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, 1999
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 September 30, 1999, 12,800,000 shares of Common Stock of the issuer
were outstanding.
S.W. LAM, INC. AND SUBSIDIARIES
INDEX
Page
Number
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999 and
September 30, 1999...............................................1
Consolidated Statements of Operations - For the three
months and six months ended September 30, 1998 and 1999..........2
Consolidated Statements of Cash Flows - For the six months ended
September 30, 1998 and 1999......................................3
Notes to Consolidated Financial Statements.......................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................5
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................11
SIGNATURES.................................................................12
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US$,000)
(Unaudited)
March 31, September 30,
ASSETS 1999 1999
-------- -------------
Current assets:
Cash and cash equivalents $ 16,702 $ 15,347
Accounts receivable, net 15,655 17,346
Inventories 16,970 21,223
Prepayments and other current assets 599 491
-------- --------
Total current assets 49,926 54,407
Property, plant and equipment, and capital leases, net 23,772 26,867
-------- --------
Total assets $73,698 $81,274
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings $ 16,525 $ 21,079
Long-term bank loans, current portion 363 362
Capital lease obligations, current portion 1,224 1,566
Accounts payable 3,437 2,254
Accrued liabilities 861 1,179
Dividend payable 1,849 0
Income tax payable 7,562 8,454
Due to director 400 359
-------- --------
Total current liabilities 32,221 35,253
Long-term bank loans, non-current portion 1,083 1,163
Capital lease obligations, non current portion 997 823
Deferred taxation 1,283 1,283
-------- --------
Total liabilities 35,584 38,522
-------- --------
Minority interest 17,980 20,163
-------- --------
Stockholders' Equity:
Preferred stock 0 0
Common stock 13 13
Additional paid-in capital 511 511
Retained earnings 19,610 22,065
-------- --------
Total stockholders' equity 20,134 22,589
-------- --------
Total liabilities and stockholders' equity $73,698 $81,274
======== ========
The accompanying notes are an integral part of these consolidated
financial statements
1
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(US$,000, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
1998 1999 1998 1999
------ ------ ------ ------
Total revenues $ 16,177 $ 29,041 $ 32,659 $ 53,565
Cost of sales and services (11,755) (22,787) (24,355) (40,545)
-------- -------- -------- --------
Gross profit 4,422 6,254 8,304 13,020
Selling, general and
administrative expenses (2,835) (3,515) (4,188) (6,826)
-------- -------- -------- --------
Operating income 1,587 2,739 4,116 6,194
-------- -------- -------- --------
Other income (expense), net:
Interest expense (377) (569) (715) (1,025)
Interest income 109 157 175 314
Other income (expense) (98) 26 (78) 32
-------- -------- -------- --------
Total other income
(expense), net (366) (386) (618) (679)
-------- -------- -------- --------
Income before income
taxes and minority interest 1,221 2,353 3,498 5,515
Provision for income taxes (149) (355) (563) (877)
-------- -------- -------- --------
Income before minority interest 1,072 1,998 2,935 4,638
Minority interest - (946) - (2,183)
-------- -------- -------- --------
Net income before dividends 1,072 1,052 2,935 2,455
Dividends - redeemable preferred stock 493 - 1,045 -
-------- -------- -------- --------
Net income attributable to common stock $ 579 $ 1,052 $ 1,890 $ 2,455
======== ======== ======== ========
Basic income per share $ 0.05 $ 0.08 $ 0.15 $ 0.19
======== ======== ======== ========
Weighted average shares
outstanding 12,800,000 12,800,000 12,800,000 12,800,000
The accompanying notes are an integral part of these consolidated
financial statements
2
S.W. LAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$,000)
(Unaudited)
Six Months Ended September 30,
1998 1999
------ ------
Cash flows from operating activities:
Net income $ 1,890 $ 2,445
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 1,786 3,373
Minority interest 0 2,183
Redeemable preferred stock dividends 1,045 0
(Increase) Decrease in operating assets:
Accounts receivable, net (1,235) (1,691)
