U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended March 31, 2006.
[ ] TRANSITION REPORT UNDER 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.
(Name of registrant as specified in its charter)
DELAWARE 16-1642709
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
B24-B27,1/F., BLOCK B
PROFICIENT INDUSTRIAL CENTRE, 6 WANG KWUN ROAD
KOWLOON, HONG KONG
(Address of principal executive offices)
(852) 2799-1996
(Registrant's telephone number)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check whether the registrant is a large accelerated filer, an accelerated filer,
or non-accelerated filer.
Large accelerated filer [_] ___ Accelerated filer [_] __
Non-accelerated filer __[X]__
Indicate whether the registrant is a shell company. Yes [ ] No [X]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 31, 2006 was approximately $1,035,488 based upon the
closing price of $0.19 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, 2006). (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 12, 2006.
Transitional small business disclosure format (check one) Yes [ ] No [X]
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 2006 (unaudited)
and December 31, 2005 1-2
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2006 and March 31, 2005 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and March 31, 2005 (unaudited) 4-5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 19-20
PART II OTHER INFORMATION 21
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES 22
EXHIBITS 23-26
-1-
ITEM 1. FINANCIAL STATEMENTS.
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
March 31, December 31,
2006 2005
Unaudited)
-------------- -------------
Current assets:
Cash and cash equivalents $ 935,840 $ 2,537,799
Restricted cash 1,410,256 769,231
Accounts receivable, net of allowance
for doubtful accounts of $0 for 2006 and 2005 829,862 515,557
Accounts receivable, related parties 5,075,027 2,175,737
Inventories, net 1,487,813 1,087,752
Refundable deposits - 1,000,000
Other current assets 411,138 263,300
-------------- -------------
Total current assets 10,149,936 8,349,376
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net of
accumulated depreciation and amortization 94,155 102,037
OTHER DEPOSITS 380,762 381,044
-------------- -------------
$ 10,624,853 $ 8,832,457
============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements
1
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of As of
March 31, December 31,
2006 2005
Unaudited)
------------ ------------
Current liabilities:
Accounts payable $ 4,970,847 $ 4,495,819
Accrued expenses 252,551 272,782
Lines of credit and notes payable 4,166,300 2,842,285
Payable related to debt settlement - 76,088
Due to stockholders for converted pledged collateral 112,385 112,385
Income tax payable 229,258 217,453
Other current liabilities 17,499 55,019
------------ ------------
Total current liabilities 9,748,840 8,071,831
------------ ------------
Total liabilities 9,748,840 8,071,831
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
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 (101,328) (102,936)
Accumulated deficit (2,410,894) (2,524,673)
------------ ------------
Total stockholders' equity 876,013 760,626
------------ ------------
$ 10,624,853 $ 8,832,457
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31, March 31,
2006 2005
------------ ------------
NET SALES:
Related parties $ 4,168,683 $ 11,644,762
Other 21,010,486 17,015,959
Less discounts to customers (3,516) (14,467)
------------ ------------
25,175,653 28,646,254
COST OF SALES 24,224,716 27,683,372
------------ ------------
GROSS PROFIT 950,937 962,882
OPERATING EXPENSES:
Selling 214,200 148,656
General and administrative 459,087 512,031
------------ ------------
INCOME FROM OPERATIONS 277,650 302,195
OTHER INCOME (EXPENSES):
Interest expense (154,832) (43,210)
Miscellaneous 22,854 (1,779)
------------ ------------
INCOME BEFORE INCOME TAXES 145,672 257,206
INCOME TAXES 31,893 66,314
------------ ------------
NET INCOME $ 113,779 $ 190,892
============ ============
EARNINGS PER SHARE - BASIC $ 0.00 $ 0.01
============ ============
EARNINGS PER SHARE - DILUTED $ 0.00 $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 27,829,936 27,829,936
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 27,829,936 29,169,222
============ ============
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)
Three months ended
March 31, March 31,
2006 2005
----------- -----------
Cash flows provided by (used for) operating activities:
Net income $ 113,779 $ 190,892
----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 8,883 6,300
