U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended September 30, 2005.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from ____ to ____ .
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Commission File Number: 000-50140
ACL SEMICONDUCTORS INC.
(Name of registrant as specified in its charter)
DELAWARE 16-1642709
(State or other jurisdiction (I.R.S. 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)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[_]
The aggregate market value of the voting common equity held by non-affiliates of
the Registrant as of September 30, 2005 was approximately $544,993 based upon
the closing price of $0.18 of the Registrant's common stock on the OTC Bulletin
Board, as of the last business day of the most recently completed third fiscal
quarter (September 30, 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 November 9, 2005.
Transitional small business disclosure format (check one) Yes [_] No [X]
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2005 (unaudited)
and December 31, 2004 1-2
Condensed Consolidated Statements of Operations for the three months
and nine months ended September 30, 2005 (unaudited) and September 30, 2004 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 (unaudited) and September 30, 2004
(unaudited) 4-5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 22
ITEM 4. CONTROLS AND PROCEDURES 23
PART II OTHER INFORMATION
Item 1 Legal Proceedings 24
Item 6 Exhibits 24
SIGNATURES 25
ITEM 1. FINANCIAL STATEMENTS.
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
September 30, December 31,
2005 2004
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 197,847 $ 512,548
Restricted cash 769,231 --
Accounts receivable, net of allowance
for doubtful accounts of $0 for 2005 and 2004 1,663,900 1,088,751
Accounts receivable, related parties 2,779,545 4,727,517
Loan receivable, related party 288,983 930,429
Inventories, net of reserve of $124,359 724,139 1,520,117
Other current assets 89,562 80,802
----------- -----------
Total current assets 6,513,207 8,860,164
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net of
accumulated depreciation and amortization 66,073 55,819
ACQUISITION DEPOSITS 1,000,000 1,000,000
OTHER DEPOSITS 350,000 350,000
----------- -----------
$ 7,929,280 $10,265,983
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements
1
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
As of As of
September 30, December 31,
2005 2004
------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 3,866,927 $ 5,065,965
Accrued expenses 168,644 456,676
Loan payable, related party 327,919 --
Lines of credit and notes payable 2,409,321 3,469,632
Current portion of long-term debt 156,825 286,032
Convertible note payable, net of unamortized discount of
$0 and $150,000 for 2005 and 2004 -- 150,000
Payable related to debt settlement 216,088 --
Due to stockholders for converted pledged collateral 112,385 112,385
Income tax payable 155,862 145,050
Other current liabilities 6,583 13,610
------------ ------------
Total current liabilities 7,420,554 9,699,350
Long-term debt, less current portion 0 65,522
------------ ------------
Total liabilities 7,420,554 9,764,872
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock - $0.001 par value, 50,000,000 shares
authorized, 27,829,936 in 2005 and 2004 issued 27,830 27,830
and outstanding
Additional paid in capital 3,360,405 3,360,405
Amount due from stockholder/director (98,113) (102,936)
Accumulated deficit (2,781,396) (2,784,188)
------------ ------------
Total stockholders' equity 508,726 501,111
------------ ------------
$ 7,929,280 $ 10,265,983
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements
2
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
NET SALES:
Related parties $ 5,095,987 $ 15,312,795 $ 24,622,869 $ 38,102,727
Other 23,735,186 19,444,391 59,425,169 59,535,518
Less discounts to customers (21,635) (42,007) (91,632) (88,824)
------------ ------------ ------------ ------------
28,809,538 34,715,179 83,956,406 97,549,421
COST OF SALES 28,004,464 34,120,204 81,937,853 95,187,218
------------ ------------ ------------ ------------
GROSS PROFIT 805,074 594,975 2,018,553 2,362,203
OPERATING EXPENSES:
Selling 126,060 4,304 374,891 30,887
General and administrative 488,050 891,805 1,446,025 2,157,959
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 190,964 (301,134) 197,637 173,357
OTHER INCOME (EXPENSES):
Interest expense (53,021) (92,466) (153,075) (326,082)
Gain on disposal of property and equipment -- -- -- 128
Miscellaneous 2,565 (2,508) (1,028) (7,000)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 140,508 (396,108) 43,534 (159,597)
INCOME TAX EXPENSE (BENEFIT) 31,243 (34,862) 40,742 (8,647)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 109,265 $ (361,246) $ 2,792 $ (150,950)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED $ 0.00 $ (0.01) $ 0.00 $ (0.01)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED 27,829,936 27,829,936 27,829,936 27,829,936
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements
3
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Nine months ended
September 30, September 30,
2005 2004
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income (loss) $ 2,792 $ (150,950)
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 20,401 16,713
Bad debt 6,200 --
Change in inventory reserve (29,487) 25,051
Gain on disposal of property and equipment -- (128)
Interest expense from discount amortization of convertible note payable -- 216,677
Non-cash compensation to shareholder/director -- 200,000
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS
Accounts receivable - other (581,350) (436,950)
Accounts receivable - related parties 1,947,972 69,534
Inventories 825,466 111,310
Other current assets (8,760) (15,384)
INCREASE (DECREASE) IN LIABILITIES
Accounts payable (1,199,038) (18,435)
Accrued expenses (288,032) 232,238
Payable related to debt settlement 66,088 --
Income tax payable 10,812 (39,013)
Other current liabilities (7,027) (5,159)
----------- -----------
Total adjustments 763,245 356,454
----------- -----------
Net cash provided by operating activities 766,037 205,504
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Repayments from (loans to) stockholders 4,823 (86,081)
Increase of restricted cash (769,231) --
Cash receipts for loan repayments by related party 611,446 --
Repayments from related party 30,000 --
Loans to related party -- (611,446)
Proceeds received from sale of fixed assets -- 128
Purchases of property, equipment and improvements (30,655) (21,371)
----------- -----------
Net cash used for investing activities (153,617) (718,770)
----------- -----------
The accompanying notes are an integral part of these condensed consolidated financial statements
4
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Nine Months Ended
September 30, September 30,
2005 2004
------------- -------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds (repayments) on lines of credit and
notes payable (1,060,311) 1,421,789
Principal payments on long-term debt (194,729) (553,160)
Borrowings from related party 414,195 --
Repayments to related party (86,276) --
----------- -----------
Net cash provided by (used for) financing activities (927,121) 868,629
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (314,701) 355,363
CASH AND CASH EQUIVALENTS, beginning of the period 512,548 467,074
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ 197,847 $ 822,437
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 53,021 $ 97,020
=========== ===========
Income tax paid $ 29,930 $ 30,366
=========== ===========
NON CASH ACTIVITIES:
Reclassification for Convertible note payable to payable to debt settlement $ 150,000 $ --
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements
5
ACL SEMICONDUCTORS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The condensed consolidated financial statements include the financial
statements of ACL Semiconductors Inc. and its subsidiaries, Atlantic
Components Ltd. and Alpha Perform Technology Limited (collectively, "ACL"
or the "Company"). The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions
to Form 10-Q and do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
of America for complete consolidated financial statements. These condensed
consolidated financial statements and related notes should be read in
conjunction with the Company's audited financial statements for the fiscal
years ended December 31, 2004, 2003 and 2002 filed in the Form 10-K filed
by the Company on April 15, 2005. In the opinion of management, these
condensed consolidated financial statements reflect all adjustments which
are of a normal recurring nature and which are necessary to present fairly
the consolidated financial position of ACL as of September 30, 2005 and
December 31, 2004, and the results of operations for the three-month and
nine-month periods ended September 30, 2005 and 2004 and the cash flows for
the nine-month periods ended September 30, 2005 and 2004. The results of
operations for the three months and nine months ended September 30, 2005
are not necessarily indicative of the results, which may be expected for
the entire year. All significant intercompany accounts and transactions
have been eliminated in preparation of the condensed consolidated financial
statements.
