UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED - December 31, 2004
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 Number: 000-50140
ACL SEMICONDUCTORS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 16-1642709
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(State or other jurisdiction (IRS Employer
of incorporation) 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, including area code)
Securities registered pursuant to Common Stock - $.001 par value
Section 12(b) of the Act: The Common Stock is listed on the
Over-the-Counter Bulletin Board
Securities registered pursuant to None
Section 12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports) and (2) has been subject to such filing requirements for
at least the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 31, 2005 was approximately $1,525,982 based upon the
closing price of $0.28 of the registrant's common stock on the OTC Bulletin
Board, as of the last business day of the most recently completed first fiscal
quarter (March 31, 2005). (For purposes of determining this amount, only
directors, executive officers, and 10% or greater stockholders have been deemed
affiliates).
Registrant had 27,829,936 shares of common stock, par value $0.001 per share,
outstanding as of April 13, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). N/A
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN CONTAIN
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
ANNUAL REPORT, STATEMENTS THAT ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT
MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING,
THE WORDS "PLAN", "INTEND", "MAY," "WILL," "EXPECT," "BELIEVE", "COULD,"
"ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR SIMILAR EXPRESSIONS OR OTHER
VARIATIONS OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. EXCEPT
AS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
ANY REFERENCE TO ACL, THE COMPANY, WE, US, OUR OR THE REGISTRANT MEANS ACL
SEMICONDUCTORS INC. AND ITS SUBSIDIARIES.
TABLE OF CONTENTS
Form 10-K Index
PART I
PAGE
Item 1. Business.......................................................................................2
Item 2. Properties....................................................................................12
Item 3. Legal Proceedings.............................................................................13
Item 4. Submission of Matters to a Vote of Security Holders...........................................13
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.....................................................................................14
Item 6. Selected Financial Data.......................................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................27
Item 8. Financial Statements and Supplementary Data...................................................27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................................27
Item 9A. Controls and Procedures.......................................................................27
PART III
Item 10. Directors and Executive Officers of the Registrant............................................28
Item 11. Executive Compensation........................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.................................................................31
Item 13. Certain Relationships and Related Transactions................................................32
Item 14. Principal Accounting Fees and Services........................................................36
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................36
Signatures ............................................................................................40
1
PART I
ITEM 1. BUSINESS
We were incorporated under the laws of the State of Delaware on
September 17, 2002. Our predecessor, Print Data Corp. ("Historic Print Data")
was incorporated under the laws of the State of Delaware on August 15, 1984 as a
business forms distributor and supplier of office and computer environment
supply needs. In September 2001, Historic Print Data merged with Odyssey Capital
Group, Ltd., a Nevada Corporation ("Odyssey"), whereby all of the issued and
outstanding shares of Historic Print Data stock were acquired by means of a
merger of Historic Print Data into Odyssey, with Odyssey as the surviving
corporation. Historic Print Data effectively disappeared.
In connection with the merger, Articles of Merger were filed in
September 2001 with the Nevada Department of State; however, due to oversight,
the Certificate of Merger was not filed until August 2002 with the Delaware
Department of State. Odyssey's Nevada certificate of incorporation remained as
the surviving corporation's certificate of incorporation, and as part of the
merger transaction, Odyssey amended its certificate of incorporation to change
its name to Print Data Corp. For accounting purposes the acquisition was treated
as a recapitalization of Historic Print Data with Historic Print Data as the
acquirer (reverse acquisition). At the time of the merger transaction, Odyssey
was a shell corporation conducting virtually no business operation, other than
its efforts to seek merger partners or acquisition candidates. Its
capitalization consisted of 1,818,532 shares of common stock issued and
outstanding. Shareholders of Historic Print Data received 7,500,000 shares of
Odyssey common stock and 642,576 shares of Odyssey preferred stock (convertible
into 3,212,880 shares of common stock). Concurrently, an additional 790,000
shares of preferred stock (convertible into 3,950,000 shares of common stock)
was issued to certain advisors and consultants as part of the plan of merger.
Odyssey was originally incorporated as Dayton Filmcorp. under the laws
of the State of Nevada in June 1987. In August 1987, World Energy Solar
Technology Corp., a Utah corporation, merged into Dayton Filmcorp, whereby
Dayton Filmcorp was the surviving corporation. In 1994, Dayton Filmcorp changed
its name to Universal Marketing and Entertainment, Inc. In 1998, it reverse
split its stock 1 for 20. In May 2001, Universal Marketing and Entertainment,
Inc. changed its name to Odyssey Capital Group, Ltd., and reverse split its
stock 1 for 5. In September 2001, Odyssey merged with Historic Print Data,
whereby Odyssey was the surviving corporation; and Odyssey changed its name to
Print Data Corp., a Nevada corporation ("Print Data Nevada"). On October 11,
2002, Print Data Nevada restructured its entire capital structure whereby it
reverse split its common stock 1 for 20 and its preferred stock 1 for 500; and,
in order to change its state of incorporation from Nevada to Delaware, Print
Data Nevada, merged into its newly formed subsidiary Print Data Corp., a
Delaware corporation. Pursuant to the plan of merger, all of the issued and
outstanding shares of Print Data Nevada stock were acquired by means of a merger
of Print Data Nevada into the Company, with the Company as the surviving
corporation. Print Data Nevada effectively disappeared. The Company's
certificate of incorporation remained as the surviving corporation's certificate
of incorporation. Pursuant to the plan of merger, each share of common stock of
Print Data Nevada was converted into one share of common stock of the Company
and each share of preferred stock of Print Data Nevada was converted into 5
shares of common stock of Print Data Corp.
On September 8, 2003, the Company entered into a Share Exchange and
Reorganization Agreement (the "Exchange Agreement") with Atlantic Components
Limited, a Hong Kong corporation ("Atlantic"), and Mr. Chung-Lun Yang, the sole
beneficial stockholder of Atlantic ("Mr. Yang"), which set forth the terms and
conditions of the exchange by Mr. Yang of his common shares of Atlantic,
representing all of the issued and outstanding capital stock of Atlantic, in
exchange for the issuance by
2
Company to Mr. Yang and certain financial advisors of an aggregate twenty five
million (25,000,000) shares of common stock, par value $0.001 per share (the
"Common Stock"), of Company (the "Transaction"). Pursuant to the Exchange
Agreement, the Company and Atlantic agreed, INTER ALIA, to elect Mr. Yang and
Mr. Ben Wong to the board of directors ("Board of Directors") of the Company
upon the closing of the Transaction (the "Closing"), effective as of that date
(the "Closing Date"), at which time, all of the Company's existing directors
resigned.
On September 9, 2003, in contemplation of the Closing and the resultant
change in control of the Board of Directors, the Company filed an Information
Statement on Schedule 14f-1 with the Securities and Exchange Commission (the
"SEC").
The Closing occurred on September 30, 2003, upon the satisfaction or
waiver of the conditions to the Closing set forth in the Exchange Agreement, as
a result of which (i) Atlantic became a wholly-owned subsidiary of the Company,
(ii) Mr. Yang received an aggregate of 22,380,000 shares of Common Stock, (iii)
the Company's existing directors resigned and Mr. Yang and Mr. Wong were
appointed to fill their vacancies and become the sole members of the Board of
Directors, and (iv) certain financial advisors to Atlantic became entitled to
receive an aggregate of 2,620,000 shares of Common Stock. Giving effect to the
Closing (including required issuances to financial advisors), Mr. Yang held
approximately 80.4% of the outstanding Common Stock immediately following the
Closing.
In connection with the Transaction, the Company entered into a
Conveyance Agreement dated as of September 30, 2003, pursuant to which the
Company conveyed its historic operations of providing supplies used in a
computer or office environment to New Print Data Corp, a newly-formed,
wholly-owned subsidiary of the Company, by assigning all of the assets and
liabilities relating to such operations to such subsidiary which, in turn,
accepted the assignment and assumed all such liabilities. On October 1, 2003,
subsequent to the Closing of the Transaction, the Company entered into a
Securities Purchase Agreement with Jeffrey I. Green, Phyllis S. Green and Joel
Green (collectively, the "Series A Holders"), pursuant to which it sold all of
the issued and outstanding capital stock of New Print Data Corp. to the Series A
Holders in consideration for their surrender to the Company for cancellation of
all of their outstanding shares of Series A Preferred Stock, par value $0.001
per share, of the Company.
On December 16, 2003, the Company filed a Certificate of Amendment with
the Secretary of State of the State of Delaware changing its name from Print
Data Corp. to ACL Semiconductors Inc.
The address of the Company's principal executive offices and its
telephone and facsimile numbers at that address are:
ACL Semiconductors Inc., B24-B27, 1st Floor, Block B, Proficient
Industrial Centre, 6 Wang Kwun Road, Kowloon, Hong Kong; Phone Number: (852)
2799-1996.
The Company files registration statements, periodic and current
reports, proxy statements and other materials with the Securities and Exchange
Commission (the "SEC"). You may read and copy any materials the Company files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web
site at www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC,
including the Company's filings.
3
GENERAL
The Company is a non-exclusive distributor in the Hong Kong and South
China markets of memory products of Samsung Electronics Co., Ltd. ("Samsung"),
the world's largest producer of memory chips and a global producer of memory
products pursuant to a distribution agreement with Samsung (the "Distribution
Agreement"). Atlantic Components Ltd. ("Atlantic") was established as a Hong
Kong corporation in May 1991 by Mr. Yang as a regional distributor of memory
products of various manufacturers. In 1993, Atlantic became an authorized
distributor and marketer of Samsung's memory products in Hong Kong and other
overseas markets and entered into the Distribution Agreement. Beginning in 2001,
Atlantic established a representative office in Shenzhen, China and began
concentrating its distribution and marketing efforts in the southern region of
the People's Republic of China. Since 1993, Atlantic has diversified its product
portfolio to include all Samsung's memory products marketed under the "Samsung"
brandname which comprise Dynamic Random Access Memory ("DRAM"), Static Random
Access Memory ("SRAM"), Double Data Rate RAM ("DDR"), Graphic Random Access
Memory ("Graphic RAM"), NAND FLASH, NOR FLASH, MASK Read Only Memory ("MASK
ROM") and Multi-Chip Packing ("MCP"). Atlantic believes it is the largest
distributor of Samsung memory products in Hong Kong and Southern China.
The Company's business objectives are to offer updated market
intelligence to Samsung in connection with the Hong Kong and Southern China
markets' demand in memory products and secure high-quality Samsung products in
order to meet the market demands of individual and corporate users in Hong Kong
and Southern China. Each quarter, the Company works closely with Samsung to
present updated market information collected from retail channels and corporate
users to assist Samsung to plan their production and allocation schedule for the
coming six months. The Company's business strategy is to assist Samsung in
implementing their production planning using market intelligence to balance the
supply and demand of memory products in the Hong Kong and Southern China
markets. Accordingly, the Company maintains and develops a sales and market
research team to answer marketing questions from Samsung on a regular basis. In
addition, the Company has established distribution channels covering retail
outlets and major corporate users in the region allows those retail or ultimate
customers a secure stable supply of Samsung's memory products with competitive
prices. The Company is a non-exclusive distributor of Samsung, and enjoys a
minimum guaranteed gross profit margin of approximately 5% of products sold in
form of sales rebate payable by Samsung.
Approximately 80% of the Company's evenues are derived from sales of
Samsung memory products. As of December 31, 2004, pricing for the Samsung memory
products ranged from approximately $0.17 to $750 per product depending on the
product specifications.
The Distribution Agreement has a one-year term and contains certain
sales quotas to be met by the Company. The Distribution Agreement has been
renewed more than ten times, most recently on March 1, 2004. The Company has
never failed to meet the sales quotas set forth in the Distribution Agreement.
As of April 13, 2005, the Company is in negotiation with Samsung regarding the
annual renewal of the Distribution Agreement.
PRODUCTS
DRAMs are high density, low-cost-per-bit, random access memory
components that store digital information and provide high-speed storage and
retrieval of data. DRAMs are the most widely used semiconductor memory component
in computer systems, DVD player, DVB (settop box), Digital TV, High Definition
TV, PMP (Portable Multimedia Player).
4
SRAMs are semiconductor devices that perform memory functions similar
to DRAMs. SRAMs utilize a more complex memory cell and do not require the memory
array to be periodically refreshed. This simplifies system design for memory
applications utilizing SRAM and allows SRAM to operate faster than DRAM,
although SRAM has a higher cost-per-bit than DRAM.
DDRs (DDR1, DDR2) are random access memory components that transfer
data on both 0-1 and 1-0 clock transitions, theoretically yielding twice the
data transfer rate of normal DRAM or SRAM.
Graphic RAM is a special purpose DDR (DDR1, DDR2, DDR3) as graphic
products request high-speed 3-Dimensional calculation performance and large
memory size as data storage buffer for VCD/DVD display. The current market
consumption on graphic products is mainly for DDR 128Mb IC and DDR 256Mb IC with
clockspeed up to 500MHz.
FLASH. Flash memory is a specialized type of memory component used to
store user data and program code; it retains this information even when the
power is off. Although flash memory is currently used predominantly in mobile
phones and PDAs, it is commonly used in multi-media digital storage applications
for products such as MP3 players, Digital Still Cameras, Digital Voice
Recorders, PDAs, USB Disks, Flash Cards, etc. Samsung is a major supplier in the
world of FLASH products. In July 2003, Samsung announced its intention to
significantly increase its production capacity for FLASH products in
anticipation of future growth of global demand.
MASK ROM is a kind of ROM in which the memory contents are determined
by one of the masks used to manufacture the integrated circuit. MROM can give
high storage density (bits per millimeter squared) making it a cheap solution
for high volume applications. Due to the constant growth of consumer electronic
products such as games, toys and PDAs, the worldwide demand for MASK ROM is
expected to increase significantly in the coming year.
INDUSTRY BACKGROUND
Memory products are integral parts of a wide variety of consumer
products and industry applications including personal computer systems,
notebooks, workstations and servers, handheld computer devices, cellular phones,
camcorders, MP3 music players, digital answering machines and game boxes, DVD
player, DVB (settop box), HDTV and PMP, among others. Market trends, such as
increased emphasis on high-throughput applications, including networking,
graphics, multimedia, computer, consumer, and telecommunications products, have
created opportunities for high performance memory products. Based upon a market
study by iSuppli, Taiwan Digitimes March 2004 report, the market for DRAM memory
products worldwide was estimated to be approximately US$24.6 billion in 2005.
The Company expects the worldwide demand for DRAM products to remain at
approximately the same level in 2006. Samsung is among the world's largest
developers and manufacturers of memory products.
Set forth below is a table forecast on World-Wide Semiconductors Sales
Turnover from Gartner Dataquest quote in February 2004.
5
(THE DATA BELOW REPRESENTS A GRAPH IN THE PRINTED PIECE)
----------------------------------------------------
Forecast On World Semi-Conductors Sales Turnover
USD
Year (In Billion)
---- ------------
2004 21.7
2005 24.6
2006 24.0
2007 26.5
2008 29.4
Information from Taiwan's Electronics Newspaper
----------------------------------------------------
As the largest memory chip manufacturer in the world, Samsung recorded
sales of its DRAM memory products of approximately US$4.9 billion in 2003
(approximately 28.3% of the overall DRAM market). Like many of the major
manufacturers of memory products, Samsung markets and sells its products through
a network of non-exclusive distributors who are granted rights to sell within
specific territories. There are over 200 distributors of Samsung memory products
worldwide of which six are authorized distributors in Hong Kong who serve the
Hong Kong and southern China markets.
----------- -------------------------------- -----------------------
Rating Manufacturer Market Share
----------- -------------------------------- -----------------------
1 Samsung 28.5%
----------- -------------------------------- -----------------------
2 Hynix 16.2%
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3 Micron 15.9%
----------- -------------------------------- -----------------------
4 Infineon 13.9%
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5 Elpida 6.8%
----------- -------------------------------- -----------------------
(Source: iSuppli March 8, 2005)
CUSTOMERS
As of December 31, 2004, the Company had over 200 active customers in
Hong Kong and Southern China, the majority of whom are memory product traders
and PC/Servers OEM manufacturers. Sales to Classic Electronic Ltd., a related
party, accounted for 31%, 21% and 12% of the Company's net sales for the years
ended December 31, 2004, 2003 and 2002. No other customers accounted for more
than 25% of the Company's net sales for 2004, 2003 and 2002. In order to control
the Company's credit risks, the Company does not offer any credit terms to its
customers other than a small number of clients who have long-established
business relationships with the Company.
SALES AND MARKETING
As of December 31, 2004, the Company employed a total of 13
salespeople, each of whom has several years experience in the memory products
industry. Nine of these salespeople are stationed in the Company's headquarters
offices in Hong Kong; and four work out of the Company's representative office
in Shenzhen, China as customer liaisons. These sales personnel co-operate with
key memory
6
product retailers and PC/Servers OEM manufacturers to ensure that clients are
supplied promptly with Samsung memory products. The Company intends to expand
its sales force if levels of business materially increase in the next twelve
months.
MARKET RESEARCH
The Company invests significant resources in market research for its
own account to provide prompt and accurate market intelligence and feedback on a
weekly or on demand basis to Samsung in order to assist Samsung's production
planning and products allocation functions and maintains the close business
relationship accordingly.
SUPPLIERS
As of December 31, 2004, the distributed mostly Samsung memory products
and relied heavily on Samsung to supply these products. Since 1993, our
procurement operations have been supported by Samsung Electronics H.K. Co., Ltd.
("SAMSUNG HK"), a wholly-owned subsidiary of Samsung, to ensure there are enough
supplies of memory products according to our monthly sales quota although there
is no written long-term distribution agreement in place with Samsung HK. Samsung
HK is allocated quantities of Samsung memory products each year based on
anticipated demand for such products by the customers of the various
distributors of Samsung memory products in Hong Kong. The distributors that are
supported by Samsung HK provide Samsung HK with their own annual estimates of
product demand. In case of unexpected strong demand in the market exceeding our
monthly sales quota, there is no assurance that Samsung HK will be able to
supply sufficient memory products to us and other non-exclusive distributors to
meet such demand in excess of Samsung's global allocation policy to Samsung HK.