Change in inventory reserve - 3,846
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS
Accounts receivable - other (314,305) (528,653)
Accounts receivable - related parties (1,899,290) 659,492
Inventories (400,061) (342,304)
Other current assets (147,838) (94,959)
Deposits 282 -
INCREASE (DECREASE) IN LIABILITIES
Accounts payable 475,028 153,466
Accrued expenses (20,231) (23,359)
Payable related to debt settlement (76,088) -
Income tax payable 11,805 36,384
Other current liabilities (37,520) 32,791
----------- -----------
Total adjustments (2,399,335) (96,996)
----------- -----------
Net cash provided by (used for)
operating activities (2,285,556) 93,896
----------- -----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Repayments from stockholders 1,608 -
Increase of restricted cash (641,025) (1,025,641)
Loan to related party - 611,446
Purchases of property, equipment and improvements (1,001) (3,923)
----------- -----------
Net cash used for investing activities (640,418) (418,118)
----------- -----------
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)
Three Months Ended
March 31, March 31,
2006 2005
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds (repayments) on lines of credit and
notes payable 1,324,015 (20,795)
Principal payments on long-term debt - (92,142)
Loan received from related parties - 414,195
----------- -----------
Net cash provided by financing activities 1,324,015 301,258
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,601,959) (22,964)
CASH AND CASH EQUIVALENTS, beginning of the period 2,537,799 512,548
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ 935,840 $ 489,584
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 154,832 $ 43,210
=========== ===========
Income tax paid $ 20,089 $ 29,930
=========== ===========
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, 2005, 2004 and 2003 filed in the Form
10-K filed by the Company on April 17, 2006. In the opinion of management, these
condensed consolidated financial statements reflect all adjustments which are of
a normal recurring nature and which are necessary to present fairly the
consolidated financial position of ACL as of March 31, 2006 and December 31,
2005, and the results of operations for the three-month periods ended March 31,
2006 and 2005 and the cash flows for the three-month periods ended March 31,
2006 and 2005. The results of operations for the three months ended March 31,
2006 are not necessarily indicative of the result which may be expected for the
entire fiscal year. All significant intercompany accounts and transactions have
been eliminated in preparation of the condensed consolidated financial
statements.
On April 13, 2006, the Company entered into a Rescission Agreement with the
sellers of Classic Electronics Ltd. ("Classic") to rescind the original Stock
Purchase Agreement entered on December 30, 2005. The sellers agreed to fully
refund the acquisition deposit of $1.0 million during 2006.
The acquisition deposit of $1 million was reclassified to increase the accounts
receivable from Classic. The deposit was originally recorded to reduce the
accounts receivable from Classic. Due to the termination of the acquisition, the
original entry was reversed in the accompanying condensed balance sheets as of
March 31, 2006.
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 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 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 Hong Kong Special Administrative Region, China.
2. EARNINGS 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. For the three months ended March 31, 2006 and 2005, the Company had 0
and 1,339,286 shares of common stock equivalents (representing shares of Common
Stock issuable upon conversion of a convertible note payable based on the quoted
market price at the end of each reporting period), respectively.
3. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH MR. YANG
As of March, 2006 and December 31, 2005, the Company had an outstanding
receivable from Mr. Yang, the President and Chairman of ACL's Board of
Directors, totaling $101,328 and $102,936 representing advanced compensation
paid. These balances bear no interest and are payable on demand.
For the three months ended March 31, 2006 and 2005, the Company recorded $50,000
and $76,923, respectively, and paid $50,000 and $76,923, respectively, to Mr.
Yang as compensation.
During the three months ended March 31, 2006 and 2005, the Company paid rent of
$23,077 and $23,077, respectively, for Mr. Yang's personal residence as
additional compensation to Mr. Yang.
