U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended March 31, 2004.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from ____ to ____ .
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Commission File Number: 000-50140
ACL SEMICONDUCTORS INC.
(Name of registrant as specified in its charter)
DELAWARE 16-1642709
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
B24-B27,1/F., BLOCK B
PROFICIENT INDUSTRIAL CENTRE, 6 WANG KWUN ROAD
KOWLOON, HONG KONG
(Address of principal executive offices)
(852) 2799-1996
(Registrant's telephone number)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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 [ ]
The number of shares of common stock, par value $.001 per share, of the
Registrant as of May 14, 2004 was 27,829,936 shares.
Transitional small business disclosure format (check one) Yes [ ] No [X]
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
March 31, 2004 (unaudited) and December 31, 2003 1-2
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2004 and March 31, 2003 (unaudited) 3
Condensed Consolidated Statements of Stockholders' Equity
for the year ended December 31, 2003 and three months
ended March 31, 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and March 31, 2003 (unaudited) 5-6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 18
PART II OTHER INFORMATION 19
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES 20
EXHIBITS 21-24
ITEM 1. FINANCIAL STATEMENTS.
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
March 31, December 31,
2004 2003
(Unaudited)
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 182,470 $ 467,074
Accounts receivable, net of allowance
for doubtful accounts of $0 for 2004 and 2003 1,710,840 880,361
Accounts receivable, related parties 6,123,795 5,481,192
Inventories, net 2,692,523 1,327,120
Other current assets 10,679 10,679
----------- -----------
Total current assets 10,720,307 8,166,426
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net of
accumulated depreciation and amortization 50,362 54,382
ACQUISITION DEPOSITS 1,000,000 1,000,000
OTHER DEPOSITS 350,000 350,000
----------- -----------
$12,120,669 $ 9,570,808
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements
1
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,982,257 $ 5,037,304
Accrued expenses 251,126 140,369
Lines of credit and notes payable 2,238,330 2,158,984
Current portion of long-term debt 779,223 884,131
Convertible note payabe, net of unamortized
discount of $151,704 and $250,000 for 2004
and 2003 47,396 --
Due to stockholders for converted
pledged collateral 50,900 --
Amount due to stockholder/director 69,663 --
Income tax payable 199,825 177,645
Other current liabilities 20,418 22,555
------------ -----------
Total current liabilities 10,639,138 8,420,988
Long-term debt, less current portion 102,577 194,703
------------ -----------
Total liabilities 10,741,715 8,615,691
------------ -----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock - $0.001 par value, 50,000,000
shares authorized, 27,829,936 in 2004 and
2003 issued and outstanding 27,830 27,830
Additional paid in capital 3,360,405 3,360,405
Amount due from stockholder/director -- (102,936)
Accumulated deficit (2,009,281) (2,330,182)
------------ -----------
Total stockholders' equity 1,378,954 955,117
------------ -----------
$ 12,120,669 $ 9,570,808
============ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003
------------ ------------
NET SALES:
Related parties $ 8,437,082 $ 3,016,697
Other 21,139,771 12,553,499
Less discounts to customers (26,978) (40,935)
------------ ------------
29,549,875 15,529,261
COST OF SALES 28,273,223 14,720,522
------------ ------------
GROSS PROFIT 1,276,652 808,739
OPERATING EXPENSES:
Selling 15,435 50,412
General and administrative 748,659 491,732
------------ ------------
INCOME FROM OPERATIONS 512,558 266,595
OTHER INCOME (EXPENSES):
Interest expense (138,942) (45,061)
Miscellaneous (168) (2,226)
------------ ------------
INCOME BEFORE INCOME TAXES 373,448 219,308
INCOME TAXES 52,547 38,379
------------ ------------
NET INCOME $ 320,901 $ 180,929
============ ============
EARNINGS PER SHARE - BASIC AND DILUTED $ 0.01 $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC
AND DILUTED 27,829,936 22,380,000
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common stock Additional Due from Total
------------------------ paid-in stockholder/ Accumulated stockholders'
Shares Amount capital director deficit equity (deficit)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2002 22,380,000 $ 22,380 $ 362,235 $ (624,351) $ (379,691) $ (619,427)
Reverse acquisition between
ACL Semiconductors Inc.
