UNITED STATES
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, 2004.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from ____ to ____ .
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Commission File Number: 000-50140
ACL SEMICONDUCTORS INC.
(Name of registrant as specified in its charter)
DELAWARE 16-1642709
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
B24-B27,1/F., BLOCK B
PROFICIENT INDUSTRIAL CENTRE, 6 WANG KWUN ROAD
KOWLOON, HONG KONG
(Address of principal executive offices)
(852) 2799-1996
(Registrant's telephone number)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). Yes [ ] No [X]
The number of shares of common stock, par value $.001 per share, of the
Registrant as of November 11, 2004 was 27,829,936 shares.
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2004
(unaudited) and December 31, 2003 1-2
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2004 and
September 30, 2003 (unaudited) 3
Condensed Consolidated Statements of Stockholders' Equity
for the year ended December 31, 2003 and nine months ended
September 30, 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and September 30, 2003
(unaudited) 5-6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 21
PART II OTHER INFORMATION
ITEM 6 Exhibits 22
SIGNATURES 23
ITEM 1. FINANCIAL STATEMENTS.
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
September 30, December 31,
2004 2003
(Unaudited)
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 822,437 $ 467,074
Accounts receivable, net of allowance
for doubtful accounts of $0 for 2004 and 2003 1,317,311 880,361
Accounts receivable, related party 5,411,658 5,481,192
Loan receivable, related party 611,446 --
Inventories, net 1,190,759 1,327,120
Other current assets 26,063 10,679
----------- -----------
Total current assets 9,379,674 8,166,426
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net 59,040 54,382
ACQUISITION DEPOSITS 1,000,000 1,000,000
OTHER DEPOSITS 350,000 350,000
----------- -----------
$10,788,714 $ 9,570,808
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,018,869 $ 5,037,304
Accrued expenses 360,222 140,369
Lines of credit and notes payable 3,580,773 2,158,984
Current portion of long-term debt 447,606 884,131
Convertible note payable, net of unamortized discount of
$33,323 and $250,000 for 2004 and 2003, respectively 116,677 --
Due to stockholders for converted pledged collateral 112,385 --
Income tax payable 138,632 177,645
Due to shareholder/director 10,983 --
Other current liabilities 17,396 22,555
------------ ------------
Total current liabilities 9,803,543 8,420,988
Long-term debt, less current portion 78,068 194,703
------------ ------------
Total liabilities 9,881,611 8,615,691
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock - $0.001 par value, 50,000,000 shares
authorized, 27,829,936 shares issued and outstanding 27,830 27,830
Additional paid in capital 3,360,405 3,360,405
Amount due from stockholder/director -- (102,936)
Accumulated deficit (2,481,132) (2,330,182)
------------ ------------
Total stockholders' equity 907,103 955,117
------------ ------------
$ 10,788,714 $ 9,570,808
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
September 2004 September 2003 September 2004 September 2003
-------------- -------------- -------------- --------------
NET SALES:
Related parties $ 12,779,153 $ 5,973,462 $ 31,288,480 $ 11,223,988
Other 21,978,033 14,327,071 66,349,765 41,236,555
Less discounts to customers (42,007) (7,438) (88,824) (114,097)
------------ ------------ ------------ ------------
34,715,179 20,293,095 97,549,421 52,346,446
COST OF SALES 34,120,204 18,550,042 95,187,218 49,039,746
------------ ------------ ------------ ------------
GROSS PROFIT 594,975 1,743,053 2,362,203 3,306,700
OPERATING EXPENSES:
Sales and marketing 4,304 10,424 30,887 165,092
General and administrative 891,805 981,204 2,157,959 1,724,468
Merger cost -- 2,753,620 -- 2,753,620
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (301,134) (2,002,195) 173,357 (1,336,480)
OTHER INCOME (EXPENSES):
Interest expense (92,466) (42,884) (326,082) (226,660)
Gain (loss) on disposal of property and
equipment -- (18,413) 128 (18,413)
Miscellaneous (2,508) 2,236 (7,000) (2,177)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (396,108) (2,061,256) (159,597) (1,583,730)
INCOME TAXES EXPENSE (BENEFIT) (34,862) 128,327 (8,647) 204,731
------------ ------------ ------------ ------------
NET LOSS $ (361,246) $ (2,189,583) $ (150,950) $ (1,788,461)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.10) $ (0.01) $ (0.08)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC
AND DILUTED 27,829,936 22,380,000 27,829,936 22,380,000
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common stock Additional Due from Total
------------------------- paid-in stockholder/ Accumulated stockholders'
Shares Amount capital director deficit equity (deficit)
----------- ----------- ----------- ----------- ----------- ----------------
Balance at December 31, 2002 22,380,000 $ 22,380 $ 362,235 $ (624,351) $ (379,691) $ (619,427)
Reverse acquisition betw een
ACL Semiconductors Inc.