TRANSACTIONS WITH CLASSIC ELECTRONICS LTD.
During the three months ended March 31, 2006 and 2005, the Company sold $0 and
$11,230,380, respectively, of memory products to Classic Electronics Ltd.
("Classic"). During the three months ended March 31, 2006 and 2005, the Company
purchased Samsung memory products sourced from other authorized distributors of
$564,396 and $1,062,761, respectively, from Classic to satisfy part of its
demand of insufficient product supply from Samsung HK. The Company had
outstanding accounts receivable from Classic totaling $4,621,637 and $2,175,737,
respectively, as of March 31, 2006 and December 31, 2005. 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.
The Company leases one of its facilities and Mr. Yang's personal residency from
Classic. The lease agreement for the facility expires 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 for the three month
periods
7
ended March 31, 2006 and 2005. The Company incurred and paid rent expense of ACL
$20,053 and $22,115 to Classic for the three months ended March 31, 2006 and
2005, respectively.
Mr. Ben Wong, a director of Classic, is a 99.9% shareholder of Classic. The
remaining 0.1% of Classic is owned by a non-related party.
TRANSACTIONS WITH KADATCO COMPANY LTD.
During the three months ended March 31, 2006 and 2005, the Company recognized $0
and $141,620, respectively, from the sale of memory products to Kadatco Company
Ltd. ("Kadatco"). There are no outstanding accounts receivable due from Kadatco
as of March 31, 2006 and December 31, 2005. The Company has not experienced any
bad debt from this customer in the past.
Mr. Yang is the sole beneficial owner of the equity interest of Kadatco.
TRANSACTIONS WITH RAMBO TECHNOLOGIES LTD.
During the three months ended March 31, 2006 and 2005, the Company sold $0 and
$165,140, respectively, to Rambo Technologies Ltd. ("Rambo"). There were no
outstanding accounts receivable due from Rambo as of March 31, 2006 and December
31, 2005. 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 Rambo. The
remaining 40% of Rambo is owned by a non-related party. Mr. Yang is a director
of Rambo.
TRANSACTIONS WITH ATLANTIC NETCOM LTD.
During the three months ended March 31, 2006 and 2005, the Company sold $0 and
$1,652, respectively, to Atlantic Netcom Ltd. ("Atlantic Netcom"). Outstanding
accounts receivable totaled $0 as of March 31, 2006 and December 31, 2005,
respectively. The Company has not experienced any bad debt from this customer in
the past.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is a 60% shareholder and director of Atlantic Netcom Ltd. The
remaining 40% of Atlantic Netcom is owned by a non-related party.
TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD
During the three months ended March 31, 2006 and 2005, the Company sold $0 and
$33,350, respectively, to Solution Semiconductor (China) Ltd. ("Solution").
Outstanding accounts receivable totaled $0 as of March 31, 2006 and December 31,
2005. The Company has not experienced any bad debt from this customer in the
past.
During the three months ended March 31, 2006 and 2005, the Company purchased $0
and $261, respectively, from Solution. There are no outstanding accounts payable
due to Solution as of March 31, 2006 and December 31, 2005.
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 March 31, 2006 and 2005, the Company sold $0 and
$61,910, respectively, to Systematic Information Ltd. ("Systematic"). There are
no outstanding accounts receivable due from Systematic as of March 31, 2006 and
December 31, 2005.
8
The Company has not experienced any bad debt from this customer in the past.
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. The Company incurred and
paid an aggregate rent expense of $9,615 to Systematic during the three months
ended March 31, 2006 and 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is a director and the sole shareholder of Systematic.
TRANSACTIONS WITH GLOBAL MEGA DEVELOPMENT LTD.
During the three months ended March 31, 2006 and 2005, the Company sold $0 and
$9,250 respectively, and received management fees of $1,923 and $0,
respectively, from Global Mega Development Ltd. ("Global"). There are no
outstanding accounts receivable due from Global as of March 31, 2006 and
December 31, 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is the sole beneficial owner of the equity interest of Global.