The Company expects to complete its acquisition of Classic Electronics
Ltd., a Hong Kong corporation during the fourth quarter of 2005. During
2003, the Company made an acquisition deposit of $1 million in relation to
this acquisition. This deposit will be used to offset the purchase price of
acquisition upon the closing of this transaction. In the case if the
acquisition arrangement is terminated, the deposit will be refunded to the
Company based on the agreements between the two entities.
NATURE OF BUSINESS OPERATIONS
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 formed 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.
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.
6
CURRENCY REPORTING
Amounts reported in the accompanying condensed consolidated financial
statements and disclosures are stated in U.S. Dollars, unless stated
otherwise. The functional currency of the Company's subsidiaries, which
accounted for most of the Company's operations, is reported in Hong Kong
dollars ("HKD"). Foreign currency transactions (outside Hong Kong) during
the period are translated into HKD according to the prevailing exchange
rate at the relevant transaction dates. Assets and liabilities denominated
in foreign currencies at the balance sheet dates are translated into HKD
at period-end exchange rates.
For the purpose of preparing these consolidated financial statements, the
financial statements of ACL reported in HKD have been translated into U.S.
Dollars at US$1.00=HKD7.8, a fixed exchange rate maintained between the
United States and China.
2. EARNINGS (LOSS) PER COMMON 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. As of September
30, 2005 and 2004, the Company has 0 and 441,000 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. The common stock
equivalents for 2004 were excluded from the computation of diluted loss per
share as their effect is antidilutive.
3. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH MR. YANG
As of September 30, 2005 and December 31, 2004, the Company had an
outstanding receivable from Mr. Yang, the Company's Chief Executive
Officer, majority stockholder and a director, totaling $98,113 and $102,936
representing advanced compensation paid. These balances bear no interest
and are payable on demand.
For the three months ended September 30, 2005 and 2004, the Company
recorded and paid $50,000 and $23,077, respectively, to Mr. Yang, and for
the nine months ended September 30, 2005 and 2004, the Company recorded
$176,923 and 269,231, respectively, and paid $176,923 and $69,231,
respectively, to Mr. Yang as compensation to him.
During the three months ended September 30, 2005 and 2004, and nine months
ended September 30, 2005 and 2004, the Company paid rent of $23,077,
$23,077, $69,231 and $69,231, respectively, for Mr. Yang's personal
residency as additional compensation.
TRANSACTIONS WITH CLASSIC ELECTRONICS LTD.
During the three months ended September 30, 2005 and 2004, and nine months
ended September 30, 2005 and 2004, the Company sold $1,951,509,
$12,779,153, $18,710,411 and $31,096,914, respectively, of memory products
to Classic Electronics Ltd. ("Classic"). The Company had outstanding
accounts receivable from Classic totaling $2,542,968 and $4,714,057,
respectively, as of September 30, 2005 and December 31, 2004. The Company
has not experienced any bad debt from this customer in the past. Pursuant
to a written personal guarantee agreement, Mr. Yang personally guarantees
all the outstanding accounts receivable from Classic up to $10 million of
accounts receivable.
During the three months ended September 30, 2005 and 2004, and nine months
ended September 30, 2005 and 2004, the Company purchased Samsung memory
products sourced from other authorized distributors of
7
$1,289,368, $955,001, $5,054,434 and $3,703,180, respectively, from Classic
to satisfy part of its demand of insufficient product supply from Samsung
HK.
The Company leased one of its facilities and Mr. Yang's personal residency
from Classic. Lease agreements for the one facility expire on November 30,
2006 while the lease agreement for Mr. Yang's personal residency expires on
March 31, 2008. Monthly lease payments for these 2 leases totaled $6,684.
The Company incurred and paid rent expense of ACL in the amount of $20,053,
$23,076, $63,197 and $66,346 to Classic during the three months ended
September 30, 2005 and 2004 and the nine months ended September 30, 2005
and 2004, respectively.
On December 31, 2004, the Company executed an agreement to purchase 100% of
the capital stock of Classic. On April 8 2005, the Company made the
determination to postpone its acquisition of Classic until the second half
of 2005. Both entities have agreed upon this decision. The Company expects
to close this acquisition by the end of 2005.
Mr. Ben Wong, a director of the Company, is a director of Classic and 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.
In 2004, the Company loaned $318,983 to ACL Technology Pte Ltd. ("ACLT"),
which is classified as loans receivable from related party. During the nine
months ended September 30, 2005, this related party repaid $30,000 to the
Company and the Company expects the loan be collected by the end of 2005.
The loan is unsecured, bears no interest and a balance of $288,983 was
outstanding thereunder as of September 30, 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 three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company recognized
$2,600,665, $0, $5,072,859 and $166,152 from the sale of memory products to
Kadatco Company Ltd. ("Kadatco"). Outstanding accounts receivable from
Kadatco totaled $203,782 and $0 as of September 30, 2005 and December 31,
2004. The Company has not experienced any bad debt from this customer in
the past.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company purchased $0 and $0,
respectively, from Kadatco. As of September 30, 2005 and December 2004,
there were no outstanding accounts payable to Kadatco.
Mr. Yang is the sole beneficial owner of Kadatco.
TRANSACTIONS WITH RAMBO TECHNOLOGIES LTD.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company sold $0, $1,593,767,
$165,225 and $4,539,712, respectively, to Rambo Technologies Ltd.
