Company or until their successors in office are elected and
duly qualified. All officers serve at the discretion of the Board of Directors
except as set forth in employment agreements.
Family Relationships
Lam Sai Wing and Chan Yam Fai, Jane are husband and wife.
Business Experience
Lam Sai Wing has served as Chairman of the Board, Chief Executive Officer
and President of the Company since the Exchange in December of 1996 and of the
Company's predecessor and operating subsidiaries, the Hang Fung Group, since
founding the Hang Fung Group in 1986.
Chan Yam Fai, Jane has served as Vice President, Chief Financial Officer
and a Director of the Company since the Exchange in December of 1996 and of the
Hang Fung Group since 1990.
Ng Yee Mei has served as Vice President and a Director of the Company since
the Exchange in December of 1996 and of the Hang Fung Group since 1991.
Cheng Wa On has served as a Director of the Company since the Exchange in
December of 1996. Mr. Cheng has been employed by the Hang Fung Group as Export
Manager since 1986.
Compliance With Section 16(a) of the Exchange Act
Under the securities laws of the United States, the Company's directors,
its executive officers and any persons holding more than ten percent of the
Company's Common Stock are required to report their initial ownership of the
Company's Common Stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established and the Company is required to disclose any failure to file by
these dates during fiscal 2001.
All of the filing requirements were satisfied on a timely basis in fiscal
2001. In making these disclosures, the Company has relied solely on written
statements of its directors, executive officers and shareholders and copies of
the reports that they filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Table
The following table sets forth information as to the compensation paid or
accrued by the Company or Hang Fung Group to each officer and director receiving
compensation of at least $100,000 per year and the Chief Executive Officer for
the three years ended March 31, 2001:
Annual Compensation
--------------------------------------------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation (1) Compensation
- --------------------------- ----- ------ ----- ---------------- ------------
Lam Sai Wing.................. 2001 $191,666 $320,512 $66,178 $0
Chief Executive Officer,.... 2000 166,880 507,060 56,222 0
Chairman and President...... 1999 202,694 400,000 39,237 0
- ---------------
(1) Mr. Lam's other annual compensation consists of a housing allowance and
education allowance.
24
Director's Compensation
No compensation has been paid to any directors for service in such capacity
in the past and no such compensation is presently payable to directors. At such
time as the Board of Directors deems appropriate, the Company intends to adopt
an appropriate policy to compensate non-employee directors in order to attract
and retain the services of qualified non-employee directors.
Employment Agreements
The Company previously maintained employment agreements with Mr. Lam and
Ms. Chan. In connection with the Group Reorganization and Hong Kong Offering,
both of those employment agreements were terminated on February 27, 1999 and the
Company's affiliate, Hang Fung Gold, entered into employment agreements with Mr.
Lam, Ms. Chan and Ms. Ng Yee Mei.
The Employment Agreement with Mr. Lam commenced October 1, 1998 and runs
for a term of three years. The agreement provides for a monthly salary of
HK$100,000 with annual adjustments based on review by the board of directors,
not to exceed 15%. The agreement also provides for a guaranteed annual bonus
equal to one month's salary and discretionary bonuses to be fixed by the board,
with the aggregate bonuses payable to executive directors not to exceed 5% of
consolidated profits of Hang Fung Gold. In addition to the salary and bonus
provisions, Mr. Lam is entitled to (i) participation in insurance schemes
adopted by Hang Fung Gold, (ii) participation in provident funds maintained by
Hang Fung Gold, (iii) use of a company automobile, including maintenance, gas
and parking, (iv) payment of maintenance, gas and parking costs for one
automobile owned by Mr. Lam, (v) use of a company provided residence, including
payment by Hang Fung Gold of all management and utility costs associated with
such residence, with the monthly rental payable by Hang Fung Gold not to exceed
HK$30,000, and (vi) an education allowance of up to HK$300,000 annually to pay
for tuition of dependent children under the age of 18.
The Employment Agreement with Ms. Chan commenced October 1, 1998 and runs
for a term of three years. The agreement provides for a monthly salary of
HK$30,000 with annual adjustments based on review by the board of directors, not
to exceed 15%. The agreement also provides for a guaranteed annual bonus equal
to one month's salary and discretionary bonuses to be fixed by the board, with
the aggregate bonuses payable to executive directors not to exceed 5% of
consolidated profits of Hang Fung Gold. In addition to the salary and bonus
provisions, Ms. Chan is entitled to (i) participation in insurance schemes
adopted by Hang Fung Gold, (ii) participation in provident funds maintained by
Hang Fung Gold, (iii) use of a company automobile, including maintenance, gas
and parking, and (iv) payment of maintenance, gas and parking costs for one
automobile owned by Ms. Chan.
The Employment Agreement with Ms. Ng Yee Mei commenced October 1, 1998 and
runs for a term of three years. The agreement provides for a monthly salary of
HK$50,000 with annual adjustments based on review by the board of directors, not
to exceed 15%. The agreement also provides for a guaranteed annual bonus equal
to one month's salary and discretionary bonuses to be fixed by the board, with
the aggregate bonuses payable to executive directors not to exceed 5% of
consolidated profits of Hang Fung Gold. In addition to the salary and bonus
provisions, Ms. Ng Yee Mei is entitled to (i) participation in insurance schemes
adopted by Hang Fung Gold, (ii) participation in provident funds maintained by
Hang Fung Gold, (iii) use of a company automobile, including maintenance, gas
and parking, and (iv) payment of maintenance, gas and parking costs for one
automobile owned by Ms. Ng Yee Mei. The Employment Agreement with Ms. Ng
terminated effective November 1, 1999 by delivery of notice of termination from
Ms. Ng.
Provident Plan
The Company's affiliates in Hong Kong have adopted a voluntary defined
contribution provident plan (the "Plan") for its employees in Hong Kong. The
Plan generally covers all employees of the Company's operating affiliates
(excluding contract workers in the PRC) who have completed twelve months of
service with the company. Employees electing to participate in the Plan defer,
in the form of a contribution to the Plan, an amount equal to five percent (5%)
of their monthly salary and the company makes a matching contribution on behalf
of each participating employee. Participating employees are always fully vested
with respect to contributions made by them to the Plan and earnings or increases
thereon. Employees become vested in contributions made by the company ratably
over ten years. The Plan was terminated in December 2000.
25
From December 2000, the Company's affiliates have arranged for its Hong
Kong employees to join the Mandatory Provident Fund Scheme (the "MPF Scheme").
The MPF Scheme is a defined contribution scheme managed by an independent
trustee. Under the MPF Scheme, each of the company and its employees make
monthly contributions to the scheme at 5% of the employees' earnings as defined
under the Mandatory Provident Fund legislation. Both the employer's and the
employees' contributions are subject to a cap of HK$1,000 per month and
thereafter contributions are voluntary.
Share Option Scheme
The Company's affiliate, Hang Fung Gold, adopted a Share Option Scheme
pursuant to which the directors of Hang Fung Gold may grant options to Hang Fung
Gold employees to purchase shares of common stock of Hang Fung Gold. Pursuant to
the Share Option Scheme, options may be granted to purchase shares of Hang Fung
Gold at a price determined by the directors, not less than 80% of the average
closing price of the share quoted on the Stock Exchange for the five trading
days immediately preceding the date of the option or the nominal value of the
share of Hang Fung Gold whichever is higher, for a period of not more than 10
years. The total number of shares issuable pursuant to the Share Option Scheme
may not exceed ten percent of the shares of Hang Fung Gold outstanding from time
to time.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock
The following table is furnished as of June 15, 2001 to indicate beneficial
ownership of shares of the Company's Common Stock by (1) each shareholder of the
Company who is known by the Company to be a beneficial owner of more than 5% of
the Company's Common Stock, (2) each director and named officer of the Company,
individually, and (3) all officers and directors of the Company as a group. The
information set out in the following table was supplied by such persons.
Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned Percent
- -------------------- ------------------ -------
Good Day Holdings Ltd. (2)(3).................... 6,600,000 (2) 51.6%
Lam Mo Wan (3)................................... 2,930,000 22.9%
Chan Wai Sum (3)................................. 670,000 5.2%
Lam Sai Wing (2)................................. 6,600,000 (2) 51.6%
Carhill Limited (4).............................. 800,000 6.3%
Chan Yam Fai, Jane............................... 300,000 2.3%
Ng Yee Mei....................................... 0 -
Cheng Wa On...................................... 0 -
All officers and directors as a group (2 persons) 6,900,000 (2) 53.9%
- -----------------
(1) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to the shares shown opposite the
name of such person or group.
(2) Good Day Holdings Ltd. is controlled 100% by Lam Sai Wing, an officer and
director of the Company. Accordingly, Mr. Lam may be deemed to be the
beneficial owner of the shares held by Good Day Holdings Ltd.
(3) Address is Unit 25-32, Second Floor, Block B, Focal Industrial Centre, 21
Man Lok Street, Hunghom, Hong Kong.
(4) Address is c/o Suite 4703, Central Plaza, 18 Harbour Road, Wanchai, Hong
Kong.
26
Preferred Stock
Series A Preferred Stock. The following table is furnished as of June
15, 2001 to indicate beneficial ownership of the Company's Series A Preferred
Stock by each shareholder of the Company who is known by the Company to be a
beneficial owner of more than 5% of the Company's Series A Preferred Stock.
Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned Percent
- -------------------- ------------------ -------
Good Day Holdings Ltd. (3)............ 100,000 (2) 100.0%
Lam Sai Wing.......................... 100,000 (2) 100.0%
(1) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to the shares shown opposite the
name of such person or group.
(2) Good Day Holdings Ltd. is controlled 100% by Lam Sai Wing, an officer and
director of the Company. Accordingly, Mr. Lam may be deemed to be the
beneficial owner of the shares held by Good Day Holdings Ltd.
(3) Address is Unit 25-32, Second Floor, Block B, Focal Industrial Centre, 21
Man Lok Street, Hunghom, Hong Kong.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's predecessor and affiliate, Hang Fung Group, has, from time to
time entered into transactions with officers and directors of the Company and
companies controlled by officers and directors of the Company.
During the fiscal year ended March 31, 2000 and March 31, 2001, the Hang
Fung Group paid rental payments of $41,592 and $41,538, respectively, to Mr. Lam
in connection with the lease of a residential premises for Mr. Lam's residence.
The Company has from time to time both advanced to and borrowed funds from
Mr. Lam. At March 31, 2000, the Company owed Mr. Lam $568,000. At March 31,
2001, the Company owed Mr. Lam $303,000. All of such loans are unsecured,
non-interest bearing and without pre-determined repayment terms.
Mr. Lam and Ms. Chan personally guaranteed the existing banking facilities
of the Hang Fung Group, pledged certain real estate as collateral to secure such
banking facilities.
All of the above transactions are believed by management to be on terms at
least as favorable to the Company as may have been obtained from unaffiliated
third parties. The Company has no present policy governing related party
transactions but intends to implement a policy such that all future and ongoing
transactions between the Company and its directors, officers, principal
stockholders or affiliates will be on terms no less favorable to the Company
than may be obtained from unaffiliated third parties, and any such transactions
will be approved by a majority of disinterested directors of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Consolidated Financial Statements: See Index to Financial Statements
on page 30 of this report for financial statements and supplementary
data filed as part of this report.
(2) Financial Statement Schedules
None
27
(3) Exhibits
Exhibit
Number Description of Exhibit
--------- ------------------------
2.1 Acquisition Agreement between S.W. Lam, Inc. and the shareholders
of Hang Fung Jewellery Company Limited and Kai Hang Jewellery
Company Limited (1)
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
4.1 Certificate of Designation for Series A Preferred Stock (1)
10.1++ Employment Agreement with Lam Sai Wing dated January 1, 1994 (1)
10.2++ Employment Agreement with Chan Yam Fai, Jane dated January 1,1994 (1)
10.3 Sales Agency Agreement between Hang Fung Jewellery Co., Ltd. and China
Jewellery Import & Export Co. (1)
10.4 Agreement for Jewellery Assembling between Hang Fung Jewellery Co., Ltd.
and China Jewellery Import & Export Co. (1)
10.5 Sales Cooperation Agreement between Hang Fung Jewellery Co., Ltd. and
China Jewellery Import & Export Co. (1)
10.6 Confirmation Agreement between Hang Fung Jewellery Co., Ltd. and
China Jewellery Import & Export Co. (1)
10.7 Lease Agreement between Chan Yam Fai, Jane and Hang Fung Jewellery Co., Ltd.
re: executive offices (1)
10.8++ Supplementary Employment Contract with Lam Sai Wing and Lam Chan Yam Fai (2)
10.9 Warrant Agreement with Phenomenal Limited (3)
10.10 Convertible Note with Phenomenal Limited (3)
10.11 Deed Amendment (3)
10.12++ Employment Agreement between Hang Fung Gold and Lam Sai Wing dated
February 27, 1999 (4) 10.13++ Employment Agreement between Hang Fung Gold
and Chan Yam Fai, Jane dated February 27, 1999 (4) 10.14++ Employment
Agreement between Hang Fung Gold and Ng Yee Mei dated February 27, 1999 (4)
10.15 Agreement between Hang Fung Gold Technology Limited, New Epoch
Holdings International Limited,
and Quality Prince Limited dated June 24, 2000 (5)
10.16 Facility Agreement between Hang Fung Gold Technology Limited and New
Epoch Information (BVI) Limited dated June 24, 2000 (5)
- -------------
++ Compensatory plan or management agreement.
* Filed herewith
(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form 10 (Commission File No.
0-22049)
(2) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended March 31,
1997
(3) Incorporated by reference to the respective exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the period ended June
30, 1997
(4) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended March 31,
1999
(5) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-K for the year ended March 31,
2000
(b) Reports on Form 8-K
None
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
S.W. LAM, INC.
By: /s/ Lam Sai Wing
--------------------------------
Lam Sai Wing
President and Chief Executive Officer
Dated: August 13 , 2001
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
- --------------- --------- --------
/s/ Lam Sai Wing
- ----------------------- President, Chief Executive Officer
Lam Sai Wing (Principal Executive Officer) and August 13, 2001
Chairman of the Board
/s/ Chan Yam Fai
- ----------------------- Vice President, Chief Financial
Chan Yam Fai, Jane Officer (Principal Accounting August 13, 2001
and Financial Officer) and Director
/s/ Ng Yee Mei
- ----------------------- Vice President and Director August 13, 2001
Ng Yee Mei
/s/ Cheng Wa On
- ----------------------- Director August 13, 2001
Cheng Wa On
29
S.W. LAM, INC.