In the event of a supply shortage, the market prices of such memory products
will rise and any loss of income attributable to our inability to fulfill all of
our orders would be offset by the increase in income as a result of any increase
in the market prices of such memory products. The most recent instance of a
supply shortage of memory product (FLASH) occurred in early 2004 as a result of
unexpectedly strong demand in Hong Kong and Southern China. The Company believes
that this shortage of FLASH supply was unusual and has not had an adverse effect
on its reputation insofar as the Company explained to its customers the reason
for its inability to fill their orders and the Company believes that other
suppliers of Samsung memory products in Hong Kong and Southern China experienced
similar shortages. However, no assurance can be given that any such shortages
will not recur or that such shortages won't have a negative impact on the
Company's business.
Atlantic relies solely on Samsung to provide it with memory products
for distribution to its clients. Atlantic's relationship with Samsung is
primarily maintained through Mr. Yang, the founder of the Company, who is
verbally contracted to remain with the Company as Chief Executive Officer for
the next two years. If the Company's relationship with Samsung is terminated or
if Mr. Yang terminates his employment with Atlantic, Atlantic may be unable to
renew the Distribution Agreement with Samsung or may not be able to continue as
a distributor of Samsung memory products on favorable terms if at all.
COMPETITION
The memory products industry in the Hong Kong and Southern China
markets is very competitive. However, as one of the world's largest memory
products manufacturers, Samsung's memory products are competitively priced and
have an established reputation for product quality and brandname recognition in
the retail and PC/Server OEM & Consumer segments. The Company, as one of the
largest distributors of Samsung's memory products for the Hong Kong and Southern
China
7
markets, believes it is in a strong competitive position against other US,
European, Japanese and Taiwanese memory products manufacturers and distributors.
Samsung's principal competitors in the Hong Kong and Southern China
markets include Hynix and other Taiwanese manufacturers such as Nanya, PSC,
Promos, ISSI and ESMT. The Company's principal competitors also include the five
other non-exclusive distributors of Samsung memory products in the Hong Kong and
Southern China markets. Samsung may at its sole discretion increase the number
of distributors of its products in Hong Kong and Southern China which would
result in increased competition for the Company.
REGULATION
As of December 31, 2004, the Company's business operations were not
subject to the regulations of any jurisdiction other than China. Although the
Company is not formally authorized to do business in the People's Republic of
China, it has been permitted by the Chinese authorities to establish a
representative office in Shenzhen, China to carry out liaison works for its
customers in Southern China. The Company executes its sales contracts and
deliver its products in Hong Kong for its Chinese customers and there have been
no restrictions imposed on the Company by the mainland Chinese authorities with
respect to the Company's pursuit of business growth and opportunities in China.
EMPLOYEES
As of December 31, 2004, the Company had 40 employees. Of the 40
employees, 13 employees are in sales and marketing, 13 employees are in
administration, 8 employees are in engineering, 6 employees are in customer
service and liaison. None of the Company employees are represented by labor
unions.
The Company's primary hiring sources for its employees include
referrals from existing employees, print and Internet advertising and direct
recruiting. All of the Company's employees are highly skilled and educated and
subject to rigorous recruiting standards appropriate for a company involved in
the distribution of brandname memory products. The Company attracts talent from
numerous sources, including higher learning institutions, colleges and industry.
Competition for these employees is intense.
EMPLOYEE COMPENSATION
For the year ended December 31, 2004, Mr. Yang, the Company's chief
executive officer and director, had annual compensation exceeding $100,000. No
long-term compensation was awarded or paid to him in 2004.
As of December 31, 2004, the Company did not have any employment
agreements with its directors, executives or staff and the Company had not
issued any stock options or stock appreciation rights to any executive officers
(or any other persons). The Company may grant stock options or stock
appreciation rights to these or other executive officers or other persons in the
future at the discretion of our Board of Directors.
8
RISK FACTORS
In addition to the other information contained in this report, the
following risk factors should be considered carefully in evaluating an
investment in the Company and in analyzing the Company's forward-looking
statements.
IF OUR RELATIONSHIP WITH SAMSUNG IS TERMINATED, WE MAY NOT BE ABLE TO CONTINUE
OPERATIONS.
We rely ultimately on Samsung to provide us with memory products for
distribution to our clients even though we, with the consent from Samsung HK,
can purchase the required memory products from other Samsung distributors under
the same mode in calculation of commission income receivable from Samsung. Our
relationship with Samsung is primarily maintained through our Chief Executive
Officer Mr. Yang, who is verbally contracted to remain with us for the next two
years. If our relationship with Samsung is terminated or if Mr. Yang terminates
his employment with us, we may be unable to replace Samsung as distributor of
memory products on favorable terms if at all.
Although we are not an exclusive distributor of Samsung's memory
products, we believe we are the largest Samsung memory products distributor for
the Hong Kong and Southern China markets. Although the Distribution Agreement is
subject to annual renewal at Samsung's option, we do not foresee, based upon the
long-term business relationship with Samsung established by Mr. Yang and our
sales history with respect to the distribution of Samsung's memory products, any
significant obstacles to obtaining renewals of the Distribution Agreement in the
foreseeable future. However, no assurances can be given that Samsung will
definitely renew the Distribution Agreement or, if renewed, on terms
satisfactory to us.
In addition, Samsung has the right to increase the number of
distributors of its memory products in Hong Kong and the Southern China markets
without consulting us. If Samsung significantly increases the number of
authorized distributors of its memory products, competition among Samsung
distributors, would increase and we may not be able to meet its annual sales
quota, which could increase the likelihood that Samsung would not renew the
Distribution Agreement, or if renewed, that we could operate profitably.
IF THE GROWTH RATE OF EITHER MEMORY PRODUCTS SOLD OR THE AMOUNT OF MEMORY USED
IN EACH PRODUCT DECREASES, SALES OF OUR PRODUCTS COULD DECREASE.
We are dependent on the computer market as many of the memory products
that we distribute are used in PCs or peripheral products. DRAMs are the most
widely used semiconductor components in PCs. In recent years, the growth rate of
PCs sold has slowed or declined. If there is a sustained reduction in the growth
rate of either PCs sold or the average amount of semiconductor memory included
in each PC, sales of our memory products built for those markets could decrease,
and our results of operations, cash flows and financial condition could be
adversely affected.
THE MEMORY PRODUCT INDUSTRY IS HIGHLY COMPETITIVE.
We face intense competition from a number of companies, some of which
are large corporations or conglomerates that may have greater resources to
withstand downturns in the semiconductor memory market, invest in technology and
capitalize on growth opportunities. To the extent Samsung memory products become
less competitive, our ability to effectively compete against distributors of
other memory products will diminish.
9
CURRENT ECONOMIC AND POLITICAL CONDITIONS MAY HARM OUR BUSINESS.
Global economic conditions and the effects of military or terrorist
actions may cause significant disruptions to worldwide commerce. If these
disruptions result in delays or cancellations of customer orders, a decrease in
corporate spending on information technology or our inability to effectively
market, manufacture or ship our products, our results of operations, cash flows
and financial condition could be adversely affected. In addition, our ability to
raise capital for working capital purposes and ongoing operations is dependent
upon ready access to capital markets. During times of adverse global economic
and political conditions, accessibility to capital markets could decrease. If we
are unable to access the capital markets over an extended period of time, we may
be unable to fund operations, which could materially adversely affect our
results of operations, cash flows and financial condition.
IF SAMSUNG IS UNABLE TO RESPOND TO CUSTOMER DEMAND FOR DIVERSIFIED SEMICONDUCTOR
MEMORY PRODUCTS OR IS UNABLE TO DO SO IN A COST-EFFECTIVE MANNER, WE MAY LOSE
MARKET SHARE AND OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED.
In recent periods, the semiconductor memory market has become
relatively segmented, with diverse memory needs being driven by the different
requirements of desktop and notebook PCs, servers, workstations, handheld
devices, and communications, industrial and other applications that demand
specific memory solutions. Samsung currently offers customers a variety of
memory products including DDR, RAM, FLASH, SRAM and MASK ROM.
Samsung needs to dedicate significant resources to product design and
development to respond to customer demand for the continued diversification of
memory products. If Samsung is unable or unwilling to invest sufficient
resources to meet the diverse memory needs of customers, we, as a Samsung memory
products' major distributor may lose market share. In addition, as we diversify
our product lines, we may encounter difficulties penetrating certain markets,
particularly markets where we do not have existing customers. If we are unable
to respond to customer demand for market diversification in a cost-effective
manner, our results of operations may be adversely affected.
If Samsung's global allocation process results in Samsung HK not having
sufficient supplies of memory product to meet all of our customer orders, this
would have a negative impact on our sales and could result in our loss of
customers. Although such shortages are infrequent, there was such a shortage
during the three months ended March 31, 2004 and no assurance can be given that
such shortages will not occur in the future. Currently, due to increased demand
in FLASH memory, ACL also experiences insufficient supplies of such products
from Samsung and loss of sales.
IF SAMSUNG'S MANUFACTURING PROCESS IS DISRUPTED, OUR RESULTS OF OPERATIONS, CASH
FLOWS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.
Samsung manufactures products using highly complex processes that
require technologically advanced equipment and continuous modification to
improve yields and performance. Difficulties in the manufacturing process can
reduce yields or disrupt production. From time to time, we have experienced
minor disruptions in product deliveries from Samsung and we may be unable to
meet our customers' requirements and they may purchase products from other
suppliers. This could result in loss of revenues or damage to customer
relationships.
WE BELIEVE THAT WE WILL REQUIRE ADDITIONAL EQUITY FINANCING TO REDUCE OUR
LONG-TERM DEBTS AND IMPLEMENT OUR BUSINESS PLAN.
We anticipates that we will require additional equity financing in
order to reduce our long-term debts and implement our business plan of
increasing sales into the Southern China markets. There can be
10
no assurance that we will be able to obtain the necessary additional capital on
a timely basis or on acceptable terms, if at all. As a result of such financing,
the holders of our common stock may experience substantial dilution.
WE ARE HEAVILY DEPENDENT UPON THE ELECTRONICS INDUSTRY, AND EXCESS CAPACITY OR
DECREASED DEMAND FOR PRODUCTS PRODUCED BY THIS INDUSTRY COULD RESULT IN
INCREASED PRICE COMPETITION AS WELL AS A DECREASE IN OUR GROSS MARGINS AND UNIT
VOLUME SALES.
Our business is heavily dependent on the electronics industry. A
majority of our revenues are generated from the networking, high-end computing
and computer peripherals segments of the electronics industry, which is
characterized by intense competition, relatively short product life-cycles and
significant fluctuations in product demand. Furthermore, these segments are
subject to economic cycles and have experienced in the past, and are likely to
experience in the future. A recession or any other event leading to excess
capacity or a downturn in these segments of the electronics industry could
result in intensified price competition, a decrease in our gross margins and
unit volume sales and materially affect its business, prospects, financial
condition and results of operations.
OUR MAJOR STOCKHOLDER CONTROLS OUR BUSINESS, AND COULD DELAY, DETER OR PREVENT A
CHANGE OF CONTROL OR OTHER BUSINESS COMBINATION.
One shareholder, Mr. Yang, our Chief Executive Officer and Chairman of
the Board of Directors, holds approximately 80.4% of our outstanding common
stock. By virtue of his stock ownership, Mr. Yang will control all matters
submitted to our board and our stockholders, including the election of
directors, and will be able to exercise control over our business, policies and
affairs. Through his concentration of voting power, he could cause us to take
actions that we would not consider absent his influence, or could delay, deter
or prevent a change of control of us or other business combination that might
otherwise be beneficial to our stockholders.
OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE.
There has been significant volatility in the market prices for publicly
traded shares of computer related companies, including ours. From September 30,
2003, the effective date of the reverse-acquisition of Atlantic Components Ltd.,
to March 31, 2005, the closing price of our common stock fluctuated from a per
share high of $2.95 to a low of $0.22 per share. The per share price of our
common stock may not remain at or exceed current levels. The market price for
our common stock, and for the stock of electronic companies generally, has been
highly volatile. The market price of our common stock may be affected by: (1)
incidental level of demand and supply of the stock; (2) daily trading volume of
the stock; (3) number of public stockholders in our stock; (4) fundamental
results announced by ACL; and any other unpredictable and uncontrollable
factors.
IF ADDITIONAL AUTHORIZED SHARES OF OUR COMMON STOCK AVAILABLE FOR ISSUANCE OR
SHARES ELIGIBLE FOR FUTURE SALE WERE INTRODUCED INTO THE MARKET, IT COULD HURT
OUR STOCK PRICE.
We are authorized to issue 50,000,000 shares of common stock. As of
December 31, 2004, there were 27,829,936 shares of our common stock issued and
outstanding.
Currently, outstanding shares of common stock are eligible for resale.
We are unable to estimate the amount, timing or nature of future sales of
outstanding common stock. Sales of substantial amounts of the common stock in
the public market by these holders or perceptions that such sales may take place
may lower the common stock's market price.
11
IF PENNY STOCK REGULATIONS IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR
COMMON STOCK, THE ABILITY OF OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD
BE IMPAIRED.
The SEC has adopted regulations that generally define a "penny stock"
to be an equity security that has a market price of less than $5.00 per share or
an exercise price of less than $5.00 per share subject to certain exceptions.
Exceptions include equity securities issued by an issuer that has (i) net
tangible assets of at least $2,000,000, if such issuer has been in continuous
operation for more than three years, or (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average revenue of at least $6,000,000 for the preceding three
years. Unless an exception is available, the regulations require that prior to
any transaction involving a penny stock, a risk of disclosure schedule must be
delivered to the buyer explaining the penny stock market and its risks. Our
common stock is currently trading at under $5.00 per share. Although we
currently fall under one of the exceptions, if at a later time we fail to meet
one of the exceptions, our common stock will be considered a penny stock. As
such the market liquidity for the common stock will be limited to the ability of
broker-dealers to sell it in compliance with the above-mentioned disclosure
requirements.
You should be aware that, according to the SEC, the market for penny stocks has
suffered in recent years from patterns of fraud and abuse. Such patterns
include:
o Control of the market for the security by one or a few broker-dealers;
o "Boiler room" practices involving high-pressure sales tactics;
o Manipulation of prices through prearranged matching of purchases and
sales;
o The release of misleading information;
o Excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
o Dumping of securities by broker-dealers after prices have been
manipulated to a desired level, which hurts the price of the stock and
causes investors to suffer loss.
We are aware of the abuses that have occurred in the penny stock market.
Although we do not expect to be in a position to dictate the behavior of the
market or of broker-dealers who participate in the market, we will strive within
the confines of practical limitations to prevent such abuses with respect to our
common stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM
ACQUIRING US.
Section 203 of the Delaware General Corporation Law prohibits a merger
with a 15% shareholder within three years of the date such shareholder acquired
15%, unless the merger meets one of several exceptions. The exceptions include,
for example, approval by two-thirds of the shareholders (not counting the 15%
shareholder), or approval by the Board prior to the 15% shareholder acquiring
its 15% ownership. This provision makes it difficult for a potential acquirer to
force a merger with or takeover of the Company, and could thus limit the price
that certain investors might be willing to pay in the future for shares of our
common stock.
ITEM 2. PROPERTIES
Our principal offices occupy approximately 4,989 square feet gross
floor area located at B24-B27, 1/F., Block B, Proficient Industrial Centre, 6
Wang Kwun Road, Kowloon Bay, Kowloon, Hong Kong, which is leased from Classic
Electronic Ltd., a related party, covering a lease period from December 1, 2004
to November 30, 2006 at monthly rental of HK$17,137 (approximately US$2,197).
12
We lease a warehouse unit of approximately 825 square feet gross floor
area located at B34, 2/F., Block B, Proficient Industrial Centre, 6 Wang Kwun
Road, Kowloon Bay, Kowloon, Hong Kong pursuant to a one-year lease with Classic
Electronics Ltd. which covers a period from December 1, 2004 to November 30,
2006 with monthly lease payments of HK$5,363 (approximately US$687).
We lease approximately 3,000 square feet gross floor area for its
directors' offices located at No. 78, 5th Street, Hong Lok Yuen, Tai Po, New
Territories, Hong Kong for Mr. Yang which is covered by a one year lease with
Classic Electronics Limited which expired on March 31, 2005, and was extended to
March 31, 2006 with monthly rentals of HK$35,000 (approximately US$4,487). Mr.
Ben Wong, a director, is also a director of Classic Electronics Limited.
We lease approximately 3,000 square feet gross floor area for its
directors' offices located at No. 76, 5th Street, Hong Lok Yuen, Tai Po, New
Territories, Hong Kong for Mr. Yang which is covered by a one year lease with
Systematic Information Limited which expired on March 31, 2005, and was extended
to March 31, 2006 with monthly rentals of HK$25,000 (approximately US$3,205).
Mr. Ben Wong, a director, is also a director of Systematic Information Limited.
We lease an office unit of approximately 1,273.8 square feet gross
floor area located at Room 2307, 23/F., Building A, United Plaza, No.5022 Binhe
Road, Futian Centre, Shenzhen, China pursuant to an original lease dated June 1,
2002 and an extended lease dated May 27, 2004 with Shenzhen Jing Tian Wei
Investment Development Co. Ltd. which expired on May 31, 2005 and was extended
to March 31, 2006 with monthly lease payments of RMB7,643 (approximately
US$920).