("Rambo"). Outstanding accounts receivable totaled $0 and $0 as of
September 30, 2005 and December 31, 2004. The Company has not experienced
any bad debt from this customer in the past.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company purchased $316,708,
$59,275, $874,553 and $273,524 respectively, from Rambo. Outstanding
accounts payable due to Rambo totaled $0 and $61,360 as of September 30,
2005 and December 31, 2004, respectively.
8
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, the
Company's Chief Executive Officer, majority shareholder and a director, is
a director of Rambo.
TRANSACTIONS WITH ARISTO COMPONENTS LTD.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company sold $26,750,$0,
$26,750 and $90, respectively, to Aristo Components Ltd. ("Aristo
Components"). There was no outstanding accounts receivable as of September
30, 2005 and December 31, 2004. The Company has not experienced any bad
debt from this customer in the past.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company purchased $0, $0, $0
and $500, respectively, from Aristo Components. There are no outstanding
accounts payable due to Aristo as of September 30, 2005 and December 31,
2004, respectively.
Mr. Ben Wong, a director of the Company, is a 90% shareholder of Aristo.
The remaining 10% of Aristo Components is owned by a non-related party. Mr.
Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is a director of Aristo Components.
TRANSACTIONS WITH ARISTO TECHNOLOGIES LTD.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company sold $508,406, $0,
$508,406 and $0, respectively, to Aristo Technologies Ltd. ("Aristo
Technologies"). Outstanding accounts receivable totaled $31,513 and $0 as
of September 30, 2005 and December 31, 2004. The Company has not
experienced any bad debt from this customer in the past.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company purchased $100,822,
$0, $100,822 and $0, respectively, from Aristo Technologies. There are no
outstanding accounts payable due to Aristo as of September 30, 2005 and
December 31, 2004, respectively.
Mr. Ben Wong, a director of the Company, is a 90% shareholder of Aristo.
The remaining 10% of Aristo Technologies is owned by a non-related party.
Mr. Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is a director of Aristo Technologies.
TRANSACTIONS WITH ATLANTIC NETCOM LTD.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company sold $0, $6,354,
$1,652 and $6,354, respectively, to Atlantic Netcom Ltd. ("Atlantic
Netcom"). Outstanding accounts receivable totaled $0 and $13,460 as of
September 30, 2005 and December 31, 2004, 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, the Company's Chief Executive Officer, majority
shareholder and a director, is a director of Atlantic Netcom.
TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company sold $0, $0, $55,122
and $0, respectively, to Solution Semiconductor (China) Ltd. ("Solution").
Outstanding accounts receivable totaled $0 as of September 30, 2005 and
December 31, 2004. The Company has not experienced any bad debt from this
customer in the past.
9
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company purchased $0, $0,
$22,019 and $0, respectively, from Solution. There are no outstanding
accounts payable due to Solution as of September 30, 2005 and December 31,
2004.
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 three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company sold $0, $506,517,
$61,910 and $1,866,501, respectively, to Systematic Information Ltd.
("Systematic"). There are no outstanding accounts receivable due from
Systematic as of September 30, 2005 and December 31, 2004. The Company has
not experienced any bad debt from this customer in the past.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company purchased $0,
$74,862, $0, and $154,460, respectively, from Systematic. There are no
outstanding accounts payable due to Systematic as of September 30, 2005 and
December 31, 2004.
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, 2008.
Monthly lease payment for this lease totaled $3,205. The Company incurred
and paid an aggregate rent expense of $9,615 and 28,845 to Systematic
during the three months and nine months ended September 30, 2005.
Mr. Ben Wong, a director of the Company, and the wife of Mr. Yang, the
Company's Chief Executive Officer, majority shareholder and a Director, are
the directors and shareholders of Systematic with a total of 100% interest.
TRANSACTIONS WITH GLOBAL MEGA DEVELOPMENT LTD.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company sold $8,657,
$427,004, $19,074 and $427,004, respectively, to Global Mega Development
Ltd. ("Global Mega"). There are no outstanding accounts receivable due from
Global Mega as of September 30, 2005 and December 31, 2004. The Company has
not experienced any bad debt from this customer in the past.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company received management
fee income $641, $0, $641 and $0, respectively, from Global Mega.
Outstanding accounts receivable due from Global Mega totaled $641 and $0 as
of September 30, 2005 and December 31, 2004, respectively.
Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder
and a director, is a 90% shareholder of Global Mega. The remaining 10% of
Global Mega is owned by a non-related party.
TRANSACTIONS WITH TFT TECHNOLOGIES LTD.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company sold $0, $0, $1,460
and $0, respectively, to TFT Technologies Ltd. ("TFT"). The management is
of the opinion that the above transactions were entered into in the normal
course of business and the prices were set in accordance to the market.
There are no outstanding accounts receivable due from TFT as of September
30, 2005 and December 31, 2004. The Company has not experienced any bad
debt from this customer in the past.
10
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company purchased $0, $0, $0,
and $0, respectively, from TFT. There are no outstanding accounts payable
due to TFT as of September 30, 2005 and December 31, 2004.
Mr. Yang, the Company's Chief Executive Officer, majority shareholder and a
director, and his wife are the directors and shareholders of TFT owning
100% of the capital stock thereof.
TRANSACTIONS WITH INTELLIGENT NETWORK TECHNOLOGY LTD.
During the three months ended September 30, 2005 and 2004, and the nine
months ended September 30, 2005 and 2004, the Company received management
fee income of $641, $0, $641 and $0, respectively, from Intelligent Network
Technology Ltd. ("Intelligent"). Outstanding accounts receivable due from
Intelligent totaled $641 and $0 as of September 30, 2005 and December 31,
2004, respectively.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder
and a director, is a 75% shareholder of Intelligent. The remaining 25% of
Intelligent is owned by a non-related party.
TRANSACTIONS WITH CITY ROYAL LTD.
In August 2004, the Company was in negotiation with The Dah Sing Bank
Limited (the "Dah Sing Bank") for an additional amount of its available
line of credit. As a condition to the extension of additional credit to the
Company, Dah Sing 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 ("City
Royal") to pay off the mortgage loan on a residential property owned by
City Royal Limited and pledged to Dah Sing Bank as collateral to secure the
Company's borrowings from Dah Sing Bank. In consideration thereof, Dah Sing
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 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 Dah Sing Bank as collateral for the Company's
line which was subsequent reduced to HK$6,000,000 (approximately $769,231).
The loan to City Royal is non-interest bearing, in consideration of which
City Royal 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 Dah Sing Bank. The Company settled this loan in
February 2005 and received payment in the full amount of $611,446. City
Royal loaned $414,195 to the Company during the three months ended March
31, 2005 and the Company repaid $86,276 to City Royal during the three
months ended June 30, 2005. The outstanding loan balance due to City Royal
was $327,919 as of September 30, 2005. The Company believes that the
above-referenced loan to City Royal in 2004 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
owning 100% of the capital stock thereof.