Index to Consolidated Financial Statements
Page
------
S.W. Lam, Inc.
Report of Independent Public Accountants............................... F-1
Consolidated Balance Sheets as of March 31, 2000 and 2001.............. F-2
Consolidated Statements of Operations and Comprehensive
Income for the Years ended March 31, 1999, 2000 and 2001............... F-3
Consolidated Statements of Cash Flows for the Years ended March 31, 1999,
2000 and 2001 .......................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for
the Years ended March 31, 1999, 2000 and 2001........................... F-5
Notes to Consolidated Financial Statements.............................. F-6
Hang Fung Gold Technology Limited
Report of Independent Public Accountants................................ F-26
Consolidated Income Statement for the Year ended March 31, 2001......... F-27
Consolidated Statement of Recognised Gains and Losses for the Year
ended March 31, 2001.................................................... F-28
Consolidated Balance Sheet as at March 31, 2001......................... F-29
Consolidated Cash Flow Statement for the Year ended March 31, 2001...... F-30
Notes to Consolidated Financial Statements.............................. F-31
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of S. W. Lam, Inc.:
We have audited the accompanying consolidated balance sheets of S. W. Lam, Inc.
(incorporated in the State of Nevada, the United States of America; "the
Company") and Subsidiaries ("the Group") as of March 31, 2000 and 2001, and the
related consolidated statements of operations and comprehensive income, cash
flows and changes in shareholders' equity for the years ended March 31, 1999,
2000 and 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of S. W. Lam, Inc. and
Subsidiaries as of March 31, 2000 and 2001, and the results of their operations
and comprehensive income and their cash flows for the years ended March 31,
1999, 2000 and 2001, in conformity with generally accepted accounting principles
in the United States of America.
ARTHUR ANDERSEN & CO
Certified Public Accountants
Hong Kong
Hong Kong,
July 14, 2001.
F-1
S. W. LAM, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 2001
Note 2 0 0 0 20 0 1
------- ------------ ----------------------
HK$'000 HK$'000 US$'000
ASSETS
Current Assets:
Cash and bank deposits 18 152,385 - -
Accounts receivable, net 5 151,517 - -
Prepayments and deposits 6 3,048 - -
Inventories 7 207,249 - -
---------- ---------- ----------
Total current assets 514,199 - -
Investment in affiliates 3 - 158,882 20,369
Property, machinery and equipment and
capital leases, net 8 227,137 - -
---------- --------- ----------
Total assets 741,336 158,882 20,369
========== ========= ==========
LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings 9 221,898 - -
Long-term bank loans, current portion 10 2,123 - -
Capital lease obligations, current portion 11 12,747 - -
Accounts payable 28,579 - -
Accrued liabilities 12 9,657 - -
Due to a director 19 4,426 2,368 303
Taxation payable 13 40,326 - -
---------- --------- ----------
Total current liabilities 319,756 2,368 303
Long-term bank loans, non-current portion 10 6,272 - -
Capital lease obligations, non-current portion 11 6,993 - -
Deferred taxation 13 13,394 - -
---------- --------- ----------
Total liabilities 346,415 2,368 303
---------- --------- ----------
Minority interests 186,060 - -
---------- --------- ----------
Shareholders' equity:
Common stock, par value US$0.001 each:
- authorized - 25,000,000 shares
- outstanding and fully paid - 12,865,000
shares (2000 - 12,800,000 shares) 15 101 101 13
Preferred stock, par value US$0.001 each:
- authorized - 25,000,000 shares
- outstanding and fully paid - Series A
preferred stock - 100,000 shares - - -
Additional paid-in capital 3,960 4,118 528
Retained earnings 204,800 152,295 19,525
---------- --------- ----------
Total shareholders' equity 208,861 156,514 20,066
---------- --------- ----------
Total liabilities and shareholders' equity 741,336 158,882 20,369
========== ========= ==========
The accompanying notes are an integral part of these financial statements.
F-2
S. W. LAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001
Note 1 9 9 9 2 0 0 0 2 0 0 1
--------- ---------- ----------- -------------------------
HK$'000 HK$'000 HK$'000 US$'000
Revenues
Net sales 20.a 658,790 959,070 371,630 47,645
Contract processing fees 20.a 17,012 - - -
----------- ---------- ---------- ----------
Total revenues 675,802 959,070 371,630 47,645
Cost of sales and services (538,586) (774,794) (306,048) (39,237)
----------- ---------- ---------- ----------
Gross profit 137,216 184,276 65,582 8,408
Selling, general and
administrative expenses (51,029) (83,896) (29,541) (3,787)
Interest expense (11,588) (19,492) (7,244) (929)
Interest income 3,234 6,216 3,166 406
Share of losses of affiliates - - (52,025) (6,670)
Loss on dilution of equity
interests in subsidiaries 14 (2,100) - (15,864) (2,034)
----------- ---------- ---------- ----------
Income (Loss) before
income taxes 75,733 87,104 (35,926) (4,606)
(Provision for) Reversal of
income taxes 13 (14,747) 12,432 (2,500) (321)
----------- ---------- --------- ----------
Income (Loss) before
minority interests 60,986 99,536 (38,426) (4,927)
Minority interests (15,601) (46,716) (14,079) (1,805)
----------- ---------- --------- ----------
Net income (loss) and
comprehensive
income (loss) 45,385 52,820 (52,505) (6,732)
=========== ========== ========= ==========
Earnings (Loss) per common
share HK$3.55 HK$4.13 HK$(4.10) US$(0.53)
=========== ========== ========= ==========
Weighted average number of 12,800,000 12,800,000 12,814,000 12,814,000
common shares
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
S. W. LAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001
1 9 9 9 2 0 0 0 2 0 0 1
--------- --------- -----------------------
HK$'000 HK$'000 HK$'000 US$'000
Cash flows from operating activities:
Net income (loss) 45,385 52,820 (52,505) (6,732)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities -
Depreciation of property, machinery and
equipment 39,605 55,580 26,954 3,456
Loss on disposal of property, machinery and
equipment 49 - - -
Share of losses of affiliates - - 52,025 6,670
Loss on dilution of equity interests in
subsidiaries 2,100 - 15,864 2,034
Minority interests 15,601 46,716 14,079 1,805
(Increase) Decrease in operating assets -
Accounts receivable, net (41,907) (30,189) 15,113 1,938
Prepayments and deposits (1,580) 1,596 (9,691) (1,242)
Inventories, net (30,368) (75,736) (144,913) (18,579)
Increase (Decrease) in operating liabilities -
Accounts payable 4,318 1,940 9,462 1,213
Accrued liabilities 3,764 2,985 (3,654) (468)
Due to a director (4,909) 1,325 2,766 355
Taxation payable 14,600 (18,278) 2,500 321
Deferred taxation - 3,449 - -
---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities 46,658 42,208 (72,000) (9,229)
---------- ----------- ---------- ----------
Cash flows from investing activities:
Increase in amount due to an affiliate - - 281 36
Additions to property, machinery and equipment (67,781) (83,420) (32,919) (4,220)
Net cash outflow from dilution of equity interest
in subsidiaries (Note 21) - - (122,486) (15,704)
--------- ----------- ---------- ----------
Net cash used in investing activities (67,781) (83,420) (155,124) (19,888)
Cash flows from financing activities:
Net proceeds from issuance of new ordinary shares - - 158 20
Dividend paid to a minority shareholder of a
aubsidiary - (14,328) - -
Cash proceeds received from minority interests 58,671 - - -
Increase (Decrease) in bank overdrafts 1,538 (1,953) 5,942 762
Increase in trust receipts bank loans 80,988 85,785 58,683 7,523
New short-term bank loans 2,000 12,000 18,547 2,378
Repayment of short-term bank loans - (2,000) (2,000) (256)
New long-term bank loans 2,000 - - -
Repayment of long-term bank loans (2,288) (2,807) (854) (109)
Repayment of capital element of capital lease
obligations (8,559) (12,544) (5,737) (736)
---------- ---------- ---------- -----------
Net cash provided by financing activities 134,350 64,153 74,739 9,582
Net increase (decrease) in cash and bank
deposits 113,227 22,941 (152,385) (19,535)
Cash and bank deposits, as of beginning of year 16,217 129,444 152,385 19,535
---------- ---------- ----------- -----------
Cash and bank deposits, as of end of year 129,444 152,385 - -
========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
S. W. LAM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 2000 AND 2001
Common stock Series A preferred stock
------------------------ ------------------------
Number of Number of Additional Retained
shares Amount shares Amount paid-in capital earnings
------------ ----------- --------- ---------- --------------- -----------
'000 HK$'000 '000 HK$'000 HK$'000 HK$'000
Balance as of March 31, 1998 12,800 101 100 - 3,960 106,595
Net income - - - - - 45,385
------- --------- --------- ---------- ----------- -----------
Balance as of March 31, 1999 12,800 101 100 - 3,960 151,980
Net income - - - - - 52,820
------- --------- --------- ---------- ----------- -----------
Balance as of March 31, 2000 12,800 101 100 - 3,960 204,800
Net loss - - - - - (52,505)
Issuance of new common
shares (Note 15) 65 - - - 158 -
--------- --------- --------- ---------- ----------- -----------
Balance as of March 31, 2001 12,865 101 100 - 4,118 152,295
========= ========= ========= ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
S. W. LAM, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
------------
S. W. Lam, Inc. ("the Company"), formerly known as New Wine Inc., was
incorporated on April 12, 1994 in the State of Tennessee, the United States
of America. On October 10, 1996, the Company effected a change of domicile
by reincorporating in the State of Nevada, the United States of America,
and changed its name from New Wine Inc. to S.W. Lam, Inc. The Directors
consider Good Day Holdings Limited, a company incorporated in the British
Virgin Islands, to be the ultimate holding company.
On December 31, 1996, the Company acquired 100% interest in Quality Prince
Limited ("QPL"; a company incorporated in the British Virgins Islands) by
issuing 10,500,000 shares of its common stock of par value US$0.001 each,
and 100,000 shares of its Series A preferred stock of par value US$0.001
each, to the previous shareholders of QPL. QPL is an investment holding
company which had acquired on December 19, 1996, 100% interest in Hang Fung
Jewellery Company Limited ("HFJCL"), Kai Hang Jewellery Company Limited,
Macadam Profits Limited, and Soycue Limited (collectively known as the
"Hang Fung Entities"). The acquisition of the Hang Fung Entities by QPL has
been accounted for as a reorganization of entities under common control,
similar to a pooling of interests, as the shareholders and management
control of the Hang Fung Entities and QPL are the same before and after the
acquisition.
On December 4, 1997, Hang Fung Gold Technology Limited ("HFGTL") was
incorporated and became a wholly owned subsidiary of the Company. On
February 27, 1999, HFGTL became the holding company of the Hang Fung
Entities pursuant to a group reorganization which included exchanges of
shares. On the same date, HFJCL redeemed its preferred stock and Phenomenal
Limited, the redeemable preferred stock holder, applied the redemption
proceeds of US$10,000,000 to subscribe for 582,800 shares of HFGTL at
US$17.16 each ("Share Subscription"). On March 9, 1999, HFGTL sold
78,750,000 shares at HK$0.9 each in a public offering and received net cash
proceeds of HK$58,671,000, after deducting the common stock issuance
expenditures. Immediately after the public offering, HFGTL capitalized
share premium of approximately HK$23,425,000 for the issuance of
234,250,000 shares on a pro rata basis to the shareholders of HFGTL before
the public offering ("Capitalization"). Thus, after the Share Subscription
and the Capitalization, Phenomenal Limited holds 68,843,250 shares of HFGTL
and the Company holds 167,406,750 shares of HFGTL. These equity
transactions resulted in a dilution of the Company's effective shareholding
in HFGTL from 100% to 53.15%.
On August 23, 2000, HFGTL issued 1,632,000,000 shares at HK$0.114 each to
New Epoch Holdings International Limited, an independent third party, as
consideration for a 49.9% equity interest in New Epoch Information (BVI)
Company Limited. On August 28, 2000, HFGTL sold 550,000,000 shares at
HK$0.114 each. These equity transactions resulted in a dilution of the
Company's effective shareholding in HFGTL from 53.15% to 31.40%. As a
consequence, HFGTL was no longer a subsidiary and has become an affiliate.
The Group is subject to, among others, the following operating risks:
a. Country risk
------------
As most of the Group's operations are conducted in the People's Republic of
China (including Hong Kong and Mainland China), the Group is subject to
special considerations and significant risks not typically associated with
companies in North America and Western Europe. The include risks
associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Group's results may be
adversely affected by changes in the political and social conditions in the
People's Republic of China, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other things.
F-6
1. ORGANIZATION (Cont'd)
------------
b. Concentration of credit risk
Concentration of accounts receivable as of March 31, 2000 and 2001 is as
follows:
2 0 0 0 2 0 0 1
-------------- --------------
Five largest accounts receivable 21.6% -
============== ==============
The Group performs ongoing credit evaluation of each customer's financial
condition. It maintains reserves for potential credit losses and such
losses in aggregate have not exceeded management's projections.
c. Dependence on a limited number of suppliers
The Group purchases raw materials from a limited number of suppliers.
Concentration on the Group's suppliers for the years ended March 31, 1999,
2000 and 2001 is as follows:
1 9 9 9 2 0 0 0 2 0 0 1
---------- --------- ------------
Purchases from five largest suppliers 77.0% 89.0% 93.1%
========== ========= ============
2. SUBSIDIARY
----------
Details of the Company's subsidiary as of March 31, 2001 are as follows:
Percentage of equity
Name Place of incorporation interest held Principal activity
- --------------------- ------------------------ --------------------- -------------------
Quality Prince Limited British Virgin Islands 100% Investment holding
There is no restriction on the distribution of the subsidiary's retained
earnings.
