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, 2002
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 pecified in its charter)
Nevada 62-1563911
- ---------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Kaiser Estate, Phase II
28 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 14, 2002, 12,865,000 shares of Common Stock of the
issuer were outstanding.
S.W. LAM, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2002 and
September 30, 2002................................................1
Consolidated Statements of Operations - For the three
months and six months ended September 30, 2001 and
September 30, 2002.................................................2
Consolidated Statements of Cash Flows - For the
six months ended September 30, 2001 and September 30, 2002.........3
Notes to Consolidated Financial Statements.........................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................7
Item 3. Quantitative and Qualitative Disclosure About Market Risk.........17
Item 4. Controls and Procedures...........................................17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................18
SIGNATURES...................................................................18
CERTIFICATIONS...............................................................19
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
S.W. LAM, INC.
CONSOLIDATED BALANCE SHEETS
(US$,000)
(Unaudited)
March 31, September 30,
ASSETS 2002 2002
--------- -------------
Current asset:
Cash and cash equivalents $ 0 $ 0
Investment in affiliates 21,707 22,716
-------- ----------
Total assets $ 21,707 $ 22,716
======== ==========
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 20,863 21,872
------- -------
Total stockholders' equity 21,404 22,413
------- -------
Total liabilities and stockholders' equity $21,707 $22,716
======= =======
The accompanying notes are an integral part of these
consolidated financial statements
1
S.W. LAM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
2001 2002 2001 2002
--------- -------- -------- --------
Total revenues $ 0 $ 0 $ 0 $ 0
Cost of sales and services 0 0 0 0
--------- -------- ------- -------
Gross profit 0 0 0 0
Selling, general and
administrative expense (31) (16) (31) (28)
Interest expense 0 0 0 0
Interest income 0 0 0 0
Gain on dilution of equity
interest in affiliates 0 6 0 19
Share of profit of affiliates 352 630 902 1,018
--------- -------- -------- -------
Income before income taxes 321 620 871 1,009
Provision for income taxes 0 0 0 0
--------- ---------- -------- -------
Net income $ 321 $ 620 $ 871 $ 1,009
========= ======== ======== =======
Basic income per share $ 0.02 $ 0.05 $ 0.07 $ 0.08
========= ======== ======== =======
Weighted average shares outstanding12,865,000 12,865,000 12,865,000 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,
2001 2002
--------- ---------
Cash flows from operating activities:
Net income $ 871 $ 1,009
Adjustments to reconcile net income to net cash
used in operating activities:
Share of profit of affiliates (902) (1,018)
Gain on dilution of equity interest in affiliates 0 (19)
Increase in operating assets 0 0
Increase in operating liabilities 0 0
--------- ---------
Net cash used in operating activities (31) (28)
--------- --------
Cash flows from investing activities:
Increase in amount due to affiliates 31 28
--------- --------
Net cash provided by investing activities 31 28
--------- --------
Cash flows from financing activities:
Net cash provided by financing activities 0 0
--------- --------
Net decrease in cash and cash equivalents 0 0
Cash and cash equivalents, as of beginning of period 0 0
--------- --------
Cash and cash equivalents, as of end of period $ 0 $ 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, 2002
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, 2002
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,
2002. 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 that ultimately will be reported for the full year ending March
31, 2003.
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, 2002
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 has 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 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.
During the period from May 14, 2002 to May 29, 2002, share options of
HFGTL were exercised for the issue of 60,200,000 new shares in the
capital of HFGTL at a total consideration of HK$6.6 million. The
Company's indirect ownership interest in HFGTL decreased further from
31.4% to 31.05%. On July 29 and 30, 2002, HFGTL repurchased 1,560,000
shares in its own capital at a total consideration of HK$178,000 and,
as a result, the Company's indirect ownership interest in HFGTL
increased from 31.05% to 31.06%. The gain resulting from dilution of
the Company's interest in HFGTL, amounted to approximately $6,000 and
$19,000, respectively, was included in the consolidated statement of
operations for the three months and six months ended September 30,
2002.