TRANSACTIONS WITH INTELLIGENT NETWORK TECHNOLOGY LTD.
During the three months ended March 31, 2006 and 2005, we received management
fee $1,923 and $0, respectively, from Intelligent Network Technology Ltd.
("Intelligent"). There were no outstanding accounts receivable due from
Intelligent as of March 31, 2006 and December 31, 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is a director and 80% shareholder of Intelligent. The remaining 20% of
Intelligent is owned by a non-related party.
TRANSACTIONS WITH SYSTEMATIC SEMICONDUCTOR LTD.
During the three months ended March 31, 2006 and 2005, we received management
fee of $3,846 and $0, respectively, from Systematic Semiconductor Ltd.
("Systematic Semiconductor"). There were no outstanding accounts receivable due
from Systematic Semiconductor as of March 31, 2006 and December 31, 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is the sole beneficial owner of the equity interest of Systematic
Semiconductor.
TRANSACTIONS WITH TFT TECHNOLOGIES LTD.
During the three months ended March 31, 2006 and 2005 we sold $0 and $1,460,
respectively, to TFT Technologies Ltd. ("TFT"). Outstanding accounts receivable
totaled $0 as of March 31, 2006 and December 31, 2005, respectively. We have not
experienced any bad debt from this customer in the past.
Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a
director, is a director and 51% shareholder of TFT. The remaining 49% of TFT is
owned by a non-related party.
TRANSACTIONS WITH FIRST WORLD LOGISTICS LTD.
During the three months ended March 31, 2006 and 2005, the Company sold
$4,168,683 and $0, respectively, to First World Logistics Ltd. ("First World").
Outstanding accounts receivable totaled $453,390 and $0 as of March 31, 2006 and
December 31, 2005. The Company has not experienced any bad debt from this
customer in the past.
During the three months ended March 31, 2006 and 2005, the Company purchased
$50,640 and $0, respectively,
9
from First World. There were no outstanding accounts payable due to First World
as of March 31, 2006 and December 31, 2005.
Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a
director, is the sole beneficial owner of the equity interest of First World.
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 principal
amount and accrued and unpaid interest on this note became due and payable on
December 31, 2004. The Company defaulted on its payment obligations under the
note on December 31, 2004 and accordingly, interest began to accrued at a rate
of 15.0% per annum from 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 be paid in shares of the Company's common stock upon
conversion of all or a portion of the note at a conversion price determined in
accordance with the note and as described in the following paragraph.
The holder of this note, at its option, was entitled to convert the outstanding
balance of the debt into shares of common stock at a conversion price equal to
40% of the average closing price of the stock three trading days immediately
prior to the date of written notice of conversion delivered to the Company by
such holder or the interest payment date or the debt maturity date, in any
event, 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
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
was guaranteed by 1.2 million shares of the Company's common stock beneficially
owned by three shareholders of which 700,000 were restricted shares and 500,000
were freely tradable 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. Failure by the Company fails to meet either of
such timelines, resulted in a 1% penalty per month on the funded amount of the
note being levied against the Company.
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 sheets.
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 totally US$255,292
representing principal amounting to US$150,000; interest amounting to US$10,541;
penalties amounting to US$85,350; attorney fees amounting to US$4,781; and costs
and disbursements of taking action against the Company amounting to US$4,620.
The Company accrued the entire claimed amount as of September 30, 2005.
10
On August 16, 2005, the Company entered into a settlement agreement with PTF to
pay $255,292 in seven installments through February 28, 2006. As of December 31,
2005, the Company had paid $179,204 to PTF and the balance of $76,088 was
reclassified as payable related to debt settlement. The Company made its final
payment under the settlement agreement in February, 2006 and nothing further is
owing in respect of the settlement agreement or the convertible note.