3. AFFILIATES
----------
Investment in affiliates consisted of:
2 0 0 0 2 0 0 1
---------- --------------------
HK$'000 HK$'000 US$'000
Investment in Hang Fung Gold Technology Limited
and its subsidiaries ("HFGTL") - 159,163 20,405
Due to an affiliate - (281) (36)
---------- --------- ----------
- 158,882 20,369
========== ========= ==========
Quoted market value of investment in HFGTL - 167,407 21,462
========== ========= ==========
As of March 31, 2001, the Company had a 31.40% interest in HFGTL, a company
incorporated in Bermuda and whose shares are listed on The Stock Exchange of
Hong Kong Limited (see Note 1). HFGTL is an investment holding company and its
subsidiaries are principally engaged in the manufacturing and sales of gold and
jewellery products.
The underlying value of the investment in affiliates is in the opinion of the
Company's directors, not less than the Company's carrying value as of March 31,
2001.
F-7
3. AFFILIATES (Cont'd)
----------
The amount due to an affiliate is unsecured, non-interest bearing and not
repayable before April 1, 2002.
Summarized financial information of HFGTL are as follows:
Balance sheet
As of March 31, 2001
----------------------------
HK$'000 US$'000
Current assets 647,719 83,041
Non-current assets 389,199 49,897
----------- -------------
Total assets 1,036,918 132,938
=========== =============
Current liabilities 456,333 58,504
Non-current liabilities 73,697 9,448
----------- -------------
Total liabilities 530,030 67,952
----------- -------------
Shareholders' equity 506,888 64,986
----------- -------------
Total liabilities and shareholders' equity 1,036,918 132,938
=========== =============
Statement of operations
For the year ended March 31, 2001
---------------------------------
HK$'000 US$'000
Net sales 1,327,656 170,212
Gross profit 205,181 26,305
Loss before income taxes (146,978) (18,843)
Net loss (156,134) (20,017)
========= ============
Separate audited consolidated financial statements of HFGTL as of and for the
year ended March 31, 2001 are included in this Form 10-K.
F-8
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Basis of presentation
---------------------
The Company maintains its accounting books and records based on accounting
principles generally accepted in the United States of America ("US GAAP").
Its subsidiaries and affiliates maintain their accounting books and records
based on accounting principles generally accepted in Hong Kong ("HK GAAP").
The accompanying financial statements have been prepared to present its
financial position, results of operations and cash flows in US GAAP, which
require management to make certain estimates, assumptions and adjustments
that affect reported amounts or certain disclosures.
b. Basis of consolidation
----------------------
The consolidated financial statements include the accounts of the Company
and its subsidiaries, together with the Group's share of post acquisition
results and reserves of its affiliates under the equity method of
accounting. The results of subsidiaries and affiliates acquired or disposed
of during the year are recorded from or to their effective dates of
acquisition or disposal. Gains and losses arising from deemed acquisition
or disposal of interest in subsidiaries and affiliates as a result of
issuance shares of the subsidiaries and affiliates are included in the
consolidated statement of operations in the period in which it occurs. All
material intra-group transactions and balances have been eliminated on
consolidation.
c. Subsidiaries
------------
A subsidiary is a company in which the Company holds, directly or
indirectly, more than 50% of its issued voting share capital as long-term
investment and over which it can exercise control, as defined under
generally accepting accounting principles.
d. Affiliates
----------
The Group's investment in affiliates for which its ownership exceeds 20%,
but which are not majority-owned or controlled by the Group, is accounted
for using the equity method of accounting. Under the equity method, the
Group's proportionate share of the affiliates' net income or loss is
included in the consolidated statement of operations.
e. Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash on hand, deposit with banks and
highly liquid investments with maturities of three months or less at the
time of acquisition.
f. Inventories
-----------
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market. Costs of finished goods include direct materials, direct
labour and an attributable portion of production overheads. Net realizable
value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to
make the sale.
When inventories are sold, the carrying amount is charged to expense in the
period in which the revenue is recognized. Writedowns for declines in net
realizable value or for losses of inventories are recognized as an expense
in the period the impairment or loss occurs.
F-9
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------
g. Property, machinery and equipment and capital leases
----------------------------------------------------
Property, machinery and equipment and capital leases are recorded at cost.
Gains or losses on disposal are reflected in current operations. Major
expenditures for betterments and renewals are capitalized. All ordinary
repair and maintenance costs are expensed as incurred. Depreciation for
financial reporting purposes is provided using the straight-line method
over the estimated useful lives of the assets as follows:
Leasehold land and buildings 20 years
Machinery and equipment 5 to 7 years
Motor vehicles 5 years
Furniture and office equipment 5 years
The Group accounts for property, machinery and equipment in accordance with
Statement of Financial Accounting Standards No. 121: "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of" which requires impairment losses to be recognized on long-lived assets
when the sum of expecting future cash flows (undiscounted and without
interest charges) resulting from the use of the asset and its eventual
disposition is less then the carrying amount of the assets. Measurement of
the impairment loss is based on the fair value of the assets. If an
impairment is present, the asset is reported at the lower of carrying value
or fair value.
h. Sales recognition
-----------------
Sales comprise (i) the invoiced value of merchandise supplied to customers,
net of sales returns and allowances, which are recognized when merchandise
is delivered and title is passed to customers, (ii) contract processing
fees, which are recognized when the contract processing service is
rendered, and (iii) rental income, which is recognized on a straight-line
basis over the period of the relevant lease.
Deposits or advanced payments from customers prior to delivery and passage
of title of goods and the expiration of rights of return are recorded as
deposits from customers.
i. Advertising and promotion costs
-------------------------------
The costs of advertising and promotion are expensed in the period in which
they are incurred.
j. Employee retirement benefits
----------------------------
The costs of staff retirement benefits are recognized as an expense in the
period in which they are incurred.
k. Borrowing costs
---------------
Borrowing costs are recognized as an expense in the period in which they
are incurred.
l. Income taxes
------------
The Group accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109: "Accounting for Income Taxes",
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred income taxes are provided
using the liability method. Under the liability method, deferred income
taxes are recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities.
F-10
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
m. Leases
------
Capital leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets are transferred to the
Group. Fixed assets held under capital leases are initially recorded at the
present value of the minimum payments at the inception of the leases, with
equivalent liabilities categorized as appropriate under current or
non-current liabilities. Interest, which represents the difference between
the minimum payments at the inception of the finance leases and the
corresponding fair value of the assets acquired, is allocated to accounting
periods over the period of the leases to produce a constant rate of charge
on the outstanding balance.
Operating leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets remain with the
lessors. Rental payments under operating leases are charged to expense on a
straight-line basis over the period of the relevant leases.
n. Comprehensive income
--------------------
The Group has adopted Statement of Financial Accounting Standard s No. 130:
"Reporting Comprehensive Income" which requires the Group to report all
changes in equity during a period, except for those resulting from
investments by owners and distributions to owners, in financial statements
for the period in which they are recognized. Adoption of the Standard had
no impact on the Group's consolidated financial position, results of
operations or cash flows since the Group had no items of other
comprehensive income (loss) other than those recorded in the consolidated
statements of operations.
o. Foreign currency translation
----------------------------
A substantial portion of the Group's sales, purchases and expenses are in
Hong Kong dollars. Management believes that maintaining books and records
in Hong Kong dollars will enable financial results and relationships to be
measured with more relevance and reliability.
In the financial statements of the individual companies within the Group,
transactions in other currencies during the year are translated into Hong
Kong dollars at the applicable rates of exchange prevailing at the time of
the transactions. Monetary assets and liabilities denominated in other
currencies are translated into Hong Kong dollars at the applicable rates of
exchange in effect at the balance sheet date. All such exchange differences
are dealt with in the individual companies' statements of operations. The
net gain (loss) from foreign currency transactions included in the
statements of operations was approximately HK$149,000, HK$127,000 and
HK$(9,000) for the years ended March 31, 1999, 2000 and 2001, respectively.
Translation of amounts from Hong Kong dollars ("HK$") to United States
dollars ("US$") is for the convenience of readers and has been made at the
noon buying rate in New York City for cable transfers in foreign currencies
as certified for customs purposes by the Federal Reserve Bank of New York
on March 31, 2001 of 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 that rate or at any other rate.
F-11
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------
p. Earnings per common share
-------------------------
Basic earnings (loss) per common share is computed in accordance with
Statement of Financial Accounting Standards No. 128: "Earnings Per Share",
by dividing the net income (loss) for each year by the weighted average
number of shares of common share outstanding during the years. The
numerator in calculating basic earnings per common share for each year is
the reported net income (loss). The denominator is based on the weighted
average number of common shares of 12,800,000, 12,800,000 and 12,814,000
shares for the years ended March 31, 1999, 2000 and 2001, respectively.
Diluted earnings (loss) per common share are not presented as there were no
dilutive potential common share in existence during the years ended March
31, 1999, 2000 and 2001.
q. Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from
those estimates.
r. Fair value of financial instruments
-----------------------------------
The carrying amounts for cash and bank deposits, accounts receivable,
short-term bank borrowings and accounts payable approximate their fair
values because of the short maturity of those instruments. The carrying
amounts for long-term bank loans and capital lease obligations approximate
their fair values as of March 31, 2000 and 2001.
s. Recent accounting standards
---------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133: "Accounting for Derivative
Instruments and Hedging Activities", which was amended by several
subsequent standards. These standards require that an entity recognize
derivative instruments as either assets or liabilities on its balance sheet
and measure those instruments at fair value. Changes in the fair value of
derivative instruments are to be recorded each period in income or as part
of a hedged transaction. These standards became effective for the Group on
April 1, 2001. The Group will record the effect of adopting this Statement
in the first quarter of the financial year ending March 31, 2002. The
effect of adopting this Statement will not be material to the Group's
financial position or results of operations.
5. ACCOUNTS RECEIVABLE
Accounts receivable consisted of:
2 0 0 0 2 0 0 1
------------ -----------------------
HK$'000 HK$'000 US$'000
Accounts receivables 159,017 - -
Less: Allowance for bad and doubtful
accounts (7,500) - -
------------ ---------- ----------
Accounts receivable, net 151,517 - -
============ ========== ==========
F-12
6. PREPAYMENTS AND DEPOSITS
Prepayments and deposits consisted of:
2 0 0 0 2 0 0 1
------------ ---------------------
HK$'000 HK$'000 US$'000
Deposits for acquisition of raw materials
and equipment 2,115 - -
Rental and utility deposits 515 - -
Prepayments 137 - -
Others 281 - -
------------ --------- -----------
3,048 - -
============ ========= ===========
7. INVENTORIES
Inventories consisted of:
2 0 0 0 2 0 0 1
------------ ------------------------
HK$'000 HK$'000 US$'000
Raw Materials 86,937 - -
Finished goods (after allowance for obsolete
and slow-moving inventories of
HK$2,000,000) 120,312 - -
--------- -------- --------
207,249 - -
========= ======== ========
As of March 31, 2000, inventories of approximately HK$207,327,000 were held
under trust receipts bank loans.
F-13
8. PROPERTY, MACHINERY AND EQUIPMENT AND CAPITAL LEASES
Property, machinery and equipment and capital leases consisted of:
2 0 0 0 2 0 0 1
------------ --------------------------
HK$'000 HK$'000 US$'000
Property, machinery and equipment:
Leasehold land and buildings 1,973 - -
Machinery and equipment 240,784 - -
Motor vehicles 920 - -
Furniture and office equipment 64,682 - -
Capital leases:
Machinery and equipment 56,823 - -
----------- --------- ----------
Cost 365,182 - -
Less: Accumulated depreciation
Property, machinery and equipment (112,053) - -
Capital leases (25,992) - -
----------- --------- ----------
Property, machinery and equipment and 227,137 - -
capital leases, net
=========== ========= ==========
As of March 31, 2000, all of the Group's leasehold land and buildings were
situated in Hong Kong and held under long-term leases.
As of March 31, 2000, leasehold land and buildings with net book value of
approximately HK$1,973,000 were mortgaged and machinery and equipment with a net
book value of approximately HK$1,116,000 were pledged as collateral of certain
of the Group's banking facilities.
9. SHORT-TERM BANK BORROWINGS
Short-term bank borrowings consisted of :
2 0 0 0 2 0 0 1
----------- ----------------------
HK$'000 HK$'000 US$'000
Bank overdrafts 2,571 - -
Short-term bank loans 12,000 - -
Trust receipts bank loans 207,327 - -
----------- --------- ----------
221,898 - -
=========== ========= ==========
Short-term bank borrowings were denominated in Hong Kong dollars, and bore
interest at the Hong Kong prime lending rate to 3.5% above that, which ranged
from 8.25% to 11.75% per annum as of March 31, 2000.
F-14
9. SHORT-TERM BANK BORROWING (Cont'd)
Supplemental information with respect to short-term bank borrowings for the year
ended March 31, 2000 is as follows:
Maximum Average Weighted Weighted
amount amount average interest average interest
outstanding outstanding rate at the end rate during the
during the year during the year of year year
--------------- --------------- --------------- ---------------
HK$'000 HK$'000
Year ended March 31, 2000 9,951 7,388 10.77% 11.84%
=========== =========== =========== ===========
Bank overdrafts
12,000 7,000 9.13% 9.23%
=========== =========== =========== ===========
Short-term bank loans
213,004 166,946 8.95% 9.10%
=========== =========== =========== ===========
Trust receipts bank loans
Refer to Note 18 for details of the Group's banking facilities.
10. LONG-TERM BANK LOANS
Long-term bank loans were denominated in Hong Kong dollars, and bore interest at
the Hong Kong prime lending rate plus 0.25% to 3.25%, which ranged from 9% to
12% per annum as of March 31, 2000.
Maturities of long-term bank loans were ranged from 2000 to 2006 and details
were as follows:
2000 2001
--------- ----------------------
HK$'000 US$'000 HK$'000
Payable during the following periods:
- Within one year 2,123 - -
- Over one year but not exceeding two
years 1,033 - -
- Over two years but not exceeding three
years 1,149 - -
- Over three years but not exceeding four
years 1,278 - -
- Over four years but not exceeding five
years 1,421 - -
- Over five years
1,391 - -
----------- -------- ----------
Total bank loans 8,395 - -
Less: Current portion (2,123) - -
----------- -------- ----------
Non-current portion 6,272 - -
=========== ======== ==========
Refer to Note 18 for details of the Group's banking facilities.