(formerly Print Data Corp.) and
Atlantic Components Ltd. 2,829,936 2,830 (2,830) -- -- --
Issuance of common stock to consultants
related to reverse-acquisition 2,620,000 2,620 2,751,000 -- -- 2,753,620
Dividend declared -- -- -- -- (512,821) (512,821)
Intrinsic value for beneficial conversion
feature on convertible note payable -- -- 250,000 -- -- 250,000
Net decrease in due from stockholder/
director -- -- -- 521,415 -- 521,415
Net loss -- -- -- -- (1,437,670) (1,437,670)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 27,829,936 $ 27,830 $ 3,360,405 $ (102,936) $(2,330,182) $ 955,117
Net decrease in due from stockholder/
director (unaudited) -- -- -- 102,936 -- 102,936
Net income (unaudited) -- -- -- -- 320,901 320,901
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2004 (unaudited) 27,829,936 $ 27,830 $ 3,360,405 $ -- $(2,009,281) $ 1,378,954
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Three months ended
March 31, March 31,
2004 2003
----------- ---------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 320,901 $ 180,929
----------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 5,125 7,552
Change in inventory reserve 16,078 15,385
Interest expense from discount amortization of convertible note payable 98,296 --
Non-cash compensation to shareholder/director 200,000 200,000
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS
Accounts receivable - other (830,479) (1,363)
Accounts receivable - related parties (642,603) (920,748)
Inventories (1,381,481) (100,360)
Other current assets -- (4,371)
INCREASE (DECREASE) IN LIABILITIES
Accounts payable 1,944,953 833,137
Accrued expenses 110,757 (17,898)
Income tax payable 22,180 17,167
Other current liabilities (2,137) 21,954
----------- ---------
Total adjustments (459,311) 50,455
----------- ---------
Net cash provided by (used for)
operating activities (138,410) 231,384
----------- ---------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Loans to stockholders (27,401) (16,139)
Purchases of property, equipment and improvements (1,105) (33,333)
----------- ---------
Net cash used for investing activities (28,506) (49,472)
----------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Three Months Ended
March 31, March 31,
2004 2003
--------- ---------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds on lines of credit and
notes payable 79,346 258,415
Principal payments on long-term debt (197,034) (171,307)
--------- ---------
Net cash provided by (used for)
financing activities (117,688) 87,108
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (284,604) 269,020
CASH AND CASH EQUIVALENTS, beginning of the period 467,074 178,937
--------- ---------
CASH AND CASH EQUIVALENTS, end of the period $ 182,470 $ 447,957
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 33,756 $ 45,061
========= =========
Income tax paid $ 30,366 $ 18,332
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements
6
ACL SEMICONDUCTORS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The condensed consolidated financial statements include the financial statements
of ACL Semiconductors Inc. and its subsidiaries, Atlantic Components Ltd. and
Alpha Perform Technology Limited (collectively, "ACL" or the "Company"). The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete consolidated financial
statements. These condensed consolidated financial statements and related notes
should be read in conjunction with the Company's audited financial statements
for the fiscal years ended December 31, 2003, 2002 and 2001 filed in the Form
10-K filed by the Company on April 14, 2004. In the opinion of management, these
condensed consolidated financial statements reflect all adjustments which are of
a normal recurring nature and which are necessary to present fairly the
consolidated financial position of ACL as of March 31, 2004 and December 31,
2003, and the results of operations for the three-month periods ended March 31,
2004 and 2003 and the cash flows for the three month-month periods ended March
31, 2004 and 2003. The results of operations for the three months ended March
31, 2004 are not necessarily indicative of the results, which may be expected
for the entire fiscal year. All significant intercompany accounts and
transactions have been eliminated in preparation of the condensed consolidated
financial statements.
NATURE OF BUSINESS OPERATIONS
ACL Semiconductors Inc. (formerly Print Data Corp.) ("Company" or "ACL") was
incorporated under the State of Delaware on September 17, 2002. Through a
reverse-acquisition of Atlantic Components Ltd., a Hong Kong based company,
effective September 30, 2003, the Company's principal activities are
distribution of electronic components under the "Samsung" brandname which
comprise DRAM and graphic RAM, FLASH, SRAM and MASK ROM for the Hong Kong and
Southern China markets. Atlantic Components Ltd., its wholly owned subsidiary,
was incorporated in Hong Kong on May 30, 1991 with limited liability. On October
2, 2003, the Company set up a wholly-owned subsidiary, Alpha Perform Technology
Limited ("Alpha"), a British Virgin Islands company, to provide services on
behalf of the Company in jurisdictions outside of Hong Kong.
CURRENCY REPORTING
Amounts reported in the accompanying condensed consolidated financial statements
and disclosures are stated in U.S. Dollars, unless stated otherwise. The
functional currency of the Company's subsidiaries, which accounted for most of
the Company's operations, is reported in Hong Kong dollars ("HKD"). Foreign
currency transactions (outside Hong Kong) during the period are translated into
HKD according to the prevailing exchange rate at the relevant transaction dates.
Assets and liabilities denominated in foreign currencies at the balance sheet
dates are translated into HKD at period-end exchange rates.
For the purpose of preparing these consolidated financial statements, the
financial statements of ACL reported in HKD have been translated into U.S.
Dollars at US$1.00=HKD7.8, a fixed exchange rate maintained between the United
States and China.