5. BANK FACILITIES
With respect to all the Company's debt and credit arrangements, the Company
pledged its assets as collateral collectively to Dah Sing Bank Limited and DBS
Bank (Hong Kong) Ltd. (formerly Overseas Trust Bank Limited) for all current and
future borrowings from the bankers by the Company, the debt is secured by:
1. a fixed cash deposit of $769,231 (HK$6,000,000) as collateral for
loans from Dah Sing Bank Limited;
2. a fixed cash deposit of $641,025 (HK$5,000,000), a security interest
on residential property located in Hong Kong owned by System
Information Limited, a related party and a security interest on
residential property located in Hong Kong owned by City Royal Limited,
a related party as collateral for loans from DBS Bank (Hong Kong) Ltd;
3. a personal guarantee given by Mr. Yang for unlimited amount together
with a key man life insurance policy on Mr. Yang for $500,000 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. The Company purchased 84% of its materials
from Samsung HK for the three months ended March 31, 2006 and 2005. However,
there is no long term 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. In addition, the Company's operations and business viability is to a
large extent dependent on the provision of management services and financial
support by Mr. Yang.
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.
For the 3 months ended March 31, 2006 and 2005, the Company purchased materials
from Samsung HK costing $21,110,795 and $23,905,780, respectively. At March 31,
2006 and December 2005, accounts payable, net of rebates receivable due from
Samsung HK, to Samsung HK was $3,662,073 and $2,450,508, respectively.
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.
11
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board issued SFAS No. 155,
"Accounting for Certain Hybrid Financial Instruments -- an amendment of FASB
Statements No. 133 and 140." SFAS No. 155 simplifies the accounting for certain
hybrid financial instruments, eliminates the FASB's interim guidance which
provides that beneficial interests in securitized financial assets are not
subject to the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and eliminates the restriction on the
passive derivative instruments that a qualifying special-purpose entity may
hold. SFAS No.155 is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006, however, early adoption is permitted for instruments acquired or
issued after the beginning of an entity's fiscal year in 2006. The Company is
evaluating the impact of this new pronouncement to its financial position and
results of operations or cash flows.
9. RECLASSIFICATION
Certain reclassifications have been made to the 2005 condensed consolidated
financial statements to conform to the 2006 presentation.
12
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 subsidy Atlantic Components
Limited, a Hong Kong corporation ("Atlantic"), 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. The Company's other wholly-owned subsidiary,
Alpha Perform Technology Limited ("Alpha"), ceased activities as of January 1,
2004 and is currently inactive.
As of March 31, 2006, 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
13
future expected financial relationships. Much of the cost of sales and operating
expenses reflected in our financial statements are recurring in nature.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") recently issued
Financial Reporting Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE
ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, ACL's most critical
accounting policies include: inventory valuation, which affects cost of sales
and gross margin, policies for revenue recognition, 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 its inventories, including an assessment
of excess or obsolete inventories. ACLe 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 used for demand are
also used for near-term capacity planning and inventory purchasing and are
consistent with ACL's revenue forecasts. If ACL's demand forecast is greater
than its actual demand ACL 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. The
Company has made the determination that it is not a primary beneficiary of any
of these related entities in accordance with FIN46R.
CONTRACTUAL OBLIGATIONS
The following table presents the Company's contractual obligations as of March
31, 2006 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 228,557 132,961 95,596 --- ---
Line of credit and notes payable -
short-term 4,166,300 4,166,300 --- --- ---
--------------------------------------------------------------------
Total Contractual Obligations $4,394,857 $4,299,261 $95,596 $--- $---
====================================================================
14
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.
NET SALES
Sales from Samsung HK are recognized upon the transfer of legal title of the
electronic components to the customers. The quantities of memory products the
Company sells fluctuate with changes in demand from its customers. The prices
set by Samsung HK that the Company must charge its customers are expected to
fluctuate as a result of prevailing economic conditions and their impact on the
market.