Inventories (1,741) (4,253)
Prepayments and other current assets (282) 108
Due from a director (1,703) 0
(Decrease) Increase in operating liabilities:
Accounts payable 281 (1,183)
Accrued liabilities 112 318
Due to a director 0 (41)
Income taxes payable 563 892
-------- --------
Net cash provided by operating activities 716 2,161
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,669) (6,468)
-------- --------
Net cash used in investing activities (1,669) (6,468)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of preference share by a subsidiary 10,000 0
Payment of dividends 0 (1,849)
Net increase in short-term bank borrowings 4,135 4,554
Net decrease in convertible short-term loan (10,000) 0
Additions of capital lease obligations 2,138 861
Repayment of capital element of capital lease obligations (2,542) (693)
Additions of long-term bank loans 0 258
Repayment of long-term bank loans (156) (179)
-------- --------
Net cash provided by financing activities 3,575 2,952
-------- --------
Effect of exchange rate changes in cash 23 0
-------- --------
Net increase (decrease) in cash and cash equivalents 2,645 (1,355)
Cash and cash equivalents, as of beginning of period 2,094 16,702
-------- --------
Cash and cash equivalents, as of end of period $ 4,739 $15,347
======== ========
The accompanying notes are an integral part of these consolidated
financial statements
3
S.W. LAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
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 all of its wholly owned and
majority owned subsidiary companies (together the "Group"). The March 31,
1999 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, 1999. 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, 2000.
2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION
The translation of the financial statements of group companies into United
States Dollars is performed for balance sheet accounts using closing
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using average exchange rate during each reporting period.
The gains or losses resulting from translation are included in
shareholders' equity separately as cumulative translation adjustments.
4
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.
Results of Operations
The following table sets forth, for the periods indicated, certain items
from the Consolidated Statements of Operations expressed as a percentage of
total revenues.
Three Months Ended Six Months Ended
September 30, September 30,
1998 1999 1998 1999
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 72.7 78.5 74.6 75.7
Gross profit 27.3 21.5 25.4 24.3
Operating expenses 17.5 12.1 12.8 12.7
Income from operations 9.8 9.4 12.6 11.6
Other income (expense), net (2.3) (1.3) (1.9) (1.3)
Income before income taxes
and minority interest 7.5 8.1 10.7 10.3
Income taxes 0.9 1.2 1.7 1.6
Income before minority interest 6.6 6.9 9.0 8.7
Minority interest n.a. 3.3 n.a. 4.1
Net income before dividends 6.6 3.6 9.0 4.6
Preferred stock dividends 3.0 0.0 3.2 0.0
Net income on common stock 3.6 3.6 5.8 4.6
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
Revenues and Gross Profit. Total revenues increased $12.9 million, or
79.5%, to $29 million for the three months ended September 30, 1999 from $16.2
million for the three months ended September 30, 1998. Sales of Company products
were up 87.8% to $29 million during the current period compared to $15.5 million
during the same period in the prior fiscal year. Subcontracting fees decreased
from $0.7 million during the quarter ended September 30, 1998 to $0 during the
quarter ended September 30, 1999.
5
The increase in sales for the period was attributable to expansion of
production facilities to meet increasing demand, new product design and
increased marketing efforts. The decrease in subcontracting fees for the period
was attributable to concentration on the manufacturing of products designed by
the Group as opposed to products manufactured on a subcontract basis in order to
raise the Group's brand name recognition.
Geographically, within Southeast Asia (including Hong Kong and the PRC) the
Company's sales increased 117.6% to $16.1 million during the three months ended
September 30, 1999 from $7.4 million during the same period in the prior year.
Sales within Southeast Asia accounted for 55.3% of total sales during the
current period as compared to 48% during the same period in the prior year.
