SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to________.
Commission File No. 0-22049
S.W. LAM, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 62-1563911
- -------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Unit 25-32, 2nd Floor, Block B, Focal Industrial Centre
21 Man Lok Street, Hunghom, Hong Kong
-----------------------------------------------------------
(Address of principal executive offices)
(852) 2766 3688
--------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address and formal fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of November 15, 2001, 12,865,000 shares of Common Stock of the
issuer were outstanding.
S.W. LAM, INC.
INDEX
Page
Number
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2001 and
September 30, 2001................................................1
Consolidated Statements of Operations - For the three
months and six months ended September 30, 2000 and
September 30, 2001................................................2
Consolidated Statements of Cash Flows - For the six months ended
September 30, 2000 and September 30, 2001.........................3
Notes to Consolidated Financial Statements........................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................8
Item 3. Quantitative and Qualitative Disclosure About Market Risk........15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................16
SIGNATURES....................................................................16
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
S.W. LAM, INC.
CONSOLIDATED BALANCE SHEETS
(US$,000)
(Unaudited)
March 31, September 30,
ASSETS 2001 2001
------------- -------------
Current asset:
Cash and cash equivalents $ 0 $ 0
Investment in affiliates 20,369 21,240
------- -------
Total assets $20,369 $21,240
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liability:
Due to a director $ 303 $ 303
Stockholders' Equity:
Preferred stock 0 0
Common stock 13 13
Additional paid-in capital 528 528
Retained earnings 19,525 20,396
------- -------
Total stockholders' equity 20,066 20,937
------- -------
Total liabilities and stockholders' equity $20,369 $21,240
======= =======
The accompanying notes are an integral part of these consolidated
financial statements
1
S.W. LAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2000 2001 2000 2001
------ ------ ------ ------
Total revenues $ 16,291 $ 0 $ 43,502 $ 0
Cost of sales and services (13,246) 0 (35,175) 0
-------- --------- --------- --------
Gross profit 3,045 0 8,327 0
Selling, general and
administrative expenses (1,374) (31) (3,728) (31)
Interest expenses, net (143) 0 (508) 0
Loss on dilution of equity interests
in subsidiaries (9,611) 0 (9,611) 0
Share of profit of affiliates 149 360 149 999
-------- --------- --------- --------
Income (loss) before income taxes
and minority interests (7,934) 329 (5,371) 968
Provision for income taxes (135) (8) (340) (97)
-------- --------- --------- --------
Income (loss) before minority interests (8,069) 321 (5,711) 871
Minority interests (680) 0 (1,785) 0
-------- --------- --------- --------
Net income (loss) $(8,749) $ 321 $(7,496) $ 871
======= ========= ========= ========
Basic income (loss) per share $(0.68) $ 0.03 $(0.59) $ 0.07
====== ========= ========= ========
Weighted average shares
outstanding 12,800,000 12,865,000 12,800,000 12,865,000
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements
2
S.W. LAM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$,000)
(Unaudited)
Six Months Ended September 30,
2000 2001
-------- -------
Cash flows from operating activities:
Net income (loss) $ (7,496) $ 871
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation of property, plant and equipment 3,549 0
Loss on dilution of interests in subsidiaries 9,611 0
Minority interest 1,785 0
Share of profit of associates, net of taxes and selling,
general and administrative expense attributable to
affiliates (129) (871)
Decrease in operating assets:
Accounts receivable, net (3,741) 0
Inventories (10,131) 0
Prepayments and other current assets (621) 0
Increase in operating liabilities:
Accounts payable 597 0
Accrued liabilities 9 0
Due to affiliates 61 0
Due to a director 414 0
Income taxes payable 321 0
-------- ----------
Net cash used in operating activities (5,771) 0
-------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (5,281) 0
Net cash outflow from disposal of subsidiaries (17,867) 0
-------- ----------
Net cash used in investing activities (23,148) 0
--------- ----------
Cash flows from financing activities:
Net increase in short-term bank borrowings 10,294 0