During the first quarter of 2006, the Company believes that end-users of
personal computers deferred purchases of DDR1 product in anticipation of the
expected launch of DDR2. The price of DDR1 also dropped because of the expected
launch of DDR2. However, the launch of DDR2 was postponed until the second
quarter of 2006. As a result, the total demand for memory products in the PC
market decreased in the first quarter of 2006 and the turnover decreased as
well.
The market demands shifted from personal computers to consumer electronics
products during the first quarter of 2006. The demand for NAND Flash memory
products both in quantity and capacity continued to increase due to the
continued growth of multi-media products, such as MP3 players, MPeg 4 video
players, portable DVD players, USB drives, Flash cards (used for Cellular phone,
GPS, DSC, DV camcorders), and game cards. Flash memory has become` the most
popular solution in supporting these mobile products. The Company expects its
revenues derived from the sale of Flash memory products to increase by
approximately 15% in the second quarter over such revenues for the first quarter
of 2006.
Besides Flash, SDRAM is still the key component for the majority of home
appliance consumer products. However, SDRAM, unlike Flash, is considered data
storage memory and functions as a memory buffer. Growth in capacity instead of
quantity is expected to continue to increase. The Company expects demand for DVD
player, Set-top Box (STB), Digital Video Broadcasting (DVB) and High Density TV
in providing high quality of audio and video function to continue to be strong
in the second quarter of 2006. The Company expects its revenues from sales
relating to AV products to grow by approximately 5% in the second quarter
compared to those in the first quarter.
The computer related market utilizes mainly SYSTEM and GRAPHIC memory. Sales of
such products have historically been seasonal and have trended down from the
first quarter to the second quarter. The Company expects its sales in such
market to increase during the third quarter 2006 due to the post-summer sales.
As a result of the postponement of the launch of DDR2 mainstream by Intel in the
first quarter, the market turned again to to DDR1, and, the Company believes
many end-users lost interest in upgrading their computer system. The Company
expects strong demand for DDR2 due to the anticipated release of AMD M2 platform
in June 2006. Intel will also release comparable products in the coming months.
The Company expects DDR2 to become main stream memory products in second half of
2006.
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
15
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 the Company and
Samsung HK.
OPERATING EXPENSES
The Company's operating expenses for the three months ended March 31,
2006 and 2005 were comprised of sales and marketing and general and
administrative expenses.
Sales and marketing expenses consisted primarily of and external
commissions paid to external sales personnel and costs associated with
advertising and marketing activities.
General and administrative expenses include cost for the 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, professional
services, and travel and entertainment. The Company expects these expenses to
increase as a result of the anticipated expansion by the Company of its business
operations. Sales and marketing expenses are expected to fluctuate as a
percentage of sales due to the addition of sales personnel and various marketing
activities planned throughout the year.
Interest expense, including finance charges, relates primarily to the
Company's short-term and long-term bank borrowings.
RESULTS OF OPERATIONS
The following table sets forth unaudited statements of operations data
for the three months ended March 31, 2006 and 2005 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.
16
For the Three Months Ended March 31,
-----------------------------------------
(US$) (Unaudited)
2006 2005
---- ----
Net sales 100.00% 100.00%
Cost of sales 96.22% 96.64%
Gross profit 3.78% 3.36%
Operating expenses:
Sales and marketing 0.85% 0.52%
General and administrative 1.82% 1.79%
Total operating expenses 2.67% 2.31%
Income from operations 1.11% 1.05%
Other expenses:
Interest expenses -0.62% -0.15%
Miscellaneous 0.09% 0.00%
Total other expenses -0.53% -0.15%
Income taxes 0.13% 0.23%
Net income 0.45% 0.67%
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2005 (UNAUDITED)
NET SALES
Sales decreased by $3,470,601 or 12.1% from $28,646,254 in the three
months ended March 31, 2005 to $25,175,653 in the three months ended March 31,
2006. The decrease was mainly due to drop in demand and shortage of supplies of
Samsung products while there was no new product being launched by Samsung during
the first quarter of 2006. We expect sales be maintained at the current level
for the second quarter of 2006 and management is seeking ways to diversify the
Company's businesses and products in the near future for the purposes of
increasing both sales and profit margin.