F-15
11. CAPITAL LEASE OBLIGATIONS
-------------------------
Maturities of capital lease obligations were ranged from 2000 to 2003. Future
minimum lease payments under the capital leases, together with the present value
of the minimum lease payments, were:
2 0 0 0 2 0 0 1
---------- ----------------------
HK$'000 HK$'000 US$'000
Payable during the following periods:
- Within one year 14,253 - -
- Over one year but not exceeding two
years 5,271 - -
- Over two years but not exceeding three
years 2,267 - -
---------- -------- -------
Total minimum lease payments 21,791 - -
Less: Amount representing future interest (2,051) - -
---------- -------- -------
Present value of minimum lease payments 19,740 - -
Less: Current portion (12,747) - -
---------- -------- --------
Non-current portion 6,993 - -
========== ======== ========
12. ACCRUED LIABILITIES
Accrued liabilities consisted of:
2 0 0 0 2 0 0 1
---------- ---------------------------
HK$000 HK$'000 US$'000
Accruals for operating expenses 833 - -
- Professional fees 3,473 - -
- Workers' wages and bonus 3,950 - -
- Management bonus 324 - -
- Rental expenses 184 - -
- Others
893 - -
Accrued interest ---------- ----------- -----------
9,657 - -
========== =========== ===========
F-16
13. INCOME TAXES
Provision for income taxes consisted of the following:
1 9 9 9 2 0 0 0 2 0 0 1
---------- ------------ -------------------------
HK$'000 HK$'000 HK$'000 US$'000
Current tax
- Hong Kong profits tax (13,000) (5,217) (2,500) (321)
- Mainland China business tax
and enterprise income tax
(a) (4,253) - - -
Over-provision in prior years
- Hong Kong profits tax (b) - 21,098 - -
- Mainland China business tax
and enterprise income tax
(a) 2,506 - - -
Deferred tax - (3,449) - -
--------- ------------ ----------- ------------
(14,747) 12,432 (2,500) (321)
========= ============ =========== ============
Notes -
a. Prior to April 1, 1999, the Group received contract processing fees based
on the utilization of equipment and technology provided by the Group to its
Mainland China contracting partners. Provision for Mainland China taxes in
relation to these fees was made for periods prior to April 1, 1999.
b. A substantial portion of the Group's business activities were conducted in
Mainland China. Accordingly, the Group was entitled to a 50% offshore claim
in computing its Hong Kong profits tax, under which 50% of the Group's
profit was deemed to be derived from Mainland China activities and was not
subject to Hong Kong profits tax. Prior to April 1, 1999, the Group's
offshore claim was under review by the Hong Kong Inland Revenue Department
("the IRD") and the Group made provision for Hong Kong profits tax in
respect of all of its profit, including the 50% deemed to be derived from
Mainland China. During the year ended March 31, 2000, the Group's offshore
claim was agreed by the IRD and excess provision for Hong Kong profits tax
recorded prior to April 1, 1999 amounting to approximately HK$21,098,000
was written back.
The Company, its subsidiaries and affiliates are subject to income taxes on an
entity basis on income arising in or derived from the tax jurisdiction in which
they operate. Subsidiaries and affiliates with business operations in Hong Kong
are subject to Hong Kong profits tax at a rate of 16%. The British Virgin
Islands subsidiaries are incorporated under the International Business Companies
Act of the British Virgin Islands and, accordingly, are exempt from payment of
British Virgin Islands income taxes. HFGTL is incorporated under the Companies
Act 1981 of Bermuda (as amended) as an exempted company and, accordingly, is
exempt from payment of Bermuda income taxes until 2016.
F-17
13. INCOME TAXES (Cont'd)
------------
The reconciliation of the Hong Kong statutory tax rate to the effective income
tax rate based on the income (loss) before income taxes as stated in the
consolidated statements of operations is as follows:
1999 2000 2001
----------- ------------- -------------
Hong Kong statutory income tax rate 16.0% 16.0% 16.0%
Non-taxable income arising from activities
which qualified as offshore - (8.0%) 7.3%
Non-deductible expenses
- share of losses of affiliates - - (23.2%)
- loss on dilution of equity interests in
subsidiaries (0.4%) - (7.1%)
Provision for tax in foreign jurisdiction 7.2% - -
Over-provision of taxation in prior years (3.3%) (24.2%) -
Deferred tax assets for which no benefits have
been recognized due to the establishment of
valuation allowances - 2.8% -
Other (non-deductible) deductible items - (0.9%) -
---------- ---------- ----------
19.5% (14.3%) (7.0%)
========== ========== ==========
Taxation payable consisted of:
2 0 0 0 2 0 0 1
----------- ----------------------
HK$'000 HK$'000 US$'000
Hong Kong profits tax 3,684 - -
Mainland China business tax and enterprise 36,642 - -
income tax ---------- ---------- -----------
40,326 - -
========== ========== ===========
Components of deferred tax balances as of March 31, 2000 and 2001 are as
follows:
2000 2001
------------ ------------------------
HK$000 HK$'000 US$'000
Tax effect of accumulated difference between
taxation allowances and depreciation
expense 3,394 - -
Tax effect on loss of a subsidiary to be
utilized to offset future taxable income (2,470) - -
Tax effect on loss on dilution of equity interests
in subsidiaries - (2,538) (325)
---------- ----------- -------------
10,924 (2,538) (325)
2,470 2,538 325
---------- ----------- -------------
13,394 - -
========== =========== =============
F-18
13. INCOME TAXES (Cont'd)
------------
The retained earnings of the foreign subsidiaries and affiliates would be
subject to additional taxation if distributed. In the opinion of the Directors,
these retained earnings are, at the present time, required to finance the
continuing operations of the affiliates and, accordingly, no provision for
additional taxation has been made.
14. LOSS ON DILUTION OF EQUITY INTERESTS IN SUBSIDIARIES
----------------------------------------------------
On February 27, 1999, HFJCL redeemed its preferred stock and Phenomenal Limited,
the redeemable preferred stock holder, applied the proceeds of US$10,000,000 to
subscribe for 582,800 shares of common stock of HFGTL at US$17.16 each. On March
9, 1999, HFGTL sold 78,750,000 shares at HK$0.9 each in a public offering and
received net cash proceeds of HK$58,671,000, after deducting issuance
expenditures. Immediately after the public offering, HFGTL capitalized share
premium of approximately HK$23,425,000 for the issuance of 234,250,000 shares on
a pro rata basis to the shareholders of HFGTL before the public offering. Thus,
after the share subscription and the capitalization, Phenomenal Limited holds
68,843,250 shares of HFGTL and the Company hold 167,406,750 shares of HFGTL.
These equity transactions resulted in a dilution of the Company's effective
shareholding in HFGTL from 100% to 53.15%. The loss resulting from dilution of
the Company's interest in HFGTL amounted to approximately HK$2,100,000, which
was charged to the 1999 consolidated statement of operations.
On August 23, 2000, HFGTL issued 1,632,000,000 shares at HK$0.114 each to New
Epoch Holdings International Limited, an independent third party, as
consideration for a 49.9% equity interest in New Epoch Information (BVI) Company
Limited. On August 28, 2000, HFGTL sold 550,000,000 shares at HK$0.114 each.
These equity transactions resulted in a dilution of the Company's effective
shareholding in HFGTL from 53.15% to 31.40%. The loss resulting from dilution of
the Company's interest in HFGTL amounted to approximately HK$15,864,000, which
was charged to the consolidated statement of operations.
15. COMMON STOCK
------------
On January 16, 2001, the Company issued 65,000 shares of common stock, par value
of US$0.001 each, of US$0.3125 per share to an independent third party in return
for marketing and promotion services amounting to approximately HK$158,000
(equivalent of approximately US$20,000).
16. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------
a. Capital commitments
-------------------
As of March 31, 2000 and 2001, the Group had capital commitments for acquisition
of machinery and equipment amounting to approximately HK$1,675,000 and nil,
respectively.
F-19
16. COMMITMENTS AND CONTINGENT LIABILITIES (Cont'd)
--------------------------------------
b. Operating lease commitments
The Group has various operating lease agreements for staff quarters, factory
premises, warehouses and motor vehicles under non-cancellable operating leases
which extend to September 2006. Rental expense for the years ended March 31,
1999, 2000 and 2001 was approximately HK$4,523,000, HK$3,836,000 and
HK$1,074,000, respectively. Maturities of operating leases commitments were
ranged from 2000 to 2006. As of March 31, 2000 and 2001, future rental payments
under agreements classified as operating leases with non-cancellable terms are
as follows:
2 0 0 0 2 0 0 1
----------- ------------------
HK$'000 HK$'000 US$'000
Payable during the following periods: 2,364 - -
- Within one year 504 - -
- Over one year but not exceeding two years 495 - -
- Over two years but not exceeding three years 448 - -
- Over three years but not exceeding four years 460 - -
- Over four years but not exceeding five years 701 - -
- More than five years -------- ------- -------
4,972 - -
======== ======= =======
c. Contingent liabilities
----------------------
Contingent liabilities not provided in the financial statements are:
2 0 0 0 2 0 0 1
----------- ---------------------------
HK$'000 HK$'000 US$'000
Discounted bills with recourse 1,798 - -
=========== ========= ==============
F-20
17. RETIREMENT PLAN
---------------
The Group's employees in Mainland China are all employed on a contract basis and
consequently the Group has no obligation for pension liabilities.
The Group arranged for its Hong Kong employees to participate in defined
contribution provident funds ("the Scheme"), which were managed by independent
trustees. Each of the Group and its employees in Hong Kong made monthly
contributions to the Scheme at 5% of the employees' basic salaries. The
employees were entitled to receive their entire contribution and the accrued
interest thereon, and 100% of the Group's contribution and the accrued interest
thereon upon retirement or leaving the Group after completing ten yeas of
service or at a reduced scale of 30% to 90% after completing three to nine years
of service. Any forfeited contributions made by the Group and related accrued
interest were used to reduce the Group's contribution.
The aggregate amounts of the Group's contributions to the Scheme were
approximately HK$93,000, HK$184,000 and HK$32,000, respectively, and there were
no forfeited contributions, for the years ended March 31, 1999, 2000 and 2001.
18. BANKING FACILITIES
------------------
As of March 31, 2000 and 2001, the Group had aggregate banking facilities of
approximately HK$279,315,000 and nil, respectively, from several banks for bank
overdrafts, loans and trade financing (Refer to Note 9 and 10). Unused
facilities as of March 31, 2000 amounted to approximately HK$37,736,000. As of
March 31, 2000, these facilities were secured by the following:
a. pledge of machinery and equipment with a net book value of approximately
HK$1,116,000;
b. mortgage over the Group's leasehold land and buildings with a net book
value of approximately HK$1,973,000;
c. the Group's inventories held under trust receipts bank loans;
d. pledges of the Group's bank deposits of HK$117,575,000;
e. guarantee from the Government of the Hong Kong Special Administrative
Region under the Special Finance Scheme for Small and Medium Enterprises
amounting to HK$2,000,000;
f. mortgages over certain leasehold land and buildings owned by Mr. Lam Sai
Wing and Ms. Chan Yam Fai, Jane, directors of the Company;
g. guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane;
h. assignment of the benefits in respect of the keyman insurance for Mr. Lam
Sai Wing, a director of the Company, amounting to HK$20,000,000; and
i. guarantee provided by HFGTL.
In addition, as of March 31, 2000, the Group had undertaken to comply with
certain covenants imposed by a bank.
F-21
19. RELATED PARTY TRANSACTIONS
a. The Group entered into the following transactions with a director:
1 9 9 9 2 0 0 0 2 0 0 1
------------ ------------ --------------------
HK$'000 HK$'000 HK$'000 US$'000
Rental paid to Mr. Lam Sai Wing 162 324 127 16
============ ============ ========== =========
b. The Group had the following outstanding balances with a
director:
2 0 0 0 2 0 0 1
------------ -------------------------
HK$'000 HK$'000 US$'000
Due to a director
- - Mr. Lam Sai Wing 4,426 2,368 303
============ ========== ==========
The balances due to a director were unsecured, non-interest bearing and without
pre-determined repayment terms.
c. The Group's banking facilities were secured by, among others, mortgages
over leasehold land and buildings owned by Mr. Lam Sai Wing and Ms. Chan
Yam Fai, Jane and guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam
Fai, Jane.
20. SEGMENT INFORMATION
-------------------
Prior to April 1, 1999, the Group was principally engaged in two business
segments: (i) manufacturing and sales of gold and jewellery products; and (ii)
provision of contract processing services which ceased on April 1, 1999.
Effective on August 23, 2000, the Company's interest in HFGTL was diluted from
53.15% to 31.40%. As a consequence, the Company is principally engaged in
investment holding.
a. Sales
Analysis of sales by business activity and geographical location is as follows:
1 9 9 9 2 0 0 0 2 0 0 1
------------ ----------- -------------------------
HK$'000 HK$'000 HK$'000 US$'000
Hong Kong operation -
Sale of gold and jewellery products to
customers in
- Hong Kong/Mainland China 177,588 402,010 191,819 24,592
- South East Asia 128,352 134,517 57,665 7,393
- The United States of America 107,884 149,405 52,433 6,722
- Europe 136,880 188,065 42,040 5,390
- Others 108,086 85,073 27,673 3,548
--------- --------- --------- --------
658,790 959,070 371,630 47,645
========= ========= ========= ========
Mainland China operation -
Contract processing fees 17,012 - - -
========= ========= ========= ========
F-22
20. SEGMENT INFORMATION (Cont'd)
b. Operating profit *
----------------
1 9 9 9 2 0 0 0 2 0 0 1
---------- ----------- ----------------------
HK$'000 HK$'000 HK$'000 US$'000
Hong Kong operation
- sales of gold and jewellery
products 68,227 100,380 36,041 4,621
Mainland China operation
- contract processing services 17,960 - - -
-------- ---------- --------- ---------
Total 86,187 100,380 36,041 4,621
======== ========== ========= =========
Operating profit represents gross profit less selling, general and
administrative expenses.
c. Identifiable assets, capital expenditures and depreciation
----------------------------------------------------------
Geographical analysis of identifiable assets, capital expenditures and
depreciation is as follows:
Identifiable assets 2 0 0 0 2 0 0 1
- ------------------- ---------- -----------------------------
HK$'000 HK$'000 US$'000
Hong Kong 636,947 158,882 20,369
Mainland China 104,389 - -
----------- --------- ---------
Total 741,336 158,882 20,369
=========== ========= =========
Capital expenditures
Hong Kong 83,345 32,832 4,209
Mainland China 75 87 11
----------- --------- ---------
Total 83,420 32,919 4,220
=========== ========= =========
Depreciation
Hong Kong 51,458 25,331 3,248
Mainland China 4,122 1,623 208
----------- ---------- ---------
Total 55,580 26,954 3,456
=========== ========== =========
d. Major customers
---------------
There are no individual customers accounting for more than 5% of the
Group's sales for the years ended March 31, 1999, 2000 and 2001.