In the event that such facilities should become unavailable, we believe
that alternative facilities could be obtained on a competitive basis.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business we may be subject to litigation from
time to time. There is no past, pending or, to our knowledge, threatened
litigation or administrative action (including litigation or action involving
the our officers, directors or other key personnel) which in our opinion has,
had, or is expected to have, a material adverse effect upon our business,
prospects financial condition or operations. Professional Traders Fund, LLC
("PTF") filed a complaint, dated February 8, 2005, against us in the Southern
District of New York alleging breach of contract for the nonpayment of a 12%
subordinated convertible note from us to PTF in the principal amount of
$250,000. PTF seeks $239,850 plus default interest, costs and attorneys fees. We
have not filed an answer to such action by PTF. PTF has moved in the action to
hold us in default.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of 2004.
13
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"ACLO". The following table shows, for the periods indicated, the high and low
closing prices per share of our common stock as reported by the OTC Bulletin
Board.
COMMON STOCK
QUARTERS ENDED HIGH LOW
FISCAL YEAR
ENDED DECEMBER 31, 2004 and quarter ended December 31, 2003:
Quarter ended December 31, 2003...........................$2.95 $1.50
Quarter ended March 31, 2004..............................$3.00 $1.50
Quarter ended June 30, 2004...............................$1.70 $0.70
Quarter ended September 30, 2004..........................$1.13 $0.65
Quarter ended December 31, 2004...........................$0.88 $0.23
As of April 12, 2005, the last reported sale price of our common stock,
as reported by the OTC Bulletin Board, was $0.36 per share.
As of April 12, 2005, there were approximately 208 holders of record
(and approximately 700 beneficial owners) of our common stock. We are informed
and believe that as of April 12, 2005, Cede & Co. held 2,896,299 shares of our
common stock as nominee for Depository Trust Company, 55 Water Street, New York,
New York 10004. It is our understanding that Cede & Co. and Depository Trust
Company both disclaim any beneficial ownership therein and that such shares are
held for the account of numerous other persons.
Since our reverse-acquisition of Atlantic Components Ltd., effective
September 30, 2003, we have never paid cash dividends on our capital stock. We
currently anticipate that we will retain all available funds for use in the
operation and expansion of our business, and do not anticipate paying any cash
dividends in the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
We do not have any compensation plans (including individual
compensation arrangements) under which our equity securities are authorized for
issuance to employees or non-employees (such as directors and consultants), as
of December 31, 2004.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data, at the end of and
for the last three fiscal years, should be read in conjunction with our
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this Annual Report on Form 10-K. The consolidated selected financial data are
derived from our consolidated financial statements that have been audited by
Stonefield Josephson, Inc., our independent registered public accounting firm,
as indicated in their report included
14
herein. The selected financial data provided below is not necessarily indicative
of our future results of operations or financial performance.
2004 2003 2002
---- ---- ----
Net Sales $133,243,690 $72,672,797 $85,343,249
Net income (loss) $ (454,006) $(1,437,670) $ 986,876
Earnings (loss) per common
share $(0.02) $ (0.06) $ 0.04
Total Assets $ 10,265,983 $ 9,570,808 $ 7,215,169
Long-term Debt $ 65,522 $ 194,703 $ 1,071,503
Weighted average number of
shares outstanding - basic
and diluted 27,829,936 23,753,682 22,380,000
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, AVAILABILITY AND COST OF FINANCIAL RESOURCES, PRODUCT DEMAND, MARKET
ACCEPTANCE AND OTHER FACTORS DISCUSSED IN THIS REPORT UNDER THE HEADING "RISK
FACTORS." THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT.
OVERVIEW
CORPORATE BACKGROUND
We are engaged primarily in the business of distribution of memory
products under "Samsung" brandname which comprise DRAM and Graphic RAM, FLASH,
SRAM and MASK ROM for the Hong Kong and Southern China markets.
As of December 31, 2004, we had over 200 active customers in Hong Kong
and Southern China.
Pricing for the Samsung memory products ranges from approximately $0.17
to $750 depending on the product specifications. We also sell our products in
Hong Kong and Southern China and does not anticipate selling its products
outside of these regions in the foreseeable future.
For the years ended December 31, 2004, 2003, and 2002, the largest 5
customers accounted for 48%, 31% and 43% of our net sales, respectively. As of
December 31, 2004, we had a working capital deficit of $839,186 and accumulated
deficit of $2,784,188. We generated net sales of $133,243,690 for the year ended
December 31, 2004 and recorded a net loss of $454,006. In addition, during the
year ended December 31, 2004, net cash provided by operating activities amounted
to $416,876.
We are in the mature stage of operations and, as a result, the
relationships between revenue, cost of revenue, 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 consolidated financial statements are
recurring costs in nature.
PLAN OF OPERATIONS
Our business objectives are to offer updated market intelligence to
Samsung in connection with the Hong Kong and Southern China markets' demand in
memory products and secure high-quality Samsung products in order to meet the
market demands of individual and corporate users in Hong Kong and Southern
China. Each quarter, we work closely with Samsung to present updated market
information collected from retail channels and corporate users to assist Samsung
to plan their production and allocation schedule for the coming six months. Our
business strategy is to assist Samsung in implementing their production planning
using market intelligence to balance the supply and demand of memory products in
the Hong Kong and Southern China markets. Accordingly, we maintain and develop a
sales and market research team to answer marketing questions from Samsung on a
regular basis. In
16
addition, our established distribution channels covering retail outlets and
major corporate users in the region allows those retail or ultimate customers a
secure stable supply of Samsung's memory products with competitive prices. We
are a non-exclusive distributor of Samsung, and enjoy a minimum guaranteed gross
profit margin of approximately 5% of products sold in form of sales rebate
payable by Samsung.
ACCOUNTING PRINCIPLES; ANTICIPATED EFFECT OF GROWTH
Below is a brief description of basic accounting principles which we
adopt in determining our recognition of revenues and expenses, as well as a
brief description of the effects that the management believe that its
anticipated growth will have on our revenues and expenses in the future 12
months.
NET SALES
Net Sales are recognized upon the transfer of legal title of the
electronic components to the customers. At December 31, 2004 we had over 200
active customers.
The quantities of memory products we sell fluctuate with changes in
demand from our customers. The prices set by Samsung that we 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,
we have 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.
Although there was an unexpected world-wide pricing pressure of memory products
during May 2004 to July 2004 among major memory products manufacturers, the
market is now stabilized and results in stimulated strong demand of memory
products in the Hong Kong and Southern China markets.
The essential element of our growth in the future, will be to obtain
adequate financial resources as additional working capital to cope with the
strong market needs from the China PCs' personal and business users.
COST OF SALES
Cost of revenues consists of costs of goods purchased from our
principal supplier, Samsung and purchases from other Samsung authorized
distributors. Many factors affect our gross margin, including, but not limited
to, the volume of production orders placed on behalf of our 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 situation. Nevertheless, our procurement operations are
supported by Samsung HK, a wholly-owned subsidiary of Samsung, although there is
no written long-term supply agreement in place between us and Samsung HK. Our
cost of goods, as a percentage of total revenues, amounted to approximately
97.7% for the year ended December 31, 2004 and approximately 93.9% the year
ended December 31, 2003.
OPERATING EXPENSES
Our operating expenses for the year ended December 31, 2004 and the
year ended December 31, 2003 were comprised of sales and marketing, general and
administrative expenses, and merger cost.
17
Selling and marketing expenses consisted primarily of commissions paid
to outside sales agent and salary expenses to customer service personnel and
costs associated with advertising and marketing activities.
General and administrative expenses include all corporate and
administrative functions that serve to support our 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. We expect these expenses to remain at
approximately the same level in 2005. Sales and marketing costs are expected to
fluctuate as a percentage of revenue due to the addition of sales personnel and
various marketing activities planned throughout the year.
Merger cost includes the fair value of shares issued to certain
consultants related to the reverse-acquisition between us and Atlantic
Components Ltd.
Interest expense, including finance charges, relates primarily to our
short-term and long-term bank borrowings, which we intend to reduce and the
amortization of discount related to the convertible note payable.
RESULTS OF OPERATIONS
The following table sets forth audited consolidated statements of
operations data for the years ended years ended December 31, 2004, 2003, and
2002 and should be read in conjunction with "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and our financial
statements and the related notes appearing elsewhere in this document.
Year Ended December 31
---------------------------------------------------------
(US$)
2004 2003 2002
---- ---- ----
Net sales 133,243,690 72,672,797 85,343,249
Cost of sales 130,130,674 68,214,587 81,591,046
Gross profit 3,113,016 4,458,210 3,752,203
Operating expenses:
Sales and marketing 453,862 149,364 204,837
General and administrative 2,618,810 2,571,147 2,225,205
Merger cost -- 2,753,620 --
Total operating expenses 3,072,672 5,474,131 2,430,042
Income (loss) from operations 40,344 (1,015,921) 1,322,161
Interest expense 402,412 166,509 213,589
Net income (loss) (454,006) (1,437,670) 986,876
18
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
NET SALES
Sales increased by $60,570,893 or 83% from $72,672,797 for year ended
December 31, 2003 to $133,243,690 for the year ended December 31, 2004. This
increase resulted primarily from the unexpected world-wide pricing pressure on
memory products during May 2004 to July 2004 among major memory products
manufacturers which stimulated the strong demand of memory products in the Hong
Kong and Southern China markets. We expect our sales in the year ending December
31, 2005 to increase to more than $130 million given the stimulated strong
demand for Samsung memory products.
COST OF SALES
Cost of sales increased $61,916,087 or 90.8%, from $68,214,587 for the
year ended December 31, 2003 to $130,130,674 for the year ended December 31,
2004. The increase in cost of sales resulted from the increase in sales of
Samsung's memory products and strong demand of Samsung memory products. As a
percentage of net sales, cost of sales increased slightly from 93.8% of net
sales in the year ended December 31, 2003 to 97.7% of net sales in the year
ended December 31, 2004.
GROSS PROFIT
Gross profit decreased by $1,345,194, or 30.2% from $4,458,210 for the
year ended December 31, 2003 to $3,113,016 for the year ended December 31, 2004.
The gross profit percentage decreased to 2.3% of revenue for the year ended
December 31, 2004 compared to 6.2% of revenue for the year ended December 31,
2003 as a result of aggressive pricing strategy imposed by Samsung with our
assistance for newly launched 1 Gigabyte memory products during August 2004 to
September 2004 to prevent the entrance of other major memory products
manufacturers in the Hong Kong and Southern China markets which in turn
stimulated a strong demand of such newly launched memory products. However, such
pricing strategry reduces the gross margin significantly compared to the
historical margin on selling the Samsung products.
OPERATING EXPENSES
Sales and marketing expenses increased by $304,498, or 204%, from
$149,364 for the year ended December 31, 2003 to $453,862 for the year ended
December 31, 2004 due to increase of sales commission to ACL Technology Pte Ltd.
as a result of more than 70 new and active customers with more than $42 million
revenues introduced by this sales agent. We expect sales and marketing expenses
to increase in fiscal 2004 due to an expected increase in sales and potential
consolidation of selling expenses of Classic upon our acquisition therein
expected to occur in the second quarter of 2005.
General and administrative expenses increased $47,663 or 1.9% from
$2,571,147 for the year ended December 31, 2003 to $2,618,810 for the year ended
December 31, 2004. We expect the general and administrative expenses remain at
the current level until the consolidation of Classic takes place.
Merger cost of $2,753,620 in 2003 represents the fair value of common
stock issued to consultants and advisors related to the acquisition of Atlantic
by us, which took place on September 30, 2003. No such cost was incurred during
the year ended December 31, 2004. We do not expect reoccurrence of such cost in
year 2005. We don't expect any significant merger cost to be incurred related to
the acquisition of Classic Electronic Ltd. occurring in 2005 to be as much as
that related to those incurred in 2003.
19
Income from operations for the Company was $40,344 for the year ended
December 31, 2004 compared to the loss of $1,015,921 for the year ended December
31, 2003, an increase of income of $1,056,265. The decrease of loss was
primarily due to merger cost of $2,753,620 incurred in September 2003 related to
the acquisition of Atlantic. Excluding the merger cost, income from operations
decreased by 98% for the year ended December 31, 2004, compared to $1,737,699
for the year ended December 31, 2003. This decrease was the result of decreasing
gross profits during the year 2004, together with increased sales and marketing
expenses.
OTHER INCOME (EXPENSES)
Interest expense increased $235,903, or 142% from interest expense of
$166,509 in the year ended December 31, 2003, to $402,412 in the year ended
December 31, 2004. Excluding $250,000 non-cash interest expense incurred in the
year ended December 31, 2004 relating to amortization of discount on convertible
note payable, interest expense was $152,412 in the year ended December 31, 2004.
Excluding the above-mentioned amortization of discount on convertible note
payable, our interest expense decreased to 0.1% of sales for the year ended
December 31, 2004 from 0.2% for the year ended December 31, 2003 due to a
reduction by us of our long-term bank borrowings during the year 2004. We expect
our interest expense 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 2005.
Gain on disposal of property and equipment decreased by $7,100, to $128
in the year ended December 31, 2004 from $7,228 in the year ended December 31,
2003, due to certain automobile being disposed during 2003, which was replaced
with new purchases of automobile. We do not expect there will be any significant
gain or loss on disposal of property and equipment in year 2005.
Our net loss decreased by $983,664 from $1,437,670 for the year ended
December 31, 2003 compared to the loss of $454,006 for the year ended December
31, 2004. This decrease was the result of merger cost incurred during the year
ended December 31, 2003. We expect our net profit margin for the year 2005 will
increase back to similar level as in year 2003 as a result of the pricing
strategy of 1 Gigabyte memory products which already led to significant profit
margins recorded by us during October 2004 together with the effect of
acquisition of Classic Electronics Limited as our 100% subsidiary in the second
quarter of 2005.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
NET SALES
Sales decreased by $12,670,452 or 14.8% from $85,343,249 for year ended
December 31, 2002 to $72,672,797 for the year ended December 31, 2003. This
decrease resulted primarily from the impact of the US/Iraq War and SARS on the
economies of Hong Kong and Southern China during the first and second quarters
of 2003.
COST OF SALES
Cost of sales decreased $13,376,459 or 16.4%, from $81,591,046 for the
year ended December 31, 2002 to $68,214,587 for the year ended December 31,
2003. The decrease in cost of sales resulted from the decrease in sales of
Samsung's memory products and availability of cheaper Samsung memory products
from overseas Samsung distributors due to regional demand and supply situation.
As a
20
percentage of net sales, cost of sales decreased slightly from 95.6% of net
sales in the year ended December 31, 2002 to 93.9% of net sales in the year
ended December 31, 2003.
GROSS PROFIT
Gross profit increased by $706,007, or 18.8% from $3,752,203 for the
year ended December 31, 2002 to $4,458,210 for the year ended December 31, 2003.
The increase in gross profit was primarily due to the decrease of cost of sales
of the company. The gross profit improved accordingly to 6.1% of net sales for
the year ended December 31, 2003 compared to 4.4% of net sales for the year
ended December 31, 2002.
OPERATING EXPENSES
Sales and marketing expenses decreased by $55,473, or 27.1%, from
$204,837 for the year ended December 31, 2002 to $149,364 for the year ended
December 31, 2003 due to a decrease of sales as a result of the US/Iraq War and
SARS during the first and second quarters of 2003. As a percentage of sales,
sales and marketing expense maintained at 0.2% of revenue for both the years
ended December 31, 2003 and December 31, 2002.
General and administrative expenses increased $345,942 or 15.5% from
$2,225,205 for the year ended December 31, 2002 to $2,571,147 for the year ended
December 31, 2003. The increase was primarily attributable to the professional
charges incurred in connection with the reverse merger by us occurred during the
year ended December 31, 2003.
Merger cost of $2,753,620 represents the fair value of common stock
issued to consultants and advisors related to the acquisition of Atlantic by us,
which took place on September 30, 2003. No such cost was incurred during the
year ended December 31, 2002.
Loss from operations for the Company was $1,015,921 for the year ended
December 31, 2003 compared to an income of $1,322,161 for the year ended
December 31, 2002, a decrease of income or increase of loss by $2,338,082. The
increase of loss or decrease of income was primarily due to merger cost of
$2,753,620 incurred in September 2003 related to the acquisition of Atlantic.
Excluding the merger cost, income from operations increased $415,538 or 31% to
$1,737,699 for the year ended December 31, 2003, compared to $1,322,161 for the
year ended December 31, 2002. This increase was the result of increasing gross
profits during the year 2003, offset by increased general and administrative
expenses.
OTHER INCOME (EXPENSES)
Interest expense decreased by $47,080, or 22%, from interest expense of
$213,589 in the year ended December 31, 2002, to $166,509 in the year ended
December 31, 2003. As a percentage of sales, interest expense decreased slightly
to 0.2% in the year ended December 31, 2003 when compared to 0.3% in the year
ended December 31, 2002 due to lower interest rate throughout 2003 and lower
average loan balances. In the year ended December 31, 2003, interest expense
related primarily to Atlantic's bank charges and interest incurred from its
short-term and long-term bank borrowings.
Gain on disposal of property and equipment increased by $7,228, from $0
in the year ended December 31, 2002 to $7,228 in the year ended December 31,
2003, due to certain automobile being disposed during 2003, which was replaced
with new purchases of automobile.
21
Our net loss increased by $2,424,546 to $1,437,670 for the year ended
December 31, 2003 compared to an income of $986,876 for the year ended December
31, 2002. Excluding the merger cost of $2,753,620, our net profit increased by
$329,074 which represents an increase of 33% over the profit of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have been cash provided by
operations, bank lines of credit and credit terms from suppliers. Our principal
uses of cash have been for operations and working capital. We anticipate these
uses will continue to be our principal uses of cash in the future.
We may require additional financing in order to finance our growing
business and implement our business plan. In order to meet anticipated demand
for Samsung's memory products in the Southern China market over the next 12
months, we anticipate an additional need of working capital of at least $2.0
million through short-term borrowings from the banks 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 such delivery.