5
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
September 30, 2002
3. AFFILIATED COMPANY DISCLOSURE (Cont'd)
b. Affiliate Operating Results
The Company's operations are conducted entirely through HFGTL
Group and NEI Group (NEI, its subsidiary and affiliate). As a
result of the New ePoch Transaction, from and after August 23,
2000, HFGTL is accounted for as an affiliate of the Company and
the operations of HFGTL Group are no longer included in the
consolidated results of the Company.
The following tables present operating results of HFGTL Group and
NEI Group for the six months ended September 30, 2001 and 2002 (in
US$,000):
HFGTL Group
Six Months Ended September 30,
2001 2002
---------- ---------
Total revenues $ 79,250 $ 111,572
Cost of sales and service (67,563) (92,078)
---------- ----------
Gross profit 11,687 19,494
Selling, general and
administrative expenses (6,163) (13,787)
---------- ----------
Operating income 5,524 5,707
Interest income (expense), net (1,622) (1,147)
Share of loss of associates (367) (425)
Provision for amount due
from an associate (355) (454)
---------- ----------
Income before income taxes 3,180 3,681
Provision for income taxes (308) (410)
---------- ----------
Net income $ 2,872 $ 3,271
========= ==========
6
S.W. LAM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
(Unaudited)
September 30, 2002
3. AFFILIATED COMPANY DISCLOSURE (Cont'd)
b. Affiliate Operating Results (Cont'd)
NEI Group
Six Months Ended September 30,
2001 2002
---------- ----------
Total revenues $ 0 $ 14
Cost of sales and service (0) (9)
-------- --------
Gross profit 0 5
Selling, general and
administrative expenses (454) (503)
-------- --------
Operating loss (454) (498)
Interest expense, net (281) (246)
Share of loss of associates 0 (109)
Provision for amount due
from an associate 0 0
--------- --------
Loss before income taxes (735) (853)
Provision for income taxes 0 0
--------- --------
Net loss $ (735) $ (853)
========= ========
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.
7
Reclassification of Subsidiary as Affiliate
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.
During the period from May 14, 2002 to May 29, 2002, share options of
HFGTL were exercised for the issue of 60,200,000 new shares in the capital of
HFGTL at a total consideration of HK$6.6 million. The Company's indirect
ownership interest in HFGTL decreased further from 31.4% to 31.05%. On July 29
and 30, 2002, HFGTL repurchased 1,560,000 shares in its own capital at a total
consideration of HK$178,000 and, as a result, the Company's indirect ownership
interest in HFGTL increased from 31.05% to 31.06%. The gain resulting from
dilution of the Company's interest in HFGTL, amounted to approximately $6,000
and $19,000, respectively, was included in the consolidated statement of
operations for the three months and six months ended September 30, 2002.
Critical Accounting Policies
Our consolidated financial statements and related public
financial information are based on the application of generally accepted
accounting principles ("GAAP"). GAAP requires the use of estimates, assumptions,
judgments and subjective interpretations of accounting principles that have an
impact on the assets, liabilities, revenue and expense amounts reported. These
estimates can also affect supplemental information contained in the external
disclosures of our company including information regarding contingencies, risk
and financial condition. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Valuations based on estimates are reviewed for reasonableness and
conservatism on a consistent basis throughout our company. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements:
8
- Principals of Consolidation and Accounting for Interests in
Subsidiaries and Affiliates. As a result of the Group Reorganization, the HFG
Placement, the exercise of options to purchase shares of HFGTL and the share
repurchase of HFGTL, from and after July 30, 2002, the Company holds 100% of the
outstanding stock of Quality Prince and Quality Prince holds 31.06% of HFGTL and
HFGTL holds 49.9% of NEH. The consolidated financial statements of the Company
include the accounts of its wholly-owned subsidiary, Quality Prince. However,
the Company and Quality Prince are holding companies which carry on no active
business other than their ownership of interests in HFGTL and, indirectly, NEH.