All the related party transactions taking place during the reporting
periods were conducted during the normal course of business. The prices of
products sold to or purchased from these related entities are in the same
price ranges as those offered to other non related customers or purchased
from other vendors.
11
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 was due and payable on December 31, 2004. The interest
was payable in arrears on March 31, June 30, September 30, and December 31,
2004. The Company was in default at December 31, 2004 and accordingly,
interest began to accrue at a rate of 15% on and after the date of the
default, and the Company became 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 could have been 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, could convert the outstanding
balance of the debt into shares of common stock at the conversion price,
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, not to exceed $1 per share.
In addition, since this debt was 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 exceeded the proceeds of the convertible
debt, the amount of the discount assigned to the beneficial conversion
feature was 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 was guaranteed by 1.2 million shares of the Company's common stock
beneficially owned by three shareholders.
The Company 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 failed
to meet either of such timelines, a 1% penalty per month on the funded
amount of the note would be levied against the Company. The Company did not
meet either timeline and, accordingly, the Company began 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 which the
Company satisfied through delivery of 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 September 30, 2005 and December 31, 2004,
has been recorded as a liability to the shareholders in the accompanying
consolidated balance sheet. As of December 31, 2004, the gross outstanding
balance of this note was $150,000.
On May 25, 2005, a Default Judgment was issued by United States District
Court, Southern District of New York ordering the Company to pay PTF a
total of in US$255,292 (comprised of principal in the amount of US$150,000;
interest in the amount of US$10,541; penalties in the amount of to
US$85,350; attorney fees amounting to US$4,781; and costs and disbursements
of taking action against the Company pursuant to which the Company agreed
to pay in the amount of US$4,620). The Company accrued the entire claimed
amount in the three months ended June 30, 2005.
On August 16, 2005, the Company entered into a settlement agreement with
PTF pursuant to which the Company agreed to pay $255,292 in seven monthly
installments through February 28, 2006. The Company reclassified the
outstanding loan balance and the related accrued interest and penalties to
"Payable Related to Debt Settlement" on the accompanying consolidated
balance sheets. During the three months ended
12
September 30, 2005, the Company paid $39,204 of the $255,292 balance owed
to PTF in accordance with the terms of the settlement agreement.
5. BANK FACILITIES
With respect to all of the above referenced debt and credit arrangements,
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. 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. Yang, limited to approximately
US$6,900,000, to The Hong Kong and Shanghai Banking Corporation
Limited;
2. a fixed cash deposit of $769,231 (HK$6,000,000) as collateral for
loans from Dah Sing Bank Limited;
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.
6. ECONOMIC DEPENDENCE
The Company's distribution operations are dependent on the availability of
an adequate supply of electronic components under the "Samsung" brand name
which have historically been principally supplied to the Company by Samsung
Electronics H.K. Co., Ltd. ("Samsung HK"), a subsidiary of Samsung
Electronics Co., Ltd., a Korean public company. Samsung HK supplied
approximately 77%, 82%, 77% and 77% of materials to the Company for the
three months ended September 30, 2005 and 2004, and the nine months ended
September 30, 2005 and 2004 respectively. However, there is no written
supply contract between the Company and Samsung HK and, accordingly, there
is no assurance that Samsung HK will continue to supply sufficient
electronic components to the Company on terms and prices acceptable to the
Company or in volumes sufficient to meet the Company's current and
anticipated demand, nor can assurance be given that the Company would be
able to secure sufficient products from other third party supplier(s) on
acceptable terms.
The Company is highly dependent on the product supplies from Samsung HK. If
the relationship with Samsung HK is terminated, the Company may not be able
to continue its business. The Company has been taking necessary steps to
reduce its dependence on Samsung HK through its contemplated acquisition of
Classic which is a reseller of various memory products.
For the three months ended September 30, 2005 and 2004, and the nine months
ended September 30, 2005 and 2004, the Company purchased $21,097,135,
$28,483,654, $63,940,646 and $76,614,899, respectively, from Samsung HK. At
September 30, 2005 and December 31, 2004, included in accounts payable were
$2,631,055 and $3,836,804, respectively, payable to Samsung HK.
7. SEGMENT REPORTING
The Company's sales are generated from Hong Kong and the rest of China and
substantially all of its assets are located in Hong Kong.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2005, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 107 ("SAB 107"). The interpretations
in SAB 107 express views of the staff regarding the interaction between
Statement of Financial Accounting Standards Statement No. 123 (revised
2004), "Share-Based Payment" ("Statement 123(R)") and certain SEC rules and
regulations and provide the staff's views regarding the valuation of
share-based payment arrangements for public companies. In particular
13
SAB 107 provides guidance related to share-based payment transactions with
non-employees, the transition from public entity status, valuation methods
(including assumptions such as expected volatility and expected term), the
accounting for certain redeemable financial instruments issued under
share-based payment arrangements, the classification of compensation
expense, non-GAAP financial measures, first-time adoption of Statement
123(R) in an interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax effects of
share-based payment arrangements upon adoption of Statement 123(R), the
modification of employee share options prior to adoption of Statement
123(R) and disclosures in Management's Discussion and Analysis subsequent
to adoption of Statement 123(R).
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides
guidance relating to the identification of and financial reporting for
legal obligations to perform an asset retirement activity. FIN 47 requires
recognition of a liability for the fair value of a conditional asset
retirement obligation when incurred if the liability's fair value can be
reasonably estimated. FIN 47 also defines when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The provision is effective no later than the end of
fiscal years ending after December 15, 2005. The Company will adopt FIN 47
beginning the first quarter of fiscal year 2006 and does not believe the
adoption will have a material impact on its consolidated financial position
or results of operations or cash flows.
In May 2005, the FASB issued SFAS No.154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3
("SFAS No. 154"). SFAS No. 154 requires retrospective application to prior
periods' financial statements of a voluntary change in accounting principle
unless it is impracticable. APB Opinion No. 20 "Accounting Changes,"
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. SFAS No. 154
is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005; however earlier adoption is
permitted for accounting changes and corrections of errors made in fiscal
years beginning after the date of issuance of SFAS No 154. The Company is
in the process of evaluating whether the adoption of SFAS 154 will have a
significant impact on the Company's overall results of operations or
financial position.