In certain limited instances, our customers are permitted up to thirty (30) days
to make payment for purchased memory products. As the anticipated cash generated
by our operations are insufficient to fund our growth requirements, we will need
to obtain additional equity funds. There can be no assurance that we will be
able to obtain the necessary additional capital on a timely basis or on
acceptable terms, if at all. In any of such events, our 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 our common stock may
experience substantial dilution. In addition, as our results may be negatively
impacted and thus delayed as a result of political and economic factors beyond
the management's control, our capital requirements may increase.
The following factors, among others, could cause actual results to
differ from those indicated in the above forward-looking statements: pricing
pressures in the industry; a continued downturn in the economy in general or in
the memory products sector; an unexpected decrease in demand for Samsung's
memory products; its ability to attract new customers; an increase in
competition in the memory products market; and the ability of some of our
customers to obtain financing. These factors or additional risks and
uncertainties not known to us or that we currently deems immaterial may impair
business operations and may cause our actual results to differ materially from
any forward-looking statement.
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform them to
actual results or to make changes in its expectations.
In the year ended December 31, 2004, net cash provided by operating
activities amounted to $416,876 while in the year ended December 31, 2003, net
cash used in operating activities amounted to $216,151, an increase of $633,027.
This increase was caused, in part, by a strengthened control in inventory level
during year 2004.
In the year ended December 31, 2003, net cash provided by investing
activities amounted to $790,641 while in the year ended December 31, 2004, we
used net cash of $954,770 in investing activities, a decrease of cash used for
investing activities of $1,745,411. In August 2004, we were in
22
negotiation with DahSing Bank for an additional amount of its available line of
credit. As a condition to the extension of additional credit to us, DahSing Bank
requested additional collateral to secure the increased amount on the line. In
order to meet the increased security requirement, we loaned $611,446 to City
Royal Limited to pay off the mortgage loan on a residential property owned by
City Royal Limited. In exchange for such loan, City Royal Limited agreed to
pledge this residential property as collateral to secure our additional
borrowings of HK$10 million (approximately US$1,282,000) from DahSing Bank. The
primary purpose of the loan, from our perspective, was to advance our business
by enabling us to secure additional lines of financing in excess of the loan
amount from DahSing Bank. This loan had been fully settled on February 14, 2005.
We believe that the above-referenced loan does not violate the general
prohibition against loans made by publicly-traded companies to its directors and
executive officers set forth in Section 402 of the Sarbanes-Oxley Act of 2002 as
its primary purpose was to advance our business. However, no assurance can be
given that the SEC or U.S. federal government will agree with our position and,
in the event such loan is determined to be a violation of Section 402, the
criminal penalties of the Securities Exchange Act of 1934, as amended, could
apply. Mr. Yang's wife and Mr. Yang's mother-in-law are shareholders of City
Royal Limited with a total of 100% interest. We do not expect a significant
amount of cash used for investing activities incurred in year 2005 as the
acquisition of Classic Electronics Limited will be principally by relieve of
outstanding accounts receivable and issuance of our common stock with no
additional cash outflows to be recorded.
In the year ended December 31, 2004, net cash provided by financing
activities amounted to $583,368 while in the year ended December 31, 2003, we
used net cash of $286,353 in financing activities, an increase of cash provided
by financing activities of $869,721. This increase was caused by additional
proceeds on lines-of-credit of $1.3 million in the year 2004. We do not expect
significant cash will be provided by financing activities in year 2005.
In the year ended December 31, 2003, net cash used for operating
activities amounted to $216,151 while in the year ended December 31, 2002, we
generated net cash of $1,629,294 in operating activities, a decrease of
$1,845,445. This decrease was primarily due to an increase of the accounts
receivable from Classic by such amount.
In the year ended December 31, 2003, net cash provided by investing
activities amounted to $790,461 while in the year ended December 31, 2002, we
used net cash of $595,845 in investing activities, an increase of cash provided
by investing activities or a decrease of cash used for investing activities of
$1,386,486. This increase was caused, in part, by repayment of loans from
stockholder of $807,724 in the year ended December 31, 2003 and in the year
ended December 31, 2002, there was a net cash of $584,838 advanced to the
stockholder.
In the year ended December 31, 2003, net cash used for financing
activities amounted to $286,353 while in the year ended December 31, 2002, we
used net cash of $909,049 in financing activities, a decrease of cash used for
financing activities of $622,696. This decrease was caused, in part, by proceeds
of line-of-credit and issuance of convertible note payable of $166,410 and
$250,000 respectively in the year ended December 31, 2003 and in the year ended
December 31, 2002, there was a net repayment of line-of-credit of $269,317.
An essential element of our 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.
23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk for changes in interest rates as our bank
borrowings accrue interest at floating rates of 0% to 0.5% over the Best Lending
Rate (currently at 5.5% per annum) prevailing in Hong Kong. For the two years
ended December 31, 2004 and 2003, we did not generate any material interest
incomes. Accordingly, we believe that changes in interest rates may have a
material effect on our liquidity, financial condition or results of operations.
IMPACT OF INFLATION
We believe that our results of operations are not dependent upon
moderate changes in inflation rates as we expect we will be able to pass along
component price increases to our customers.
SEASONALITY
We have not experienced any material seasonality in sales fluctuations
over the past 2 years in the memory products markets.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB approved the consensus reached on the Emerging
Issues Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The objective of this
Issue is to provide guidance for identifying impaired investments. EITF 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB issued a FASB Staff Position
(FSP) EITF 03-1-1 that delays the effective date of the measurement and
recognition guidance in EITF 03-1 until after further deliberations by the FASB.
The disclosure requirements are effective only for annual periods ending after
June 15, 2004. The Company has evaluated the impact of the adoption of the
disclosure requirements of EITF 03-1 and does not believe the impact will be
significant to the Company's overall results of operations or financial
position.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an
amendment of ARB No. 43, Chapter 4.' The amendments made by Statement 151
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) should be recognized as current-period charges
and require the allocation of fixed production overheads to inventory based on
the normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. The Company has evaluated the impact of
the adoption of SFAS 151, and does not believe the impact will be significant to
the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real
Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67"
("SFAS 152"). The amendments made by Statement 152 amend FASB Statement No. 66,
Accounting for Sales of Real Estate, to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing
Transactions." This Statement also amends FASB Statement No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those
24
operations and costs is subject to the guidance in SOP 04-2. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005 with earlier application encouraged. The Company has evaluated the impact
of the adoption of SFAS 152, and does not believe the impact will be significant
to the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions." The amendments made by Statement 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for nonmonetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 153, and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment." Statement 123(R) will provide investors and other users
of financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R)
replaces FASB Statement No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than those filing as
small business issuers) will be required to apply Statement 123(R) as of the
first interim or annual reporting period that begins after December 15, 2005.
The Company is currently evaluating the impact of the adoption of this Statement
on its results of operations and financial position.
CONTRACTUAL OBLIGATIONS
The following table presents our contractual obligations as of December 31, 2004
over the next five years and thereafter:
25
Payments by Period
----------------------------------------------------------------------------------------------------
LESS
THAN 1-3 4-5 AFTER 5
AMOUNT 1 YEAR YEARS YEARS YEARS
------ ------ ----- ----- -------
Operating Leases 111,601 73,347 38,254 --- ---
Convertible note payable 150,000 150,000 --- --- ---
Long-term Debt 351,554 286,032 65,522 --- ---
---------- ---------- ---------- ---------- ----------
Total Contractual Obligations $613,155 $509,379 $103,776 $ --- $ ---
========== ========== ========== ========== ==========
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, our most critical
accounting policies include: inventory valuation, which affects cost of sales
and gross margin; policies for revenue recognition, and allowance for doubtful
accounts. The methods, estimates and judgments we use in applying these most
critical accounting policies have a significant impact on our results we report
in our 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. In addition, as a
result of the downturn in demand for our products, we have excess capacity in
our manufacturing facilities. Currently, we are not capitalizing any inventory
costs related to this excess capacity as the recoverability of such costs is not
certain. The application of this policy adversely affects our gross margin.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Our allowance for doubtful accounts is based on our
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, our history of bad debts, and the general condition of the
industry. If a major customer's credit worthiness deteriorates, or our
customers' actual defaults exceed our historical experience, our estimates could
change and impact our reported results.
REVENUE RECOGNITION. We derive 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. An allowance for returns is recorded based
on the management's estimate of sales returns.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not invest in or own any market risk sensitive instruments
entered into for trading purposes or for purposes other than trading purposes.
All loans to us have been made at fixed interest rates and; accordingly, the
market risk to us prior to maturity is minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Annual Report on Form 10-K
are our Consolidated Financial Statements, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to ensure that
information required to be disclosed in the reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time
period specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in the reports filed under the
Exchange Act is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Our Chief Executive Officer and Chief
Financial Officer, in consultation with our other members of management and
advisors as appropriate, carried out an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
annual report pursuant to Rule 15d-15(b) promulgated under the Exchange Act.
Based upon that evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures are not
effective in alerting them in a timely fashion to all material information
required to be included in our periodic filings with the SEC as a result of the
significant deficiency described below in that subsection captioned "SIGNIFICANT
DEFICIENCIES IN DISCLOSURE CONTROLS AND PROCEDURES OR INTERNAL CONTROLS".
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The term iNTERNAL CONTROL OVER FINANCIAL REPORTING is defined as a
process designed by, or under the supervision of, our Chief Executive Officer
and Principal Financial Officer, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States. Except as noted below in that subsection
captioned "SIGNIFICANT DEFICIENCIES IN DISCLOSURE CONTROLS AND PROCEDURES OR
INTERNAL CONTROLS", there were no changes in our internal control over financial
reporting identified in connection with our evaluation of these controls as of
the end of the period covered by this annual report that could have
significantly affected those controls subsequent to the date of the evaluation
referred to in the previous paragraph, including any correction action with
regard to significant deficiencies and material weakness.
27
SIGNIFICANT DEFICIENCIES IN DISCLOSURE CONTROLS AND PROCEDURES OR INTERNAL
CONTROLS
Our independent auditors identified that our accounting on certain
significant transactions were incorrectly calculated or incorrectly recorded. In
addition, certain related parties were not disclosed to our independent auditors
and transactions with these related parties were not disclosed in the financial
statements. During the course of the audit field work, our independent auditors
discovered these errors and these related parties and the transactions with
these related parties. Our independent auditors discussed these matters with our
Chief Financial Officer, and we subsequently reevaluated the transactions and
recorded the necessary adjustments. The auditors believe that these adjustments
reflected significant deficiencies in our internal controls over accounting and
financial reporting.
OTHER OBSERVATIONS
In connection with the audit of our consolidated financial statements
for the year ended December 31, 2004, our independent auditors also made several
other observations relating to our disclosure controls and procedures or
internal controls. First, our independent auditors observed that ACL did not
have adequate segregation of duties due to the size of the company, and that
management had the ability to override any existing controls. Management
acknowledges the existence of this problem, and is developing procedures to
address them to the extent possible given the acknowledged limitations.
Secondly, our independent auditors observed that we did not have a comprehensive
accounting procedures manual including information as to customized internal
control structure, documentation and transaction flow. Our management
acknowledges the existence of this problem, and is developing procedures to
address them to the extent possible given limitations in financial and manpower
resources. Finally, our independent auditors observed that none of the members
of the board of directors demonstrated an in-depth understanding of generally
accepted accounting principles. We acknowledge that while we believe our board
of director members are proficient in reading and understanding financial
statements, they may not have an in-depth understanding of generally accepted
accounting principles, and we are currently evaluating whether we should seek a
person with a professional accounting background to join the board.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers, as of December 31, 2004, and their
biographical information are set forth below:
NAME AGE POSITION
Chung-Lun Yang 43 Chairman of the Board of Directors and Chief Executive Officer
Ben Wong 41 Director
Kenneth Lap-Yin Chan 42 Chief Financial Officer
CHUNG-LUN YANG, Chairman of the Board and Chief Executive Officer. Mr.
Yang became a Director on September 30, 2003. Mr. Yang is the founder of
Atlantic and has been a director of Atlantic since 1991. Mr. Yang was graduated
from The Hong Kong Polytechnic in 1982 with a degree in electronic engineering.
From October 1982 until April 1985, he was the sales engineer of Karin
Electronics Supplies Ltd. From June 1986 until September 1991, he was Director
of Sales (Samsung Components Distribution) of Evertech Holdings Limited, a Hong
Kong based company. Mr. Yang has
28
over 15 years' extensive experience in the electronics distribution business.
Mr. Yang is also a member of The Institution of Electrical Engineers, United
Kingdom.
BEN WONG, Director. Mr. Wong became a Director on September 30, 2003.
Since 1992, Mr. Wong has been the vice-president of Atlantic and is responsible
for the purchasing, sales and marketing of Atlantic's products. Mr. Wong was
graduated from the Chinese Culture University of Taiwan in 1986 with a
Bachelor's Degree of Science in Mechanical Engineering.
KENNETH LAP-YIN CHAN, Chief Financial Officer. Mr. Chan was appointed
our Chief Financial Officer effective September 30, 2003. Mr. Chan has been with
Atlantic since 2001 serving as Financial Controller. From 1998 to 2001, Mr. Chan
worked for Standard Chartered Bank. Prior to September 2001, Mr. Chan worked for
a number of other banks in Hong Kong, including Dao Heng Bank and Asia
Commercial Bank. He has more than 12 years of experience in corporate and
commercial finance. Mr. Chan graduated from the University of Toronto in 1986
with a Bachelor's Degree in Commerce.
Each director holds office (subject to our By-Laws) until the next
annual meeting of shareholders and until such director's successor has been
elected and qualified. All of our executive officers are serving until the next
annual meeting of directors and until their successors have been duly elected
and qualified. There are no family relationships between any of our directors
and executive officers.
Our Board of Directors does not have a Compensation Committee, an Audit
Committee or a Nominating Committee. Our Board of Directors plans to expand the
number of members on the board and create an independent Compensation Committee,
Audit Committee and a Nominating Committee.
CODE OF BUSINESS CONDUCT AND ETHICS
We have adopted a written code of business conduct and ethics, known as
our Code of Business Conduct and Ethics which applies to all of our directors,
officers, and employees, including our principal executive officer and our
principal financial and accounting officer. A copy of the Code of Business
Conduct and Ethics is attached hereto as Exhibit 14 to the Annual Report on Form
10-K for the period ended December 31, 2003.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our directors and executive officers and persons who own more than ten
percent of a registered class of our equity securities (collectively, "Reporting
Persons") to file with the SEC initial reports of ownership and reports of
changes in ownership of our common stock and our other equity securities.
Reporting Persons are required by SEC regulation to furnish us with copies of
all Section 16(a) forms that they file. To our knowledge, based solely on a
review of the copies of such reports furnished to us, we believe that during
fiscal year ended December 31, 2004 all Reporting Persons complied with all
applicable filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
The following table sets forth the annual and long-term compensation for
services in all capacities to the Company for the two years ended December 31,
2004.
29
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------- ------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------------------------------------- ------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Fiscal Salary Bonus Other Restricted Securities LTIP All Other
Principal Position year Annual Stock Underlying Payouts Compensation
Compen- Awards Options
sation
------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ --------------
Jeffrey I. Green, 2004 N/A N/A N/A N/A N/A N/A N/A
Former Director and 2003 $195,000 0 0 0 0 0 0
President (1)
------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ --------------
Phyllis Green, Former 2004 N/A N/A N/A N/A N/A N/A N/A
Director and Executive 2003 $160,367 0 0 0 0 0 0
Administrator(2)
------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ --------------
Chung-Lun Yang, 2004 $233,590 0 $95,000 0 0 0 0
Chief Executive 2003 $23,077 $624,462 $16,539 0 0 0 0
Officer and Chairman
of the Board (3)
------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ --------------
(1) Mr. Green resigned effective September 9, 2003 upon the closing of the
reorganization. Compensation includes amount up to September 30, 2003.
(2) Ms. Green resigned effective September 9, 2003 upon the closing of the
reorganization. Compensation includes amount up to September 30, 2003.
(3) Mr. Yang was elected to be the Chief Executive Office of the Company
upon the resignation of Mr. Jeffrey I. Green after the
reverse-acquisition of Atlantic Components Ltd. Compensation
information indicated above covers the salaries of $23,077 to Mr. Yang
for the period from October 1 to December 31, 2003. Salaries for the
full year totaled $92,308 for the year ended December 31, 2003. The
Company accrued bonus of $624,462 and payable to Mr. Yang on September
30, 2003, effective date of the reverse-acquisition. Other annual
compensation includes rent and housing allowance in the amount of
$95,000 for the year ended December 31, 2004 and in the amount of
$16,539 for the period from October 1 to December 31, 2004.
OPTION GRANTS TO EXECUTIVE OFFICERS IN LAST FISCAL YEAR
No options were granted to our executive officers during the fiscal
year ended December 31, 2004. We do not have any stock option, retirement,
pension or profit-sharing plans for the benefit of the directors, officers or
other employees, but our board of directors may recommend the adoption of one or
more such plans in the future.
Shares Value Number of shares Underlying Value of Unexercised In-the-Money
Name Exercised Realized Unexercised Options at Year-End Options at Year-End (1)
---- --------- -------- ------------------------------- -----------------------
N/A N/A N/A N/A N/A N/A N/A
30
COMPENSATION OF DIRECTORS
None of the current directors who served during the years ended
December 31, 2004 received compensation for serving as such, other than
reimbursement for out of pocket expenses incurred in attending director
meetings.