The Company's investment in affiliates for which it ownership
exceeds 20%, but which are not majority-owned or controlled by the Company, is
accounted for using the equity method of accounting. Under the equity method,
the Company's proportionate share of the affiliates' net income or loss is
included in the consolidated statement of operations. Accordingly, the Company's
proportionate share of the net income or loss of HFGTL, including its interest
in NEH, is reflected as a single line item under share of income (loss) of
affiliates. Prior to August 28, 2000 the Company included, and had the Company
retained greater than 50% control of HFGTL the Company would include, the
accounts of HFGTL in its consolidated financial statements and the portion of
any income or loss not attributable to the Company would be reflected as a
minority interest.
- Revenue Recognition and Accounts Receivable. Revenue of Hang
Fung Gold consists of the net invoiced value of merchandise sold after
allowances for returns and discounts and rental income. Revenue is recognized
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
Hang Fung Gold. Sales revenue is recognized when the merchandise is delivered
and title has passed. A reserve is established at that time for estimated sales
returns, discounts and uncollectible amounts. The reserve is based primarily on
management's evaluation of the financial condition of the customer and
historical data relating to returns, discounts and uncollectible receivables.
Hang Fung Gold has demonstrated the ability to make reasonable and reliable
estimates of product returns, discounts and uncollectible receivables. Rental
income is recognized on a straight-line basis over the period of the relevant
leases. Interest income is recognized on a time-proportion basis on the
principal outstanding and at the rate applicable.
- Inventories. Inventories are stated at the lower of cost and
net realizable 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 labor and an appropriate proportion of production overheads. Net
realizable 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 recognized as an expense in the period in which the related
revenue is recognized. The amount of any write-down of inventories to net
realizable value and all losses of inventories are recognized 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 realizable value, is
recognized as a reduction in the amount of inventories recognized as an expense
in the period in which the reversal occurs.
9
- Investment in Associates and Properties; Impairment of
Assets. Hang Fung Gold maintains investments in various privately held entities
involved in the development of e-commerce trading facilities. Investment in
associates is stated at Hang Fung Gold's share of the fair value of the
identifiable net assets of the associates at the time of acquisition, adjusted
for Hang Fung Gold's share of undistributed post-acquisition results and
reserves of the associates, distributions received from the associates and other
necessary alterations in Hang Fung Gold's proportionate interest in the
associates arising from changes in the equity of the associates that have not
been included in the income statement.
Hang Fung Gold also maintains investments in various
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 recognized
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.
Hang Fung Gold reviews long-lived assets, including its
investments in affiliates and in investment properties, for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable. Where it is determined that an asset
has been impaired, a loss will be recorded and the value of the asset as
reported will be reduced to the estimated recoverable value. Due to the dramatic
downturn in the internet market, Hang Fung Gold recorded a charge of $1.1
million in fiscal 2002 relating to the impairment of its investment in
affiliates engaged in development of an e-commerce trading facility.
Results of Operations
Following the New ePoch Transaction and HFGTL Placement, the
operations of HFGTL Group are no longer consolidated but are reported as a share
of profit in affiliates. For purposes of comparability, the discussion herein
includes (1) consolidated results of operations as reported and (2) operating
results of the Company's affiliates, HFGTL Group and NEI Group, which results
are not included in the consolidated results of operations of the Company.
10
Quarter Ended September 30, 2001 Compared to Quarter Ended September 30, 2002
HFGTL Group NEI Group Consolidated
2001 2002 2001 2002 2001 2002
------ ------ ------ ------ ------ ------
Quarter ended September 30,
(in US$,000)
Revenues $ 37,248 $ 60,001 $ 0 $ (18) $ 0 0
Cost of sales and services (31,718) (50,062) 0 (6) 0 0
--------- -------- ------- -------- ------ ------
Gross profit 5,530 9,939 0 (24) 0 0
Selling, general and
administrative expenses (2,960) (6,598) (215) (198) (31) (16)
--------- -------- ------- -------- ------ ------
Operating income (loss) 2,570 3,341 (215) (222) (31) (16)
Interest expense, net (1,076) (650) (149) (124) 0 0
Gain on dilution of equity
interest in affiliate 0 0 0 0 0 6
Share of profit (loss) of
affiliates (182) (198) 0 (52) 352 630
Write-back of (Provision for)
amount due from an affiliate (170) (196) 0 0 0 0
--------- -------- ------- -------- ----- -------
Income (loss) before
income taxes 1,142 2,297 (364) (398) 321 620
Provision for income taxes (26) (269) 0 0 0 0
--------- -------- ------- -------- ----- -------
Net income (loss) $ 1,116 $ 2,028 $ (364) $(398) $ 321 $ 620
========= ======== ======= ======== ===== =======
Revenues and Gross Profit. Consolidated revenues for the three months
ended September 30, 2001 and 2002 were nil. The lack of consolidated revenues
was attributable to the reclassification of HFGTL Group as affiliates following
the New ePoch Transaction in August 2000.