In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus
on Issue 05-6, DETERMINING THE AMORTIZATION PERIOD FOR LEASEHOLD
IMPROVEMENTS, which requires that leasehold improvements acquired in a
business combination or purchased subsequent to the inception of a lease be
amortized over the lesser of the useful life of the assets or a term that
includes renewals that are reasonably assured at the date of the business
combination or purchase. EITF 05-6 is effective for periods beginning after
July 1, 2005. The Company does not expect the provisions of this consensus
to have a material impact on its financial position, results of operations
or cash flows.
9. SUBSEQUENT EVENT:
The debenture deed dated April 20, 2001 (refer to Note 5 above) in respect
of pledging the Company's assets as collateral for the outstanding and
future borrowings collectively from 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., was released on October, 2005.
10. RECLASSIFICATION:
Certain reclassifications have been made to the 2004 condensed consolidated
financial statements to confirm to the 2005 presentation.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY HAS INCLUDED IN THIS QUARTERLY REPORT CERTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 CONCERNING THE COMPANY'S BUSINESS, OPERATIONS AND FINANCIAL CONDITION.
"FORWARD-LOOKING STATEMENTS" CONSIST OF ALL NON-HISTORICAL INFORMATION, AND THE
ANALYSIS OF HISTORICAL INFORMATION, INCLUDING THE REFERENCES IN THIS QUARTERLY
REPORT TO FUTURE REVENUE GROWTH, FUTURE EXPENSE GROWTH, FUTURE CREDIT EXPOSURE,
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION, FUTURE
PROFITABILITY, ANTICIPATED CASH RESOURCES, ANTICIPATED CAPITAL EXPENDITURES,
CAPITAL REQUIREMENTS, AND THE COMPANY'S PLANS FOR FUTURE PERIODS. IN ADDITION,
THE WORDS "COULD", "EXPECTS", "ANTICIPATES", "OBJECTIVE", "PLAN", "MAY AFFECT",
"MAY DEPEND", "BELIEVES", "ESTIMATES", "PROJECTS" AND SIMILAR WORDS AND PHRASES
ARE ALSO INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
COMPANY'S FORWARD-LOOKING STATEMENTS DUE TO NUMEROUS KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, INCLUDING, AMONG OTHER THINGS, UNANTICIPATED TECHNOLOGICAL
DIFFICULTIES, THE VOLATILE AND COMPETITIVE ENVIRONMENT FOR DRUG DELIVERY
PRODUCTS, CHANGES IN DOMESTIC AND FOREIGN ECONOMIC, MARKET AND REGULATORY
CONDITIONS, THE INHERENT UNCERTAINTY OF FINANCIAL ESTIMATES AND PROJECTIONS, THE
UNCERTAINTIES INVOLVED IN CERTAIN LEGAL PROCEEDINGS, INSTABILITIES ARISING FROM
TERRORIST ACTIONS AND RESPONSES THERETO, AND OTHER CONSIDERATIONS DESCRIBED AS
"RISK FACTORS" IN OTHER FILINGS BY THE COMPANY WITH THE SEC INCLUDING ITS ANNUAL
REPORT ON FORM 10-K. SUCH FACTORS MAY ALSO CAUSE SUBSTANTIAL VOLATILITY IN THE
MARKET PRICE OF THE COMPANY'S COMMON STOCK. ALL SUCH FORWARD-LOOKING STATEMENTS
ARE CURRENT ONLY AS OF THE DATE ON WHICH SUCH STATEMENTS WERE MADE. THE COMPANY
DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING
STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE ON WHICH ANY SUCH
STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
ANY REFERENCE TO "ACL", THE "COMPANY" OR THE "REGISTRANT", "WE", "OUR" OR
"US" MEANS ACL SEMICONDUCTORS INC. AND ITS SUBSIDIARIES.
OVERVIEW
CORPORATE BACKGROUND
The Company, through its wholly-owned subsidiaries Atlantic Components
Limited, a Hong Kong corporation ("Atlantic") and Alpha Perform Technology
Limited, a British Virgins Island company ("Alpha"); provided, however that
Alpha is no longer active, for the three months ended September 30, 2005, is
engaged primarily in the business of distribution of memory products under
"Samsung" brandname which principally comprise DRAM and Graphic RAM, FLASH, SRAM
and MASK ROM for the Hong Kong and Southern China markets.
As of September 30, 2005, ACL had more than 120 active customers in Hong
Kong and Southern China.
ACL is in the mature stage of operations. As a result, the relationships
between sales, cost of sales, and operating expenses reflected in the financial
information included in this document to a large extent represent future
expected financial relationships. Much of the cost of sales and operating
expenses reflected in our financial statements are recurring in nature.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") recently issued
Financial Reporting Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE
ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, ACL's most critical
accounting policies include: inventory valuation, which affects cost
15
of sales and gross margin; policies for revenue recognition and allowance for
doubtful accounts. The methods, estimates and judgments ACL uses in applying
these most critical accounting policies have a significant impact on the results
ACL reports in its consolidated financial statements.
INVENTORY VALUATION. ACL's policy is to value inventories at the lower of
cost or market on a part-by-part basis. This policy requires ACL to make
estimates regarding the market value of our inventories, including an assessment
of excess or obsolete inventories. ACL determines excess and obsolete
inventories based on an estimate of the future demand for its products within a
specified time horizon, generally 12 months. The estimates ACL uses for demand
are also used for near-term capacity planning and inventory purchasing and are
consistent with ACL's revenue forecasts. If ACL demands forecast is greater than
ACL's actual demand it may be required to take additional excess inventory
charges, which will decrease gross margin and net operating results in the
future.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. ACL maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of ACL's customers to
make required payments. ACL's allowance for doubtful accounts is based on ACL's
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, ACL's history of bad debts, and the general condition of
the industry. If a major customer's credit worthiness deteriorates, or ACL's
customers' actual defaults exceed ACL's historical experience, ACL's estimates
could change and impact ACL's reported results.
RELATED PARTY TRANSACTIONS
The Company conducts business with several affiliated companies. All the
related party transactions taking place during the reporting periods were
conducted during the normal course of business. The prices of products sold to
or purchased from these related entities are in the same price ranges as those
offered to other non related customers or purchased from other vendors.
In 2004, the Company entered into an acquisition agreement with the
shareholders of Classic for the Company to acquire 100% of Classic. The
acquisition is expected to close during the fourth quarter of 2005. Upon the
closing of the acquisition, all the transactions with Classic, the Company's
largest business partner, will be eliminated during the consolidation.