OPTIONS TO DIRECTORSS
No options were granted to directors during the fiscal year ended
December 31, 2004. We do not have any stock option, retirement, pension or
profit-sharing plans for the benefit of the directors, officers or other
employees, but our board of directors may recommend the adoption of one or more
such plans in the future.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 31, 2004 (i) each person known by
us to own beneficially more than 5% of the outstanding shares of our common
stock (ii) each director, named executive officer and (iii) all executive
officers and directors as a group. On such date, we had 27,829,936 shares of
common stock outstanding. Shares not outstanding but deemed beneficially owned
by virtue of the right of any individual to acquire shares within 60 days are
treated as outstanding only when determining the amount and percentage of common
stock owned by such individual. Each person has sole voting and investment power
with respect to the shares shown, except as noted.
Name and Address of Shares of Common Stock Percentage of Class
Beneficial Owner Beneficially Owned Beneficially Owned(1)
---------------- ------------------ ---------------------
Chung-Lun Yang 22,380,000 78.9%
No.78,5th Street, Hong Lok Yuen,
Tai Po, New Territories, Hong Kong
Ben Wong 0 0.0%
19B, Tower 8, Bellagio,
33 Castle Peak Road, Sham Tseng,
New Territories, Hong Kong
Kenneth Lap-Yin Chan 0 0.0%
Flat B, 8/F., Block 19,
South Horizons,
Aplei Chau, Hong Kong
All Directors and Officers 22,380,000 78.9%
as a Group
------------------------------
(1) Applicable percentage of ownership is based on 27,829,936 shares of common
stock outstanding as of March 31, 2005, together with securities exercisable or
convertible into shares of common stock within 60 days of March 31, 2005, for
each stockholder. Beneficial ownership is determined in accordance with the
rules of the United States Securities and Exchange Commission and generally
includes voting or investment power with respect to securities. Shares of common
stock subject to securities exercisable or convertible into shares of common
stock
31
that are currently exercisable or exercisable within 60 days of March 31, 2005,
are deemed to be beneficially owned by the person holding such securities for
the purpose of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. The common stock is the only outstanding class of equity
securities of THE COMPANY.
Except as otherwise set forth, information on the stock ownership of
these persons was provided to us by the persons.
We do not have any compensation plans or arrangements benefiting
employees or non-employees under which our equity securities are authorized for
issuance in exchange for consideration in the form of good services.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH MR. YANG
As of December 31, 2004 and 2003, we had an outstanding receivable from Mr.
Yang, the President and Chairman of our Board of Directors, totaling $102,936,
and $102,936, respectively. These advances bear no interest and are payable on
demand.
For the years ended December 31, 2004, 2003, and 2002, we recorded compensation
to Mr. Yang of $233,590, $716,770, and $732,280, respectively, and paid
$233,590, $92,308, and $92,308, respectively, to Mr. Yang as compensation to
him. The respective unpaid amounts are included in the amount due from
stockholder/director as of December 31, 2004 and 2003.
During each of the years ended December 31, 2004, 2003, and 2002, we paid rent
of $82,692, $53,846, and $53,846, respectively, for Mr. Yang's personal
residency as fringe benefits to him, and paid housing allowance to him in the
amount of $12,308, $12,308, and $2,052, respectively. All such payments have
been recorded as compensation expense in the accompanying financial statements.
TRANSACTIONS WITH CLASSIC ELECTRONIC LTD.
During the years ended December 31, 2004, 2003, and 2002, we sold $40,885,565,
$15,224,745, and $10,007,267, respectively, to Classic Electronic Ltd.
("Classic"). We have not experienced any bad debt from this customer in the
past. Pursuant to a written personal guarantee agreement, Mr. Yang personally
guarantees to our lenders up to $10 million outstanding accounts receivable from
Classic.
During the years ended December 31, 2004, 2003, and 2002, we purchased inventory
of $5,867,150, $4,159,300, $3,266,005, respectively, from Classic, which offset
the outstanding accounts receivable from Classic. As of December 31, 2004 and
2003, we had net outstanding accounts receivable from Classic totaling
$4,714,057 and $5,289,626, respectively.
We leased two of our facilities and Mr. Yang's personal residency from Classic.
Lease agreements for the two facilities expire on November 30, 2006 while the
lease agreement for Mr. Yang's personal residency expired on March 31, 2005 and
was subsequently extended to March 31, 2006. Monthly lease payments for these 3
leases totaled $7,372. We incurred and paid rent expense of $88,462, $56,731,
and $53,846 to Classic for the years ended December 31, 2004, 2003, and 2002,
respectively.
During the years ended December 31, 2003 and 2002, certain Classic's employees
performed work on behalf of Atlantic and their salaries were allocated to
Atlantic's operations and charged to expenses in
32
the accompanying consolidated financial statements. Such expenses approximated
$0 for 2004, $248,000 for 2003, and $310,000 for 2002.
In December 2003, we relieved our account receivable from Classic by
transferring $1,048,604 of outstanding amounts we owed to its
stockholder/director.
Mr. Ben Wong, one of our directors, is a 99.9% shareholder of Classic. The
remaining 0.1% of Classic is owned by a non-related party.
TRANSACTIONS WITH ACL TECHNOLOGY PTE LTD.
During the years ended December 31, 2004, 2003, and 2002, we sold $0, $901,430,
$616,305, respectively, to ACL Technology Pte Ltd. ("ACLT. Outstanding accounts
receivable totaled $0 and $191,566 as of December 31, 2004 and 2003,
respectively. We have not experienced any bad debt from this customer in the
past.
During the years ended December 31, 2004, 2003, and 2002, we purchased
inventories of $2,049,474, $700,126, and $401,676, respectively, from ACLT. As
of December 31, 2004 and 2003, there were no outstanding accounts payable to
ACLT.
During 2002, we sold inventory previously reserved for obsolescence to ACLT. The
inventory had an original cost of approximately $300,000 and was sold to ACLT at
a substantial discount.
In December 2003, we relieved our account receivable from ACLT by transferring
$374,988 of outstanding amounts it owed to its stockholder/director.
In 2004, we paid a commission of $392,434 to ACLT related to sales brought in by
this entity.
In 2004, we loaned $318,983 to ACLT, which is classified as loans receivable
from related parties in the accompanying consolidated balance sheet. The loan is
unsecured, bears no interest and is expected to be repaid in 2005.
Mr. Ben Wong, one of our directors, is a 99% shareholder of ACLT. The remaining
1% of ACLT is owned by a non-related party.
TRANSACTIONS WITH KADATCO COMPANY LTD.
During the years ended December 31, 2004, 2003, and 2002, we sold $166,152, $0,
and $20,736, respectively, to Kadatco Company Ltd. ("Kadatco"). Outstanding
accounts receivable totaled $0 as of December 31, 2004 and 2003. We have not
experienced any bad debt from this customer in the past.
During the years ended December 31, 2004, 2003, and 2002, we purchased $0, $0,
$11,340, respectively, from Kadatco. As of December 31, 2004 and 2003, there
were no outstanding accounts payable to Kadatco.
Mr. Yang is the sole beneficial owner of the equity interest of Kadatco.
33
TRANSACTIONS WITH RAMBO TECHNOLOGIES LTD.
During the years ended December 31, 2004, 2003, and 2002, we sold $7,682,072,
$5,134,160, and $254,161, respectively, to Rambo Technologies Ltd. ("Rambo").
Outstanding accounts receivable totaled $0 as of December 31, 2004 and 2003. We
have not experienced any bad debt from this customer in the past.
During the years ended December 31, 2004, 2003, and 2002, we purchased $339,605,
$229,781, and $163,812, respectively, from Rambo. Outstanding accounts payable
due to Rambo totaled $61,360 and $0 as of December 31, 2004 and 2003.
Mr. Ben Wong, one of our directors, is a 60% shareholder of Rambo. The remaining
40% of Rambo is owned by a non-related party. Mr. Yang is a director of Rambo.
TRANSACTIONS WITH ARISTO COMPONENTS LTD.
During the years ended December 31, 2004, 2003, and 2002, we sold $90, $62,268,
and $1,132,998, respectively, to Aristo Components Ltd. ("Aristo"). Outstanding
accounts receivable totaled $0 as of December 31, 2004 and 2003. We have not
experienced any bad debt from this customer in the past.
During the years ended December 31, 2004, 2003, and 2002, we purchased $500,
$28,053, and $394,821, respectively, from Aristo. There are no outstanding
accounts payable due to Aristo as of December 31, 2004 and 2003.
Mr. Ben Wong, one of our directors, is a 90% shareholder of Aristo. The
remaining 10% of Aristo is owned by a non-related party. Mr. Yang is a director
of Aristo.
TRANSACTIONS WITH ATLANTIC NETCOM LTD.
During the years ended December 31, 2004, 2003, and 2002, we sold $14,985, $0,
and $0, respectively, to Atlantic Netcom Ltd. ("Atlantic Netcom"). Outstanding
accounts receivable totaled $13,460 and $0 as of December 31, 2004 and 2003,
respectively. We have not experienced any bad debt from this customer in the
past.
Mr. Ben Wong, one of our directors, is a 60% shareholder of Atlantic Netcom. The
remaining 40% of Atlantic Netcom is owned by a non-related party. Mr. Chung Lun
Yang is a director of Atlantic Netcom.
TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD.
During the years ended December 31, 2004, 2003, and 2002, we sold $513,698,
$523,809, and $0, respectively, to Solution Semiconductor (China) Ltd.
("Solution"). Outstanding accounts receivable totaled $0 and $5,260 as of
December 31, 2004 and 2003. We have not experienced any bad debt from this
customer in the past.
During the years ended December 31, 2004, 2003, and 2002, we purchased $8,387,
$0, and $0, respectively, from Solution. There are no outstanding accounts
payable due to Solution as of December 31, 2004 and 2003.
Mr. Ben Wong, one of our directors, is a 99% shareholder of Solution. The
remaining 1% of Solution is owned by a non-related party.
34
TRANSACTIONS WITH SYSTEMATIC INFORMATION LTD.
During the years ended December 31, 2004, 2003, and 2002, we sold $1,941,298,
$137,482, and $0, respectively, to Systematic Information Ltd. ("Systematic").
There are no outstanding accounts receivable due from Systematic as of December
31, 2004 and 2003. We have not experienced any bad debt from this customer in
the past.
During the years ended December 31, 2004, 2003, and 2002, we purchased $154,460,
$0, and $0, respectively, from Systematic. There are no outstanding accounts
payable due to Systematic as of December 31, 2004 and 2003.
On April 1, 2004, we entered into a lease agreement with Systematic pursuant to
which we lease one residential property for Mr. Yang's personal use for a
monthly lease payment of $3,205 per month. The lease agreement for this
residency expired on March 31, 2005 and was subsequently extended to March 31,
2006. Monthly lease payment for this lease totaled $3,205. We incurred and paid
an aggregate rent expense of $28,846 to Systematic during the year ended
December 31, 2004.
Mr. Ben Wong and the wife of Mr. Yang are the directors and shareholders of
Systematic with a total of 100% interest.
TRANSACTIONS WITH CITY ROYAL LTD.
In August 2004, we were in negotiation with The DahSing Bank Limited (the
"DahSing Bank") for an additional amount of its available line of credit. As a
condition to the extension of additional credit to us, DahSing Bank requested
additional collateral to secure the increased amount on the line. In order to
meet the increased security requirement, we loaned $611,446 to City Royal
Limited to pay off the mortgage loan on a residential property owned by City
Royal Limited and pledged to DahSing Bank as collateral to secure our borrowings
from DaSing Bank. In consideration thereof, DahSing Bank made available
additional borrowings of HK$10 million (approximately US$1,282,000). The loan is
unsecured and bears no interest. In February 2005, City Royal Limited sold the
residential property and has repaid the loan through transferring the entire
proceeds from the sale of HK$8,000,000 (approximately $1,025,641) to DahSing
Bank as collateral for the Company's line.
The loan to City Royal Limited is non-interest bearing, in consideration of
which City Royal Limited did not charge an arrangement fee to us in respect of
the security pledge in favor of Dah Sing Bank. The primary purpose of the loan,
from our perspective, was to advance our business by enabling us to secure
additional lines of financing in excess of the loan amount from DahSing Bank. We
settled this loan in February 2005. We believe that the above-referenc loan does
not violate the general prohibition against loans made by publicly-trade
companies to its directors and executive officers set forth in Section 402 of
the Sarbanes-Oxley Act of 2002 ("Section 402") as its primary purpose was to
advance our business. However, no assurance can be given that the Securities and
Exchange Commission or U.S. federal government will agree with our position and,
in the event such loan is determined to be a violation of Section 402, the
criminal penalties of the Securities Exchange Act of 1934, as amended, could
apply.
Mr. Yang's wife and Mr. Yang's mother-in-law are shareholders of City Royal
Limited with a total of 100% interest.
35
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees, including reimbursements for
expenses, for professional audit services rendered by Stonefield Josephson, Inc.
for the audit of our annual financial statements for the years ended December
31, 2004 and December 31, 2003 and fees billed for other services rendered by
Stonefield Josephson, Inc. during those periods.
FISCAL 2004 FISCAL 2003
Audit Fees (1) $ 221,047 $ 71,050
Audit Related Fees (2) $ -- $ --
Tax Fees (3) $ -- $ --
All Other Fees (4) $ -- $ --
Total $ -- $ --
-------------------------
(1) Audit Fees consist of fees billed for professional services rendered
for the audit of the Company's consolidated annual financial statements
and review of the interim consolidated financial statements included in
quarterly reports and services that are normally provided by Stonefield
Josephson, Inc. in connection with statutory and regulatory filings or
engagements.
(2) Audit-Related Fees consist of fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of the Company's consolidated financial statements and are not
reported under "Audit Fees." There were no such fees in fiscal year
2004 or 2003.
(3) Tax Fees consist of fees billed for professional services rendered for
tax compliance, tax advice and tax planning. There were no such fees in
fiscal year 2004 or 2003.
(4) All Other Fees consist of fees for products and services other than the
services reported above. There were no such fees in fiscal year 2004 or
2003.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) The financial statements listed in the Index to Consolidated
Financial Statements are filed as part of this report
(2) Schedule II - Valuation and Qualifying Accounts and Reserves
The Schedule on page S-1 is filed as part of this report.
(3) List of Exhibits
See Index to Exhibits in paragraph (c) below.
36
The Exhibits are filed with or incorporated by reference in this
report.
(b) REPORTS ON FORM 8-K. We filed the following current reports on Form 8-K
during the last quarter of our fiscal year ended December 31, 2004 and for the
period from January 1, 2005 through April 15, 2005:
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 items 7.
6. Form 8-K filed January 19, 2005 relating to items 1.01, 2.01 and 9.01.
7. Form 8-K/A filed April 12, 2005 to the Form 8-K filed January 19, 2005
relating to items 1.02 and 2.01.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. We will furnish to our
stockholders a copy of any of the exhibits listed below upon payment of $.25 per
page to cover the costs of the Company of furnishing the exhibits.
Exhibit
No. Description
3.1 Certificate of incorporation of the Company, together with all
amendments thereto, as filed with the Secretary of State of the State
of Delaware, incorporated by reference to Exhibit 3.1 to the Form 8-K
filed with the Securities and Exchange Commission on December 19, 2003.
3.2 By-Laws of the Company, as amended, incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement.
4.1(a) Form of specimen certificate for common stock of the Company.*
10.1 Share Exchange and Reorganization Agreement, dated as of September 8,
2003, among Print Data Corp., Atlantic Components Limited and Mr.
Chung-Lun Yang, incorporated by reference to Exhibit 10.1 to the Form
8-K filed with the Securities and Exchange Commission on October 16,
2003.
10.2 Conveyance Agreement, dated as of September 30, 2003, between Print
Data Corp. and New Print Data Corp., incorporated by reference to
Exhibit 10.2 to the Form 8-K filed with the Securities and Exchange
Commission on October 16, 2003.
10.3 Securities Purchase Agreement dated October 1, 2003 among Print Data
Corp, Jeffery Green, Phyllis Green and Joel Green, incorporated by
reference to Exhibit 10.3 to the Form 8-K filed with the Securities and
Exchange Commission on October 16, 2003.
10.4 Sales Restriction Agreement dated September 30, 2003 between Print Data
Corp. and Phyllis Green, incorporated by reference to Exhibit 10.4 to
the Form 8-K filed with the Securities and Exchange Commission on
October 16, 2003.
37
10.5 Sales Restriction Agreement dated September 30, 2003 between Print Data
Corp. and Jeffery Green, incorporated by reference to Exhibit 10.5 to
the Form 8-K filed with the Securities and Exchange Commission on
October 16, 2003.
10.6 Distribution Agreement dated May 1, 1993 by and between Samsung
Electronics Co., Ltd. and Atlantic Components Limited, incorporated by
reference to Exhibit 10.6 to the Form 8-K filed with the Securities and
Exchange Commission on October 16, 2003.
10.7 Renewal of Distributorship Agreement dated March 1, 2002 by and between
Samsung Electronics Co., Ltd. and Atlantic Components Limited,
incorporated by reference to Exhibit 10.7 to the Form 8-K filed with
the Securities and Exchange Commission on October 16, 2003.
10.8 Form of Note Subscription dated as of December 31, 2003 by and between
the Company and Professional Traders Fund LLC, a New York limited
liability company ("PTF"), incorporated by reference to Exhibit 10.1 to
the Form 8-K filed with the Securities and Exchange Commission on March
24, 2004.
10.9 Form of 12% Senior Subordinated Convertible Note due December 31, 2004
in the aggregate principal amount of $250,000 issued by the Company to
PTF, incorporated by reference to Exhibit 10.2 to the Form 8-K filed
with the Securities and Exchange Commission on March 24, 2004.
10.10 Form of Limited Guaranty and Security Agreement, dated as of December
31, 2003 by and among, the Company, PTF, Orient Financial Services
Limited, Mr. Li Wing-Kei and Emerging Growth Partners, Inc.,
incorporated by reference to Exhibit 10.3 to the Form 8-K filed with
the Securities and Exchange Commission on March 24, 2004.