Consolidated gross profit for the quarter ended September 30, 2001 and
2002 was nil. The lack of consolidated gross profit was attributable to the
reclassification of HFGTL Group as an affiliate following the New Epoch
Transaction in August 2000.
HFGTL Group. Total revenues of HFGTL Group were $60 million for the
three months ended September 30, 2002, an increase of 61.1% from $37.2 million
for the three months ended September 30, 2001. The increase in revenues of HFGTL
Group for the quarter was primarily attributable to increased sales in Hong Kong
and Mainland China which were driven by increased marketing efforts in those
markets.
Geographically, within Southeast Asia (including Hong Kong and the PRC)
sales by HFGTL Group increased 62.3% to $52.9 million during the three months
ended September 30, 2002 from $32.6 million during the same quarter in the prior
year. Sales within Southeast Asia accounted for 88.2% of total sales during the
current quarter as compared to 87.6% during the same quarter in the prior year.
Sales within the region increased due to increased marketing efforts in Hong
Kong and the PRC. Sales in Southeast Asia (not including Hong Kong and the PRC)
during the three months ended September 30, 2002 increased 5.8% to $5.5 million
from $5.2 million for the same quarter in the prior year due to recovery from
depressed levels of sales in the 2001 quarter following the events of September
11 which recovery was partially offset by the concentration of marketing efforts
in Hong Kong and the PRC.
11
Outside of Southeast Asia (mainly in the United States and Europe),
HFGTL Group experienced a 52.7% increase in sales with these sales accounting
for 11.8% of total sales in the three months ended September 30, 2002 as
compared to 12.4% of total sales in the same quarter of the prior year. The
increase in sales outside of Southeast Asia was attributable to recovery from
depressed levels of sales in the 2001 quarter following the events of September
11 which recovery was partially offset by the concentration of marketing efforts
in Hong Kong and the PRC and continuing week macroeconomic conditions worldwide.
Sales in Europe increased approximately 176.9% to $3.6 million for the three
months ended September 30, 2002 from $1.3 million in the same quarter of the
prior year. Sales in the United States increased approximately 120% to $3.3
million during the three months ended September 30, 2002 from $1.5 million in
the same quarter of the prior year.
Gross profit of HFGTL Group increased by 80% to $9.9 million during the
current quarter from $5.5 million during the same quarter in the prior fiscal
year. The increase in gross profit was attributable to the increase in net
sales. Gross margin increased to 16.6% in the current period from 14.8% in the
prior fiscal year period. The increase in gross profit percentage during the
current period was primarily attributable to a change in product mix reflected
in increased sales of higher profit margin products.
NEI Group. Total revenues of NEI Group were $(18,000) during the
current quarter as compared to nil during the prior year period. The negative
revenues of NEI Group during the quarter resulted from the return of goods by
customers. 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 three
months ended September 30, 2002 were $16,000 as compared to $31,000 for the
three months ended September 30, 2001. The consolidated operating expenses were
minimal as a result of the reclassification of HFGTL Group as affiliates
following the New ePoch Transaction in August 2000.
HFGTL Group. Total operating expenses of HFGTL Group were $6.6 million
for the three months ended September 30, 2002, an increase of 120% from $3
million for the three months ended September 30, 2001. The increase in operating
expenses of HFGTL Group for the quarter was primarily attributable to increased
sales and marketing costs to promote its "3D-Gold" and "La Milky Way" products
and brands.