COST OF SALES
Cost of sales decreased by $3,458,656, or 12.5%, from $27,683,372 for
the three months ended March 31, 2005 to $24,224,716 for the three months ended
March 31, 2006. The decrease in cost of sales is directly related to the
decrease of sales. As a percentage of sales, cost of sales decreased slightly to
96.2% of sales in the three months ended March 31, 2006 from 96.6% of sales in
the three months ended March 31, 2005. ACL expects the cost of sales percentage
to remain at approximately 96% of sales in the next twelve months, but will
improve if the Company can successfully diversify its business and products.
GROSS PROFIT
Gross profit decreased by $11,945 or 1.2%, from $962,882 for the three
months ended March 31, 2005 to $950,937 for the three months ended March 31,
2006. The decrease in gross profit resulted primarily from the decrease in sales
by the Company for the three months ended March 31, 2006. The Company's gross
profit increased slightly to 3.8% of sales in the three months ended March 31,
2006 compared to 3.4% of sales in the three months ended March 31, 2005, as a
result of shortage of supplies of Samsung products for the first quarter of
2006. We expect the gross profit be at this level in the coming months, but will
improve if the Company can successfully diversify its business and products.
17
OPERATING EXPENSES
Sales and marketing expenses increased by $65,544 or 44.1%, from
$148,656 for the three months ended March 31, 2005 to $214,200 for the three
months ended March 31, 2006. This increase was principally attributable to the
sales commission expenses incurred for the first quarter of 2006. As a
percentage of sales, sales and marketing expenses increased to 0.85% of sales
for the three months ended March 31, 2006 as compared to 0.52% of sales for the
three months ended March 31, 2005. ACL intends to continue its efforts to keep
its sales and marketing expenses in line with the sales. General and
administrative expenses decreased $52,944 or 10.3% from $512,031 in the three
months ended March 31, 2005 to $459,087 in the three months ended March 31,
2006. This decrease was principally attributable to professional costs related
to the Company's lawsuit against with Professional Traders Fund, LLC incurred in
the first quarter 2005. ACL expects the general and administrative expenses
remain at the current level in 2006.
Income from operations for the Company was $277,650 for the three
months ended March 31, 2006 compared to an income of $302,195 for the three
months ended March 31, 2005, a decrease of income by $24,545 or 8.1%. This
decrease was the result of decrease of gross profit and increase of selling
expenses during the first quarter of 2006. ACL expects the income from
operations remain at the same level during the coming months in 2006.
OTHER INCOME (EXPENSES)
Interest expense increased by $111,622, or 258.3%, from $43,210 in the
three months ended March 31, 2005, to $154,832 in the three months ended March
31, 2006. This increase is mainly due to increase of the use of the short-term
bank borrowings and an increase in interest rates. We expect our interest
expense continue to increase in 2006 because of increased interest rates.
INCOME TAX
Income tax decreased by $34,421 or 51.9% from $66,314 for the three
months ended March 31, 2005 to $31,893 for the three months ended March 31,
2006, due to the decrease in income before taxes for the three months ended
March 31, 2006.
NET INCOME
The Company's net income decreased by $77,113 or 40.4% from $190,892
for the three months ended March 31, 2005 to an income of $113,779 for the three
months ended March 31, 2006 primarily due to increase in selling expenses and
interest expenses. ACL expects its net income to continue at this level for the
year of 2006.
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.
The Company may require additional financing in order to finance our
growing business 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 through short-term borrowings from the banks in order to
finance the purchase of Samsung memory products from Samsung HK and credits
given to its customers. As the anticipated cash generated by the Company's
operations are insufficient to fund its growth, the Company needs continue
borrow or raise additional
18
working capital. There is no assurance that the Company will be able to obtain
the necessary additional capital on a timely basis or on acceptable terms, if at
all. The Company's business growth and prospects would be materially and
adversely affected. As a result of any such financing, if it is an equity
financing, the holders of the Company's common stock may experience substantial
dilution. In addition, as our operating results may be negatively impacted and
thus delayed as a result of political and economic factors beyond the
management's control, the Company's capital requirements may increase.