10.11 Form of Stock Purchase and Escrow Agreement dated as of December 31,
2003, by and among, PTF, Orient Financial Services Limited, Mr. Li
Wing-Kei and Emerging Growth Partners, Inc., and the law firm of
Sullivan & Worcester LLP, as escrow agent, incorporated by reference to
Exhibit 10.4 to the Form 8-K filed with the Securities and Exchange
Commission on March 24, 2004.
10.12 Form of Letter Agreement dated as of December 31, 2003 by and between
the Company and PTF, incorporated by reference to Exhibit 10.5 to the
Form 8-K filed with the Securities and Exchange Commission on March 24,
2004.
10.13 Letter of Intent, dated December 29, 2003, between the Company and
Classic Electronics, Ltd., incorporated by reference to Exhibit 10.1 to
the Form 8-K filed with the Securities and Exchange Commission on March
25, 2004.
10.14 Note Subscription dated as of December 31, 2003 by and between the
Company and Professional Traders Fund LLC, a New York limited liability
company ("PTF"), incorporated by reference to Exhibit 10.6 to the Form
8-K/A filed with the Securities and Exchange Commission on April 13,
2004.
10.15 12% Senior Subordinated Convertible Note due December 31, 2004 in the
aggregate principal amount of $250,000 issued by the Company to PTF,
incorporated by reference to Exhibit 10.7 to the Form 8-K/A filed with
the Securities and Exchange Commission on April 13, 2004.
38
10.16 Limited Guaranty and Security Agreement, dated as of December 31, 2003
by and among, the Company, PTF, Orient Financial Services Limited, Mr.
Li Wing-Kei and Emerging Growth Partners, Inc., incorporated by
reference to Exhibit 10.8 to the Form 8-K/A filed with the Securities
and Exchange Commission on April 13, 2004.
10.17 Stock Purchase and Escrow Agreement dated as of December 31, 2003, by
and among, PTF, Orient Financial Services Limited, Mr. Li Wing-Kei and
Emerging Growth Partners, Inc., and the law firm of Sullivan &
Worcester LLP, as escrow agent, incorporated by reference to Exhibit
10.9 to the Form 8-K/A filed with the Securities and Exchange
Commission on April 13, 2004.
10.18 Letter Agreement dated as of December 31, 2003 by and between the
Company and PTF, incorporated by reference to Exhibit 10.10 to the Form
8-K/A filed with the Securities and Exchange Commission on April 13,
2004.
14 Code of Business Conduct and Ethics of the Company incorporated by
reference to Exhibit 14 to the Form 10-K for the period ended December
31, 2003.
21 Subsidiaries of the Company
Atlantic Components Limited, a Hong Kong corporation
Alpha Perform Technologies Limited, a British Virgin Islands
corporation
31.1 Certification of Principal Executive Officer required by Rule 13a-14(a)
or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Principal Financial Officer required by Rule 13a-14(a)
or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
-------------------------
* Filed herewith
** As contemplated by SEC Release No. 33-8212, these exhibits are furnished with
this Annual Report on Form 10-K and are not deemed filed with the Securities and
Exchange Commission and are not incorporated by reference in any filing of ACL
Semiconductors Inc. under the Securities Act of 1933 or the Securities Exchange
Act of 1934, whether made before or after the date hereof and irrespective of
any general incorporation language in any such filings.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACL SEMICONDUCTORS INC.
By: /s/ CHUNG-LUN YANG
------------------------------------
Chung-Lun Yang
Chief Executive Officer
Dated: April 14, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ CHUNG-LUN YANG Chief Executive April 14, 2005
------------------------------------ Officer and Chairman of the
Chung-Lun Yang Board of Directors
(Principal Executive
Officer)
/s/ KENNETH LAP-YIN CHIN Chief Financial Officer, April 14, 2005
------------------------------------ (Principal Financial and Accounting
Kenneth Lap-Yin Chin Officer)
/s/ BEN WONG Director April 14, 2005
------------------------------------
Ben Wong
40
SCHEDULE II
ACL SEMICONDUCTORS INC. AND SUBSDIARIES
Valuation and Qualifying Accounts and Reserves
Years Ended December 31, 2004, 2003 and 2002
Balance Charged Balance
at the Beginning to Costs at the End
of the Year and Expenses Deductions of the Year
-------------------- ------------------ --------------- ----------------
Allowance for Doubtful Accounts:
Year ended December 31, 2002 205,166 -- (205,166) --
Year ended December 31, 2003 -- 128,598 (128,598) --
Year ended December 31, 2004 -- -- -- --
Inventory Obsolescence Reserve:
Year ended December 31, 2002 512,821 -- (412,821) 100,000
Year ended December 31, 2003 100,000 50,590 -- 150,590
Year ended December 31, 2004 150,590 3,256 -- 153,846
S-1
ACL Semiconductors Inc. and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004 and December 31, 2003 and
The Three-Year Period Ended December 31, 2004
WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Equity (Deficit) F-4
Consolidated Statements of Cash Flows F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
ACL Semiconductors Inc.
Kowloon, Hong Kong
We have audited the accompanying consolidated balance sheets of ACL
Semiconductors Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity (deficit),
cash flows and financial statement schedule for each of the three years in the
period ended December 31, 2004, as listed in the index appearing under Item
15(a)(1) and (2) of this Annual Report on Form 10-K. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 10 to the consolidated financial statements, the Company
has had numerous significant transactions with businesses and affiliates
controlled by, and with persons who are related to, the officers and directors
of the Company.
As discussed in Note 7 to the consolidated financial statements, the Company is
dependent on one single vendor to supply its inventories and this single vendor
provided the majority of the Company's inventory purchases during the years
ended December 31, 2004, 2003, and 2002. The Company's non-exclusive
distributorship agreement with this supplier expired on March 1, 2005. The
Company is still in negotiation with the supplier regarding the renewal terms of
the agreement, and such an agreement has not yet been renewed. Termination of
such distributorship agreement by the supplier would have a material adverse
effect on the operations of the Company.
/s/ STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Irvine, California
April 8, 2005
F-1
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
2004 2003
------------------ ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 512,548 $ 467,074
Accounts receivable, net of allowance
for doubtful accounts of $0 for 2004 and 2003 1,088,751 875,101
Accounts receivable, related parties 4,727,517 5,486,452
Loans receivable, related parties 930,429 --
Inventories, net 1,520,117 1,327,120
Other current assets 80,802 10,679
------------------ ------------------
Total current assets 8,860,164 8,166,426
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net of accumulated
depreciation and amortization 55,819 54,382
ACQUISITION DEPOSITS 1,000,000 1,000,000
OTHER DEPOSITS 350,000 350,000
------------------ ------------------
$ 10,265,983 $ 9,570,808
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,065,965 $ 5,037,304
Accrued expenses 456,676 140,369
Lines of credit and loan facilities 3,469,632 2,158,984
Current portion of long-term debt 286,032 884,131
Convertible note payable, net of unamortized discount of $0
for 2004 and $250,000 for 2003 150,000 --
Income tax payable 145,050 177,645
Due to shareholders for converted pledged collateral 112,385 --
Other current liabilities 13,610 22,555
------------------ ------------------
Total current liabilities 9,699,350 8,420,988
Long-term debt, less current portion 65,522 194,703
------------------ ------------------
Total liabilities 9,764,872 8,615,691
------------------ ------------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock - $0.001 par value, 50,000,000 shares
authorized, 27,829,936 issued and outstanding 27,830 27,830
Additional paid-in capital 3,360,405 3,360,405
Amount due from stockholder/director (102,936) (102,936)
Accumulated deficit (2,784,188) (2,330,182)
------------------ ------------------
Total stockholders' equity 501,111 955,117
------------------ ------------------
$ 10,265,983 $ 9,570,808
================== ==================
F-2
The accompanying notes form an integral part of these consolidated financial
statements
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31,
2004 2003 2002
------------------ ------------------ ------------------
NET SALES:
Related parties $ 51,203,860 $ 21,983,894 $ 12,031,467
Other 82,158,559 50,840,352 73,543,213
Less discounts to customers (118,729) (151,449) (231,431)
------------------ ------------------ ------------------
133,243,690 72,672,797 85,343,249
COST OF SALES 130,130,674 68,214,587 81,591,046
------------------ ------------------ ------------------
GROSS PROFIT 3,113,016 4,458,210 3,752,203
OPERATING EXPENSES:
Selling 453,862 149,364 204,837
General and administrative 2,618,810 2,571,147 2,225,205
Merger cost -- 2,753,620 --
------------------ ------------------ ------------------
INCOME (LOSS) FROM OPERATIONS 40,344 (1,015,921) 1,322,161
OTHER INCOME (EXPENSES):
Interest expense (402,412) (166,509) (213,589)
Gain on disposal of property and equipment 128 7,228 --
Miscellaneous (6,252) 3,398 (10,640)
------------------ ------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES (368,192) (1,171,804) 1,097,932
INCOME TAXES 85,814 265,866 111,056
------------------ ------------------ ------------------
NET INCOME (LOSS) $ (454,006) $ (1,437,670) $ 986,876
================== ================== ==================
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ (0.02) $ (0.06) $ 0.04
================== ================== ==================
WEIGHTED AVERAGE NUMBER OF SHARES -
BASIC AND DILUTED 27,829,936 23,753,682 22,380,000
================== ================== ==================
F-3
The accompanying notes form an integral part of these consolidated financial
statements
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Total
Common stock Additional Due from stockholders'
------------------------- paid-in stockholder/ Accumulated equity
Shares Amount capital Director deficit (deficit)
----------- ----------- ----------- ------------ ----------- -------------
Balance at December 31, 2001 22,380,000 $ 22,380 $ 362,235 $ (679,485) $(1,366,567) $(1,661,437)
Net decrease in due from
stockholder/ director -- -- -- 55,134 -- 55,134
Net income -- -- -- -- 986,876 986,876
----------- ----------- ----------- ----------- ----------- -----------
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 loss -- -- -- -- (454,006) (454,006)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 27,829,936 $ 27,830 $ 3,360,405 $ (102,936) $(2,784,188) $ 501,111
=========== =========== =========== =========== =========== ===========
F-4
The accompanying notes form an integral part of these consolidated financial
statements
ACL SEMICONDUCTORS AND SUBSDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31,
---------------------------------------------
2004 2003 2002
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ (454,006) (1,437,670) $ 986,876
----------- ----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 23,032 15,230 23,571
Bad debt 128,598 --
Change in inventory reserve 3,256 50,590 (412,821)
Gain on disposal of property and equipment (128) (7,228) --
Merger cost -- 2,753,620 --
Amortization of convertible note payable discount 250,000 -- --
Reduction of receivable due from stockholder/
director as additional compensation -- 624,462 639,972
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS
Accounts receivable - other (208,390) 75,157 320,412
Accounts receivable - related parties 753,675 (2,661,158) (177,044)
Inventories 196,253) (1,075,621) 663,905
Recoverable income taxes -- -- 280,903
Other current assets (70,123) 421 700
Deposits -- -- (350,000)
INCREASE (DECREASE) IN LIABILITIES
Accounts payable 28,661 1,221,659 (452,519)
Accrued expenses 328,692 (18,780) 46,820
Income tax payable (32,595) 118,707 58,938
Other current liabilities (8,945) (4,138) (419)
----------- ----------- -----------
Total adjustments 870,882 1,221,519 642,418
----------- ----------- -----------
Net cash provided by (used for)
operating activities 416,876 (216,151) 1,629,294
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
(Loans) to/repayments from stockholders -- 807,724 (584,838)
Loan to related party (930,429) -- --
Proceeds received from sale of fixed assets 128 25,641 --
Purchases of property, equipment and improvements (24,469) (42,724) (11,007)
----------- ----------- -----------
Net cash provided by (used for)
investing activities (954,770) 790,641 (595,845)
----------- ----------- -----------
F-5
The accompanying notes form an integral part of these consolidated financial
statements
Years ended December 31,
---------------------------------------------
2004 2003 2002
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds (repayments) on lines of credit and
notes payable 1,310,648 166,410 (269,317)
Cash proceeds from issuance of convertible note payable -- 250,000 --
Principal payments on long-term debt (727,280) (702,763) (639,732)
----------- ----------- -----------
Net cash provided by (used for) financing activities 583,368 (286,353) (909,049)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 45,474 288,137 124,400
CASH AND CASH EQUIVALENTS, beginning of year 467,074 178,937 54,537
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 512,548 $ 467,074 $ 178,937
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 152,412 $ 166,509 $ 213,589
=========== =========== ===========
Income tax paid $ 118,409 $ 147,159 $ 67,418
=========== =========== ===========
NON-CASH ACTIVITIES:
Reduction of accounts receivable from related party as
acquisition deposit $ -- $ 1,000,000 $ --
=========== =========== ===========
Reduction of accounts receivable from related parties
for assumed liability due stockholder/director $ -- $ 1,423,592 $ --
=========== =========== ===========
Dividend to stockholder of Atlantic Components Ltd.
prior to reverse-acquisition to increase payable to
stockholder/director $ -- $ 512,821 $ --
=========== =========== ===========
F-6
The accompanying notes form an integral part of these consolidated financial
statements
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION:
On September 8, 2003, ACL Semiconductors Inc. (formerly Print
Data Corp.) ("ACL") entered into a Share Exchange and
Reorganization Agreement with Atlantic Components Ltd.
("Atlantic"), a Hong Kong based company, and Mr. Chung-Lun
Yang ("Mr. Yang"), the then sole beneficial stockholder of
Atlantic. Under the terms of the agreement, ACL issued
22,380,000 of its shares to Mr. Chung-Lun Yang and 2,620,000
of its shares to certain financial advisors in exchange for
100% of the issued and outstanding shares of Atlantic's
capital stock. The Company recorded an expense of $2,753,620
related to the issuance of 2,620,000 shares of its common
stock to these advisors, which was computed based on the
quoted market price of $1.05 on September 30, 2003, the
effective date of the merger and was classified as merger cost
in the accompanying consolidated statements of operations for
the year ended December 31, 2003.
The share exchange agreement closed and became effective on
September 30, 2003. Upon the completion of this transaction,
Atlantic became the wholly owned subsidiary of ACL, and Mr.
Yang became the owner of approximately 80% of ACL's issued and
outstanding shares of common stock. In addition, ACL's
directors and officers resigned and were replaced by directors
and officers of Atlantic. For accounting purposes, the
acquisition was accounted for as a reverse-acquisition,
whereby Atlantic was deemed to have acquired ACL. Because the
acquisition was accounted for as a purchase of ACL, the
historical financial statements of Atlantic became the
historical financial statements of ACL after this transaction.
The accompanying consolidated statements of operations for the
year ended December 31, 2003 include the operating results of
Atlantic up to September 30, 2003, the closing date of the
acquisition, and the operating results of ACL from October 1,
2003 to December 31, 2003. In accounting for this transaction:
o Atlantic is deemed to be the purchaser and surviving
company for accounting purposes. Accordingly, due to the
acquisition, its net assets have been included in the
consolidated balance sheets at their historical book
values and the results of operations of Atlantic have been
presented for the comparative prior years ended December
31, 2002.
o Control of the net assets and operations of ACL was
acquired effective September 30, 2003. The Company
accounted for this transaction as a purchase of the assets
and liabilities of ACL. The historical cost of the net
assets assumed was $0.
F-7
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:
In connection with this transaction, ACL entered into a
Conveyance Agreement on September 30, 2003 with New Print Data
Corp. ("NewCo"). Under the terms of this agreement, effective
September 30, 2003, ACL conveyed its historic operations of
providing supplies used in a computer or office environment to
NewCo, by assigning all of the assets and liabilities related
to such operations to NewCo which accepted the assignment and
assumed all such liabilities in exchange for 1,000,000 shares
of common stock of NewCo.
On October 1, 2003, Print Data Corp. entered into a Securities
Purchase Agreement with the holders of Print Data Corp.'s
Series A Preferred Stock. Under the terms of this agreement,
Print Data Corp. sold its 1,000,000 shares of NewCo common
stock in exchange for the cancellation of the issued and
outstanding 500,400 shares of ACL's Series A Preferred Stock
(representing 100% of Print Data Corp.'s issued and
outstanding preferred stock previously held by three preferred
stockholders). This transaction was reflected in the
accompanying consolidated balance sheet as if the transaction
took place on September 30, 2003.
On December 16, 2003, Print Data Corp. filed a Certificate of
Amendment with the Secretary of State of the State of Delaware
changing its name from Print Data Corp. to ACL Semiconductors
Inc.
On December 31, 2004, ACL entered into a Stock Purchase
Agreement with Classic Electronics Ltd., a Hong Kong
corporation ("Classic") and the stockholders of Classic,
pursuant to which ACL would purchase all of the outstanding
shares of capital stock of Classic from its two selling
stockholders (the "Selling Stockholders") for an aggregate
purchase price of 12,000,000 shares of common stock, par value
$0.001 per share, of the Company, to be issued to the Selling
Stockholders pro rata based on their ownership percentages of
Classic, the cancellation of $4.0 million of indebtedness owed
by the Selling Stockholders to Classic, which consideration is
in addition to the $1.0 million paid to Classic by ACL in
December 2003 as an irrevocable deposit towards the
acquisition through the cancellation of accounts receivable
then owing by Classic to ACL. Mr. Ben Wong, a director of ACL,
is a 99.9% shareholder of Classic. The remaining 0.1% of
Classic is owned by a non-related party.
As of April 8, 2005, the due diligence procedures have not yet
been completed by both entities and the closing date of the
acquisition has been postponed to a date when such due
diligence procedures are completed and the related results are
satisfactory for both parties. Accordingly, the accompanying
consolidated financial statements do not include the financial
statements of Classic as the transaction has not been
effectively consummated because the considerations have not
yet been exchanged between the two entities and effective
control of Classic has not transferred to the Company.