Repayment of capital element of capital lease obligations (736) 0
Decrease in long-term bank loans (110) 0
--------- ----------
Net cash provided by financing activities 9,448 0
-------- ----------
Net decrease in cash and cash equivalents (19,471) 0
Cash and cash equivalents, as of beginning of period 19,562 0
-------- ----------
Cash and cash equivalents, as of end of period $ 91 $ 0
========= ==========
The accompanying notes are an integral part of these consolidated
financial statements
3
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2001
1. INTERIM PRESENTATION
The interim consolidated financial statements are prepared pursuant to
the requirements for reporting on Form 10-Q. These statements include
the accounts of S.W. Lam, Inc. (the "Company") and its subsidiary,
together with the share of post acquisition results and reserves of its
affiliates under the equity method of accounting. The March 31, 2001
balance sheet data was derived from audited financial statements but
does not include all disclosures required by generally accepted
accounting principles. The interim financial statements and notes
thereto should be read in conjunction with the financial statements and
notes included in the Company's Form 10-K for the year ended March 31,
2001. In the opinion of management, the interim financial statements
reflect all adjustments of a normal recurring nature necessary for a
fair statement of the results for the interim periods presented. The
current period results of operations are not necessarily indicative of
results which ultimately will be reported for the full year ending
March 31, 2002.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
A substantial portion of the sales, purchases and expenses of the
Company's affiliates are in Hong Kong dollars. Management believes that
maintaining books and records in Hong Kong dollars will enable
financial results and relationships to be measured with more relevance
and reliability.
In the financial statements of the individual companies within the
Group, transactions in other currencies during the period are
translated into Hong Kong dollars at the applicable rates of exchange
prevailing at the time of the transactions. Monetary assets and
liabilities denominated in other currencies are translated into Hong
Kong dollars at the applicable rates of exchange in effect at the
balance sheet date. All such exchange differences are dealt with in the
individual companies' statements of operations.
Translation of amounts from Hong Kong dollars ("HK$") to United States
dollars ("US$") is for the convenience of readers and has been made at
US$1 = HK$7.8. No representation is made that the Hong Kong dollar
amounts could have been, or could be, converted into United States
dollars at the rate or at any other rate.
4
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
September 30, 2001
3. AFFILIATED COMPANY DISCLOSURE
a. Dilution of Interest in Operating Subsidiary
On August 23, 2000, the Company's principal operating subsidiary, Hang Fung
Gold Technology Limited ("HFGTL") issued 1,632 million shares to New ePoch
Holdings International Limited ("NEH") in exchange for a 49.9% interest in
New ePoch Information (BVI) Company Limited ("NEI")(the "New ePoch
Transaction"). In conjunction with the New ePoch Transaction, HFGTL also
entered into a loan agreement for the provision of an interest bearing
secured loan facility to NEI of up to the higher of (i) HK$50 million or
(ii) the two-thirds of the amount of the net proceeds of equity or debt
issues of HFGTL. Goodwill arising on the New ePoch Transaction was
eliminated against HFGTL's reserve. On August 28, 2000, HFGTL placed 550
million shares to independent investors for HK$62.7 million (the "HFGTL
Placement").
As a result of the New ePoch Transaction and the HFGTL Placement:
i. the Company's indirect ownership interest in HFGTL decreased from
53.145% to 35% and from 35% to 31.4%;
ii. HFGTL and its subsidiaries (including affiliates)(collectively
referred to as the "HFGTL Group") are classified as affiliates
following the New ePoch Transaction;
iii. the Company's consolidated statements of operations reflect the
Company's pre-transaction interest and post-transaction proportionate
interest in HFGTL Group;
iv. the Company's investment in HFGTL Group is reported on the balance
sheet under the equity method of accounting;
v. the loss, as adjusted, resulting from dilution of the Company's
interest in HFGTL amounted to approximately $2,034,000, which was
charged to the 2001 consolidated statement of operations.