Sales within the region increased due to improving economic conditions in
Southeast Asia during the period following an extended period of weakness from
late 1997 to early 1999. Sales in Hong Kong increased approximately 163.6% to
$2.9 million for the three months ended September 30, 1999 from $1.1 million for
the same period of the prior year. Sales in the PRC increased approximately
71.1% to $6.5 million for the three months ended September 30, 1999 from $3.8
million for the same period of the prior year. Sales in Southeast Asia (not
including Hong Kong and the PRC) during the three months ended September 30,
1999 increased 168% to $6.7 million from $2.5 million for the same period in the
prior year.
Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 61.5% increase in sales with these sales accounting for
44.7% of total sales in the three months ended September 30, 1999 as compared to
52% of total sales in the same period of the prior year. The increase in sales
outside of Asia was attributable to increased production capacity, increased
marketing efforts and strong product demand which accompanied strong economic
conditions in those regions. Sales in Europe increased approximately 54.1% to
$5.7 million for the three months ended September 30, 1999 from $3.7 million in
the same period of the prior year. Sales in the Middle East were up during the
three months ended September 30, 1999, increasing approximately 100% to $3.4
million from $1.7 million in the same period of the prior year. Sales in the
United States increased approximately 46.2% to $3.8 million during the three
months ended September 30, 1999 from $2.6 million in the same period of the
prior year.
Gross profits increased by 41.4% to $6.3 million during the current period
from $4.4 million during the same period in the prior fiscal year. The increase
in gross profits was mainly attributable to the increase in net sales. Gross
margins decreased to 21.5% in the current period from 27.3% in the prior fiscal
year period. The decrease in gross profit percentage during the current period
was primarily attributable to decreased subcontracting fees and a decrease in
sales of higher margin products as a percentage of total sales which was
partially offset by economies of scale resulting from increased production.
Operating Expenses. Operating expenses totaled $3.5 million during the
current period, an increase of 24% from $2.8 million during the same period in
the prior fiscal year. The increase in operating expenses during the period was
primarily attributable to increased salary and wages, selling expense and
depreciation expense to support increased business operations.
6
Other Income (Expense), Net. Other expenses, net of other income, increased
during the current period to $386,000 from $366,000 in the same period during
the prior year. The increase in net other expenses was attributable to an
increase in interest expense of $192,000 which was partially offset by an
increase in interest income of $48,000 and a favorable variance in other income
of $124,000. The increase in interest expense was attributable to increased
trust receipt bank loans. The increase in interest income was attributable to
increased cash equivalents on hand. The favorable variance in other
expense/income was attributable to miscellaneous income incidental to increased
business operations.
Income Taxes. Income taxes increased by 138.3% to $355,000 during the
current period from $149,000 during the same period in the prior year. The
increase in income taxes during the period was primarily attributable to
increased income.
Minority Interest. Minority interest of $946,000 was reported during the
current period. No minority interest was reported during the prior year period.
Minority interest reflects the group reorganization to accommodate the listing
of shares of the Company's previously indirect wholly- owned subsidiary, Hang
Fung Gold Technology Limited ("Hang Fung Gold") on The Stock Exchange of Hong
Kong Limited in Hong Kong, including the subscription by Phenomenal Limited, an
independent third party, for shares in Hang Fung Gold, and the Hong Kong public
offering pursuant to which additional shares of Hang Fung Gold were sold.
Minority interest reflects the proportionate interest in the earnings of the
Group not attributable to the Company.
Preferred Stock Dividends. Net income attributable to common stockholders
for the quarter ended September 30, 1998 reflects accrued dividends of $493,000
on convertible preferred stock issued by a subsidiary of the Company at June 30,
1998. The convertible preferred stock was redeemed in February 1999 and, thus,
no preferred stock dividends were reported for the current quarter.
Six Months Ended September 30, 1999 Compared to Six Months Ended September 30,
1998
Revenues and Gross Profit. Total revenues increased $20.9 million, or 64%,
to $53.6 million for the six months ended September 30, 1999 from $32.7 million
for the six months ended September 30, 1998. Sales of Company products were up
70.2% to $53.6 million during the current period compared to $31.5 million
during the same period in the prior fiscal year. Subcontracting fees decreased
from $1.2 million during the six months ended September 30, 1998 to $0 during
the six months ended September 30, 1999.