F-23
20. SEGMENT INFORMATION (Cont'd)
-------------------
e. Major suppliers
---------------
Details of individual suppliers accounting for more than 5% of the Group's
purchases are as follows:
1 9 9 9 2 0 0 0 2 0 0 1
--------- --------- ---------
Heraeus Limited - supplied gold bullion 62.9% 67.4% 52.2%
Chinese Wall Technology Company Limited - 7.8% 15.7%
Johnson Matthey Hong Kong Limited 2.0% 5.8% 21.7%
========= ========= =========
21. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
a. Cash paid for interest and income taxes is as follows:
1 9 9 9 2 0 0 0 2 0 0 1
--------- ---------- ---------------------
HK$'000 HK$'000 HK$'000 US$'000
Interest paid 11,588 18,599 7,244 929
========= ========== ========== ==========
Income taxes 147 2,397 - -
========= ========== ========== ==========
b. Cash received for interest income is as follows:
1 9 9 9 2 0 0 0 2 0 0 1
---------- ---------- ---------------------
HK$'000 HK$'000 HK$'000 US$'000
Interest received 3,234 6,216 3,166 406
========== ========== ========== =========
c. As mentioned in Note 1, the Company's interest in HFGTL was diluted from
53.15% to 31.40% on August 23, 2000. Details of net assets of HFGTL on
August 23, 2000, when HFGTL changed from a subsidiary to an affiliate, were
as follows:
HK$'000
-----------
Property, machinery and equipment and capital leases, net 233,102
Cash and bank deposits 122,486
Accounts receivable, net 136,404
Prepayments and deposits 12,739
Inventories, net 352,162
Bank overdrafts (8,513)
Trust receipts bank loans (266,010)
Short-term bank loans (28,547)
Minority interests (200,139)
Accounts payable (38,041)
Accrued liabilities (6,003)
Due to a director (4,824)
Taxation payable (42,826)
Long-term bank loans (7,541)
Capital lease obligations (14,003)
Deferred taxation (13,394)
-------------
Net assets as at the date of dilution 227,052
=============
Net cash outflow in respect of the dilution of equity interests in HFGTL was as
follows:
HK$'000
-----------
122,486
===========
F-24
21. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Cont'd)
------------------------------------------------
d. Non-cash investing activities:
During the years ended March 31, 1999, 2000 and 2001, capital lease
obligations of approximately HK$2,234,000, HK$15,070,000 and nil,
respectively, were incurred to finance the Group's additions of new
machinery and equipment.
22. OTHER SUPPLEMENTAL INFORMATION
------------------------------
1 9 9 9 2 0 0 0 2 0 0 1
---------- ---------- ----------------------
HK$'000 HK$'000 HK$'000 US$'000
Depreciation of property, machinery and
Equipment
- owned assets 31,970 44,215 22,527 2,888
- assets held under capital leases 7,635 11,365 4,427 568
Loss on disposal of property, machinery and
equipment 49 - - -
Allowance for bad and doubtful accounts 2,500 5,000 - -
Allowance for obsolete and slow-moving
inventories 2,000 - - -
Interest on
- bank overdrafts and loans 9,585 17,636 6,680 857
- capital lease obligations 2,003 1,856 564 72
Operating lease rentals for
- premises 4,443 3,754 1,044 134
- machinery and equipment 80 82 30 4
Advertising and promotion 1,154 7,772 2,206 283
Repairs and maintenance 721 774 310 40
Rental income 101 48 32 4
Net foreign exchange gain (loss) 149 127 (9) (1)
Interest income from bank deposits 3,234 6,216 3,166 406
========== ========== =========== =========
F-25
Auditors' Report to the Shareholders of
HANG FUNG GOLD TECHNOLOGY LIMITED
(Incorporated in Bermuda with limited liability)
We have audited the financial statements of Hang Fung Gold Technology Limited
and its subsidiaries which have been prepared in accordance with accounting
principles generally accepted in Hong Kong.
Respective responsibilities of directors and auditors
The company's directors are responsible for the preparation of financial
statements which give a true and fair view. In preparing financial statements
which give a true and fair view it is fundamental that appropriate accounting
policies are selected and applied consistently.
It is our responsibility to form an independent opinion, based on our audit, on
those statements and to report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Statements of Auditing Standards
issued by the Hong Kong Society of Accountants and auditing standards generally
accepted in the United States of America. An audit includes examination, on a
test basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the circumstances of
the company and of the group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the financial
statements are free from material misstatement. In forming our opinion we also
evaluated the overall adequacy of the presentation of information in the
financial statements. We believe that our audit provides a reasonable basis for
our opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the state
of affairs of the company and of the group as at 31st March, 2001 and of the
profit and cash flows of the group for the year then ended, and have been
properly prepared in accordance with the accounting principles generally
accepted in Hong Kong.
Accounting practices used by the group in preparing the accompanying
consolidated financial statements conform with generally accepted accounting
principles in Hong Kong, but do not conform with accounting principles generally
accepted in the United States of America. A description of these differences and
a reconciliation of consolidated net income (loss) and shareholders' equity to
accounting principles generally accepted in the United States of America is set
forth in Note 31.
ARTHUR ANDERSEN & CO
Certified Public Accountants
Hong Kong
Hong Kong, 14th July, 2001.
F-26
HANG FUNG GOLD TECHNOLOGY LIMITED
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31ST MARCH, 2001
(Expressed in Hong Kong dollars)
Note 2 0 0 1
------- -----------
$'000
Turnover 4 1,327,753
Cost of sales (1,122,475)
------------
Gross profit 205,278
Selling and distribution expenses (16,856)
General and administrative expenses (91,260)
------------
Profit from operations 97,162
Interest income 4 8,723
Interest expense (30,105)
Share of losses of associates and provision
for doubtful receivables from an associate 14 (14,460)
------------
Profit before taxation 5 61,320
Taxation 7 (9,156)
------------
Profit attributable to shareholders 8 52,164
Retained profit, beginning of year 261,052
Elimination of goodwill 14 (188,142)
------------
Retained profit, end of year 9 125,074
============
Earnings per share 10
- Basic HK1.17 cents
==============
- Diluted HK1.16 cents
==============
F-27
HANG FUNG GOLD TECHNOLOGY LIMITED
CONSOLIDATED STATEMENT OF RECOGNISED GAINS AND LOSSES
FOR THE YEAR ENDED 31ST MARCH, 2001
(Expressed in Hong Kong dollars)
2 0 0 1
---------
$'000
Deficit on revaluation of an investment property -
Profit attributable to shareholders 52,164
----------
Net recognised gains 52,164
Elimination of goodwill from acquisition of an associate (188,142)
----------
(135,978)
==========
F-28
HANG FUNG GOLD TECHNOLOGY LIMITED
BALANCE SHEETS
AS AT 31ST MARCH, 2001
(Expressed in Hong Kong dollars)
2 0 0 1
-----------------------------
Note Consolidated Company
-------- -------------- -----------
$'000 $'000
NON-CURRENT ASSETS 11 351,978 -
Fixed assets 12 1,600 -
Investment property 13 - 339,327
Investment in subsidiaries 14 35,347 -
Investment in associates ------------ -----------
388,925 339,327
Total non-current assets ------------ -----------
CURRENT ASSETS 15 314,343 -
Inventories 16 214,847 -
Accounts receivable 7,824 121
Prepayments and deposits 3 281 -
Due from holding companies 17 77,210 -
Pledged bank deposits 33,214 -
Cash and bank deposits ------------ -----------
647,719 121
Total current assets ------------ -----------
CURRENT LIABILITIES 18 (355,492) -
Short-term bank borrowings 20 (12,973) -
Finance lease obligations, current portion 21 (30,933) -
Accounts payable (19,805) -
Accruals and other payables 3 (488) -
Due to a director 22 (36,642) -
Taxation payable ------------ -----------
(456,333) -
Total current liabilities ------------ -----------
191,386 121
Net current assets ------------ -----------
580,311 339,448
Total assets less current liabilities ------------ -----------
NON-CURRENT LIABILITIES 19 (35,580) -
Long-term bank loans, non-current portion 20 (18,086) -
Finance lease obligations, non-current portion 23 (20,031) -
Deferred taxation ------------ -----------
(73,697) -
Total non-current liabilities ------------ -----------
506,614 339,448
Net assets ============ ===========
Representing:
24 53,320 53,320
SHARE CAPITAL
26 328,220 486,821
RESERVES
125,074 (200,693)
RETAINED PROFIT (ACCUMULATED DEFICIT) ------------ -----------
506,614 339,448
Shareholders' equity ============ ===========
Approval by the Board of Directors on 14th July, 2001:
LAM SAI WING CHAN YAM FAI, JANE
Chairman Deputy Chairman
F-29
HANG FUNG GOLD TECHNOLOGY LIMITED
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31ST MARCH, 2001
(Expressed in Hong Kong dollars)
Note 2 0 0 1
------ -----------
$'000
Net cash inflow from operating activities 27.a 10,527
----------
Returns on investments and servicing of finance
Interest received 6,822
Interest paid (30,105)
Dividends paid -
----------
(23,283)
----------
Taxation
Hong Kong profits tax paid (6,203)
----------
Investing activities
Additions of fixed assets (175,476)
Advances to an associate (50,000)
Increase in the amounts due from holding companies (281)
----------
(225,757)
----------
Net cash outflow before financing activities (244,716)
----------
Financing activities 27.b
Issuance of shares 62,700
Share issuance expenses (3,321)
New short-term bank loans 26,547
Repayment of short-term bank loans (12,000)
New long-term bank loans 37,480
Repayment of long-term bank loans (2,900)
Repayment of capital element of finance lease obligations (15,832)
(Decrease) Increase in amount due to a director (865)
---------
91,809
---------
Decrease in cash and cash equivalents (152,907)
Cash and cash equivalents, Beginning of year (58,219)
---------
End of year 27.d (211,126)
=========
F-30
HANG FUNG GOLD TECHNOLOGY LIMITED
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in Hong Kong dollars unless otherwise stated)
1. ORGANISATION AND PRINCIPAL ACTIVITIES
-------------------------------------
Hang Fung Gold Technology Limited ("the Company") was incorporated in Bermuda on
4th December, 1997 as an exempted company under the Companies Act 1981 of
Bermuda (as amended). Its shares have been listed on The Stock Exchange of Hong
Kong Limited since 16th March, 1999.
The Company is an investment holding company. Its subsidiaries are principally
engaged in the design, manufacture and distribution of a broad range of gold
products, other precious metal products and jewellery products. Its associates
are principally engaged in trading and developing and operating e-commerce
trading facilities between Mainland China and the rest of the world.
2. PRINCIPAL ACCOUNTING POLICIES
-----------------------------
The financial statements have been prepared in accordance with Statements of
Standard Accounting Practice issued by the Hong Kong Society of Accountants,
accounting principles generally accepted in Hong Kong, and the disclosure
requirements of the Hong Kong Companies Ordinance and the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited. Principal
accounting policies are summarised below:
a. Basis of measurement
--------------------
The financial statements have been prepared on the historical cost basis, as
modified by the revaluation of an investment property.
b. Basis of consolidation
----------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries (together "the Group"), together with the Group's share of
post-acquisition results and reserves of its associates under the equity method
of accounting. The results of subsidiaries and associates acquired or disposed
of during the year are recorded from or to their effective dates of acquisition
or disposal. Significant intra-group transactions and balances have been
eliminated on consolidation.
c. Goodwill
--------
Goodwill represents the difference between the fair value of the consideration
given and the Group's share of the aggregate fair values of the identifiable net
assets of subsidiaries and associates acquired. Positive goodwill arises where
the consideration given exceeds the Group's share of the aggregate fair values
of the identifiable net assets acquired and is eliminated immediately against
available reserves. Negative goodwill arises where the Group's share of the
aggregate fair values of the identifiable net assets acquired exceeds the
consideration given and is credited directly to reserves.
d. Subsidiaries
------------
A subsidiary is a company in which the Company holds, directly or indirectly,
more than 50% of its issued voting share capital as a long-term investment. In
the Company's financial statements, investment in subsidiaries is stated at cost
less provision for any impairment in value, while income from subsidiaries is
recorded to the extent of dividends received and receivable.
F-31
2. PRINCIPAL ACCOUNTING POLICIES (Cont'd)
-----------------------------
e. Associates
----------
An associate is a company, not being a subsidiary, in which the Group holds 20%
or more of its issued voting share capital as a long-term investment and can
exercise significant influence over its financial and operating policies. In the
consolidated financial statements, investment in associates is stated at the
Group's share of the fair value of the identifiable net assets of the associates
at the time of acquisition, adjusted for the Group's share of undistributed
post-acquisition results and reserves of the associates, distributions received
from the associates and other necessary alterations in the Group's proportionate
interest in the associates arising from changes in the equity of the associates
that have not been included in the income statement.
f. Turnover and revenue recognition
--------------------------------
Turnover consists of the net invoiced value of merchandise sold after allowances
for returns and discounts and rental income.
Revenue is recognised when the outcome of a transaction can be measured reliably
and when it is probable that the economic benefits associated with the
transaction will flow to the Group. Sales revenue is recognised when the
merchandise is delivered and title has passed. Rental income is recognised on a
straight-line basis over the period of the relevant leases. Interest income is
recognised on a time-proportion basis on the principal outstanding and at the
rate applicable.
g. Taxation
--------
Individual companies within the Group provide for profits tax on the basis of
their profits for financial reporting purposes, adjusted for income and expense
items which are not assessable or deductible for profits tax purposes.
Deferred taxation is provided under the liability method, at the current tax
rate, in respect of significant timing differences between profit as computed
for taxation purposes and profit as stated in the financial statements, except
when it is considered that no liability will arise in the foreseeable future.