2. EARNINGS PER COMMON SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the basic earnings per
common share is calculated by
7
dividing net income available to common stockholders less preferred dividends by
the weighted average number of common shares outstanding. Diluted earnings per
common share is computed similarly to basic earnings per common share, except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares had been
issued and if the additional common shares were not anti-dilutive. As of March
31, 2004, 350,000 shares of common stock were issuable upon conversion of the
convertible note payable, which was excluded from the calculation of diluted
earnings per share as the effect of the convertible note payable is
anti-dilutive.
3. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH MR. YANG
As of March 31, 2004, the Company had an outstanding payable to Mr. Yang, the
President and Chairman of the Board of Directors of the Company and its largest
stockholder, totaling $69,663, representing amount owed primarily related to
unpaid compensation. As of December 31, 2003, the Company had an outstanding
receivable from Mr. Yang totaling $102,936 representing advanced compensation
paid. These balances bear no interest and are payable on demand.
For the three months ended March 31, 2004 and 2003, the Company recorded
$236,076 and $236,076, respectively, and paid $23,076 and $23,076, respectively,
to Mr. Yang as compensation to him. The respective unpaid amounts offset amounts
due to the Company from Mr. Yang as of March 31, 2004 and December 31, 2003.
During the three months ended March 31, 2004 and 2003, the Company paid rent of
$13,462 each period for Mr. Yang's personal residency as additional
compensation.
TRANSACTIONS WITH CLASSIC ELECTRONICS LTD.
During the three months ended March 31, 2004 and 2003, the Company sold
$8,286,930 and $3,016,697, respectively, of memory products to Classic
Electronics Ltd. ("Classic"). During the three months ended March 31, 2004 and
2003, the Company purchased Samsung memory products sourced from other
authorized distributors of $781,733 and $717,976, respectively, from Classic to
satisfy part of its demand of insufficient product supply from Samsung HK. The
Company had outstanding accounts receivable from Classic totaling $5,913,029 and
$5,289,626, respectively, as of March 31, 2004 and December 31, 2003. The
Company has not experienced any bad debt from this customer in the past.
Pursuant to a written personal guarantee agreement, Mr. Yang personally
guarantees all the outstanding accounts receivable from Classic up to $10
million of accounts receivable.
Effective December 1, 2003, the Company leases two of its facilities and Mr.
Yang's personal residency from Classic. Lease agreements for the two facilities
expire on November 30, 2004 while the lease agreement for Mr. Yang's personal
residency expired on March 31, 2004. ACL is in the process of renewing the lease
agreement for Mr. Yang's personal residency at the same terms which will expire
on March 31, 2005. Monthly lease payments for these 3 leases totaled $7,372. The
Company incurred and paid an aggregate rent expense of $22,115 and $13,461 to
Classic during each of the three month periods ended March 31, 2004 and 2003,
respectively.
On March 4, 2004, the Company announced that on December 29, 2003, the Company
entered into a Letter of Intent to acquire a 51% interest in Classic. Under the
initial terms of the Letter of Intent, the Company agreed to make cash payments
of $5 million and issue 5,000,000 shares of the Company's common stock. On
December 30, 2003, the Company made a non-refundable deposit of $1,000,000 by
forgiving $1,000,000 of accounts receivable from Classic. The Company is in the
process of performing certain due diligence work and the final terms of the
purchase are subject to changes depending on the results of the audits of
Classic and due diligence work.
8
Mr. Ben Wong, a director of Classic, was elected as a director of ACL. Mr. Wong
is a shareholder of Classic.
TRANSACTIONS WITH ACL TECHNOLOGY PTE LTD.
The Company had outstanding accounts receivable from ACL Technology Pte Ltd.
("ACLT") as a result of sales made by the Company during its fiscal year ended
December 31, 2003, of $191,566 as at March 31, 2004 and December 31, 2003. The
Company has not experienced any bad debt from this customer in the past.
Mr. Yang and Mr. Ben Wong are directors and shareholders of ACLT. Effective
September 30, 2003, Mr. Yang and Mr. Ben Wong were elected as directors of ACL.
TRANSACTIONS WITH KADATCO COMPANY LTD.
During the three months ended March 31, 2004, the Company recognized $150,152
from the sale of memory products to Kadatco Company Ltd. ("Kadatco"), a company
owned 100% by Mr. Yang. Outstanding accounts receivable from Kadatco totaled
$19,200 as of March 31, 2004. The Company has not experienced any bad debt from
this customer in the past.
Mr. Yang is the sole beneficial owner of the equity interest of Kadatco.
Effective September 30, 2003, Mr. Yang was elected as director of ACL.