(formerly Print Data Corp.) and
Atlantic Components Ltd. 2,829,936 2,830 (2,830) -- -- --
Issuance of common stock to consultants
related to reverse-acquisition 2,620,000 2,620 2,751,000 -- -- 2,753,620
Dividend declared -- -- -- -- (512,821) (512,821)
Intrinsic value for benef icial
conversion feature on convertible
note payable -- -- 250,000 -- -- 250,000
Net decrease in due from stockholder/
director -- -- -- 521,415 -- 521,415
Net loss -- -- -- -- (1,437,670) (1,437,670)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 27,829,936 $ 27,830 $ 3,360,405 $ (102,936) $(2,330,182) $ 955,117
Net decrease in due from stockholder/
director (unaudited) -- -- -- 102,936 -- 102,936
Net loss (unaudited) -- -- -- -- (150,950) (150,950)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2004
(unaudited) 27,829,936 $ 27,830 $ 3,360,405 $ -- $(2,481,132) $ 907,103
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Nine months ended
September 30, September 30,
2004 2003
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net loss $ (150,950) $(1,788,461)
----------- -----------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 16,713 14,329
Change in inventory reserve 25,051 --
(Gain) loss on disposal of property and equipment (128) 18,413
Amortization of discount on convertible note payable 216,677 --
Issuance of common stock to consultants
related to reverse-acquisition -- 2,753,620
Non-cash compensation to shareholder/director 200,000 624,462
CHANGE S IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS
Accounts receivable - other (436,950) (3,500)
Accounts receivable - related parties 69,534 (2,423,113)
Inventories 111,310 (901,864)
Other current assets (15,384) 421
INCREASE (DECREASE) IN LIABILITIES
Accounts payable (18,435) 936,282
Accrued expenses 232,238 45,338
Income tax payable (39,013) 186,399
Due to shareholder / director (86,081) --
Other current liabilities (5,159) 32,786
----------- -----------
Total adjustments 270,373 1,283,573
----------- -----------
Net cash provided by (used for)
operating activities 119,423 (504,888)
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) INV ESTING ACTIVITIES:
Loans to related party (611,446) --
Proceeds received from sale of property, equipment and improvements 128 --
Purchases of property, equipment and improvements (21,371) (40,506)
----------- -----------
Net cash used for investing activities (632,689) (40,506)
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Nine months ended
September 30, September 30,
2004 2003
----------- -----------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds (repayments) on lines of credit and
notes payable 1,421,789 272,058
Advances from related party, net -- 735,987
Principal payments on long-term debt (553,160) (523,424)
----------- -----------
Net cash provided by financing activities 868,629 484,621
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 355,363 (60,773)
CASH AND CASH EQUIVALENTS, beginning of period 467,074 178,937
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 822,437 $ 118,164
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 97,020 $ 228,837
=========== ===========
Income tax paid $ 30,366 $ 18,332
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
ACL SEMICONDUCTORS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The condensed consolidated financial statements include the financial statements
of ACL Semiconductors Inc. and its subsidiaries, Atlantic Components Ltd.
("Atlantic") 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 consolidated financial statements for the fiscal years ended December
31, 2003, 2002 and 2001 included in the Form 10-K filed by the Company on April
14, 2004. In the opinion of management, these condensed consolidated financial
statements reflect all adjustments which are of a normal recurring nature and
which are necessary to present fairly the consolidated financial position of ACL
as of September 30, 2004, and the results of operations for the three-month and
nine-month periods ended September 30, 2004 and 2003 and the cash flows for the
nine-month periods ended September 30, 2004 and 2003. The results of operations
for the nine months ended September 30, 2004 are not necessarily indicative of
the results, which may be expected for the entire fiscal year. All significant
intercompany accounts and transactions have been eliminated in preparation of
the condensed consolidated financial statements.
NATURE OF BUSINESS OPERATIONS
ACL Semiconductors Inc. (formerly Print Data Corp.) ("Company" or "ACL") was
incorporated under the State of Delaware on September 17, 2002. Upon the
Company's reverse-acquisition of Atlantic Components Ltd., a Hong Kong based
company, effective September 30, 2003, the Company's principal activities became
and 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., the Company's its wholly
owned subsidiary, was incorporated in Hong Kong on May 30, 1991 with limited
liability. On October 2, 2003, the Company set up a wholly-owned subsidiary,
Alpha Perform Technology Limited ("Alpha"), a British Virgin Islands company, to
provide services on behalf of the Company in jurisdictions outside of Hong Kong.
CURRENCY REPORTING
Amounts reported in the accompanying condensed consolidated financial statements
and disclosures are stated in U.S. Dollars, unless stated otherwise. The
functional currency of the Company's subsidiaries, which accounted for most of
the Company's operations, is reported in Hong Kong dollars ("HKD"). Foreign
currency transactions (outside Hong Kong) during the period are translated into
HKD according to the prevailing exchange rate at the relevant transaction dates.