Deferred tax assets are not recognised unless the related benefits are expected
to crystallise in the foreseeable future.
h. Advertising and promotion costs
-------------------------------
The costs of advertising and promotion are expensed as incurred.
i. Employee retirement benefits
----------------------------
Costs of employee retirement benefits are recognised as an expense as incurred.
j. Borrowing costs
---------------
Borrowing costs that are directly attributable to the acquisition, construction
or production of fixed assets that takes a substantial period of time to prepare
for its intended use or sale are capitalised as part of the cost of that asset
at rates based on the actual cost of the specific borrowings. All other
borrowing costs are recognised as an expense as incurred.
F-32
2. PRINCIPAL ACCOUNTING POLICIES (Cont'd)
-----------------------------
k. Fixed assets and depreciation
-----------------------------
Fixed assets are stated at cost less accumulated depreciation. Major
expenditures on modifications and betterments of fixed assets which will result
in future economic benefits are capitalised, while expenditures on maintenance
and repairs of fixed assets are expensed when incurred. Depreciation is provided
on a straight-line basis to write off the cost less estimated residual value of
each asset over its estimated useful life. The annual rates of depreciation are
as follows:
Land and buildings 5%
Machinery and equipment 16% to 20%
Furniture and office equipment 12% to 20%
Motor vehicles 20%
The carrying value of fixed assets is assessed periodically or when factors
indicating an impairment are present. Fixed assets carried at cost less
accumulated depreciation are reduced to their recoverable amount if this is
lower than net book value, with the difference charged to the income statement.
In determining the recoverable amount of individual items of fixed assets,
expected future cash flows are not discounted to their present value.
Gains and losses on disposal of fixed assets are recognised in the income
statement based on the net disposal proceeds less the then carrying amount of
the assets.
Fixed assets held under finance leases are recorded and depreciated on the same
basis as described above.
l. Investment properties
---------------------
Investment properties are interests in leasehold land and buildings in respect
of which construction and development work has been completed and which is held
for their long-term investment potential. Investment properties are included in
the balance sheet at their open market value on the basis of an annual valuation
by an independent qualified valuer. All changes in the value of investment
properties are dealt with in the investment properties revaluation reserve
unless the total of this reserve is insufficient to cover a deficit on a
portfolio basis, in which case the net deficit is charged to the income
statement. When an investment property is disposed of, previously recognised
revaluation surpluses are reversed and the gain or loss on disposal reported in
the income statement is determined based on the net disposal proceeds less the
original cost.
No depreciation is provided for investment property unless the unexpired lease
term is 20 years or less, in which case depreciation is provided on the then
carrying value over the unexpired lease term.
m. Inventories
-----------
Inventories are stated at the lower of cost and net realisable value. Cost
includes costs of raw materials calculated using the first-in, first-out method
of costing and, in the case of finished goods, also direct labour and an
appropriate proportion of production overheads. Net realisable value is based on
estimated selling prices in the ordinary course of business, less further costs
expected to be incurred to completion and disposal. Provision is made for
obsolete, slow-moving or defective items where appropriate.
When inventories are sold, the carrying amount of those inventories is
recognised as an expense in the period in which the related revenue is
recognised. The amount of any write-down of inventories to net realisable value
and all losses of inventories are recognised as an expense in the period the
write-down or loss occurs. The amount of reversal of any write-down of
inventories, arising from an increase in net realisable value, is recognised as
a reduction in the amount of inventories recognised as an expense in the period
in which the reversal occurs.
F-33
2. PRINCIPAL ACCOUNTING POLICIES (Cont'd)
-----------------------------
n. Provisions and contingencies
----------------------------
A provision is recognised when there is a present obligation, legal or
constructive, as a result of a past event and it is probable (i.e. more likely
than not) that an outflow of resources embodying economic benefits will be
required to settle the obligation, and a reliable estimate can be made of the
amount of the obligation. Provisions are reviewed regularly and adjusted to
reflect the current best estimate. Where the effect of the time value of money
is material, the amount of a provision is the present value of the expenditures
expected to be required to settle the obligation.
Contingent liabilities are not recognised in the financial statements. They are
disclosed unless the possibility of an outflow of resources embodying economic
benefits is remote. A contingent asset is not recognised in the financial
statements but disclosed when an inflow of economic benefits is probable.
o. Leases
------
Finance leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets are transferred to the Group.
Fixed assets held under finance leases are initially recorded at the present
value of the minimum payments at the inception of the leases, with equivalent
liabilities categorised as appropriate under current or non-current liabilities.
Interest expense, which represents the difference between the minimum payments
at the inception of the leases and the corresponding fair value of the assets
acquired, is allocated to accounting periods over the period of the relevant
leases to produce a constant rate of charge on the outstanding balances.
Operating leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets remain with the lessors. Rental
payments under operating leases are charged to the income statement on a
straight-line basis over the period of the relevant leases.
p. Currency translation
--------------------
Companies within the Group maintain their books and records in Hong Kong
dollars. Transactions in other currencies during the year are translated into
Hong Kong dollars at the applicable rates of exchange prevailing at the time of
the transactions. Monetary assets and liabilities denominated in other
currencies are translated into Hong Kong dollars at the applicable rates of
exchange in effect at the balance sheet date. Exchange gains or losses are dealt
with in the income statement.
q. Use of estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles in Hong Kong requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
3. RELATED PARTY TRANSACTIONS
--------------------------
Parties are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operating decisions. Parties are also
considered to be related if they are subject to common control or common
significant influence.
Significant transactions and balances with related parties are summarised below:
a. During the year ended 31st March, 2001, the Group paid rental of
approximately $324,000 in respect of residential premises owned by Mr. Lam
Sai Wing, a director of the Company. The premises are used as the residence
of Mr. Lam Sai Wing and his family.
F-34
3. RELATED PARTY TRANSACTIONS (Cont'd)
--------------------------
b. The amount due from an associate of $50,000,000 (see Note 14) is secured by
certain of equity interest in the associate not owned by the Group, bears
interest at the Hong Kong prime lending rate plus 2.5%, and is repayable
after September 2003. During the year, interest earned from this advance
amounted to approximately $1,901,000.
c. Details of the amounts due from holding companies (consolidated) are:
Balance as at Maximum balance
31st March, outstanding during
2001 the year
------------- ------------------
$'000 $'000
Quality Prince Limited, the immediate holding company 6 6
S.W. Lam, Inc., the intermediate holding company 275 275
----------- ================
281
===========
These amounts are unsecured, non-interest bearing and without pre-determined
repayment terms.
d. Details of the amount due to a director (consolidated) are:
Maximum balance due
Balance as at 31st from a director during
March, 2001 the year
---------------------- ------------------------
$'000 $'000
Mr. Lam Sai Wing 488 -
====================== ========================
The balances with the director are unsecured, non-interest bearing and without
pre-determined repayment terms.
e. The Group's banking facilities are secured by, among others, mortgages over
certain properties owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane,
directors of the Company, and personal guarantees provided by Mr. Lam Sai
Wing and Ms. Chan Yam Fai, Jane (see Note 30).
4. TURNOVER AND REVENUE
--------------------
Analysis of turnover and revenue in the consolidated income statement is as
follows:
2 0 0 1
-----------
$'000
Sales of merchandise 1,327,657
Rental income 96
-----------
Turnover 1,327,753
Interest income 8,723
-----------
Total revenue 1,336,476
===========
The Group's turnover by major product category and geographical location,
together with their respective contributions to profit from operations, are
analysed as follows:
F-35
4. TURNOVER AND REVENUE (Cont'd)
--------------------
a. By major product category -
2 0 0 1
-------------------------------------
Contribution to profit
Turnover from operations
------------- ----------------------
$'000 $'000
Sales of merchandise
- -Gold products 1,011,996 45,862
- -Other precious metal products 129,348 23,271
- -Jewellery products 183,604 27,577
- -Others 2,709 368
Rental income 96 84
------------ -------------
1,327,753 97,162
============ =============
b. By geographical location* -
2 0 0 1
-----------
$'000
Mainland China and Hong Kong 767,585
South-East Asia 238,083
The United States of America 140,903
Europe 118,006
Others 63,176
-----------
1,327,753
===========
* Turnover by geographical location is determined on the basis of the
destination of delivery of merchandise.
No analysis of profit from operations by geographical location is presented as
it is generally in line with the distribution of turnover as set out above.
F-36
5. PROFIT BEFORE TAXATION
----------------------
Profit before taxation in the consolidated income statement is determined after
charging or crediting the following items:
2 0 0 1
----------
$'000
After charging -
Interest on
- bank overdrafts and borrowings wholly repayable
within five years 27,272
647
- bank borrowings wholly repayable after five years 2,186
- finance leases
47,321
Employment costs (including directors' emoluments)
7,772
Advertising and promotion costs
Website development expense 3,969
Operating lease rentals in respect of 4,485
- office and factory premises 82
- machinery and equipment
Depreciation of fixed assets 63,662
- owned assets 11,774
- assets held under finance leases
377
Net loss on disposal of fixed assets
250
Deficit on revaluation of an investment property
2,500
Provision for bad and doubtful debts
1,200
Provision for slow-moving and obsolete inventories
-
Derivative trading loss *
75
Net exchange loss
780
Auditors' remuneration ===========
After crediting -
450
Derivative trading gain *
Interest from 6,822
- bank deposits 1,901
- amount due from an associate (see Notes 3 and 14)
82
Rental income, less outgoings
-
Net exchange gain ===========
* During the year, the Company entered into forward contracts for trading of
gold and recognised a gain of approximately $450,000. There was no
outstanding forward contract as at 31st March, 2001.
F-37
6. DIRECTORS' AND SENIOR EXECUTIVES' EMOLUMENTS
--------------------------------------------
a. Details of emoluments paid/payable to directors of the Company are:
2 0 0 1
-----------
$'000
Fees for executive directors -
Fees for non-executive directors 120
Other emoluments for executive directors
- Basic salaries and allowances 2,460
- Bonus * 2,500
-----------
5,080
===========
* The Company's executive directors are entitled to a discretionary bonus not
exceeding 5% of the Group's consolidated profit attributable to
shareholders.
No directors waived any emoluments during the year. No incentive payment for
joining the Group or compensation for loss of office was paid or payable to any
directors during the year.
Analysis of directors' emoluments by number of directors and emolument range is
as follows:
2 0 0 1
-------------
Executive directors 1
- Nil to $1,000,000 1
- $4,500,001 to $5,000,000 -
- $5,500,001 to $6,000,000
Non-executive directors 5
- Nil to $1,000,000 ----------
7
==========
b. Details of emoluments of the five highest paid individuals (including
directors and other employees) are:
2 0 0 1
-----------
$'000
Basic salaries and allowances 4,364
Bonus 2,500
-----------
6,864
===========
Two of the highest paid individuals were directors of the Group, whose
emoluments have been included in Note 6.a above.
During the year, no emolument of the five highest paid individuals (including
directors and other employees) was incurred as inducement to join or upon
joining the Group or as compensation for loss of office.
F-38
6. DIRECTORS' AND SENIOR EXECUTIVES' EMOLUMENTS (Cont'd)
--------------------------------------------
b. (Cont'd)
Analysis of emoluments of the five highest paid individuals (including
directors and other employees) by number of individuals and emolument range
is as follows:
2 0 0 1
---------
- - Nil to $1,000,000 4
- - $4,500,001 to $5,000,000 1
- - $5,500,001 to $6,000,000 -
---------
5
=========
7. TAXATION
Taxation in the consolidated income statement consisted of:
2 0 0 1
-----------
$'000
Hong Kong profits tax 2,519
- Current year -
- Write-back of over-provision in prior years ---------
2,519
6,637
Deferred taxation - Hong Kong profits tax ---------
9,156
=========
The Company is exempted from taxation in Bermuda until 2016. Hong Kong
profits tax has been provided at the rate of 16% on the estimated
assessable profit arising in or derived from Hong Kong.
8. PROFIT ATTRIBUTABLE TO SHAREHOLDERS
-----------------------------------
The consolidated profit attributable to shareholders included a loss of
approximately $200,701,000 dealt with in the financial statements of the
Company.
9. RETAINED PROFIT
---------------
Retained profit consisted of:
2 0 0 1
-----------
$'000
Company and subsidiaries 131,241
Associates (6,167)
----------
125,074
==========
F-39
10. EARNINGS PER SHARE
------------------
The calculation of basic earnings per share for the year ended 31st March, 2001
is based on the consolidated profit attributable to shareholders of
approximately $52,164,000 and on the weighted average number of approximately
4,468,231,000 shares in issue during the year.
The calculation of diluted earnings per share for the year ended 31st March,
2001 is based on the consolidated profit attributable to shareholders of
approximately $52,164,000 and on the weighted average number of approximately
4,502,197,000 shares in issue, after adjusting for the effects of all dilutive
potential shares. The effect of the dilutive potential shares resulting from the
exercise of the outstanding employee share options on the weighted average
number of shares in issue during the year was approximately 33,966,000 shares,
which were deemed to have been issued at no consideration as if all outstanding
employee share options had been exercised on the date when the employee share
options were granted.
11. FIXED ASSETS
------------
a. Movements of fixed assets (consolidated) were:
2 0 0 1
----------------------------------------------------------------------------
Furniture
Land and Machinery and and Office Moter
buildings equipment Equipment Vehicles Total
------------ --------------- -------------- ------------ -----------
$'000 $'000 $'000 $'000 $'000
Cost
Beginning of year - 297,607 64,682 920 363,209
Additions 16,700 89,474 96,319 134 202,627
Disposals - - (390) - (390)
------------ ------------ -------------- ----------- -----------
End of year 16,700 387,081 160,611 1,054 565,446
------------ ------------ -------------- ----------- -----------
Accumulated depreciation
Beginning of year - 116,887 20,238 920 138,045
Provision for the year 105 60,770 14,553 8 75,436
Disposals - - (13) - (13)
------------ ------------ -------------- ----------- -----------
End of year 105 177,657 34,778 928 213,468
------------ ------------ -------------- ----------- -----------
Net book value
End of year 16,595 209,424 125,833 126 351,978
============ ============ ============== =========== ===========
Beginning of year - 180,720 44,444 - 225,164
============ ============ ============== =========== ===========
b. Land and buildings:
Land and buildings are located in Hong Kong and are held under medium-term
leases. All land and buildings with a net book value of approximately
$15,608,000 were mortgaged as security for the Group's banking facilities (see
Note 30).