4. CONVERTIBLE NOTE PAYABLE
On December 31, 2003, the Company issued a 12% subordinated convertible note in
the principal amount of $250,000 (the "Financing Note") to Professional Traders
Fund, Inc. ("PTF"), a financing company. The borrowing amount is due and payable
on December 31, 2004. Interest on the Financing Note is payable in arrears on
March 31, June 30, September 30, and December 31, 2004. In the event of default
on principal and interest payments, interest shall accrue at a rate of 15% from
and after the date of such default, and the Company would be obligated to pay a
default penalty equal to 30% of the then-unpaid principal and accrued interest
owing thereunder. At the option of the debt holder, such unpaid principal,
interest and default penalty can be paid with shares of the Company's common
stock at conversion price, which is defined in the following paragraph.
The Financing Note is convertible, at the option of its holder, in whole or in
part, into shares of common stock of the Company at a conversion price equal to,
with respect to any conversion thereof, 40% of the average closing price of the
stock three trading days immediately prior to the date of the notice of such
conversion, the interest payment date or the debt maturity date, as the case may
be; provided, however, that the conversion price shall not in any case exceed
$1. During the three months ended March 31, 2004, PTF has converted $50,900 of
principal into 75,000 shares from the escrowed shares provided by 3 shareholders
of ACL. Per verbal agreements between these three shareholders and ACL, the
Company agreed to issue 75,000 shares of its common stock to these shareholders
as a return of the advances of shares by these shareholders. Accordingly, the
Company classified the $50,900 as "Due to Stockholders for Converted Pledged
Collateral" in the accompanying condensed consolidated balance sheet.
Since the Financing Note is convertible into equity at the option of the holder
thereof at conversion rates below prevailing market prices, an embedded
beneficial conversion feature was recorded as a debt discount and amortized over
the life of the debt in accordance with Emerging Issues Task Force No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments." Since the
intrinsic value of the beneficial conversion feature exceeds the proceeds of the
convertible debt, the amount of the discount assigned to the beneficial
conversion feature is limited to the amount of the proceeds of the convertible
debt. Therefore, the Company recorded a discount of $250,000, the face value of
the debt, and accordingly the debt is $0 at December 31, 2003, net of the
unamortized discount. Any unamortized debt discount related to the beneficial
conversion feature is being accreted as interest expense. During the three
months ended March 31, 2004, the Company recorded interest
9
expense of $98,296 including the discount related to the converted portion of
the debt in the amount of $42,144 and the amortization of discount of $56,152
under the straight-line method. The amortization under straight-line method is
not materially different from the amount under the effective interest method. As
of March 31, 2004, outstanding principal amount and unamortized discount of the
convertible note amounted to $199,100 and $151,704, respectively.
Pursuant to the terms of a Limited Guarantee and Security Agreement, the
Financing Note is guaranteed by 1.2 million shares of the Company's common stock
beneficially owned by three shareholders of which 700,000 are restricted shares
and 500,000 are freely traded shares.
In connection with the Financing Note, the Company agreed to file a registration
statement with the Securities and Exchange Commission in respect of the shares
issuable upon conversion thereof within 60 days of the funding of the note and
agreed to use reasonable efforts to cause such registration statement to be
declared effective within 150 days of the funding of the note. If the Company
fails to meet either of such timelines, a 1% penalty per month on the funded
amount of the Financing Note will be levied against the Company. As of May 14,
2004, the Company had not yet filed a registration statement in respect of such
conversion shares. Accordingly, the Company incurred and accrued a penalty of
$7,500 for the three months ended March 31, 2004.
5. BANK FACILITIES
Pursuant to a debenture deed dated April 20, 2001, Atlantic, a wholly-owned
subsidiary of the Company, pledged its assets as collateral to a bank group in
Hong Kong comprised of Dah Sing Bank Limited, The Hong Kong and Shanghai Banking
Corporation Limited and Overseas Trust Bank Limited for all current and future
borrowings from the bank group by Atlantic. Amounts outstanding under this
borrowing arrangement totaled $3,120,130 as of March 31, 2004. In addition to
the above first priority security over all assets of the Company, such
borrowings are also secured by:
1. a HKD53,550,000 (approximately US$6,865,385) personal guarantee given
by Mr. Yang to the above bank group;
2. a security interest in a residential property located in Hong Kong
owned by an independent third party together with a joint and several
guarantee given by Mr. Yang and an ex-director of the Company; and
3. a personal guarantee given by Mr. Yang for unlimited amount together
with a key man insurance of Mr. Yang for $1,000,000 denoting Dah Sing
Bank Limited as beneficiary.
As of March 31, 2004, the Company's general banking facilities were subject to
interest rates of 0.5% to 1.0% above the Best Lending Rate (currently at 5.0%
per annum) prevailing in Hong Kong.