NEI Group. Total operating expenses of NEI Group were $198,000 for the
three months ended September 30, 2002, a decrease of 7.9% from $215,000 for the
three months ended September 30, 2001.
Interest Expense, Net. Consolidated interest expense, net, for the
three months ended September 30, 2002 and September 30, 2001 was nil. The lack
of consolidated net interest expense was attributable to the reclassification of
HFGTL Group as affiliates following the New ePoch Transaction in August 2000.
12
HFGTL Group. Net interest expense of HFGTL Group was $650,000 for the
three months ended September 30, 2002, a decrease of 39.6% from $1,076,000 for
the three months ended September 30, 2001. The decrease in net interest expense
of HFGTL Group for the quarter was primarily attributable to lower interest
rates on bank loans.
Share of Profit of Affiliates. Consolidated share of profit of
affiliates, net of taxes, totaled $630,000 during the quarter ended September
30, 2002 as compared to $352,000 during the quarter ended September 30, 2001.
Consolidated share of profit of affiliates represents the Company's interest in
HFGTL Group, including a 49.9% interest in NEI Group owned by HFGTL.
Income Taxes. Consolidated income taxes were nil for both the quarters
ended September 30, 2002 and September 30, 2001.
HFGTL Group. Income tax expense of HFGTL Group was $269,000 for the
three months ended September 30, 2002, an increase of 934.6% from $26,000 for
the three months ended September 30, 2001. The increase in income tax expense of
HFGTL Group for the quarter was primarily attributable to the increase in
pre-tax net income.
Six Months Ended September 30, 2001 Compared to Six Months Ended September 30,
2002
HFGTL Group NEI Group Consolidated
Six months ended September 30, 2001 2002 2001 2002 2001 2002
(in US$,000) ------ ------ ------ ------ ------ ------
Revenues $ 79,250 $ 111,572 $ 0 $ 14 $ 0 0
Cost of sales and services (67,563) (92,078) 0 (9) 0 0
--------- --------- ------- -------- ------- -------
Gross profit 11,687 19,494 0 5 0 0
Selling, general and
administrative expenses (6,163) (13,787) (454) (503) (31) (28)
--------- --------- -------- -------- -------- -------
Operating income (loss) 5,524 5,707 (454) (498) (31) (28)
Interest expense, net (1,622) (1,147) (281) (246) 0 0
Gain on dilution of equity
interest in affiliate 0 0 0 0 0 19
Share of profit (loss) of
affiliates (367) (425) 0 (109) 902 1,018
Write-back of (Provision for)
amount due from an affiliate (355) (454) 0 0 0 0
--------- ---------- ------- --------- ------- ------
Income (loss) before
income taxes 3,180 3,681 (735) (853) 871 1,009
Provision for income taxes (308) (410) 0 0 0 0
--------- ---------- ------- --------- ------- ------
Net income (loss) $ 2,872 $ 3,271 $ (735) $ (853) $ 871 $1,009
========= ========== ======= ========= ======= ======
Revenues and Gross Profit. Consolidated revenues for the six months
ended September 30, 2001 and 2002 were nil. The lack of consolidated revenues
was attributable to the reclassification of HFGTL Group as affiliates following
the New ePoch Transaction in August 2000.
Consolidated gross profit for the six months ended September 30, 2001
and 2002 was nil. The lack of consolidated gross profit was attributable to the
reclassification of HFGTL Group as an affiliate following the New Epoch
Transaction in August 2000.
13
HFGTL Group. Total revenues of HFGTL Group were $111.6 million for the
six months ended September 30, 2002, an increase of 40.7% from $79.3 million for
the six months ended September 30, 2001. The increase in revenues of HFGTL Group
for the period was primarily attributable to increased sales in Hong Kong and
Mainland China which were driven by increased marketing efforts in those
markets.