5
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
September 30, 2001
3. AFFILIATED COMPANY DISCLOSURE (Cont'd)
b. Pro Forma Information
In connection with the New ePoch Transaction and the HFGTL Placement, the
Company has presented the following condensed pro forma consolidated
statement of operations reflecting the New ePoch Transaction and the HFGTL
Placement, as if both transactions had occurred at April 1, 1999.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended September 30, 2001
US $000
(Unaudited)
Total revenues $ 0
Selling, general and administrative expenses (31)
---------
Operating loss (31)
Share of profit of affiliates 999
--------
Income before income taxes 968
Provision for income taxes (97)
--------
Net income 871
========
c. Affiliate Operating Results
The Company's operations are conducted entirely through HFGTL Group and NEI
Group (NEI, its subsidiary and affiliate). As a result of the New ePoch
Transaction, from and after August 23, 2000, HFGTL is accounted for as an
affiliate of the Company and the operations of HFGTL Group are no longer
included in the consolidated results of the Company.
6
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
September 30, 2001
3. AFFILIATED COMPANY DISCLOSURE (Cont'd)
c. Affiliate Operating Results (Cont'd)
The following table presents operating results of HFGTL Group and NEI Group
for the six months ended September 30, 2001 (in US$,000):
HFGTL Group NEI Group
----------------------- ---------------------
Six Months Ended Six Months Ended
September 30, 2001 September 30, 2001
----------------------- ---------------------
Total revenues $ 79,250 $ 0
Cost of sales and service (67,563) (0)
----------- ----------
Gross profit 11,687 0
Selling, general and
administrative expenses (6,163) (454)
----------- ----------
Operating income (loss) 5,524 (454)
Interest income (expense), net (1,622) (281)
Share of profit (loss) of affiliates (367) 0
Write-back of (Provision for)
amount due from an affiliate (355) 0
----------- ---------
Income (loss) before income taxes 3,180 (735)
Provision for income taxes (308) 0
----------- ---------
Net income (loss) $ 2,872 $ (735)
=========== =========
7
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of Securities Exchange
Act of 1934. Statements contained herein which are not historical facts are
forward-looking statements that involve risks and uncertainties. All phases of
the Company's operations are subject to a number of uncertainties, risks and
other influences. Therefore, the actual results of the future events described
in such forward-looking statements in this Form 10-Q could differ materially
from those stated in such forward-looking statements. Among the factors which
could cause the actual results to differ materially are the risks and
uncertainties described both in this Form 10-Q and the risks, uncertainties and
other factors set forth from time to time in the Company's other public reports,
filings and public statements. Many of these factors are beyond the control of
the Company, any of which, or a combination of which, could materially affect
the results of the Company's operations and whether the forward-looking
statements made by the Company ultimately prove to be accurate.
Dilution of Interest in Operating Subsidiary
On August 23, 2000, the Company's principal operating subsidiary, Hang
Fung Gold Technology Limited ("HFGTL") issued 1,632 million shares to New ePoch
Holdings International Limited ("NEH") in exchange for a 49.9% interest in New
ePoch Information (BVI) Company Limited ("NEI")(the "New ePoch Transaction"). On
August 28, 2000, HFGTL placed 550 million shares to independent investors for
HK$62.7 million (the "HFGTL Placement").
As a result of the New ePoch Transaction and the HFGTL Placement, the
Company's indirect ownership interest in HFGTL decreased from 53.145% to 35% and
from 35% to 31.4%; HFGTL and its subsidiary (including affiliates) are
classified as affiliates following the New ePoch Transaction; the Company's
consolidated statements of operations reflect the Company's pre-transaction
interest and post-transaction proportionate interest in HFGTL Group; the
Company's investment in HFGTL Group is reported on the balance sheet under the
equity method of accounting; during fiscal 2001, the Company reported a loss on
dilution of equity interest of HFGTL, which was charged to the 2001 consolidated
statement of operations.
Comparability of Financial Data
Prior to the New ePoch Transaction, HFGTL was the principal operating
subsidiary of the Company. After the New ePoch Transaction and the HFGTL
Placement, the Company's effective percentage of ownership in HFGTL was reduced
from 53.145% to 31.4% in August 2000, the accounting treatment of HFGTL and its
subsidiaries (including affiliates) changed from subsidiaries to affiliates of
the Company.