CONTRACTUAL OBLIGATIONS
The following table presents the Company's contractual obligations as of
September 30, 2005 over the next five years and thereafter:
Payments by Period
----------------------------------------------------------------------------------------------------------------
LESS
THAN 1-3 4-5 AFTER 5
AMOUNT 1 YEAR YEARS YEARS YEARS
------ ------ ----- ----- -----
Operating Leases 68,662 12,360 56,302 --- ---
Line of credit and notes payable -
short-term 2,409,321 2,409,321 --- --- ---
Payable related to debt settlement 216,088 216,088 --- --- ---
Long-term Debt 156,825 156,825 --- --- ---
----------------------------------------------------------------------
Total Contractual Obligations 2,850,896 2,794,594 56,302 $--- $---
======================================================================
ACCOUNTING PRINCIPLES; ANTICIPATED EFFECT OF GROWTH
Below is a brief description of basic accounting principles which the
Company has adopted in determining its recognition of sales and expenses, as
well as a brief description of the effects that the Company believes its
anticipated growth will have on the Company's sales and expenses in the next 12
months.
16
NET SALES
Sales from Samsung are recognized upon the transfer of legal title of the
electronic components to the customers. At September 30, 2005, ACL had more than
120 active customers.
The quantities of memory products the Company sells fluctuate with changes
in demand from its customers. The prices set by Samsung that the Company must
charge its customers are expected to fluctuate as a result of prevailing
economic conditions and their impact on the market.
In the third quarter of 2005, large OEMS like DELL, IBM and many other
personal computer manufacturers placed large orders for new memory standard DDR2
for personal computers. However, Intel could not meet the demand for their i945
Motherboard chip set full series. Consequently, the output for personal
computers dropped substantially, which lead to a high level of memory module
inventory at the personal computer manufacturers. These excess inventories were
flooded into the market and the prices for DDR2 memory module dropped
significantly. This reduction in prices caused our revenue to be lower than
expected.
Starting from November 2005, the supplies of Intel i945 mother board chip
set series is expected to grow steadily. Other parties like SIS (mother board
chip set maker) and AMD (CPU maker) joined forces in supporting DDR2 standard.
Demand for personal computers is expected to continue to increase especially
during the period prior to Christmas.
Demand for Flash components, MP3, PMP, storage, etc, is expected to
continue to increase in the fourth quarter of fiscal 2005 in light of the
holiday season. Flash prices have also been rising rapidly due to the increased
demand. Other Flash manufacturers like Hynix, Micron, ST-Micro are expected to
increase supplies in order to meet projected demand. The shortage of Flash
components in the market is expected to continue in the 4th quarter of the 2005.
The overall memory market is expected to improve in the last quarter of
2005 for both personal computer and consumer electronics products. Though our
business in the last quarter of 2005 is expected to be difficult, we expect our
financial performance to improve.
COST OF SALES
Cost of sales consists of costs of goods purchased from Samsung HK, and
purchases from other Samsung authorized distributors. Many factors affect the
Company's gross margin, including, but not limited to, the volume of production
orders placed on behalf of its customers, the competitiveness of the memory
products industry and the availability of cheaper Samsung memory products from
overseas Samsung distributors due to regional demand and supply situations.
Nevertheless, the Company's procurement operations are supported by Samsung HK,
although there is no written long-term supply agreement in place between
Atlantic and Samsung HK.
OPERATING EXPENSES
The Company's operating expenses for the three months and nine months ended
September 30, 2005 and 2004 were comprised of sales and marketing and general
and administrative expenses only.
Sales and marketing expenses consisted primarily of and external
commissions paid to external sales personnel and costs associated with
advertising and marketing activities. Sales and marketing expenses are expected
to fluctuate as a percentage of sales due to the addition of sales personnel and
various marketing activities planned throughout the year.
General and administrative expenses include all corporate and
administrative functions that serve to support the Company's current and future
operations and provide an infrastructure to support future growth. Major items
in this category include management and staff salaries, rent/leases,
professional services, and travel and entertainment. The Company expects these
expenses to increase as a result of increased legal and accounting
17
fees anticipated in connection with the Company's compliance with ongoing
reporting and accounting requirements of the Securities and Exchange Commission
and as a result of anticipated expansion by the Company of its business
operations.
Interest expense, including finance charges, relates primarily to
Atlantic's short-term and long-term bank borrowings, which the Company intends
to reduce, and amortization of discount on the convertible debenture.
RESULTS OF OPERATIONS
The following table sets forth unaudited statements of operations data for
the three months and nine months ended September 30, 2005 and 2004 and should be
read in conjunction with the "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Company's financial statements and
the related notes appearing elsewhere in this document.
Three Months Three Months Nine months Nine months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
(Unaudited)
Net Sales 100% 100% 100% 100%
Cost of sales 97.21% 98.29% 97.60% 97.58%
Gross Profit 2.79% 1.71% 2.40% 2.42%
Operating expenses:
Sales and marketing 0.44% 0.01% 0.45% 0.03%
General and administrative 1.68% 2.57% 1.72% 2.21%
Total operating expenses 2.12% 2.58% 2.17% 2.24%
Income (loss) from operations 0.67% -0.87% 0.23% 0.18%
Other expenses:
Interest expenses -0.18% -0.27% -0.18% -0.33%
Miscellaneous 0.00% -0.01% 0.00% -0.01%
Income (loss) before income
taxes 0.49% -1.15% 0.05% -0.16%
Income taxes expenses (benefits) 0.11% -0.10% 0.05% -0.01%
Net income (loss) 0.38% -1.05% 0.00% -0.15%
18
UNAUDITED THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2004
NET SALES
Net sales decreased by $5,905,641 or 17.01% from $34,715,179 in the
three months ended September 30, 2004 to $28,809,538 in the three months ended
September 30, 2005. This decrease resulted primarily from shortage of supplies
of products to meet the demands. The Company expects the supplies to be
increased in the 4th quarter of 2005 and 1st half of 2006.
COST OF SALES
Cost of sales decreased by $6,115,740 or 17.92% from $34,120,204 in the
three months ended September 30, 2004 to $28,004,464 in the three months ended
September 30, 2005. The cost of sales decreased in proportion to the decrease of
net sales.
GROSS PROFIT
Gross profit increased by $210,099 or 35.31% from $594,975 in the three
months ended September 30, 2004 to $805,074 in the three months ended September
30, 2005. The gross profit % increases slightly by 1.08% from 1.71% in the three
months ended September 30, 2005 to 2.79% in the three months ended September 30,
2005. The increase was due primarily by rising prices of its products which was
caused by the shortage of the products in the market.
OPERATING EXPENSES
Selling and marketing expenses increased by $121,756 or 2828.90% from
$4,304 in the three months ended September 30, 2004 to $126,060 in the three
months ended September 30, 2005. The increase was primarily attributable to the
sales commission expenses incurred and paid to an external sales agent which
brought in certain sales orders to the Company. No such sales were subject to
commission during the same period of prior year.