6. ECONOMIC DEPENDENCE
The Company's distribution operations are dependent on the availability of an
adequate supply of electronic components under the "Samsung" brand name which
have historically been principally supplied to the Company by Samsung
Electronics H.K. Co., Ltd. ("Samsung HK"), a subsidiary of Samsung Electronics
Co., Ltd., a Korean public company. Samsung HK supplied approximately 75% and
87% of materials to the Company for the three months ended March 31, 2004 and
2003 respectively. However, there is no written supply contract between the
Company and Samsung HK and, accordingly, there is no assurance that Samsung HK
will continue to supply sufficient electronic components to the Company on terms
and prices acceptable to the Company or in volumes sufficient to meet the
Company's current and anticipated demand, nor can assurance be given that the
Company would be able to secure sufficient products from other third party
supplier(s) on acceptable terms.
10
In addition, the Company's operations and business viability is to a large
extent dependent on the provision of management services and financial support
by Mr. Yang.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS REPORT CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING
INFORMATION.
ANY REFERENCE TO "ACL", THE "COMPANY" OR THE "REGISTRANT", "WE", "OUR" OR
"US" MEANS ACL SEMICONDUCTORS INC. AND ITS SUBSIDIARIES.
OVERVIEW
CORPORATE BACKGROUND
The Company, through its wholly-owned subsidiaries Atlantic Components
Limited, a Hong Kong corporation ("Atlantic") and Alpha Perform Technology
Limited ("Alpha"), is engaged primarily in the business of distribution of
memory products under "Samsung" brandname which principally comprise DRAM and
Graphic RAM, FLASH, SRAM and MASK ROM for the Hong Kong and Southern China
markets.
As of March 31, 2004, ACL had more than 130 active customers in Hong Kong
and Southern China.
ACL is in the mature stage of operations. As a result, the relationships
between sales, cost of sales, and operating expenses reflected in the financial
information included in this document to a large extent represent future
expected financial relationships. Much of the cost of sales and operating
expenses reflected in our financial statements are recurring in nature.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") recently issued
Financial Reporting Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE
ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, ACL's most critical
accounting policies include: inventory valuation, which affects cost of sales
and gross margin; policies for revenue recognition, allowance for doubtful
accounts, and stock-based compensation. The methods, estimates and judgments ACL
uses in applying these most critical accounting policies have a significant
impact on the results ACL reports in its consolidated financial statements.
INVENTORY VALUATION. Our policy is to value inventories at the lower of
cost or market on a part-by-part basis. This policy requires us to make
estimates regarding the market value of our inventories, including an assessment
of excess or obsolete inventories. We determine excess and obsolete inventories
based on an estimate of the future demand for our products within a specified
time horizon, generally 12 months. The estimates we use for demand are also used
for near-term capacity planning and inventory purchasing and are consistent with
our revenue forecasts. If our demand forecast is greater than our actual demand
we may be required to take additional excess inventory charges, which will
decrease gross margin and net operating results in the future.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. ACL maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of ACL's customers to
make required payments. ACL's allowance for doubtful accounts is based on ACL's
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, ACL's history of bad debts, and the general condition of
the industry. If a major customer's credit
12
worthiness deteriorates, or ACL's customers' actual defaults exceed ACL's
historical experience, ACL's estimates could change and impact ACL's reported
results.
STOCK-BASED COMPENSATION. ACL records stock-based compensation to outside
consultants at fair market value as operating cost. ACL accounted for
options/warrants to outside consultants under the fair value method on the date
of grant using the Black-Scholes pricing method. This option valuation model
requires input of highly subjective assumptions. Changes in the subjective input
assumptions can materially affect the fair value estimate. In management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of these options/warrants granted to outside consultants.
REVENUE RECOGNITION. The Company derives revenues from resale of computer
memory products. Revenue for resale of computer memory products is recognized
based on guidance provided in Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements," as
amended (SAB 104). Computer memory resale revenue is recognized when products
have been shipped and collection is probable.
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB
101 that had been codified in SEC Topic 13, "Revenue Recognition". Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not
impact the consolidated financial statements.
CONTRACTUAL OBLIGATIONS
The following table presents the Company's contractual obligations as of March
31, 2004 over the next five years and thereafter:
Payments by Period
--------------------------------------------------------------------------------------------------
LESS
THAN 1-3 4-5 AFTER 5
AMOUNT 1 YEAR YEARS YEARS YEARS
---------- ---------- -------- -------- --------
Operating Leases 34,439 34,439 -- -- --
Line of credit and notes payable -
short-term 2,238,330 2,238,330 -- -- --
Convertible note payable 199,100 199,100 -- -- --
Long-term Debt 881,800 779,223 102,577 -- --
---------- ---------- -------- -------- --------
Total Contractual Obligations $3,353,669 $3,251,092 $102,577 $ -- $ --
========== ========== ======== ======== ========
ACCOUNTING PRINCIPLES; ANTICIPATED EFFECT OF GROWTH
Below is a brief description of basic accounting principles which the
Company has adopted in determining its recognition of sales and expenses, as
well as a brief description of the effects that the Company believes its
anticipated growth will have on the Company's sales and expenses in the next 12
months.