Because the financial statements for the three and six months ended
September 30, 2001 account for HFGTL and its subsidiaries (including affiliates)
as affiliates of the Company, prior year comparative financial information may
be of limited value.
8
Results of Operations
Following the New ePoch Transaction and HFGTL Placement, the operations
of HFGTL Group are no longer consolidated but are reported as a share of profit
in affiliates. For purposes of comparability, the discussion herein includes (1)
consolidated results of operations as reported, (2) pro forma consolidated
results of operations reflecting the New ePoch Transaction and HFGTL Placement
as if those transactions had occurred at April 1, 1999, and (3) operating
results of the Company's affiliates, HFGTL Group and NEI Group, which results
are not included in the consolidated results of operations of the Company.
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 2001
Pro Forma
HFGTL Group NEI Group Consolidated Consolidated
------------------ ----------------- -------------- --------------
Quarter Ended September 30, 2000 2001 2000 2001 2000 2001 2000 2001
---- ----- ----- ----- ------ ---- ---- -----
(in US`000)
Revenues $ 28,004 $ 37,248 $ - $ - $16,291 $ - $ - $ -
Cost of sales and services (22,563) (31,718) - - (13,246) - - -
--------- ---------- -------- ------- -------- -------- ------ ------
Gross profit 5,441 5,530 - - 3,045 - - -
Selling, general and
administrative expenses (2,706) (2,960) (262) (215) (1,374) (31) (22) (31)
--------- ---------- -------- ------- -------- -------- ------ ------
Operating income (loss) 2,735 2,570 (262) (215) 1,671 (31) (22) (31)
Interest expense, net (609) (1,076) (8) (149) (143) - - -
Loss on dilution of equity
interests in subsidiaries - - - - (9,611) - - -
Write-back of (provision for)
amount due from an affiliate - (170) - - - - - -
Share of profit (loss) of
affiliates (95) (182) (270) - 149 360 554 360
--------- --------- -------- ------- -------- --------- ------ ------
Income (loss) before
income taxes 2,031 1,142 (540) (364) (7,934) 329 532 329
Provision for income taxes (180) (26) - - (135) (8) (57) (8)
Minority interest - - - - (680) - - -
--------- --------- -------- ------- -------- --------- ------ ------
Net income (loss) $ 1,851 $ 1,116 $ (540) $ (364) $(8,749) $ 321 $ 475 $ 321
========= ========= ======== ======= ======== ========= ====== ======
Revenues and Gross Profit. Consolidated revenues for the quarter ended
September 30, 2001 were nil as compared to $16.3 million for the quarter ended
September 30, 2000. The decrease in consolidated revenues was attributable to
the reclassification of HFGTL Group as affiliates following the New ePoch
Transaction in August 2000. Pro forma consolidated revenues were nil for both
the 2000 and 2001 quarters.
Consolidated gross profit for the quarter ended September 30, 2001 was
nil as compared to $3 million for the quarter ended September 30, 2000. The
decrease in consolidated gross profit was attributable to the reclassification
of HFGTL Group as an affiliate following the New Epoch Transaction in August
2000. Pro forma consolidated gross profit was nil for both the 2000 and 2001
quarters.
HFGTL Group. Total revenues of HFGTL Group were $37.3 million for the
quarter ended September 30, 2001, an increase of 33.2% from $28 million for the
quarter ended September 30, 2000. The increase in revenues of HFGTL Group for
the quarter was primarily attributable to increased marketing efforts and
adoption of a more competitive pricing strategy.
9
Geographically, within Southeast Asia (including Hong Kong and the PRC)
sales by HFGTL Group increased 60.6% to $32.6 million during the quarter ended
September 30, 2001 from $20.3 million during the same period in the prior year.
Sales within Southeast Asia accounted for 87.6% of total sales during the
current period as compared to 72.6% during the same period in the prior year.