F-40
11. FIXED ASSETS (Cont'd)
c. Finance leases:
Certain machinery and equipment were purchased under finance leases. Details of
these assets are as follows:
2 0 0 1
-------------
$000
Cost 58,868
Less: Accumulated depreciation (20,382)
-------------
Net book value 38,486
=============
Depreciation for the year 11,774
=============
12. INVESTMENT PROPERTY
Movements of investment property (consolidated) were:
2 0 0 1
----------
$'000
Beginning of year 1,850
Deficit on revaluation (250)
---------
End of year 1,600
=========
The investment property is located in Hong Kong and is held under a long-term
lease. It is stated at the open market value at 31st March, 2001 as determined
by DTZ Debenham Tie Leung Limited, an independent qualified valuer.
Details of the investment property as at 31st March, 2001 are as follows:
Location Group's interest Existing use
- --------------------------------------- ----------------- --------------
Flat B4 on 14th Floor, Peace Building,
3 Peace Avenue, Ho Man Tin,
Kowloon, Hong Kong 100% Residential
F-41
In the Company's balance sheet, investment in subsidiaries consisted of:
2 0 0 1
----------
$'000
Unlisted shares, at cost 158,743
Due from subsidiaries 381,285
----------
540,028
Less: Provision for impairment in value and doubtful
receivables from subsidiaries (200,701)
-----------
339,327
===========
The amounts due from subsidiaries are unsecured and non-interest bearing.
The underlying value of investment in subsidiaries is, in the opinion of the
Company's Directors, not less than the carrying value as at 31st March, 2001.
F-42
13. INVESTMENT IN SUBSIDIARIES (Cont'd)
Details of the subsidiaries as at 31st March, 2001 were as follows:
Place of Percentage of
incorporation/ Issuedmand fully equity interes
Name operations paid share capital held (ii)
- ------------------------ --------------- ------------------ ---------------- --------------------
Hang Fung Gold British Virgin US$1 100% Investment holding
(International) Company Islands/Hong
Limited Kong
Hang Fung Jewellery Hong Kong Class A (non- - Manufacturing and
Company Limited voting) ordinary selling of gold a
- $4 (i) 100% jewellery product
Class B (voting)
ordinary - $2
Hang Fung Jewellery Mainland China $25,000,000 100% Manufacturing of
(Shenzhen) Co., Ltd. (iii) registered capital gold and jeweller
products
Jubonet.com Limited Hong Kong $2 100% Operation of an e
(formerly known as commerce
Pender Limited) platform for gold
and jewelley
products
Kai Hang Jewellery Hong Kong Class A (non - Property holding
Company Limited voting) ordinary
- $10,002 (i)
Class B (voting) 100%
ordinary - $2
Macadam Profits Limited British Virgin 100% Investment holding
Islands/Hong
Kong
Soycue Limited British Virgin 100% Investment holding
Islands/Hong
Kong
Notes -
(i) The Class A (non-voting) ordinary shares have no voting rights, are not
entitled to dividends unless dividends paid to holders of Class B (voting)
ordinary shares exceed $900,000,000,000 in a financial year, and are not
entitled to distribution of the companies' assets unless each Class B
(voting) ordinary shareholder has been returned its paid-up capital
together with a premium of $900,000,000,000.
(ii) The shares of Macadam Profits Limited are held directly by the Company. The
shares of other subsidiaries are held indirectly.
(iii)Hang Fung Jewellery (Shenzhen) Co., Ltd. is wholly foreign owned
enterprises established in Mainland China to be operated for 30 years up to
2028.
None of the subsidiaries had any loan capital in issue at any time during the
year ended 31st March, 2001.
F-43
14. INVESTMENT IN ASSOCIATES
Investment in associates (consolidated) consisted of:
2 0 0 1
--------------
$'000
Unlisted shares, at cost 186,048
Goodwill on acquisition, eliminated against retained profit (188,142)
Share of losses of associates (6,167)
------------
(8,261)
Advances to an associate 50,000
Accrued interest 1,901
Provision against receivables from an associate (8,293)
-----------
35,347
===========
During the year ended 31st March, 2001, the Company issued 1,632,000,000 shares
with a fair value of $186,048,000 as consideration for the acquisition of a
49.9% equity interest in New Epoch Information (BVI) Company Limited. Goodwill
resulting from this acquisition of approximately $188,142,000 has been
eliminated against retained profit.
The amount due from an associate (New Epoch Information (BVI) Company Limited)
of $50,000,000 is secured by certain of equity interest in the associate not
owned by the Group, bears interest at the Hong Kong prime lending rate plus
2.5%, and is repayable after September 2003.
The underlying value of investment in associates is, in the opinion of the
Company's Directors, not less than the carrying value as at 31st March, 2001.
Details of the principal associates as at 31st March, 2001 were as follows:
Place of
incorporation/ Issued and fully paid percentage of equity
Name operations share capital interest held (i) Principal activities
- ------------------------------ --------------- --------------------- ------------------ ----------------------
Asia Trader Associates Limited
("ATAL") British Virgin US$450,000 16.5% (ii) Trading and developing
Islands/Hong Kong and operating of e-
commerce trading facilities
between Mainland Chin and
the rest of the world
China International Electronic Hong Kong $20,000,000 24.5% Trading and developing
Commerce (HK) Limited and operating of e-
commerce trading facilities
between Mainland Chin and
the rest of the world
New Epoch Information (BVI) British Virgin US$1,000 49.9% Investment holding
Company Limited Islands/Hong Kong
New Epoch Information Company Hong Kong $5,000,000 49.9% Trading and investment
Limited holding
F-44
14. INVESTMENT IN ASSOCIATES (Cont'd)
------------------------
Notes -
(i) The shares of the above associates are held indirectly by the Company.
(ii) Asia Trader Associates Limited is an associate as the Group's interest in
it is held through an associate which in turn holds more than 20% of the
issued voting share capital of ATAL.
The above summary lists only the principal associates of the Company which, in
the opinion of the Company's Directors, principally affected the results or
formed a substantial portion of the net assets of the Group. To give details of
other associates would, in the opinion of the Company's Directors, result in
particulars of excessive length.
15. INVENTORIES
-----------
Inventories (consolidated) consisted of:
2 0 0 1
--------------
$'000
Raw materials 160,912
Finished goods 156,631
--------------
317,543
Less: Provision for slow-moving and obsolete inventories (3,200)
--------------
314,343
==============
As at 31st March, 2001, no inventories were stated at net realisable value.
Inventories of approximately $317,543,000 were held under trust receipts bank
loan arrangements (see Note 30).
16. ACCOUNTS RECEIVABLE
-------------------
The Group grants to its customers credit periods ranging from 30 days to 120
days. The ageing analysis of accounts receivable (consolidated) is as follows:
2 0 0 1
------------
$'000
0 to 90 days 215,249
91 to 180 days 7,295
181 to 270 days 2,303
------------
224,847
Less: Provision for bad and doubtful debts (10,000)
------------
214,847
============
17. PLEDGED BANK DEPOSITS
---------------------
As at 31st March, 2001, the Group's bank deposits of approximately $77,210,000
were pledged as collateral for the Group's banking facilities (see Note 30).
F-45
18. SHORT-TERM BANK BORROWINGS
--------------------------
Short-term bank borrowings (consolidated) consisted of:
2 0 0 1
------------
$'000
Bank overdrafts 84
Trust receipts bank loans 321,466
Short-term bank loans 26,547
------------
348,097
Long-term bank loans, current portion (Note 19) 7,395
------------
355,492
============
Short-term bank borrowings are secured and bear interest at rates ranging from
0.75% below the Hong Kong prime lending rate to 2.5% above that. Refer to Note
30 for details of the Group banking facilities.
19. LONG-TERM BANK LOANS
--------------------
Long-term bank loans (consolidated) consisted of:
2 0 0 1
-------------
$'000
Amounts repayable within a period
- not exceeding one year 7,703
- more than one year but not exceeding two years 18,714
- more than two years but not exceeding five years 9,163
- more than five years -------------
42,975
Less: Amounts repayable within one year included under current
liabilities (Note 18) (7,395)
-------------
35,580
=============
Long-term bank loans are secured and bear interest at rates ranging from 1.75%
below the Hong Kong prime lending rate to 3.5% above that. Refer to Note 30 for
details of the Group's banking facilities.
F-46
20. FINANCE LEASE OBLIGATIONS
-------------------------
Finance lease obligations, net of future finance charges (consolidated),
consisted of:
2 0 0 1
---------
$'000
Amounts repayable within a period 12,973
- not exceeding one year 10,548
- more than one year but not exceeding two years 7,538
- more than two years but not exceeding five years --------
31,059
Less: Amounts repayable within one year included under
current liabilities (12,973)
---------
18,086
=========
21. ACCOUNTS PAYABLE
-----------------
The ageing analysis of accounts payable (consolidated) is as follows:
2 0 0 1
-----------
$'000
0 to 90 days 28,636
91 to 180 days 1,716
181 to 270 days 581
---------
30,933
=========
22. TAXATION PAYABLE
----------------
Taxation payable (consolidated) consisted of:
2 0 0 1
---------
$'000
Hong Kong profits tax -
General provision for Mainland China business tax and
enterprise income tax * 36,642
----------
36,642
==========
* Prior to 1st April, 1999, the Group received contract processing fees based
on the utilisation of equipment and technology provided by the Group to its
Mainland China contracting partners. Provision for Mainland China taxes in
relation to these fees has been made for periods prior to 1st April, 1999.
F-47
23. DEFERRED TAXATION
-----------------
Movements of deferred taxation (consolidated) were:
2001
-----------
$'000
Beginning of year 13,394
Provision for net timing differences 6,637
-----------
20,031
===========
Deferred taxation represented the taxation effect of accelerated depreciation of
fixed assets for taxation purposes. There were no significant unprovided
deferred tax liabilities as at 31st March, 2001.
24. SHARE CAPITAL
-------------
Movements were:
2 0 0 1
-----------------------------
Number of
shares Nominal value
----------- --------------
'000 $'000
Authorised - ordinary shares of $0.01 each 20,000,000 200,000
=========== =========
Issued and fully paid - ordinary shares of $0.01 each (from
22nd February, 2000 - see Note (iii))
Beginning of year 3,150,000 31,500
Issuance of shares for acquisition of associates (i) 1,632,000 16,320
Issuance of shares through a placement (ii) 550,000 5,500
Effect of ten-for-one share split (iii) - -
---------- ---------
End of year 5,332,000 53,320
========== =========
Notes -
(i) During the year ended 31st March, 2001, the Company issued 1,632,000,000
shares of $0.01 each, with a fair value of $186,048,000 (i.e. $0.114 per
share), as consideration for the acquisition of a 49.9% equity interest in
New Epoch Information (BVI) Company Limited.
(ii) In August 2000, the Company issued 550,000,000 shares of $0.01 each through
a private placement for cash consideration of $62,700,000 (i.e. $0.114 per
share).
(iii)On 22nd February, 2000, the Company effected a ten-for-one share split and
changed the par value of its shares from $0.1 per share to $0.01 per share.
As a result, the then outstanding 315,000,000 shares with a par value of
$0.10 each became 3,150,000,000 shares with a par value of $0.01 each.
F-48
25. SHARE OPTIONS
-------------
The Company has a share option scheme, under which it may grant options to
employees of the Group (including executive directors of the Company) to
subscribe for shares in the Company, subject to a maximum of 10% of the nominal
value of the issued share capital of the Company from time to time, excluding
for this purpose shares issued on the exercise of options. The subscription
price will be determined by the Company's board of directors, and will not be
less than the higher of the nominal value of the shares and 80% of the average
of the closing price of the shares quoted on The Stock Exchange of Hong Kong
Limited on the five trading days immediately preceding the date of offer of the
options.
During the year ended 31st March, 2001, the Company granted options to subscribe
for 315,000,000 shares in the Company at a subscription price (subject to
adjustment) of $0.109 per share to be exercised during the period from 9th June,
2001 to 26th February, 2009. No options were exercised during the year ended
31st March, 2001.
26. RESERVES
---------
Movements of reserves were:
2 0 0 1
-----------------
Share premium
-----------------
$'000
Consolidated
Beginning of year 104,613
Premium on issuance of shares 226,928
Share issuance expenses (3,321)
-------------
End of year 328,220
=============
2 0 0 1
--------------------------------------------------
Contributed
Share premium surplus Total
----------------- -------------- --------------
$'000 $'000 $'000
Company
Beginning of year 104,613 158,601 263,214
Premium on issuance of shares 226,928 - 226,928
Share issuance expenses (3,321) - (3,321)
------------- -------------- -------------
End of year 328,220 158,601 486,821
============= ============== =============
Under the Companies Act 1981 of Bermuda (as amended), contributed surplus is
distributable to shareholders, subject to the condition that the Company cannot
declare or pay a dividend, or make a distribution out of contributed surplus if
(i) it is, or would after the payment be, unable to pay its liabilities as they
become due, or (ii) the realisable value of its assets would thereby be less
than the aggregate of its liabilities and its issued share capital and share
premium account.
F-49
27. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT
---------------------------------------------
a. Reconciliation of profit before taxation to net cash inflow from operating
activities:
2 0 0 1
---------
$'000
Profit before taxation 61,320
Interest income (8,723)
Interest expense 30,105
Share of losses of associates 6,167
Provision against receivables from an associate 8,293
Depreciation of fixed assets 75,436
Net loss on disposal of fixed assets 377
Deficit on revaluation of an investment property 250
Increase in inventories (107,094)
Increase in accounts receivable (63,330)
(Increase) Decrease in prepayments and deposits (4,776)
Increase in accounts payable 3,866
Increase in accruals and other payables 8,636
----------
Net cash inflow from operating activities 10,527
==========
b. Analysis of changes in financing:
Share
capital and Finance
share Short-term Long-term lease
premium bank loans bank loans obligations Total
------------- ------------- ------------ ------------ ---------
$'000 $'000 $'000 $'000 $'000
As at 31st March, 2000 136,113 12,000 8,395 19,740 176,248
Issuance of shares
- - for cash 62,700 - - - 62,700
- - as consideration to acquire an
associate 186,048 - - - 186,048
Share issuance expenses (3,321) - - - (3,321)
New finance lease obligations - - - 27,151 27,151
Repayment of capital element of
finance lease obligations - - - (15,832) (15,832)
New bank loans - 26,547 37,480 - 64,027
Repayment of bank loans - (12,000) (2,900) - (14,900)
----------- ------------- ------------ ------------ ----------
As at 31st March, 2001 381,540 26,547 42,975 31,059 482,121
=========== ============= ============ ============ ==========
c. Major non-cash transactions:
(i) During the year, the Group acquired fixed assets of approximately
$27,151,000 under finance leases.