13
NET SALES
Sales from Samsung are recognized upon the transfer of legal title of the
electronic components to the customers. At March 31, 2004, ACL had more than 130
active customers.
The quantities of memory products the Company sells fluctuate with
changes in demand from its customers. The prices set by Samsung that the Company
must charge its customers are expected to fluctuate as a result of prevailing
economic conditions and their impact on the market. Since the second half of
year 2003, the Company has experienced increased demand for Samsung memory
products among personal and corporate users in the Hong Kong and Southern China
regions due to a recovery of their economies, in particular for the first
quarter of 2004. The Company believes that increased market demand in Hong Kong
and Southern China exceeds the planned production of most memory products
manufacturers in the world and has resulted in upward pressure in average
pricing of the memory products offered by the Company in these regions. The
Company expects this upward trend in average pricing of the available memory
products in these regions to continue over the next 12 months. Due to
insufficient allocation of memory products from Samsung HK, Atlantic's principal
supplier of Samsung memory products, during the three months ended March 31,
2004, the Company had to source certain Samsung memory products from other
Samsung memory products importers rather than directly from Samsung HK.
Fortunately for the Company, Samsung memory products were available at
competitive prices due to memory product surpluses in other parts of the world.
Such availability enabled the Company to maintain approximately the same level
of gross profit when compared to that of the previous period, despite the
regional shortage of Samsung memory products available directly from Samsung HK.
COST OF SALES
Cost of sales consists of costs of goods purchased from Samsung HK, and
purchases from other Samsung authorized distributors. Many factors affect the
Company's gross margin, including, but not limited to, the volume of production
orders placed on behalf of its customers, the competitiveness of the memory
products industry and the availability of cheaper Samsung memory products from
overseas Samsung distributors due to regional demand and supply situations.
Nevertheless, the Company's procurement operations are supported by Samsung HK,
although there is no written long-term supply agreement in place between
Atlantic and Samsung HK.
OPERATING EXPENSES
The Company's operating expenses for the three months ended March 31,
2004 and 2003 were comprised of sales and marketing and general and
administrative expenses only.
Sales and marketing expenses consisted primarily of and internal
commissions paid to internal sales personnel and costs associated with
advertising and marketing activities.
General and administrative expenses include all corporate and
administrative functions that serve to support the Company's current and future
operations and provide an infrastructure to support future growth. Major items
in this category include management and staff salaries, rent/leases,
professional services, and travel and entertainment. The Company expects these
expenses to increase as a result of increased legal and accounting fees
anticipated in connection with the Company's compliance with ongoing reporting
and accounting requirements of the Securities and Exchange Commission and as a
result of anticipated expansion by the Company of its business OPERATIONS. Sales
and marketing expenses are expected to fluctuate as a percentage of sales due to
the addition of sales personnel and various marketing activities planned
throughout the year.
Interest expense, including finance charges, relates primarily to
Atlantic's short-term and long-term bank borrowings, which the Company intends
to reduce, and amortization of discount on the convertible debenture.
14
RESULTS OF OPERATIONS
The following table sets forth unaudited statements of operations data
for the three months ended March 31, 2004 and 2003 and should be read in
conjunction with the "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Company's financial statements and
the related notes appearing elsewhere in this document.
For the Three Months Ended
March 31,
------------------------------
(US$) (Unaudited)
2004 2003
----------- -----------
Net sales $29,549,875 $15,529,261
Cost of sales 28,273,223 14,720,522
Gross profit 1,276,652 808,739
Operating expenses:
Sales and marketing 15,435 50,412
General and administrative 748,659 491,732
Total operating expenses 764,094 542,144
Income from operations 512,558 266,595
Other expenses:
Interest expenses 138,942 45,061
Miscellaneous 168 2,226
Total other expenses 139,110 47,287
Income taxes 52,547 38,379
Net income $ 320,901 $ 180,929
UNAUDITED THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2003
NET SALES
Sales increased by $14,020,614 or 90.3% to $29,549,875 in the three
months ended March 31, 2004 from $15,529,261 in the three months ended March 31,
2003. This increase resulted primarily from the strong performance of the
economies of Hong Kong and Southern China. We expect our sales in the year
ending December 31, 2004 to increase to more than $100 million given the current
strong demand for Samsung memory products and an anticipated increase in the
Company's sales following the Company's acquisition of a majority interest in
Classic , contemplated to occur in the second quarter of 2004.
COST OF SALES
Cost of sales increased $13,552,701, or 92.1%, to $28,273,223 for the
three months ended March 31, 2004 from $14,720,522 for the three months ended
March 31, 2003. The increase in cost of sales resulted from primarily the
increase of sales recorded during the three months ended March 31, 2004. As a
percentage of sales, cost of sales increased slightly to 95.7% of sales in the
three months ended March 31, 2004 from 94.8% of sales in the three months ended
March 31, 2003. We expect our cost of sales in fiscal 2004 to increase as a
result of our expectation of an increase in sales in fiscal 2004.