Sales within the region increased due to increased marketing efforts in the
region, particularly in the PRC, during the current quarter. Sales in Southeast
Asia (not including Hong Kong and the PRC) during the quarter ended September
30, 2001 increased 67.7% to $5.2 million from $3.1 million for the same period
in the prior year.
Outside of Asia (mainly in the United States and Europe), HFGTL Group
experienced a 39.6% decrease in sales with these sales accounting for 12.4% of
total sales in the quarter ended September 30, 2001 as compared to 27.4% of
total sales in the same period of the prior year. The decrease in sales outside
of Asia was attributable to a shift in marketing resources and efforts to, and
strong product demand in, Southeast Asia regions, particularly in the PRC. Sales
in Europe decreased approximately 50% to $1.3 million for the quarter ended
September 30, 2001 from $2.6 million in the same period of the prior year. Sales
in the United States decreased approximately 46.4% to $1.5 million during the
quarter ended September 30, 2001 from $2.8 million in the same period of the
prior year.
Gross profit of HFGTL Group increased by 1.9% to $5.5 million during
the current period from $5.4 million during the same period in the prior fiscal
year. The increase in gross profit was mainly attributable to the increase in
revenues. Gross margin decreased to 14.9% in the current period from 19.4% in
the prior fiscal year period. The decrease in gross profit percentage during the
current period was primarily attributable to increased competition, the adoption
of a more competitive pricing strategy and the increase in proportion of sales
of gold products of relatively lower profit margin.
NEI Group. Total revenues of NEI Group were nil during the current
period and the prior year period. NEI Group operations during the current
quarter were focused on developing and operating e-commerce trading facilities
between the PRC and the rest of the world.
Operating Expenses. Consolidated operating expenses for the quarter
ended September 30, 2001 were $31,000 as compared to $1.4 million for the
quarter ended September 30, 2000. The decrease in consolidated operating
expenses was attributable to the reclassification of HFGTL Group as affiliates
following the New ePoch Transaction in August 2000. Pro forma consolidated
operating expenses were $31,000 for the current period and $22,000 for the prior
year period.
HFGTL Group. Total operating expenses of HFGTL Group were $3 million
for the quarter ended September 30, 2001, an increase of 11.1% from $2.7 million
for the quarter ended September 30, 2000. The increase in operating expenses of
HFGTL Group for the quarter was primarily attributable to increased selling
expenses to support increased business operations.
NEI Group. Total operating expenses of NEI Group were $215,000 for the
quarter ended September 30, 2001, a decrease of 17.9% from $262,000 for the
quarter ended September 30, 2000.
10
Interest Expense, Net. Consolidated interest expense, net, for the
quarter ended September 30, 2001 was nil as compared to $143,000 for the quarter
ended September 30, 2000. The decrease in consolidated net interest expense was
attributable to the reclassification of HFGTL Group as affiliates following the
New ePoch Transaction in August 2000. Pro forma consolidated net interest
expense were nil for the 2001 quarter and 2000 quarter.
HFGTL Group. Net interest expense of HFGTL Group was $1,076,000 for the
quarter ended September 30, 2001, an increase of 76.7% from $609,000 for the
quarter ended September 30, 2000. The increase in net interest expense of HFGTL
Group for the quarter was primarily attributable to increased short-term bank
borrowings to support increased business operations.
Share of Profit of Affiliates. Consolidated share of profit of
affiliates totaled $360,000 during the quarter ended September 30, 2001 as
compared to $149,000 during the quarter ended September 30, 2000. Consolidated
share of profit of affiliates represents the Company's 31.4% interest in HFGTL
Group, including a 49.9% interest in NEI Group owned by HFGTL. Pro forma
consolidated share of profit of affiliates totaled $360,000 for the quarter
ended September 30, 2001 and $554,000 for the quarter ended September 30, 2000.
Income Taxes. Consolidated income taxes for the quarter ended September
30, 2001 was $8,000 as compared to $135,000 for the quarter ended September 30,
2000. The decrease in consolidated income tax expense was attributable to the
reclassification of HFGTL Group as affiliates following the New ePoch
Transaction in August 2000. Pro forma consolidated income tax expense were
$8,000 for the 2001 quarter and $57,000 for the 2000 quarter.