(ii) During the year, the Company issued 1,632,000,000 shares with a fair
value of $186,048,000 as consideration for the acquisition of a 49.9%
equity interest in New Epoch Information (BVI) Company Limited.
F-50
27. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (Cont'd)
---------------------------------------------
d. Analysis of cash and cash equivalents:
2 0 0 1
------------
$'000
Cash and bank deposits 110,424
Bank overdrafts (84)
Trust receipts bank loans (321,466)
-----------
(211,126)
===========
28. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------
The Group and the Company had the following significant commitments and
contingent liabilities which were not provided for in the financial statements:
a. Capital commitments
Capital commitments, which were all authorised and
contracted for, are analysed as follows:
2 0 0 1
--------------------------------------------
Consolidated Company
------------------- -------------------
$'000 $'000
Acquisition of fixed assets 9,587 -
=================== ===================
F-51
28. COMMITMENTS AND CONTINGENT LIABILITIES (Cont'd)
--------------------------------------
b. Operating lease commitments
The Group had operating lease commitments in respect of rented premises and
machinery under various non- cancellable operating lease agreements extending to
September 2006. The total commitments are analysed as follows:
2 0 0 1
--------------------------------------
Consolidated Company
-------------- -------------
$'000 $'000
Amounts payable 1,784 -
- within one year 1,704 -
- between one year and two years 2,081 -
- between two years and five years 221 -
- over five years ----------- ------------
5,790 -
=========== ============
The commitments payable within one year are analysed as follows:
2 0 0 1
--------------------------------------
Consolidated Company
--------------- ---------------
$'000 $'000
Leases expiring - -
- - within one year 1,362 -
- - within two to five years 422 -
- - over five years ------------ -----------
1,784 -
============ ===========
2 0 0 1
--------------------------------------
Consolidated Company
------------ ---------
$'000 $'000
Leases expiring - -
- within one year 1,362 -
- within two to five years 422 -
- over five years ---------- ----------
1,784 -
========== ==========
c. Contingent liabilities
2 0 0 1
---------------------------------------
Consolidated Company
-------------- -------------------
$'000 $'000
Bills discounted with recourse 5,166 -
Guarantees provided by the Company
in respect of banking - 344,980
facilities of its subsidiaries
------------ --------------
5,166 344,980
============ ==============
F-52
29. PENSION SCHEME
The Group's employees in Mainland China are all employed on a contract basis and
consequently the Group has no obligation for pension liabilities.
During the period from 1st April, 2000 to 30th November, 2000, the Group
arranged for its Hong Kong employees to participate in defined contribution
provident funds ("the Original Scheme"), which were managed by independent
trustees. Each of the Group and its employees in Hong Kong made monthly
contributions to the Original Scheme at 5% of the employees' basic salaries. The
employees were entitled to receive their entire contribution and the accrued
interest thereon, and 100% of the Group's employer contribution and the accrued
interest thereon upon retirement or leaving the Group after completing ten years
of service or at a reduced scale of 30% to 90% after completing three to nine
years of service. Any forfeited contributions made by the Group and related
accrued interest were used to reduce the Group's employer contribution. The
Original Scheme was terminated in December 2000.
From 1st December, 2000, the Group has arranged for its Hong Kong employees to
join the Mandatory Provident Fund Scheme ("the MPF Scheme"). The MPF Scheme is a
defined contribution scheme managed by an independent trustee. Under the MPF
Scheme, each of the Group and its employees make monthly contributions to the
scheme at 5% of the employees earnings as defined under the Mandatory Provident
Fund legislation. Both the employer's and the employees' contributions are
subject to a cap of $1,000 per month and thereafter contributions are voluntary.
For the year ended 31st March, 2001, the aggregate amount of the Group's
employer contributions to the Original Scheme and the MPF Scheme was
approximately $624,000 and there was no forfeited contribution utilised to
reduce the Group's employer contributions to the Original Scheme.
30. BANKING FACILITIES AND PLEDGE OF ASSETS
As at 31st March, 2001, the Group had aggregate banking facilities of
approximately $432,186,000 from several banks for overdrafts, loans and trade
financing. Unused facilities as at the same date amounted to approximately
$38,117,000. These facilities were secured by:
a. mortgage over the Group's land and buildings with a net a. book value of
approximately $15,608,000 (see Note 11);
b. pledges of the Group's bank deposits of $77,210,000 (see Note 17);
c. the Group's inventories held under trust receipts bank loan arrangements
(see Note 15);
d. mortgages over certain properties owned by Mr. Lam Sai Wing and Ms. Chan
Yam Fai, Jane, directors of the Company (see Note 3);
e. personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane
(see Note 3);
f. assignment of the benefits in respect of the keyman insurance for Mr. Lam
Sai Wing amounting to $20,000,000; and
g. guarantees provided by the Company.
In addition, the Group is required to comply with certain financial covenants
imposed by a bank.
F-53
31. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES OF AMERICA
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
---------------------------------------------------------------------
The accounting policies adopted by the Company conform to accounting principles
generally accepted in Hong Kong ("HK GAAP") which differ in certain respects
from accounting principles generally accepted in the United States of America
("US GAAP"). The principal differences having a significant effect on its
financial statements are set out below:
a. Accounting on Goodwill
----------------------
Under HK GAAP, goodwill arising on the acquisitions of affiliates has been
charged directly to retained profit on consolidation.
Under US GAAP, the purchase consideration has been allocated to the
identifiable net assets acquired based on their fair values, with any
residual accounted for as goodwill and amortised over its estimated useful
life and less any impairment in value.
b. Investment properties
---------------------
Under HK GAAP, investment properties are stated on the basis of appraised
values and depreciation is not provided. Under US GAAP, investment
properties are stated at historical cost less accumulated depreciation.
c. Share option scheme
-------------------
HFGTL follows the current practice in Hong Kong that no accounting entry is
made on grant of share options to employees. Under US GAAP, compensation
expense for share options is recognised at the date of grant (in accordance
with Accounting Principles Board of Opinion ("APB") No. 25 or Statement of
Financial Accounting Standards ("SFAS") No. 123) and amortised over the
vesting period. The Company adopted APB No. 25 under which the amount of
compensation expense is determined based upon the excess, if any, of the
quoted market price of the shares over the exercise price of the options at
the date of the grant and is amortised over the vesting period of the
opinion concerned.
d. Cash flows
----------
There is no material difference in the cash flow statements of the Group
between HK GAAP and US GAAP for the year ended March 31, 2001 except the
following:
i. Effect of cash flows from interest received, interest paid, profits
tax paid, and dividends paid are separately presented in the cash flow
statement under HK GAAP;
ii. Cash and cash equivalents are short-term, highl liquid investments
with original maturities of less than three months and are readily
convertible to known amounts of cash. They include bank loans and
overdrafts repayable within three months that are reflected as a
component of cash and cash equivalents under HK GAAP.
e. Reclassifications
-----------------
The reconciliation of net income (loss) and shareholders' equity from HK
GAAP to US GAAP as presented below include those items which have a net
effect on net income (loss) or shareholders' equity. There are no other
major GAAP differences not included in the reconciliation which would
affect the classification of assets and liabilities or income and expense.
F-54
31. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES OF AMERCIA
GENERALLY ACCPEPTED ACCOUNTING PRINCIPLES (Cont'd)
-----------------------------------------
A reconciliation of the financial results of the Group from HK GAAP to US GAAP
in relation to net income (loss) for the year ended March 31, 2001 and
shareholders' equity as of March 31, 20001 is:
Net income (loss) for the year ended Shareholders' equity as of
March 31, 2001 March 31, 2001
------------------------------------- ---------------------------
HK$'000 US$'000 HK$'000 US$'000
Balance under HK GAAP 52,164 6,688 506,614 64,951
Adjustments:
- Provision for impairment in value of goodwill
arising from acquisition of New Epoch
Information (BVI) Company Limited under U
GAAP; while goodwill is eliminated directS
against retained profit under HK GAAP (188,142) (24,121) - -
- Reversal of revaluation deficit on investment
properties 250 32 373 48
- additional depreciation on investment properties (99) (13)
- Stock compensation expense (20,307) (2,603) (20,307) (2,603)
- Increase in additional paid-in capital - - 25,200 3,230
- Increase in deferred compensation expense - - (4,893) (627)
-------------- -------------- ------------- ------------
Balance under US GAAP (156,134) (20,017) 506,888 64,986
============== ============== ============= ============
Basic loss per ordinary share under US GAAP HK(3.49) cents US(0.45) cents
============== ==============
Diluted loss per ordinary share under US GAAP HK(3.49) cents* US(0.45) cents*
============== ==============
* Diluted loss per ordinary share under US GAAP is antidilutive as a result
of the net operating loss; therefore, the basic loss per ordinary share and
diluted loss per ordinary share are the same.
A reconciliation of the summarised cash flow statement of the Group from HK GAAP
to US GAAP for the year ended March 31, 2001 is:
Returns on investment
Operating activities Investing activitities Financing activities and servicing of finance Taxation
--------------------- ----------------------- -------------------- ------------------------ -----------------
HK$'000 US$'000 HK$'000 US$'000 HK$'000 US$'000 HK$'000 US$'000 HK$'000 US$'000
Balance under HK GAAP 10,527 1,350 (225,757) (28,943) 91,809 11,770 (23,283) (2,985) (6,203) (796)
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Balance under US GAAP (20,105) (2,578) (225,476) (28,907) (204,326) 26,196 - - - -
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
32. NEW US GAAP ACCOUNTING STANDARDS
--------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded on the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognised currently in earnings unless specific
hedge criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the item in the
income statement or other comprehensive income (depending on the type of hedge).
To adopt hedge accounting, a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", addresses a limited number of implementation difficulties involved
in applying SFAS No. 133.
F-55
32. NEW US GAAP ACCOUNTING STANDARDS (Cont'd)
--------------------------------
The adoption of SFAS No. 133 on April 1, 2001 will not have a significant effect
on the Group's financial statements reconciled to US GAAP.
33. NEW HK GAAP ACCOUNTING STANDARDS
--------------------------------
In February 2000, the Hong Kong Society of Accountants ("HKSA") issued Statement
of Standard Accounting Practice ("SSAP") No. 26 relating to segment reporting.
SSAP No. 26 is effective from January 1, 2001 and requires certain disclosures
regarding an enterprise's primary and secondary reportable segments. The
adoption of SSAP No. 26 will not have a significant effect on the Group's
financial results.
In January 2001, the HKSA issued SSAP No. 28, "Provisions, Contingent
Liabilities, and Contingent Assets". SSAP No. 28 clarifies the measurement and
disclosures for provisions, contingent liabilities and contingent assets. SSAP
No. 28 is effective from January 1, 2001. The adoption of SSAP No. 28 will not
have a significant effect on the Group's financial results.
In January 2001, the HKSA issued SSAP No. 29, "Intangible Assets". SSAP No. 29
establishes the recognition criteria for intangible assets not accounted for
under other pronouncements. SSAP No. 29 requires acquired intangible assets to
be recognised and amortised in financial statements to the extent they are
identifiable, controllable, and provide future economic benefits. SSAP No. 29 is
effective from January 1, 2001. The adoption of SSAP No. 29 will not have a
significant effect on the Group's financial results.
In January and June 2001, the HKSA also issued the following new SSAPs and
interpretations of SSAPs:
* SSAP 30, "Business Combinations"
* SSAP 31, "Impairment of Assets"
* SSAP 32, "Consolidated Financial Statements and Accounting for Investments
in Subsidiaries"
* Interpretation 12, "Business Combinations Subsequent adjustment of fair
values and goodwill initially reported"
* Interpretation 13, "Goodwill - Continuing requirements for goodwill and
negative goodwill previously eliminated against/credited to reserves"
These pronouncements will be effective for the Group's fiscal year beginning
April 1, 2001.
Under the requirements of SSAP 30, goodwill, if any, arising from future
business combinations undertaken by the Group, which are accounted for using the
purchase method of accounting will be recognised as an asset and amortised on a
systematic basis over its useful life. In general, the amortisation period will
not exceed twenty years as SSAP 30 makes a rebuttable assumption that the useful
life of goodwill will not exceed twenty years from initial recognition.
As permitted by the transitional provisions of SSAP 30, goodwill and negative
goodwill previously eliminated against reserves need not be restated at the time
of adoption of SSAP 30.
In accordance with the provisions of Interpretation 13, assessments of
impairment of goodwill in accordance with the provisions of SSAP 31 will apply
to goodwill previously eliminated against reserves and which will not be
restated at the time of adoption of SSAP 30. Any impairment loss identified in
respect of goodwill previously eliminated against reserves will be immediately
recognised as an expense in the income statement. The Group will be required to
assess at each balance sheet date whether there is any indication of impairment
of the goodwill. If such indications exist, the recoverable amount of the
goodwill will need to be estimated to determine the amount of impairment, if
any, to be recognised in the income statement. The Group has not yet completed
its assessment of the impact this pronouncement may have on the Group's
financial statements.
Under the provisions of interpretation 13 and SSAP 30, upon the future disposal
of an interest in a subsidiary or associate or joint venture by the Group, the
gain or loss on disposal will be calculated taking into account the attributable
amount of the purchased goodwill previously eliminated against reserves and not
previously charged to the income statement.
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33. NEW HK GAAP ACCOUNTING STANDARDS (Cont'd)
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SSAP 31 prescribes procedures to be applied to ensure that assets are carried at
not more than their recoverable amounts. SSAP 31 defines the recoverable amount
of an asset to be the higher of its net selling price and its value in use. In
adopting SSAP 31, the Group will be required to determine value in use of the
assets, including fixed assets, any goodwill arising on business combinations
accounted for using the purchase method and intangible assets, as the present
value of estimated future cash flows from the use of the asset and from its
disposal at the end of its useful life. The Group will be required to assess at
each balance sheet date whether there are any indications that assets may be
impaired, and if there are such indications, the recoverable amount of the
assets will be determined. Any impairment losses identified will be immediately
expensed to the income statement.
The adoption of SSAP 32 on April 1, 2001 will not have a significant effect on
the Group's financial statements.
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