15
GROSS PROFIT
Gross profit increased by $467,913 or 57.9%, to $1,276,652 for the three
months ended March 31, 2004 from $808,739 for the three months ended March 31,
2003. The increase in gross profits resulted primarily from the increase in
sales by the Company for the three months ended March 31, 2004. The Company's
gross profit decreased slightly from 5.2% of sales in the three months ended
March 31, 2003 compared to 4.3% of sales in the three months ended March 31,
2004, as a result of increased procurement commission paid to certain suppliers
of Samsung memory products sourced from other Samsung authorized distributors to
satisfy the strong demand but not satisfied by Samsung HK.
OPERATING EXPENSES
Sales and marketing expenses decreased by $34,977 or 69.4%, from $50,412
for the three months ended March 31, 2003 to $15,435 for the three months ended
March 31, 2004. This decrease was principally attributable to the restructuring
of the compensation scheme of the Company pursuant to which the Company ceased
paying sales commissions paid to the marketing staff which became effective
during the quarter ended December 31, 2003 in favor of the payment of
performance linked discretionary bonuses. As a percentage of sales, sales and
marketing expenses decreased to 0.05% of sales for the three months ended March
31, 2004 when compared to 0.32% of sales for the three months ended March 31,
2003. We expect sales and marketing expenses to increase in fiscal 2004 due to
an expected increase in sales and the consolidation of selling expenses of
Classic upon our acquisition of a 51% interest therein expected to occur in the
second quarter of 2004.
General and administrative expenses increased $256,927 or 52.2% to
$748,659 in the three months ended March 31, 2004 from $491,732 in the three
months ended March 31, 2003. This increase was principally attributable to
increased professional costs associated with the Company's compliance with its
public reporting requirements since its reverse acquisition transaction in the
last quarter of year 2003 and increased salary and overhead expense associated
with the employment of additional personnel in anticipation of increased demand
for Samsung memory products. Due to anticipated financing and acquisition
activities in 2004 and the anticipated consolidation of general and
administrative expenses of Classic in the second quarter of 2004, we expect that
general and administrative expenses will increase in year 2004.
Income from operations for the Company was $512,558 for the three months
ended March 31, 2004 compared to an income of $266,595 for the three months
ended March 31, 2003, an increase of income by $245,963 or 92.3%. This increase
was the result of increase of gross profit during the first quarter of 2004.
OTHER INCOME (EXPENSES)
Interest expense increased by $93,881, or 208.3%, from $45,061 in the
three months ended March 31, 2003, to $138,942 in the three months ended March
31, 2004. Excluding $98,296 interest expense incurred in the three months ended
March 31, 2004 relatd to amortization of discount on convertible note payable
which is non-cash in nature, as a percentage of sales, interest expense was
$40,646 in the three months ended March 31, 2004. Excluding the above-mentioned
amortization of discount on convertible note payable, interest expense of ACL
decreased to 0.1% of sales for the three months ended March 31, 2004 from 0.3%
for the three months ended March 31, 2003 due to a reduction by the Company of
its need to open and draw down on letters of credits to obtain goods from its
suppliers. We expect our interest expense excluding the amortization of
convertible note to continue to decrease as we repay our long-term bank
borrowings, which decrease is expected to be offset by consolidation of the
line-of-credit and long-term bank borrowings of Classic after our acquisition
anticipated in the second quarter of 2004.
The Company's net income increased by $139,972 from $180,929 for the
three months ended March 31, 2003 compared to an income of $320,901 for the
three months ended March 31, 2004 or 77.4% due primarily to increased gross
margin.
16
INCOME TAX
Income tax increased by $14,168 from $38,379 for the three months ended
March 31, 2003 to $52,547 for the three months ended March 31, 2004,
representing, however, a decrease in our effective tax rate from 17.5% to 14.1%
for such respective periods. Such reduction resulted from the fact that during
the first three months of 2004, a portion of income was attributed to technical
support and procurement services and allocated to Alpha. Such services were
performed out of Hong Kong which was not subject to Hong Kong income tax in
accordance with Hong Kong income tax laws.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have historically been cash
provided by operations, bank lines of credit and credit terms from suppliers.
The Company's principal uses of cash have been for operations and working
capital. The Company anticipates these uses will continue to be its principal
uses of cash in the future. See Note 5 of the Notes to Financial Statements for
a description of the Company's banking arrangements.