HFGTL Group. Income tax expense of HFGTL Group was $26,000 for the
quarter ended September 30, 2001, a decrease of 85.6% from $180,000 for the
quarter ended September 30, 2000. The decrease in income tax expense of HFGTL
Group for the quarter was primarily attributable to adjustment in the quarter
for tax over-accrued in the June 30, 2001 quarter.
Minority Interest. Consolidated minority interest was nil during the
quarter ended September 30, 2001 as compared to $680,000 during the quarter
ended September 30, 2000. The decrease in minority interest was attributable to
reclassification of HFGTL Group from as subsidiaries to become affiliates
following the New ePoch Transaction. Pro forma consolidated minority interest
was nil for the quarters ended September 30, 2001 and 2000.
11
Six Months Ended September 30, 2000 Compared to Six Months Ended September 30,
2001
Pro Forma
HFGTL Group NEI Group Consolidated Consolidated
Six Months Ended September 30, 2000 2001 2000 2001 2000 2001 2000 2001
------- ------- ------ ------ ------ ------ ------ ------
(in US`000)
Revenues $ 55,215 $ 79,250 $ - $ - $ 43,502 $ - $ - $ -
Cost of sales and services (44,492) (67,563) - - (35,175) - - -
--------- --------- ------- ------- --------- ------- ------- ---------
Gross profit 10,723 11,687 - - 8,327 - - -
Selling, general and
administrative expenses (5,060) (6,163) (431) (454) (3,728) (31) (22) (31)
--------- --------- --------- -------- --------- ------- ------- ---------
Operating income (loss) 5,663 5,524 (431) (454) 4,599 (31) (22) (31)
Interest expense, net (974) (1,622) (8) (281) (508) - - -
Loss on dilution of equity interests
in subsidiaries - - - - (9,611) - - -
Write-back of (provision for)
amount due from an affiliate - (355) - - - - - -
Share of profit (loss) of affiliates (95) (367) (452) - 149 999 1,303 999
---------- --------- -------- -------- ---------- ------- ------- ---------
Income (loss) before
income taxes 4,594 3,180 (891) (735) (5,371) 968 1,281 968
Provision for income taxes (385) (308) - - (340) (97) (121) (97)
Minority interest - - - - (1,785) - - -
---------- --------- -------- -------- ---------- -------- ------- ---------
Net income (loss) $ 4,209 $ 2,872 $ (891) $ (735) $ (7,496) $ 871 $1,160 $ 871
========== ========= ======== ======== ========== ======== ======= =========
Revenues and Gross Profit. Consolidated revenues for the six months
ended September 30, 2001 were nil as compared to $43.5 million for the six
months ended September 30, 2000. The decrease in consolidated revenues was
attributable to the reclassification of HFGTL Group as affiliates following the
New ePoch Transaction in August 2000. Pro forma consolidated revenues were nil
for both the 2000 and 2001 periods.
Consolidated gross profit for the six months ended September 30, 2001
was nil as compared to $8.3 million for the six months ended September 30, 2000.
The decrease in consolidated gross profit was attributable to the
reclassification of HFGTL Group as an affiliate following the New Epoch
Transaction in August 2000. Pro forma consolidated gross profit was nil for both
the 2000 and 2001 periods.
HFGTL Group. Total revenues of HFGTL Group were $79.3 million for the
six months ended September 30, 2001, an increase of 43.7% from $55.2 million for
the six months ended September 30, 2000. The increase in revenues of HFGTL Group
for the period was primarily attributable to increased marketing efforts and
adoption of a more competitive pricing strategy.
Geographically, within Southeast Asia (including Hong Kong and the PRC)
sales by HFGTL Group increased 62.6% to $64.4 million during the six months
ended September 30, 2001 from $39.6 million during the same period in the prior
year. Sales within Southeast Asia accounted for 81.3% of total sales during the
current period as compared to 71.7% during the same period in the prior year.