The increase in sales for the period was attributable to expansion of
production facilities to meet increasing demand, new product design and
increased marketing efforts. The decrease in subcontracting fees for the period
was attributable to concentration on the manufacturing of products designed by
the Group as opposed to products manufactured on a subcontract basis in order to
raise the Group's brand name recognition.
7
Geographically, within Southeast Asia (including Hong Kong and the PRC) the
Company's sales increased 59.7% to $24.6 million during the six months ended
September 30, 1999 from $15.4 million during the same period in the prior year.
Sales within Southeast Asia accounted for 46% of total sales during the current
period as compared to 49% during the same period in the prior year. Sales within
the region increased due to increased production capacity and improving economic
conditions in Southeast Asia during the period following an extended period of
weakness from late 1997 to early 1999. Sales in Hong Kong increased
approximately 116% to $5.4 million for the six months ended September 30, 1999
from $2.5 million for the same period of the prior year. Sales in the PRC
increased approximately 34.2% to $10.2 million for the six months ended
September 30, 1999 from $7.6 million for the same period of the prior year.
Sales in Southeast Asia (not including Hong Kong and the PRC) during the six
months ended September 30, 1999 increased 78.4% to $9.1 million from $5.1
million for the same period in the prior year.
Outside of Asia (in the United States, Europe and the Middle East), the
Company experienced a 80.3% increase in sales with these sales accounting for
54% of total sales in the six months ended September 30, 1999 as compared to 51%
of total sales in the same period of the prior year. The increase in sales
outside of Asia was attributable to increased production capacity, increased
marketing efforts and strong product demand which accompanied strong economic
conditions in those regions. Sales in Europe increased approximately 69.7% to
$12.9 million for the six months ended September 30, 1999 from $7.6 million in
the same period of the prior year. Sales in the Middle East were up during the
six months ended September 30, 1999, increasing approximately 54.3% to $5.4
million from $3.5 million in the same period of the prior year. Sales in the
United States increased approximately 114% to $10.7 million during the six
months ended September 30, 1999 from $5 million in the same period of the prior
year.
Gross profits increased by 56.8% to $13 million during the current period
from $8.3 million during the same period in the prior fiscal year. The increase
in gross profits was mainly attributable to the increase in net sales. Gross
margins decreased slightly to 24.3% in the current period from 25.4% in the
prior fiscal year period. The decrease in gross profit percentage during the
current period was primarily attributable to decreased subcontracting fees which
was partially offset by economies of scale resulting from increased production.
Operating Expenses. Operating expenses totaled $6.8 million during the
current period, an increase of 63% from $4.2 million during the same period in
the prior fiscal year. The increase in operating expenses during the period was
primarily attributable to increased salary and wages, selling expense and
depreciation expense to support increased business operations.
Other Income (Expense), Net. Other expenses, net of other income, increased
during the current period to $679,000 from $618,000 in the same period during
the prior year. The increase in net other expenses was attributable to an
increase in interest expense of $310,000 which was partially offset by an
increase in interest income of $139,000 and a favorable variance in other income
of $110,000. The increase in interest expense was attributable to increased
trust receipt bank loans. The increase in interest income was attributable to
increased cash equivalents on hand. The favorable variance in other
expense/income was attributable to miscellaneous income incidental to increased
business operations.
8
Income Taxes. Income taxes increased by 55.8% to $877,000 during the
current period from $563,000 during the same period in the prior year. The
increase in income taxes during the period was primarily attributable to
increased income.