General and administrative expenses decreased by $403,755 or 45.27%
from $891,805 in the three months ended September 30, 2005 to $488,050 in the
three months ended September 30, 2004. In August 2004, the Company suffered a
loss of $475,591 as a result of the theft of certain of its inventory which were
not covered by its insurance policy. Excluding this incident, the Company's
general and administrative expenses would have increased by $84,295 which was
primary related to increase of payroll expenses.
INCOME (LOSS) FROM OPERATIONS
Income from operations increased by $492,098 or 163.41% to a profit of
$190,964 in the three months ended September 2005 from a loss of $301,134 in the
three months ended September 30, 2004. The increase was mainly due to increase
in gross profit of its products caused by the shortage of memory products in the
market.
19
OTHER INCOME (EXPENSES)
Interest expense decreased by $39,445 or 42.77% from $92,466 in the
three months ended September 30, 2004 to $53,021 in the three months ended
September 30, 2005. Excluding $59,217 interest expense incurred in the three
months ended September 30, 2004 related to amortization of discount on
convertible note payable which is non-cash in nature, interest expense was
$33,249 in the three months ended September 30, 2004. After excluding the
$59,217, discount amortization, interest expense increased by $19,772. Such
increase is primarily due to increase in interest rates.
INCOME TAX
Income tax increased by $66,105 or 189.62% from a benefit of $34,862 in
the three months ended September 30, 2004 to an expense of $31,243 in the three
months ended September 30, 2005 due to an increase of net profit of $536,616
from the three months ended September 30, 2004 to the three months ended
September 30, 2005.
NET INCOME (LOSS)
Net income increased by $470,511 or 130.25% from a net loss of $361,246
in the three months ended September 30, 2004 to a net profit of $109,265 in the
three months ended September 30, 2005. It is primarily due to increase in gross
profit and decrease in general and administrative expenses.
UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
NET SALES
Net sales decreased by $13,593,015 or 13.93% from $97,549,421 in the
nine months ended September 30, 2004 to $83,956,406 in the nine months ended
September 30, 2005. This decrease resulted primarily from shortage of supplies
of products. The Company expects the supplies be increased in the 4th quarter of
2005 and 1st half of 2006.
COST OF SALES
Cost of sales decreased by $13,249,365 or 13.92% from $95,187,218 in
the nine months ended September 30, 2004 to $81,937,853 in the nine months ended
September 30, 2005. The cost of sales decreased in proportion to the decrease of
net sales.
GROSS PROFIT
Gross profit decreased by $343,650 or 14.55% from $2,362,203 in the
nine months ended September 30, 2004 to $2,018,553 in the nine months ended
September 30, 2005. The decrease in gross profit was primarily due to the
decrease of sales. The gross profit % reduced slightly by 0.02% from 2.42% in
the nine months ended September 30, 2004 to 2.4% in the nine months ended
September 30, 2005. The increase in selling prices for the 3rd quarter of 2005
could not overcome the drop in selling prices for the first two quarters of
2005.
OPERATING EXPENSES
Selling and marketing expenses increased by $344,004 or 1113.75% from
$30,887 in the nine months ended September 30, 2004 to $374,891 in the nine
months ended September 30, 2005. The increase was primarily attributable to the
sales commission expenses incurred and paid to an external sales agent which
brought in certain sales orders to the Company. No such sales were subject to
commission during the same period of prior year.
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General and administrative expenses decreased by $711,934 or 32.99%
from $2,157,959 in the nine months ended September 30, 2004 to $1,446,025 in the
nine months ended September 30, 2005. This decrease was principally attributable
to professional costs for services performed after the Company became a publicly
traded company. Majority of the accounting and legal services were performed
during the nine months ended September 30, 2004. In addition, in August 2004,
the Company suffered a loss of $475,591 as a result of the theft of certain of
its inventory which were not covered by its insurance policy. The Company
expects the general and administrative expenses to remain at the current level
until the consolidation of Classic taking place.
INCOME FROM OPERATIONS
Income from operations increased by $24,280 or 14.01% from $173,357 in
the nine months ended September 30, 2004 to $197,637 in the nine months ended
September 30, 2005. The decrease was mainly due to decrease in general and
administrative expenses exceeding the decrease in gross profit and increase in
selling & marketing expenses.
OTHER INCOME (EXPENSES)
Interest expense decreased by $173,007 or 53.06% from $326,082 in the
nine months ended September 30, 2004 to $153,075 in the nine months ended
September 30, 2005. Excluding $216,677 interest expense incurred in the three
months ended September 30, 2004 related to amortization of discount on
convertible note payable which is non-cash in nature, interest expense was
$109,405 in the nine months ended September 30, 2004. After excluding the
discount amortization of $216,677, interest expense increased by $43,670. Such
increase was primarily due to default interest owning to Professional Traders
Fund, LLC and increase in interest rates.
INCOME TAX
Income tax increased by $49,389 or 571.17% from a benefit of $8,647 in
the nine months ended September 30, 2004 to an expense of $40,742 in the nine
months ended September 30, 2005 due to net profit increase for the nine months
ended September 30, 2005.
NET INCOME (LOSS)
Net income increased by $153,742 or 101.85% from a net loss of $150,950
in the nine months ended September 30, 2004 to a net profit of $2,792 in the
nine months ended September 30, 2005, primarily as a result of a reduction of
operating and interest expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have historically been
cash provided by operations, bank lines of credit and credit terms from
suppliers. The Company's principal uses of cash have been for operations and
working capital. The Company anticipates these uses will continue to be its
principal uses of cash in the future. See Note 5 of the Notes to Financial
Statements for a description of the Company's banking arrangements.
The Company may require additional financing in order to reduce its
short-term debts and implement its business plan. In order to meet anticipated
demand for Samsung's memory products in the Southern China market over the next
12 months, the Company anticipates an additional need of working capital of at
least $2.0 million to finance the cash flow required to finance the purchase of
Samsung memory products from Samsung HK one day in advance of the release of
goods from Samsung HK's warehouse before receiving payments from customers upon
physical delivery of such goods in Hong Kong which, in most instances, takes
approximately two days from the date of such delivery. In certain limited
instances, customers of Atlantic are permitted up to thirty (30) days to make
payment for purchased memory products. As the anticipated cash generated by the
Company's operations are insufficient to fund its growth requirements, it will
need to obtain additional funds. There can be no assurance that the Company will
be able to obtain the necessary additional capital on a timely basis or on
acceptable terms, if at all. The Company's business growth and prospects would
be materially and adversely affected. Additionally, if such financing was an
equity financing, the holders of the Company's common stock
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may experience substantial dilution. In addition, as its results may be
negatively impacted and thus delayed as a result of political and economic
factors beyond the management's control, the Company's capital requirements may
increase.