Sales within the region increased due to increased marketing efforts in the
region, particularly in the PRC, during the current period. Sales in Southeast
Asia (not including Hong Kong and the PRC) during the six months ended September
30, 2001 increased 67.1% to $12.7 million from $7.6 million for the same period
in the prior year.
12
Outside of Asia (mainly in the United States and Europe), HFGTL Group
experienced a 5.1% decrease in sales with these sales accounting for 18.7% of
total sales in the six months ended September 30, 2001 as compared to 28.3% of
total sales in the same period of the prior year. The increase in sales outside
of Asia was attributable to a shift in marketing resources and efforts to, and
strong product demand in, Southeast Asia regions, particularly in the PRC. Sales
in Europe decreased approximately 5.7% to $5 million for the six months ended
September 30, 2001 from $5.3 million in the same period of the prior year. Sales
in the United States decreased approximately 1.6% to $6 million during the six
months ended September 30, 2001 from $6.1 million in the same period of the
prior year.
Gross profit of HFGTL Group increased by 9.3% to $11.7 million during
the current period from $10.7 million during the same period in the prior fiscal
year. The increase in gross profit was mainly attributable to the increase in
revenues. Gross margin decreased to 14.7% in the current period from 19.4% in
the prior fiscal year period. The decrease in gross profit percentage during the
current period was primarily attributable to increased competition, the adoption
of a more competitive pricing strategy and the increase in proportion of sales
of gold products of relatively lower profit margin.
NEI Group. Total revenues of NEI Group were nil during the current
period and the prior year period. NEI Group operations during the current period
were focused on developing and operating e-commerce trading facilities between
the PRC and the rest of the world.
Operating Expenses. Consolidated operating expenses for the six months
ended September 30, 2001 were $31,000 as compared to $3.7 million for the six
months ended September 30, 2000. The decrease in consolidated operating expenses
was attributable to the reclassification of HFGTL Group as affiliates following
the New ePoch Transaction in August 2000. Pro forma consolidated operating
expenses were $31,000 for the current period and $22,000 for the prior year
period.
HFGTL Group. Total operating expenses of HFGTL Group were $6.2 million
for the six months ended September 30, 2001, an increase of 21.6% from $5.1
million for the six months ended September 30, 2000. The increase in operating
expenses of HFGTL Group for the period was primarily attributable to increased
selling expenses to support increased business operations.
NEI Group. Total operating expenses of NEI Group were $454,000 for the
six months ended September 30, 2001, an increase of 5.3% from $431,000 for the
six months ended September 30, 2000.
Interest Expense, Net. Consolidated interest expense, net, for the six
months ended September 30, 2001 was nil as compared to $508,000 for the six
months ended September 30, 2000. The decrease in consolidated net interest
expense was attributable to the reclassification of HFGTL Group as affiliates
following the New ePoch Transaction in August 2000. Pro forma consolidated net
interest expense were nil for the 2001 period and 2000 period.
13
HFGTL Group. Net interest expense of HFGTL Group was $1,622,000 for the
six months ended September 30, 2001, an increase of 66.5% from $974,000 for the
six months ended September 30, 2000. The increase in net interest expense of
HFGTL Group for the period was primarily attributable to increased short-term
bank borrowings to support increased business operations.
Share of Profit of Affiliates. Consolidated share of profit of
affiliates totaled $999,000 during the six months ended September 30, 2001 as
compared to $149,000 during the six months ended September 30, 2000.
Consolidated share of profit of affiliates represents the Company's 31.4%
interest in HFGTL Group, including a 49.9% interest in NEI Group owned by HFGTL.
Pro forma consolidated share of profit of affiliates totaled $999,000 for the
six months ended September 30, 2001 and $1,303,000 for the six months ended
September 30, 2000.
Income Taxes. Consolidated income taxes for the six months ended
September 30, 2001 was $97,000 as compared to $340,000 for the six months ended
September 30, 2000. The decrease in consolidated income tax expense was
attributable to the reclassification of HFGTL Group as affiliates following the
New ePoch Transaction in August 2000. Pro forma consolidated income tax expense
were $97,000 for the 2001 period and $121,000 for the 2000 period.