The following factors, among others, could cause actual results to
differ from those expected caused by: pricing pressures in the industry; a
downturn in the economy in general or in the memory products sector; an
unexpected decrease in demand for Samsung's memory products; a decrease in our
ability to attract new customers; an increase in competition in the memory
products market; and the ability of our customers to obtain financing. These
factors or additional risks and uncertainties not known to ACL or that currently
deems immaterial may impair business operations and may cause ACL's actual
results to differ materially from any forward-looking statement.
Although ACL believes its expectations of future growth to be
reasonable, however, ACL cannot guarantee future results, levels of activity,
performance or achievements. ACL is under no duty to update its expectations
after the date of this report to conform them to actual results or to make
changes in its expectations.
In the three months ended March 31, 2006, net cash used for operating
activities was $2,285,556 while in the three months ended March 31, 2005, net
cash provided by operating activities was $93,896, an increase in net cash used
for operating activities of $2,379,452. Increase was primarily due to increase
of accounts receivable from related parties at March 31, 2006.
In the three months ended March 31, 2006, net cash used for investing
activities was $640,418 while in the three months ended March 31, 2005, ACL used
$418,118 in investing activities, an increase in cash used of $222,300. Such
increase was primarily due to the increase in restricted cash held by the bank
as collateral for borrowings.
In the three months ended March 31, 2006, net cash provided by
financing activities was $1,324,015 while in the three months ended March 31,
2005, net cash provided by financing activities was $301,258, an increase of
$1,022,757. Such increase was primarily due to an increase of lines of credit
and loan facilities.
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 and whether
the Company can diversify its businesses and products in the near future.
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 of 7.75 to 8.0% per annum) prevailing in
Hong Kong. For the three months ended March 31, 2005, ACL did not generate any
material interest income or incurred significant interest expenses. Due to the
increase in the line of credit and notes payables in 2006, ACL believes that
changes in interest rates may have a material effect on its liquidity, financial
condition or results of operations.
IMPACT OF INFLATION
ACL believes that its results of operations are not significantly
impacted by moderate changes in inflation rates as it expects it will be able to
pass these costs by component price increases to its customers.
19
SEASONALITY
ACL has not experienced any material seasonality in sales fluctuations
over the past 2 years in the memory products markets.
ITEM 4. CONTROLS AND PROCEDURES
The Company has established disclosure controls and procedures to
ensure that material information relating to the Company, including Atlantic, is
made known to the officers who certify the Company's financial reports and to
other members of senior management and the Board of Directors.
(a) Based on their evaluation as of a date within 90 days of the filing
date of this Quarterly Report on Form 10-Q, our chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) There were no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. Although there were no significant deficiencies or material
weaknesses, there were some areas where room for improvement was noted and
management has committed to improving in these areas. The Company has adopted
many of the formal and informal suggestions of our auditors, Stonefield
Josephson, Inc., and are implementing weekly and monthly checks to assure that
these disclosure controls and internal controls stay in place.
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 its 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 the Company's 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.
20
PART II
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.
We filed the following reports on Form 8-K during the period from
January 1, 2006 to May 15, 2006: Form 8-K filed on January 6, 2006
relating to items 1.01, 2.01 and 9.01, and Form 8-K filed on April 13,
2006 relating to items 1.01 and 9.01
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACL SEMICONDUCTORS INC.
Date: May 15, 2006 By: /s/ CHUNG-YUN LANG
------------------
Chung-Lun Yang
Chief Executive Officer
Date: May 15, 2006 By: /s/ KENNETH LAP-YIN CHAN
------------------------
Kenneth Lap-Yin Chan
Chief Financial Officer
22