Geographically, within Southeast Asia (including Hong Kong and the PRC)
sales by HFGTL Group increased 56.4% to $100.7 million during the six months
ended September 30, 2002 from $64.4 million during the same period in the prior
year. Sales within Southeast Asia accounted for 90.3% of total sales during the
current period as compared to 81.3% during the same period in the prior year.
Sales within the region increased due to increased marketing efforts in Hong
Kong and the PRC. Sales in Southeast Asia (not including Hong Kong and the PRC)
during the six months ended September 30, 2002 decreased 21.3% to $10 million
from $12.7 million for the same period in the prior year due to the
concentration of marketing efforts in Hong Kong and the PRC.
Outside of Southeast Asia (mainly in the United States and Europe),
HFGTL Group experienced a 26.7% decrease in sales with these sales accounting
for 9.7% of total sales in the six months ended September 30, 2002 as compared
to 18.7% of total sales in the same period of the prior year. The decrease in
sales outside of Southeast Asia was attributable to the concentration of
marketing efforts in Hong Kong and the PRC and deteriorating macroeconomic
conditions worldwide. Sales in Europe increased approximately 6% to $5.3 million
for the six months ended September 30, 2002 from $5 million in the same period
of the prior year. Sales in the United States decreased approximately 10% to
$5.4 million during the six months ended September 30, 2002 from $6 million in
the same period of the prior year.
Gross profit of HFGTL Group increased by 66.6% to $19.5 million during
the current period from $11.7 million during the same period in the prior fiscal
year. The increase in gross profit was attributable to the increase in net
sales. Gross margin increased to 17.5% in the current period from 14.7% in the
prior fiscal year period. The increase in gross profit percentage during the
current period was primarily attributable to a change in product mix reflected
in increased sales of higher profit margin products.
NEI Group. Total revenues of NEI Group were $14,000 during the current
period as compared to nil during 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 six months
ended September 30, 2002 were $28,000 as compared to $31,000 for the six months
ended September 30, 2001. The consolidated operating expenses were minimal as a
result of the reclassification of HFGTL Group as affiliates following the New
ePoch Transaction in August 2000.
14
HFGTL Group. Total operating expenses of HFGTL Group were $13.8 million
for the six months ended September 30, 2002, an increase of 122.6% from $6.2
million for the six months ended September 30, 2001. The increase in operating
expenses of HFGTL Group for the period was primarily attributable to increased
sales and marketing costs to promote its "3D-Gold" and "La Milky Way" products
and brands.
NEI Group. Total operating expenses of NEI Group were $503,000 for the
six months ended September 30, 2002, an increase of 10.8% from $454,000 for the
six months ended September 30, 2001.
Interest Expense, Net. Consolidated interest expense, net, for the six
months ended September 30, 2002 and September 30, 2001 was nil. The lack of
consolidated net interest expense was attributable to the reclassification of
HFGTL Group as affiliates following the New ePoch Transaction in August 2000.
HFGTL Group. Net interest expense of HFGTL Group was $1,147,000 for the
six months ended September 30, 2002, a decrease of 29.3% from $1,622,000 for the
six months ended September 30, 2001. The decrease in net interest expense of
HFGTL Group for the quarter was primarily attributable to lower interest rates
on bank loans.
Share of Profit of Affiliates. Consolidated share of profit of
affiliates, net of taxes, totaled $1,018,000 during the six months ended
September 30, 2002 as compared to $902,000 during the six months ended September
30, 2001. Consolidated share of profit of affiliates represents the Company's
interest in HFGTL Group, including a 49.9% interest in NEI Group owned by HFGTL.
Income Taxes. Consolidated income taxes were nil for both the six
months ended September 30, 2002 and September 30, 2001.
HFGTL Group. Income tax expense of HFGTL Group was $410,000 for the six
months ended September 30, 2002, an increase of 33.1% from $308,000 for the six
months ended September 30, 2001. The increase in income tax expense of HFGTL
Group for the period was primarily attributable to the increase in pre-tax net
income.
Financial Condition, Liquidity and Capital Resources
Cash and Working Capital. The Company had no cash balance and had a
working capital deficit of $303,000 at both September 30, 2002 and March 31,
2002. 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.