The following factors, among others, could cause actual results to
differ from those expected: pricing pressures in the industry; a downturn in the
economy in general or in the memory products sector; an unexpected decrease in
demand for Samsung's memory products; a decrease in its ability to attract new
customers; an increase in competition in the memory products market; and the
ability or inability of some of ACL's customers to obtain financing. These
factors or additional risks and uncertainties not known to ACL or that it
currently deems immaterial may impair business operations and may cause ACL's
actual results to differ materially from its historical operating results.
Although ACL believes its expectations of future growth are reasonable,
it cannot guarantee future results, levels of activity, performance or
achievements. ACL is under no duty to update its expectation after the date of
this report to confirm them to actual results or to make changes in its
expectations.
In the nine months ended September 30, 2005, net cash provided by
operating activities was $766,037 while in the nine months ended September 30,
2004, net cash provided by operating activities was $205,504, an increase of
$560,533. Increase was primarily due to decrease of accounts receivable which
was partially offset by decrease of accounts payable.
In the nine months ended September 30, 2005, net cash used for
investing activities was $153,617 while in the nine months ended September 30,
2004, ACL used $718,770 in investing activities, a decrease of cash used of
$565,153. Increase was primarily due to the restricted cash held by the bank as
collateral for borrowings which was partially offset by loan received from a
related party.
In the nine months ended September 30, 2005, net cash used for
financing activities was $927,121 while in the nine months ended September 30,
2004, net cash provided by financing activities was $868,629, a decrease of
$1,795,750. Decrease was primarily due to cash repayment to reduce the short
term and long term loans which were partially offset by loan borrowed from City
Royal.
The transactions with City Royal were considered short term in nature.
The cash borrowed from City Royal was used as collateral to secure a line of
credit with DahSing Bank. During the three months ended September 30, 2005, the
Company extended its line of credit agreement ith DahSing Bank. Under the new
terms, the maximum borrowing limit was reduced and consequently, the cash
collateral amount was reduced from $1,025,641 (HK$8,000,000) to $769,231
(HK$6,000,000). Since the transactions involved both cash loaned to and from
City Royal, net imputed interest expense and income is immaterial to the
accompanying consolidated financial statements.
The Company is highly dependent on the product supplies from Samsung
HK. If the relationship with Samsung HK is terminated, the Company may not be
able to continue its business. The Company has been taking necessary steps to
reduce its dependence on Samsung HK through potential acquisition of Classic
which is a reseller of various memory products.
An essential element of the Company's growth in the future will be to
obtain adequate additional working capital to meet anticipated market demand
from PC users (business and personal) in the southern part of China.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ACL is exposed to market risk for changes in interest rates as its bank
borrowings accrue interest at floating rates of 0.5% to 1.0% over the Best
Lending Rate (currently at the range from 7.0% to 7.25% per annum) prevailing in
Hong Kong. For the nine months ended September 30, 2005 and the nine months
ended September 30, 2004, Atlantic did not generate any material interest income
(expense). Accordingly, ACL believes that changes in interest rates will not
have a material effect on its liquidity, financial condition or results of
operations.
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IMPACT OF INFLATION
ACL believes that its results of operations are not significantly
impacted by moderate changes in inflation rates as it expects it will be able to
pass these costs by component price increases to its customers.
SEASONALITY
ACL has not experienced any material seasonality in sales fluctuations
over the past 2 years in the memory products markets.
ITEM 4. CONTROLS AND PROCEDURES
The Company has established disclosure controls and procedures to ensure
that material information relating to the Company, including Atlantic, is made
known to the officers who certify the Company's financial reports and to other
members of senior management and the Board of Directors.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as
of September 30, 2005, our chief executive officer and chief financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")) are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROLS. In connection with the evaluation of the Company's
internal controls as of September 30, 2005, the Company's Principal Executive
Officer and Principal Financial Officer have determined that there are no
changes to the Company's internal controls over financial reporting that has
materially affected, or is reasonably likely to materially effect, the Company's
internal controls over financial reporting.
The regulations implementing Section 404 of the Sarbanes-Oxley Act of 2002
require an assessment of the effectiveness of the Company's internal controls
over financial reporting beginning with our Annual Report on Form 10-K for the
fiscal year ending on or after July 15, 2007. The Company's independent auditors
will be required to confirm in writing whether management's assessment of the
effectiveness of the internal controls over financial reporting is fairly stated
in all material respects, and separately report on whether they believe
management maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007.
As part of the assessment of our internal controls in connection with the
process required by Section 404 of the Sarbanes-Oxley Act of 2002, management
intends to continue to review, evaluate and strengthen our controls and
processes. Management cannot state that material weaknesses in internal controls
will not be determined. Management also cannot state that the process of
evaluation and the auditor's attestation will be completed on time. If a
material weakness is discovered, corrective action may be time consuming, costly
and further divert the attention of management. The disclosure of a material
weakness, even if quickly remedied, could reduce the market's confidence in the
Company's financial statements and harm the Company's stock price, especially if
a restatement of financial statements for past periods is required.
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PART II
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business the Company may be subject to
litigation from time to time. There is no past, pending or, to the
Company's knowledge, threatened litigation or administrative action
(including litigation or action involving the Company's officers,
directors or other key personnel) which in the Company's opinion has, had,
or is expected to have, a material adverse effect upon its business,
prospects financial condition or operations.
Professional Traders Fund, LLC ("PTF") had filed a complaint, dated
February 8, 2005, against the Company in the Southern District of New York
alleging breach of contract for the nonpayment of a 12% subordinated
convertible note from the Company to PTF in the principal amount of
$250,000. PTF was seeking $239,850 plus default interest, costs and
attorneys fees. On August 16, 2005, the Company and PTF entered into a
settlement agreement whereby the Company agreed to pay PTF pursuant to a
payment schedule a total of $255,292, which amount includes all post
judgment legal expenses and payment by PTF of $1,400 to the stock transfer
agent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. The Company did not file any current reports on Form
8-K during the third quarter of 2005 through the date hereof.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACL SEMICONDUCTORS INC.
Date: November 14, 2005 By: /s/ Chung-Lun Yang
--------------------
Chung-Lun Yang
Chief Executive Officer
Date: November 14, 2005 By: /s/ Kenneth Lap-Yin Chan
--------------------------
Kenneth Lap-Yin Chan
Chief Financial Officer/
Principal Accounting Officer
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