F-8
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
BUSINESS ACTIVITY:
ACL Semiconductors Inc. ("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. Effective January 1, 2004, the Company has ceased
the operations of Alpha and all the related activities are
consolidated with those of Atlantic.
CURRENCY REPORTING:
Amounts reported in the accompanying consolidated financial
statements and disclosures are stated in U.S. Dollars, unless
stated otherwise. The functional currency of the Company,
which accounted for most of the Company's operations, is
reported in Hong Kong dollars ("HKD"). Foreign currency
transactions (outside Hong Kong) during the years ended
December 31, 2004, 2003, and 2002 are translated into HKD
according to the prevailing exchange rate at the transaction
dates. Assets and liabilities denominated in foreign
currencies at the balance sheet dates are translated into HKD
at year-end exchange rates.
For the purpose of preparing these consolidated financial
statements, the financial statements of Atlantic reported in
HKD have been translated into United States Dollars at
US$1.00=HKD7.8, a fixed exchange rate maintained between the
two countries.
CONSOLIDATION POLICY:
The consolidated financial statements include the financial
statements of ACL Semiconductors Inc. and its wholly owned
subsidiaries, Atlantic Components Ltd., and Alpha Perform
Technology Limited. All significant intercompany accounts and
transactions have been eliminated in preparation of the
consolidated financial statements.
F-9
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION:
Product sales are recognized when products are shipped to
customers, title passes and collection is reasonably assured.
Provisions for discounts to customers, estimated returns and
allowances and other price adjustments are provided for in the
same periods the related revenue is recorded which are
deducted from the gross sales.
USE OF ESTIMATES:
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, revenue
recognition, allowance for doubtful accounts, long lived
assets impairment, inventories, and disclosure of contingent
assets and liabilities, at the date of the consolidated
financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Actual
results could differ from these estimates.
CASH AND CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows,
cash equivalents include all highly liquid debt instruments
with original maturities of three months or less which are not
securing any corporate obligations. The Company had no cash
equivalents at December 31, 2004 or 2003.
ACCOUNTS RECEIVABLE:
The Company provides an allowance for doubtful accounts equal
to the estimated uncollectible amounts. The Company's estimate
is based on historical collection experience and a review of
the current status of trade accounts receivable. It is
reasonably possible that the Company's estimate of the
allowance for doubtful accounts will change. The Company did
not provide an allowance for doubtful accounts as of December
31, 2004 and 2003.
INVENTORIES:
Inventories are stated at the lower of cost or market and are
comprised of purchased computer technology resale products.
Cost is determined using the first-in, first-out method. The
reserve for obsolescence was increased by $3,256 for 2004 and
$50,590 for 2003. Inventory obsolescence reserve totaled
$153,846 and $150,590 as of December 31, 2004 and 2003,
respectively.
F-10
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Property and equipment are valued at cost. Depreciation and
amortization are provided over the estimated useful lives of
three to five years using the straight-line method. Leasehold
improvements are amortized on a straight-line basis over the
shorter of the economic lives or the lease terms.
The estimated service lives of property, equipment and
improvements are as follows:
Automobile 3 1/3 years
Office equipment 5 years
Leasehold improvements 5 years
Computers 5 years
LONG-LIVED ASSETS:
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," long-lived assets to be held and used
are analyzed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset
may not be recoverable. SFAS No. 144 relates to assets that
can be amortized and the life can be determinable. The Company
evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment.
If there are indications of impairment, the Company uses
future undiscounted cash flows of the related asset or asset
grouping over the remaining life in measuring whether the
assets are recoverable. In the event such cash flows are not
expected to be sufficient to recover the recorded asset
values, the assets are written down to their estimated fair
value. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value of asset less the cost
to sell. The Company determined that there was no impairment
of long-lived assets as of December 31, 2004 and 2003.
ADVERTISING:
The Company expenses advertising costs when incurred.
Advertising expense totaled $8,851, $3,567, and $24,580 for
the years ended December 31, 2004, 2003, and 2002,
respectively.
F-11
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES:
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. Deferred income tax expense represents the
change during the period in the deferred tax assets and
deferred tax liabilities. The components of the deferred tax
assets and liabilities are individually classified as current
and non-current based on their characteristics. Realization of
the deferred tax asset is dependent on generating sufficient
taxable income in future years. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of the Company's cash and cash
equivalents, accounts receivable, lines of credit, convertible
debt, accounts payable, accrued expenses, and long-term debt
approximates their estimated fair values due to the short-term
maturities of those financial instruments.
COMPREHENSIVE INCOME:
SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive
income and its components in the financial statements. For the
years ended December 31, 2004, 2003, and 2002, the Company has
no items that represent other comprehensive income and,
therefore, has not included a schedule of comprehensive income
in the consolidated financial statements.
SEGMENT REPORTING:
Based on the Company's integration and management strategies,
the Company operated in a single business segment. For the
years ended December 31, 2004, 2003, and 2002, all sales have
been derived from Hong Kong and the South East Asia region.
F-12
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
In accordance with SFAS No. 128, "Earnings Per Share," the
basic earnings (loss) per common share is computed by dividing
net earnings (loss) available to common stockholders by the
weighted average number of common shares outstanding. Diluted
earnings (loss) per common share is computed similarly to
basic earnings (loss) 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 dilutive. For the years ended December 31,
2004 and 2003, the Company has 517,241 and 346,580 shares of
common stock equivalents upon conversion of the convertible
note payable based on the quoted market price at the end of
each reporting years. These common stock equivalents were
excluded from the computation of diluted loss per share as
their effect is antidilutive for 2004 and 2003. There were no
common stock equivalents for 2002.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003
consolidated financial statements to conform to the 2004
presentation.
NEW ACCOUNTING PRONOUNCEMENTS:
In March 2004, the FASB approved the consensus reached on the
Emerging Issues Task Force (EITF) Issue No. 03-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments." The objective of this Issue is to
provide guidance for identifying impaired investments. EITF
03-1 also provides new disclosure requirements for investments
that are deemed to be temporarily impaired. In September 2004,
the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that
delays the effective date of the measurement and recognition
guidance in EITF 03-1 until after further deliberations by the
FASB. The disclosure requirements are effective only for
annual periods ending after June 15, 2004. The Company has
evaluated the impact of the adoption of the disclosure
requirements of EITF 03-1 and does not believe the impact will
be significant to the Company's overall results of operations
or financial position.
In November 2004, the FASB issued SFAS No. 151 "Inventory
Costs, an amendment of ARB No. 43, Chapter 4.' The amendments
made by Statement 151 clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period
charges and require the allocation of fixed production
overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15,
2005. Earlier application is permitted for inventory costs
incurred
F-13
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:
during fiscal years beginning after November 23, 2004. The
Company has evaluated the impact of the adoption of SFAS 151,
and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.152, "Accounting for
Real Estate Time-Sharing Transactions--an amendment of FASB
Statements No. 66 and 67" ("SFAS 152"). The amendments made by
Statement 152 amend FASB Statement No. 66, Accounting for
Sales of Real Estate, to reference the financial accounting
and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position
(SOP) 04-2, "Accounting for Real Estate Time-Sharing
Transactions." This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real
Estate Projects, to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects
does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years beginning after June 15,
2005 with earlier application encouraged. The Company has
evaluated the impact of the adoption of SFAS 152, and does not
believe the impact will be significant to the Company's
overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions." The amendments made
by Statement 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value
of the assets exchanged. Further, the amendments eliminate the
narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for
exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting
for an exchange of a productive asset for a similar productive
asset or an equivalent interest in the same or similar
productive asset should be based on the recorded amount of the
asset relinquished. Opinion 29 provided an exception to its
basic measurement principle (fair value) for exchanges of
similar productive assets. The Board believes that exception
required that some nonmonetary exchanges, although
commercially substantive, be recorded on a carryover basis. By
focusing the exception on exchanges that lack commercial
substance, the Board believes this Statement produces
financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for
nonmonetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions
of this Statement shall be applied prospectively. The Company
has evaluated the impact of the adoption of SFAS 153, and does
not believe the impact will be significant to the Company's
overall results of operations or financial position.
F-14
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment." Statement 123(R) will provide investors
and other users of financial statements with more complete and
neutral financial information by requiring that the
compensation cost relating to share-based payment transactions
be recognized in financial statements. That cost will be
measured based on the fair value of the equity or liability
instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans.
Statement 123(R) replaces FASB Statement No. 123, "Accounting
for Stock-Based Compensation," and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." Statement 123,
as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted
entities the option of continuing to apply the guidance in
Opinion 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable
fair-value-based method been used. Public entities (other than
those filing as small business issuers) will be required to
apply Statement 123(R) as of the first interim or annual
reporting period that begins after December 15, 2005. The
Company is currently evaluating the impact of the adoption of
this Statement on its results of operations and financial
position.
(2) PROPERTY, EQUIPMENT AND IMPROVEMENTS:
A summary is as follows:
2004 2003
---- ----
Office equipment $ 68,376 $ 45,907
Leasehold improvements 4,346 2,346
Furniture and fixtures 3,843 3,843
Automobile 33,333 53,281
-------- --------
109,898 105,377
Less accumulated depreciation and amortization 54,079 50,995
-------- --------
$ 55,819 $ 54,382
======== ========
Depreciation and amortization expense for property, equipment, and
improvements amounted to $23,032, $15,230, and $23,571, for the years
ended December 31, 2004, 2003, and 2002, respectively.
F-15
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(3) REVOLVING LINES OF CREDIT AND LOAN FACILITIES:
The Company has available to it a $2,051,282 revolving line of credit
with Dah Sing Bank with an outstanding balance of $2,050,000 at
December 31, 2004 and $737,000 at December 31, 2003. For borrowings in
Hong Kong dollars, the line of credit bears interest at the greater of
(1) Hong Kong dollar prime rate or (2) 1% over the Hong Kong Interbank
Offer Rate ("HIBOR".), or 5% as of December 31, 2004 and 2003,
respectively. Weighted average interest rate approximated 5% for 2004
and 5.5% for 2003. For borrowings in foreign currency, the line of
credit carries interest of 0.5% over the Base Rate. The line matures on
September 30, 2005.
The Company has available to it a $256,410 line for overdraft with Dah
Sing Bank with an outstanding balance of $137,632 at December 31, 2004
and $247,984 at December 31, 2003. The line of credit bears interest at
the greater of (1) 0.5% over Hong Kong dollar prime rate or (2) 1% over
HIBOR, or 5.5% as of December 31, 2004 and 2003. Weighted average
interest rate approximated 5.5% for 2004 and 6% for 2003. The line
matures on September 30, 2005.
The Company has available to it import loan facilities totaling
$1,282,051 with HSBC with an outstanding balance of $1,282,000 at
December 31, 2004 and $1,174,000 at December 31, 2003. For borrowings
in Hong Kong dollars, the import loan facilities bear interest at 0.5%
per annum over the bank's best lending rate and are payable monthly, or
5.5% as of December 31, 2004 and 2003, respectively. Weighted average
interest rate approximated 5.5% for 2004 and 6% for 2003. This loan is
due on demand.
See Note 5 for the details for the security, collateral and guarantees
under the debenture deed dated April 20, 2001.
(4) CONVERTIBLE NOTE PAYABLE:
On December 31, 2003, the Company issued a 12% subordinated convertible
note in the amount of $250,000 to Professional Traders Fund, Inc.
("PTF"). The borrowing amount is due and payable on December 31, 2004.
The interest is payable in arrears on March 31, June 30, September 30,
and December 31, 2004. The Company is in default at December 31, 2004
and accordingly, interest is accrued at a rate of 15% on and after the
date of the default, and the Company is obligated to pay a default
penalty equal to 30% of the unpaid principal and interest. 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 holder of this note, at its option, can convert the outstanding
balance of the debt into shares of common stock at the conversion
price, which is defined as 40% of the average closing price of the
stock three trading days immediately prior to the Notice of Conversion
date or the interest payment date or the debt maturity date. The
conversion price shall not in any case exceed $1 per share.
F-16
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(4) CONVERTIBLE NOTE PAYABLE, CONTINUED:
In addition, since this debt is convertible into equity at the option
of the note holder at beneficial conversion rates, an embedded
beneficial conversion feature was recorded as a debt discount and
amortized using the effective interest method 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 in 2003. The Company
fully amortized the discount of $250,000 during the year ended December
31, 2004.
Pursuant to the terms of a Limited Guarantee and Security Agreement,
the debt 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.
The Company has agreed to file a registration statement for the
conversion shares 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 note will be levied against the Company.
Accordingly, the Company is incurring a 1% penalty per month on the
funded amount of the note.
During the year ended December 31, 2004, PTF converted principal note
balance of $100,000 into 222,980 shares of common stock and outstanding
accrued interest of $12,385 into 29,579 shares of common stock through
the shares pledged by three shareholders. Accordingly, the Company's
shareholders issued directly to PTF a total of 252,559 common shares.
The value of the converted principal and accrued interest, totaling
$112,385 at December, has been recorded as a liability to the
shareholders in the accompanying consolidated balance sheet. As of
December 31, 2004 and 2003, the gross outstanding balance of this note
totaled $150,000 and $250,000, respectively.
The outstanding balance of the note is convertible into 517,241 shares
and 346,580 shares of the Company's common stock based on the closing
prices as of December 31, 2004 and 2003, respectively.
In February 2005, PTF filed a lawsuit against the Company for unpaid
note balance of $150,000, unpaid interest of $4,500, default interest
of $938, liquidated damage of $30,000 and default damage of $55,350 and
the related legal cost. The Company is in the process of negotiating a
settlement with PTF and has accrued the maximum liabilities including
all the amounts being claimed by PTF as of December 31, 2004. The
accrued interest and penalties totaling $90,788 are included in the
accrued expenses in the accompanying consolidated balance sheet. Also,
PTF is seeking reimbursement for attorneys' fees and costs; however,
since the attorneys' fees and costs are unknown and cannot be
reasonably estimated, the legal cost was not accrued as of December 31,
2004.
F-17
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(5) LONG-TERM DEBT:
A summary is as follows as of December 31:
2004 2003
---- ----
Installment loan carrying an interest of 0.75% over Hong Kong dollar
Prime Rate (5.75% at December 31, 2004 and 2003) to Dah Sing Bank
payable in monthly installments of $4,535 including interest through
April 2007 $ 114,602 $ 160,961
Installment loan carrying an interest of 1% over Hong Kong dollar
Prime Rate (6% at December 31, 2004 and 2003) to Dah Sing Bank
payable in monthly installments of $7,723 including interest through
June 2004 -- 45,540
Term loan carrying an interest of 0.75% over the bank's best lending
rate (5.75% at December 31, 2004 and 2003) to HSBC payable in monthly
installments of $35,897 including interest through June 2005 38,322 453,827
Accrued interest on previous term loan which was converted to a term loan
carrying 0% to HSBC, unpaid amount due June 2005 156,825 156,825
Term loan carrying an interest of 0.75% over Hong Kong dollar Prime
Rate (5.75% at December 31, 2004 and 2003) to DBS Bank payable in
monthly installments including interest at the following schedule:
$16,410 from May 2002 to April 2003, $19,103 from May 2003 to April
2004, $21,923 from May 2004 to March 2005, and the remaining balance
due April 2005 41,805 261,681
----------- -----------
351,554 1,078,834
Less current maturities 286,032 884,131
----------- -----------
$ 65,522 $ 194,703
=========== ===========
F-18
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(5) LONG-TERM DEBT, CONTINUED:
With respect to all of the above referenced debt and credit
arrangements in Note 3, pursuant to a debenture deed dated April 20,
2001, the Company pledged its assets as collateral collectively to a
bank group in Hong Kong comprised of Dah Sing Bank Limited, The Hong
Kong and Shanghai Banking Corporation Limited, and DBS Bank (Hong Kong)
Ltd. (formerly Overseas Trust Bank Limited) for all current and future
borrowings from the bank group by the Company. In addition to the above
pledged collateral, the debt is also secured by:
1. a personal guarantee given by Mr. Alan Chung-Lun Yang ("Mr.
Yang") limited to approximately US$6,900,000 to The Hong Kong
and Shanghai Banking Corporation Limited;
2. a security interest on a residential property located in Hong
Kong owned by City Royal Limited, a related party; and
3. a personal guarantee given by Mr. Yang for unlimited amount
together with a key man life insurance policy on Mr. Yang for
$1,000,000 and a personal guarantee to Dah Sing Bank Limited.
A summary of the maturities of long-term debt at December 31, 2004
follows:
Year ending December 31,
2005 $ 286,032
2006 52,052
2007 13,470
Thereafter --
---------
$ 351,554
=========
(6) INCOME TAXES:
Income tax expense amounted to $85,814 for 2004, $265,866 for 2003, and
$111,056 for 2002 (an effective rate of 23% for 2004, 23% for 2003, and
10% for 2002). A reconciliation of the provision for income taxes with
amounts determined by applying the statutory federal income tax rate of
34% to income before income taxes is as follows:
F-19
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(6) INCOME TAXES, CONTINUED:
2004 2003 2002
---- ---- ----
Computed tax at federal statutory rate $(125,185) $(398,414) $ 373,297
Non-deductible merger cost -- 936,231 --
Tax rate differential on foreign earnings of
Atlantic Components Ltd.("Atlantic"), a Hong Kong
based company (80,910) (89,247) (197,628)
Earnings on Alpha Perform Technology Limited
("Alpha"), a British Virgin Islands ("BVI")
Company not subject to corporate income tax -- (353,914) --
Net operating loss carryforward 291,909 -- --
Provision for tax liabilities on procurement
service fee income to Alpha -- 150,000 --
Other -- 21,210 (64,613)
--------- --------- ---------
$ 85,814 $ 265,866 $ 111,056
========= ========= =========
The income tax provision consists of the following components:
2004 2003 2002
---- ---- ----
Federal $ -- $ -- $ --
Foreign 85,814 265,866 111,056
--------- --------- ---------
$ 85,814 $ 265,866 $ 111,056
========= ========= =========
As of December 31, 2004, 2003 and 2002, there are no material amounts
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes.