HFGTL Group. Income tax expense of HFGTL Group was $308,000 for the six
months ended September 30, 2001, a decrease of 20% from $385,000 for the six
months ended September 30, 2000. The decrease in income tax expense of HFGTL
Group for the period was primarily attributable to a decrease in income for the
current period compared with the corresponding period in the prior year.
Minority Interest. Consolidated minority interest was nil during the
six months ended September 30, 2001 as compared to $1.8 million during the six
months ended September 30, 2000. The decrease in minority interest was
attributable to reclassification of HFGTL Group from as subsidiaries to become
affiliates following the New ePoch Transaction. Pro forma consolidated minority
interest was nil for the periods ended September 30, 2001 and 2000.
Financial Condition, Liquidity and Capital Resources
The Company had no cash balance and had a working capital deficit of
$303,000 at both September 30, 2001 and March 31, 2001. Because of the
reclassification of HFGTL Group as affiliates, the Company's balance sheet does
not include any of the assets and liabilities of HFGTL Group.
For the six months ended September 30, 2001 no cash was used in
operating activities as compared to net cash used in operating activities of
$5.8 million for the corresponding period of the prior year. This change
resulted from the reclassification of HFGTL Group as affiliates.
No cash was used in investing activities during the six months ended
September 30, 2001 compared with $23.1 million used in investing activities
during the six months ended September 30, 2000. This change resulted from the
reclassification of HFGTL Group as affiliates.
14
No cash was provided by financing activities during the six months
ended September 30, 2001 compared with $9.4 million provided during the six
months ended September 30, 2000. This change resulted from the reclassification
of HFGTL Group as affiliates.
The Company had no long term debt at both September 30, 2001 and March
31, 2001. This was attributable to the reclassification of HFGTL Group from as
consolidated subsidiaries to become as affiliates.
As the Company has no operations other than those conducted by its
affiliates, HFGTL Group, the Company has limited liquidity and capital resource
requirements. Management believes that its current financial condition is
sufficient to meet the Company's anticipated needs for at least the next twelve
months and HFGTL Group's cash and working capital is sufficient to meet its
anticipated needs for at least the next twelve months.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company has no material market risk.
Sales of the Company's affiliates, HFGTL Group, are denominated in
Renminbi (the "Rmb"), U.S. dollars or Hong Kong dollars. Any material
fluctuation in the value of the Rmb, the Hong Kong dollars relative to the U.S.
dollars would have significant impact on HFGTL Group's operating results.
In order to minimize its exposure to fluctuations in the exchange rate
of Rmb, HFGTL Group utilities its Rmb revenue to settle the expenses denominated
in Rmb incurred in the purchase of raw materials and its production facilities
in the PRC. Only the unused Rmb may be subjected to exchange risk. In addition,
HFGTL Group's currency risk during the six months ended September 30, 2001 was
immaterial as a result of the "peg" of Hong Kong dollars to the U.S. dollars and
therefore no derivative contracts such as forward contracts and options to hedge
against foreign exchange fluctuations was considered or made.
HFGTL Group's interest expense is subject to the fluctuations of Hong
Kong interest rates. The interest rates on the bank installment loans of HFGTL
Group, in the principal amount of approximately $9.2 million, ranged from Hong
Kong prime lending rate less 1.75% to Hong Kong prime lending rate plus 3.5%
during the six months ended September 30, 2001. HFGTL Group does not currently
hedge its interest rate exposure as HFGTL Group considers that there are (i) no
significant changes in Hong Kong interest rates in the foreseeable future, and
(ii) no adversely effects on its operation and cash flow even if the applicable
prime lending interest rate is increased by 1% in Hong Kong.
15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
S.W. LAM, INC.
Dated: December 6, 2001 By: /s/ Lam Sai Wing
-----------------------
Lam Sai Wing, President and
Chief Executive Officer
Dated: December 6, 2001 By: /s/ Chan Yam Fai, Jane
-----------------------
Chan Yam Fai, Jane
Chief Financial Officer