The Company may require additional financing in order to reduce its
short-term and long-term debts and implement its business plan. The Company
currently anticipates a need of $3.0 million in additional financing to repay
long-term bank borrowings. In order to meet anticipated demand for Samsung's
memory products in the Southern China market over the next 12 months, the
Company anticipates an additional need of working capital of at least $2.0
million to finance the cash flow required to finance the purchase of Samsung
memory products from Samsung HK one day in advance of the release of goods from
Samsung HK's warehouse before receiving payments from customers upon physical
delivery of such goods in Hong Kong which, in most instances, takes
approximately two days from the date of such delivery. In certain limited
instances, customers of Atlantic are permitted up to thirty (30) days to make
payment for purchased memory products. As the anticipated cash generated by the
Company's operations are insufficient to fund its growth requirements, it will
need to obtain additional funds. There can be no assurance that the Company will
be able to obtain the necessary additional capital on a timely basis or on
acceptable terms, if at all. The Company's business growth and prospects would
be materially and adversely affected. As a result of any such financing, if it
is an equity financing, the holders of the Company's common stock may experience
substantial dilution. In addition, as its results may be negatively impacted and
thus delayed as a result of political and economic factors beyond the
management's control, the Company's capital requirements may increase.
The following factors, among others, could cause actual results to differ
from those expected caused by: pricing pressures in the industry; a downturn in
the economy in general or in the memory products sector; an unexpected decrease
in demand for Samsung's memory products; a decrease in its ability to attract
new customers; an increase in competition in the memory products market; and the
ability or inability of some of ACL's customers to obtain financing. These
factors or additional risks and uncertainties not known to ACL or that it
currently deems immaterial may impair business operations and may cause ACL's
actual results to differ materially from its historical operating results.
Although ACL believes its expectations of future growth are reasonable,
it cannot guarantee future results, levels of activity, performance or
achievements. ACL is under no duty to update its expectation after the date of
this report to conform them to actual results or to make changes in its
expectations.
In the three months ended March 31, 2004, net cash used for operating
activities was $138,410 while in the three months ended March 31, 2003, ACL
generated net cash of $231,384 in operating activities, a decrease of $369,794.
This decrease was caused, in part, by an incidental increase in accounts
receivable from independent third parties of approximately $0.8 million in the
three months ended March 31, 2004 but there was only an immaterial increase in
accounts receivable from independent third parties in the nine months ended
March 31, 2003. In addition, the inventories was increased by approximately $1.4
million during the three months ended March 31, 2004 due to the strong demand of
memory products in such period.
17
An essential element of the Company's growth in the future will be to
obtain adequate additional working capital to meet anticipated market demand
from PC users (business and personal) in the southern part of China.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ACL is exposed to market risk for changes in interest rates as its bank
borrowings accrue interest at floating rates of 0.5% to 1.0% over the Best
Lending Rate (currently at 5.0% per annum) prevailing in Hong Kong. For the
three months ended March 31, 2004 and the three months ended March 31, 2003,
Atlantic did not generate any material interest income (expense). Accordingly,
ACL believes that changes in interest rates will not have a material effect on
its liquidity, financial condition or results of operations.
IMPACT OF INFLATION
ACL believes that its results of operations are not significantly
impacted by moderate changes in inflation rates as it expects it will be able to
pass these costs by component price increases to its customers.
SEASONALITY
ACL has not experienced any material seasonality in sales fluctuations
over the past 2 years in the memory products markets.
ITEM 4. CONTROLS AND PROCEDURES
The Company has established disclosure controls and procedures to ensure
that material information relating to the Company, including Atlantic, is made
known to the officers who certify the Company's financial reports and to other
members of senior management and the Board of Directors.
(a) Based on their evaluation as of a date within 90 days of the
filing date of this Quarterly Report on Form 10-Q, our chief executive officer
and chief financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) There were no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. Although there were no significant deficiencies or material
weaknesses, there were some areas where room for improvement was noted and
management has committed to improving in these areas. The Company has adopted
many of the formal and informal suggestions of our auditors, Stonefield
Josephson, Inc., and are implementing weekly and monthly checks to assure that
these disclosure controls and internal controls stay in place.
18
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q
(a) Exhibits:
21.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
21.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the three months ended March 31, 2004
except for:
1. Form 8-K/A filed February 9, 2004 to the Form 8-K filed October 16, 2003
relating to item 7.
2. Form 8-K filed March 5, 2004 relating to item 12.
3. Form 8-K filed March 24, 2004 relating to items 5 and 7.
4. Form 8-K filed March 25, 2004 relating to items 5 and 7.
5. Form 8-K/A filed April 13, 2004 to the Form 8-K filed March 24, 2004
relating to item 7.
19
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACL SEMICONDUCTORS INC.
Date: May 20, 2004
By: /s/ Chung-Lun Yang
----------------------------------
Chung-Lun Yang
Chief Executive Officer
Date: May 20, 2004 By: /s/ Kenneth Lap-Yin Chan
----------------------------------
Kenneth Lap-Yin Chan
Chief Financial Officer
20