At September 30, 2002, Hang Fung Group had cash balances of $14.6
million and working capital of $47.1 million as compared to a cash balance of
$11.5 million and working capital of $30.5 million at March 31, 2002 and New
Epoch had cash balances of $1.1 million and working capital of $1 million as
compared to cash balances of $1.3 million and working capital of $1.9 million at
March 31, 2002. Included in the cash balance of Hang Fung Group were $10.8
million at September 30, 2002 and $10 million at March 31, 2002 which amounts
were pledged as collateral to secure existing bank financing facilities.
15
Cash Flows. For the six months ended September 30, 2002, net cash used
by the Company in operating activities amounted to $28,000 as compared to
$31,000 during the six months ended September 30, 2001.
Net cash provided by investing activities totaled $28,000 during the
2002 six month period as compared to $31,000 during the 2001 period and
consisted of funds advanced by the Company's affiliate, HFGTL, to pay operating
expenses of the Company.
No cash was provided, or used, by financing activities for the six
months ended September 30, 2002 and 2001.
The Company had no long term debt at both September 30, 2002 and March
31, 2002.
Hang Fung Group had long term debt of $14.1 million at September 30,
2002 as compared to $8.5 million at March 31, 2002 and New Epoch had no long
term debt at September 30, 2002 as compared to $6.4 million at March 31, 2002.
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 September 30, 2002, the Company had no material capital commitments.
Hang Fung Group intends to use available funds as needed to expand its wholesale
and retail business. Additionally, Hang Fung Group expanded the 3D-Gold Tourism
Exhibition Hall with the addition of 30,000 square feet of retail space opening
in September 2002. New Epoch intends to use available funds to develop and
maintain its e-commerce trading facilities.
At September 30, 2002, 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 September 30, 2002 were
approximately $75.2 million of which approximately $68.6 million had been used
at such date.
At September 30, 2002, 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 September 30, 2002, Hang Fung Group's capital lease
obligations totaled $4.3 million of which $2.3 million was attributable to
current lease obligations.
16
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.
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, 2002 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 $19.6 million, ranged from Hong
Kong prime lending rate less 1.75% to Hong Kong prime lending rate plus 1.75%
during the six months ended September 30, 2002. 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.
Item 4. Controls and Procedures
Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the
filing date of this quarterly report, have concluded that as of the Evaluation
Date, our disclosure controls and procedures were adequate and designed to
ensure that material information relating to us and our consolidated
subsidiaries would be made known to them by others within those entities.
There were no significant changes in our internal controls or to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.
17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification Pursuant to 18.U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K, dated June 30, 2002 (filed July 5, 2002), reporting
under Item 4 the resignation of Arthur Andersen & Co as
independent auditors and the appointment of
PricewaterhouseCoopers as independent auditors.
Form 8-K, dated July 24, 2002 (filed July 24, 2002), reporting
under Item 9 the issuance of a press release by Hang Fung Gold
Technology Limited reporting earnings for the year ended March
31, 2002.
Form 8-K, dated June 30, 2002 (filed August 28, 2002),
reporting under Item 4 that PricewaterhouseCoopers had
declined their appointment as independent auditors and the
appointment of Moore Stephens Wurth Frazer and Torbet as
independent auditors.
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: November 21, 2002 By:/s/ Lam Sai Wing
---------------------------
Lam Sai Wing, President and
Chief Executive Officer
Dated: November 21, 2002 By:/s/ Chan Yam Fai, Jane
----------------------------
Chan Yam Fai, Jane
Chief Financial Officer
18
CERTIFICATIONS
I, Lam Sai Wing, certify that:
1. I have reviewed this quarterly report on Form 10-Q of S.W. Lam,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 21, 2002
By: /s/ Lam Sai Wing
Lam Sai Wing
Chief Executive Officer
19
I, Chan Yam Fai, Jane, certify that:
1. I have reviewed this quarterly report on Form 10-Q of S.W. Lam,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 21, 2002
By: /s/ Chan Yam Fai, Jane
Chan Yam Fai, Jane
Chief Financial Officer
20