In 2003, the Company's Hong Kong subsidiary, Atlantic, paid a
procurement fee to the Company's subsidiary, Alpha in BVI, and
allocated certain expenses incurred outside Hong Kong. Procurement fee
income net of such expenses totaled approximately $1,000,000, which is
not subject to corporate tax in Hong Kong or BVI. However, such
procurement service fee income or income net of related expenses may be
subject to corporate income tax in the People's Republic of China.
Based on the analysis of its tax counsel, the Company accrued
approximately $150,000 for such potential tax liabilities as of
December 31, 2003. The Company has not paid any of this tax in 2004 and
the amount remained to be included in the income tax payable as of
December 31, 2004.
F-20
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(6) INCOME TAXES, CONTINUED:
Effective January 1, 2004, the Company has ceased the operations of
Alpha and all the related activities are consolidated with those of
Atlantic.
(7) CONCENTRATIONS:
The Company has a non-exclusive Distributorship Agreement with Samsung
Electronics Hong Kong Co., Ltd. ("Samsung"), which was initially
entered into in May 1993 and has been renewed annually. Under the terms
of the agreement, Samsung appointed the Company on a non-exclusive
basis as Samsung's distributor to distribute and market its products in
the designated territory. The Company has the right to market and sell
the products of other manufacturers and render service related to such
activities, unless such activities result in the Company's inability to
fulfill its obligations under the Agreement. However, the Company shall
not purchase to sell any of the same product lines as Samsung produces
and deals in from any other Korean manufacturer during the term of this
Agreement. The most recent renewal of the Distributorship Agreement
expired on March 1, 2005. As of April 8, 2005, the Company is still in
negotiation with Samsung regarding the terms and such agreement has not
yet been renewed.
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 the Hong Kong office of Samsung. The Company purchased 80%,
84%, and 94% of materials from Samsung for the years ended December 31,
2004, 2003, and 2002, respectively. However, there is no written supply
contract between the Company and Samsung and, accordingly, there is no
assurance that Samsung 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. In addition, the Company's operations and business
viability are to a large extent dependent on the provision of
management services and financial support by Mr. Yang. See Note 5 for
details for Mr. Yang's support of the Company's banking facilities. At
December 31, 2004 and 2003, included in accounts payable were
$2,921,612 and $2,551,823, respectively, to Samsung. Termination of
such distributorship by Samsung will significantly impair and adversely
affect the continuation of the Company's business.
During the years ended December 31, 2004, 2003, and 2002, 31%, 21%, and
12%, respectively, of the Company's sales were generated from Classic
Electronic Ltd. ("Classic"), a related party (see Note 10 for
additional discussion of related party transactions). As of December
31, 2004 and 2003, accounts receivable, related parties included
$4,714,057 and $5,289,626, respectively, due from Classic, which
represented 81% and 83%, respectively, of the total accounts receivable
due from related and unrelated parties.
F-21
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(7) CONCENTRATIONS, CONTINUED:
As of December 31, 2004 and 2003, Samsung has withheld a total of
$350,000 commission due to the Company as deposits. Per a letter sent
by Samsung on May 1, 2001, the deposits will be released upon further
agreement between Samsung and the Company. Subsequent to this letter,
no further discussion regarding this matter was made. The Company
believes the amount is fully recoverable.
(8) RETIREMENT PLAN:
Under the Mandatory Provident Fund ("MPF") Scheme Ordinance in Hong
Kong, the Company is required to set up or participate in an MPF scheme
to which both the Company and employees must make continuous
contributions throughout their employment based on 5% of the employees'
earnings, subject to maximum and minimum level of income. For those
earning less than the minimum level of income, they are not required to
contribute but may elect to do so. However, regardless of the
employees' election, their employers must contribute 5% of the
employees' income. Contributions in excess of the maximum level of
income are voluntary. All contributions to the MPF scheme are fully and
immediately vested with the employees' accounts. The contributions must
be invested and accumulated until the employees' retirement. The
Company contributed and expensed $14,396 for 2004, $16,129 for 2003 and
$15,611 for 2002.
(9) COMMITMENTS:
The Company leases its facilities. The following is a schedule by years
of future minimum rental payments required under operating leases that
have noncancellable lease terms in excess of one year as of December
31, 2004:
Related Party Other TOTAL
------------- -----
Year ending December 31,
2005 $ 57,692 $ 15,655 $ 73,347
2006 31,731 $ 6,523 $ 38,254
Thereafter -- -- --
------------- ------------- -------------
Total $ 89,423 $ 22,178 $ 111,601
============= ============= =============
See Note 10 for related party leases. All leases expire prior to
December 31, 2006. Real estate taxes, insurance, and maintenance
expenses are obligations of the Company. It is expected that in the
normal course of business, leases that expire will be renewed or
replaced by leases on other properties; thus, it is anticipated that
future minimum lease commitments will likely be more than the amounts
shown for 2005. Rent expense for the years ended December 31, 2004,
2003, and 2002 totaled $111,214, $106,612, and $100,229, respectively.
F-22
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(10) RELATED PARTY TRANSACTIONS:
TRANSACTIONS WITH MR. YANG
As of December 31, 2004 and 2003, the Company had an outstanding
receivable from Mr. Yang, the President and Chairman of the Board of
Directors of the Company, totaling $102,936 at the end of each of
respective years. These advances bear no interest and are payable on
demand.
For the years ended December 31, 2004, 2003, and 2002, the Company
recorded compensation to Mr. Yang of $233,590, $716,770, and $732,280,
respectively, and paid $233,590, $92,308, and $92,308, respectively, to
Mr. Yang as compensation to him. The respective unpaid amounts are
included in the amount due from stockholder/director as of December 31,
2004 and 2003.
During each of the years ended December 31, 2004, 2003, and 2002, the
Company paid rent of $82,692, $53,846, and $53,846, respectively, for
Mr. Yang's personal residency as fringe benefits to him, and paid
housing allowance to him in the amount of $12,308, $12,308, and $2,052,
respectively. All such payments have been recorded as compensation
expense in the accompanying financial statements.
TRANSACTIONS WITH CLASSIC ELECTRONIC LTD.
During the years ended December 31, 2004, 2003, and 2002, the Company
sold $40,885,565, $15,224,745, and $10,007,267, respectively, to
Classic Electronic Ltd. ("Classic"). 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 to the
Company's lenders up to $10 million outstanding accounts receivable
from Classic.
During the years ended December 31, 2004, 2003, and 2002, the Company
purchased inventory of $5,867,150, $4,159,300, and $3,266,005,
respectively, from Classic, which offset the outstanding accounts
receivable from Classic. As of December 31, 2004 and 2003, the Company
had net outstanding accounts receivable from Classic totaling
$4,714,057 and $5,289,626, respectively.
The Company leased two of its facilities and Mr. Yang's personal
residency from Classic. Lease agreements for the two facilities expire
on November 30, 2006 while the lease agreement for Mr. Yang's personal
residency expires on March 31, 2005. Monthly lease payments for these 3
leases totaled $7,372. The Company incurred and paid rent expense of
$88,462, $56,731, and $53,846 to Classic for the years ended December
31, 2004, 2003, and 2002, respectively.
During the years ended December 31, 2003 and 2002, certain Classic's
employees performed work on behalf of Atlantic and their salaries were
allocated to Atlantic's operations and charged to expenses in the
accompanying consolidated financial statements. Such expenses
approximated $0 for 2004, $248,000 for 2003, and $310,000 for 2002.
F-23
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
In December 2003, the Company relieved its account receivable from
Classic by transferring $1,048,604 of outstanding amounts to its
stockholder/director as payment.
Mr. Ben Wong, a director of the Company, is a 99.9% shareholder of
Classic. The remaining 0.1% of Classic is owned by a non-related party.
TRANSACTIONS WITH ACL TECHNOLOGY PTE LTD.
During the years ended December 31, 2004, 2003, and 2002, the Company
sold $0, $901,430, $616,305, respectively, to ACL Technology Pte Ltd.
("ACLT"). Outstanding accounts receivable totaled $0 and $191,566 as of
December 31, 2004 and 2003, respectively. The Company has not
experienced any bad debt from this customer in the past.
During the years ended December 31, 2004, 2003, and 2002, the Company
purchased inventories of $2,049,474, $700,126, and $401,676,
respectively, from ACLT. As of December 31, 2004 and 2003, there were
no outstanding accounts payable to ACLT.
During 2002, the Company sold inventory previously reserved for
obsolescence to ACLT. The inventory had an original cost of
approximately $300,000 and was sold to ACLT at a substantial discount.
In December 2003, the Company relieved its account receivable from ACLT
by transferring $374,988 of outstanding amounts it owed to its
stockholder/director.
In 2004, the Company paid a commission of $392,434 to ACLT related to
sales brought in by this entity.
In 2004, the Company loaned $318,983 to ACLT, which is classified as
loans receivable from related parties in the accompanying consolidated
balance sheet. The loan is unsecured, bears no interest and is expected
to be repaid in 2005.
Mr. Ben Wong, a director of the Company, is a 99% shareholder of ACLT.
The remaining 1% of ACLT is owned by a non-related party.
TRANSACTIONS WITH KADATCO COMPANY LTD.
During the years ended December 31, 2004, 2003, and 2002, the Company
sold $166,152, $0, and $20,736, respectively, to Kadatco Company Ltd.
("Kadatco"). Outstanding accounts receivable totaled $0 as of December
31, 2004 and 2003. The Company has not experienced any bad debt from
this customer in the past.
F-24
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
During the years ended December 31, 2004, 2003, and 2002, the Company
purchased $0, $0, $11,340, respectively, from Kadatco. As of December
31, 2004 and 2003, there were no outstanding accounts payable to
Kadatco.
Mr. Yang is the sole beneficial owner of the equity interest of
Kadatco.
TRANSACTIONS WITH RAMBO TECHNOLOGIES LTD.
During the years ended December 31, 2004, 2003, and 2002, the Company
sold $7,682,072, $5,134,160, and $254,161, respectively, to Rambo
Technologies Ltd. ("Rambo"). Outstanding accounts receivable totaled $0
as of December 31, 2004 and 2003. The Company has not experienced any
bad debt from this customer in the past.
During the years ended December 31, 2004, 2003, and 2002, the Company
purchased $339,605, $229,781, and $163,812, respectively, from Rambo.
Outstanding accounts payable due to Rambo totaled $61,360 and $0 as of
December 31, 2004 and 2003, respectively.
Mr. Ben Wong, a director of the Company, is a 60% shareholder of Rambo.
The remaining 40% of Rambo is owned by a non-related party. Mr. Yang is
a director of Rambo.
TRANSACTIONS WITH ARISTO COMPONENTS LTD.
During the years ended December 31, 2004, 2003, and 2002, the Company
sold $90, $62,268, and $1,132,998, respectively, to Aristo Components
Ltd. ("Aristo"). There was no outstanding accounts receivable as of
December 31, 2004 and 2003. The Company has not experienced any bad
debt from this customer in the past.
During the years ended December 31, 2004, 2003, and 2002, the Company
purchased $500, $28,053, and $394,821, respectively, from Aristo. There
are no outstanding accounts payable due to Aristo as of December 31,
2004 and 2003, respectively.
Mr. Ben Wong, a director of the Company, is a 90% shareholder of
Aristo. The remaining 10% of Aristo is owned by a non-related party.
Mr. Yang is a director of Aristo.
TRANSACTIONS WITH ATLANTIC NETCOM LTD.
During the years ended December 31, 2004, 2003, and 2002, the Company
sold $14,985, $0, and $0, respectively, to Atlantic Netcom Ltd.
("Atlantic Netcom"). Outstanding accounts receivable totaled $13,460
and $0 as of December 31, 2004 and 2003, respectively. The Company has
not experienced any bad debt from this customer in the past.
Mr. Ben Wong, a director of the Company, is a 60% shareholder of
Atlantic Netcom. The remaining 40% of Atlantic Netcom is owned by a
non-related party. Mr. Yang is a director of Atlantic Netcom.
F-25
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD.
During the years ended December 31, 2004, 2003, and 2002, the Company
sold $513,698, $523,809, and $0, respectively, to Solution
Semiconductor (China) Ltd. ("Solution"). Outstanding accounts
receivable totaled $0 and $5,260 as of December 31, 2004 and 2003. The
Company has not experienced any bad debt from this customer in the
past.
During the years ended December 31, 2004, 2003, and 2002, the Company
purchased $8,387, $0, and $0, respectively, from Solution. There are no
outstanding accounts payable due to Solution as of December 31, 2004
and 2003.
Mr. Ben Wong, a director of the Company, is a 99% shareholder of
Solution. The remaining 1% of Solution is owned by a non-related party.
TRANSACTIONS WITH SYSTEMATIC INFORMATION LTD.
During the years ended December 31, 2004, 2003, and 2002, the Company
sold $1,941,298, $137,482, and $0, respectively, to Systematic
Information Ltd. ("Systematic"). There are no outstanding accounts
receivable due from Systematic as of December 31, 2004 and 2003. The
Company has not experienced any bad debt from this customer in the
past.
During the years ended December 31, 2004, 2003, and 2002, the Company
purchased $154,460, $0, and $0, respectively, from Systematic. There
are no outstanding accounts payable due to Systematic as of December
31, 2004 and 2003.
On April 1, 2004, the Company entered into a lease agreement with
Systematic pursuant to which the Company leases one residential
property for Mr. Yang's personal use for a monthly lease payment of
$3,205 per month. The lease agreement for this residency expires on
March 31, 2005. Monthly lease payment for this lease totaled $3,205.
The Company incurred and paid an aggregate rent expense of $28,846 to
Systematic during the year ended December 31, 2004.
Mr. Ben Wong and the wife of Mr. Yang are the directors and
shareholders of Systematic with a total of 100% interest.
F-26
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(10) RELATED PARTY TRANSACTIONS, CONTINUED:
TRANSACTIONS WITH CITY ROYAL LTD.
In August 2004, the Company was in negotiation with The DahSing Bank
Limited (the "DahSing Bank") for an additional amount of its available
line of credit. As a condition to the extension of additional credit to
the Company, DahSing Bank requested additional collateral to secure the
increased amount on the line. In order to meet the increased security
requirement, the Company loaned $611,446 to City Royal Limited to pay
off the mortgage loan on a residential property owned by City Royal
Limited and pledged to DahSing Bank as collateral to secure the
Company's borrowings from DahSing Bank. In consideration thereof,
DahSing Bank made available additional borrowings of HK$10 million
(approximately US$1,282,000). The loan is unsecured and bears no
interest. In February 2005, City Royal Limited sold the residential
property and has repaid the loan through transferring the entire
proceeds from the sale of HK$8,000,000 (approximately $1,025,641) to
DahSing Bank as collateral for the Company's line.
The loan to City Royal Limited is non-interest bearing, in
consideration of which City Royal Limited did not charge an arrangement
fee to the Company in respect of the security pledge in favor of Dah
Sing Bank. The primary purpose of the loan, from the Company's
perspective, was to advance the business of the Company by enabling it
to secure additional lines of financing in excess of the loan amount
from DahSing Bank. The Company settled this loan in February 2005 and
received payment in the full amount of $611,446. The Company believes
that the above-referenced loan does not violate the general prohibition
against loans made by publicly-traded companies to its directors and
executive officers set forth in Section 402 of the Sarbanes-Oxley Act
of 2002 ("Section 402") as its primary purpose was to advance the
business of the Company. However, no assurance can be given that the
Securities and Exchange Commission or U.S. federal government will
agree with the Company's position and, in the event such loan is
determined to be a violation of Section 402, the criminal penalties of
the Securities Exchange Act of 1934, as amended, could apply.
Mr. Yang's wife and Mr. Yang's mother-in-law are shareholders of City
Royal Limited with a total of 100% interest.
(11) LOSS ON ROBBERY:
The Company incurred a loss of $475,592 due to an uninsured robbery of
its products-in-transit in August 2004. Such loss is included in the
general and administrative expenses in the accompanying consolidated
statements of operations.
F-27
ACL SEMICONDUCTORS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 2004 AND DECEMBER 31, 2003 AND
THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2004
(12) QUARTERLY INFORMATION (UNAUDITED):
The summarized quarterly financial data presented below reflects all
adjustments, which in the opinion of management, are of a normal and
recurring nature necessary to present fairly the results of operations
for the periods presented.
(dollars in thousands except per share data)
------------------------------------------------------------------
TOTAL FOURTH THIRD SECOND FIRST
----- ------ ----- ------ -----
2004
----
Total net sales $133,244 $35,695 $34,715 $33,284 $29,550
Gross profit $3,113 $750 $595 $491 $1,277
Net income (loss) $(454) $(303) $(361) $(111) $321
Net income (loss) per share:
basic and diluted $(0.02) ($0.01) $(0.01) ($0.00) $0.01
2003
----
Total net sales $72,673 $20,212 $20,301 $17,081 $15,079
Gross profit $4,458 $1,037 $1,750 $844 $827
Net income (loss) $(1,438) $351 $(2,190) $217 $184
Net income (loss) per share:
basic and diluted $(0.06) $0.01 $(0.10) $0.01 $0.01
(13) SUBSEQUENT EVENT (UNAUDITED):
In April 2005, the Company, Classic and the selling shareholders of
Classic have made the determination to postpone the closing of the
acquisition of Classic (see Note 1) due to delays of certain due
diligence procedures. The acquisition is expected to close upon the
completion of such due diligence procedures and the related results and
findings are satisfactory for both parties. As of April 8, 2005, the
due diligence procedures are still in process.
F-28