Minority Interest. Minority interest of $2.2 million was reported during
the current period. No minority interest was reported during the prior year
period. Minority interest reflects the group reorganization to accommodate the
listing of shares of the Company's previously indirect wholly- owned subsidiary,
Hang Fung Gold Technology Limited ("Hang Fung Gold") on The Stock Exchange of
Hong Kong Limited in Hong Kong, including the subscription by Phenomenal
Limited, an independent third party, for shares in Hang Fung Gold, and the Hong
Kong public offering pursuant to which additional shares of Hang Fung Gold were
sold. Minority interest reflects the proportionate interest in the earnings of
the Group not attributable to the Company.
Preferred Stock Dividends. Net income attributable to common stockholders
for the six months ended September 30, 1998 reflects accrued dividends of
$1,045,000 on convertible preferred stock issued by a subsidiary of the Company
at June 30, 1998. The convertible preferred stock was redeemed in February 1999
and, thus, no preferred stock dividends were reported for the current period.
Financial Condition, Liquidity and Capital Resources
The Company had a cash balance of $15.3 million and working capital of
$19.2 at September 30, 1999 compared to a cash balance of $16.7 million and
working capital of $17.7 million at March 31, 1999. The increase in working
capital was attributable to net income during the period and normal changes in
current assets and liabilities.
For the six months ended September 30, 1999 net cash provided by operating
activities amounted to $2.2 million as compared to net cash provided by
operating activities of $0.7 million for the corresponding period of the prior
year. This change resulted primarily from a combination of increased net income
before minority interest and accrued dividends of $1.7 million and an increase
in depreciation expense of $1.6 million which was partially offset by variances
in current assets and liabilities associated with increased sales activities.
Net cash used in investing activities totaled $6.5 million during the six
months ended September 30, 1999 compared with $1.7 million during the six months
ended September 30, 1998. This increase was attributable to an increase in
acquisition of machinery and equipment during the current period to support
expanded operations.
Net cash provided by financing activities decreased to $3 million during
the six months ended September 30, 1999 from $3.6 million during the six months
ended September 30, 1998. This decrease was attributable to payment of dividends
accrued and payable at March 31, 1999 which was partially offset by variances in
short-term and long-term bank borrowings and capital lease obligations.
9
At September 30, 1999, the Company had long term debt totaling $3.3 million
compared to long term debt at March 31, 1999 of $3.4 million. The decrease in
long term debt was primarily attributable to the repayment of bank loans and
capital lease obligations which was partially offset by an increase in long-term
bank loans.
Management believes that based on its current financial condition, the
Company's cash and working capital is sufficient to meet the Company's
anticipated needs for at least the next twelve months.
Year 2000 Issue
The Year 2000 Issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock
or date recording mechanism including date sensitive software which uses only
two digits to represent the year, may recognize a date using 00 as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.
The Company is using both internal and external resources to identify
significant applications that will require modification, and to make such
modifications, to ensure Year 2000 Compliance. The total cost to the Company of
these Year 2000 Compliance activities has not been and is not anticipated to be
material to its financial position or results of operations in any given year.
An overall review has been completed on the computer software and hardware
systems of the Company that may be subjected to the Year 2000 problem. The
Company's computer software and hardware with such potential problems were
identified and upgraded by the end of October 1999. It has been concluded that
critical systems have become Year 2000 compliant. The directors of the Company
believe that the internal risk associated with the Year 2000 issue are minimal
and should not cause any significant impact on its operations. The Company has
also initiated communications with major vendors and customers. As of November
1, 1999, the Company had received verbal assurances from its principal vendors
and customers that they are either Year 2000 compliant or are undertaking steps
to assure Year 2000 compliance. The Company expects to have received adequate
assurances of Year 2000 compliance from all material third parties with which
the Company deals by December 1999. However, there can be no guarantee that the
systems of other companies on which the Company's business may rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's system, would not have a
material adverse effect on the Company.
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
11
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 15, 1999 By: /s/ Lam Sai Wing
---------------------------
Lam Sai Wing, President and
Chief Executive Officer
Dated: November 15, 1999 By: /s/ Chan Yam Fai, Jane
---------------------------
Chan Yam Fai, Jane
Chief Financial Officer
12