Assets and liabilities denominated in foreign currencies at the balance sheet
dates are translated into HKD at period-end exchange rates.
For the purpose of preparing these consolidated financial statements, the
financial statements of ACL reported in HKD have been translated into U.S.
Dollars at US$1.00HKD7.8, a fixed exchange rate maintained between the United
States and Hong Kong, China.
2. EARNINGS (LOSS) PER COMMON SHARE
7
In accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss)
per common share is calculated by dividing net income (loss) available to common
stockholders less preferred dividends, if any, by the weighted average number of
common shares outstanding. Diluted earnings (loss) per common share is computed
similarly to basic earnings per common share, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were not anti-dilutive. As of September 30, 2004, the Company has
approximately 441,000 common stock equivalent related to the convertible note
payable, which was excluded from the calculation of diluted earnings per share
as the effect of the convertible note payable is anti-dilutive.
3. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH MR. YANG
As of September 30, 2004, the Company had an outstanding payable to Mr. Yang,
the President and Chairman of the Board of Directors of the Company and its
largest stockholder, totaling $10,983. As of December 31, 2003, the Company had
an outstanding receivable from Mr. Yang totaling $102,936 representing advanced
compensation paid. These balances bear no interest and are payable on demand.
For the three months ended September 30, 2004 and 2003, the Company recorded and
paid $23,077 and $23,077, respectively, to Mr. Yang, and for the nine months
ended September 30, 2004 and 2003, the Company recorded $269,231 and $693,693,
respectively, and paid $69,231 and $69,231, respectively, to Mr. Yang, as
compensation to him. The respective unpaid amounts offset amounts due to the
Company from Mr. Yang as of September 30, 2004 and December 31, 2003.
During the three months ended September 30, 2004 and 2003, and nine months ended
September 30, 2004 and 2003, the Company paid rent of $23,076, $13,462, $66,346
and $40,385, respectively, for Mr. Yang's personal residency as additional
compensation.
TRANSACTIONS WITH CLASSIC ELECTRONICS LTD.
During the three months ended September 30, 2004 and 2003, and nine months ended
September 30, 2004 and 2003, the Company sold $12,779,153, $5,877,632,
$31,096,914 and $11,128,158, respectively, of Samsung memory products to Classic
Electronics Ltd. ("Classic"). During the three months ended September 30, 2004
and 2003, and nine months ended September 30, 2004 and 2003, the Company
purchased Samsung memory products sourced from other authorized distributors of
$955,001, $771,699, $3,703,180 and $2,708,768, respectively, from Classic to
satisfy part of its demand of insufficient product supply from Samsung Hong
Kong. The Company had outstanding net accounts receivable from Classic totaling
$5,411,658 and $5,289,626, respectively, as of September 30, 2004 and December
31, 2003. The Company has not experienced any bad debt from this customer in the
past. Pursuant to a written personal guarantee agreement, Mr. Yang personally
guarantees all the outstanding accounts receivable from Classic up to $10
million of accounts receivable.
The Company leases two of its facilities and one of Mr. Yang's personal
residencies from Classic pursuant to lease agreements dated as of December 1,
2003. The lease agreements for the two facilities expire on November 30, 2004
while the lease agreement for Mr. Yang's personal residency expires on March 31,
2005. Monthly lease payments for these 3 leases totaled $7,372. The Company
incurred and paid an aggregate rent expense of $23,076, $13,462, $66,346 and
$40,385, to Classic during the three months ended September 30, 2004 and 2003,
and the nine months ended September 30, 2004 and 2003, respectively, in respect
of these two facilities and residency.
Under the initial terms of the Letter of Intent, the Company agreed to make cash
payments of $5 million and issue 5,000,000 shares of the Company's common stock.
On December 29, 2003, the Company entered into a Letter of Intent to acquire
Classic and made a non-refundable deposit of $1,000,000 by forgiving $1,000,000
of accounts
8
receivable from Classic. The Company is in the process of performing certain due
diligence work and the final terms of the purchase are subject to changes
depending on the results of the audits of Classic and due diligence work.
Mr. Ben Wong, a director of the Company, is a 99.9% shareholder of Classic. The
remaining 0.1% of Classic is owned by a non-related party.
TRANSACTIONS WITH SYSTEMATIC INFORMATION LTD.
Effective April 1, 2004, the Company entered into a lease agreement with
Systematic Information Ltd. ("Systematic") pursuant to which the Company leases
one residential property for Mr. Yang's personal use for a monthly lease payment
of $3,205 per month. The lease agreement for this residency expires on March 31,
2005. Monthly lease payment for this lease totaled $3,205. The Company incurred
and paid an aggregate rent expense of $9,615 and $19,230, to Systematic during
the three months and nine months ended September 30, 2004, respectively.
Mr. Ben Wong and the wife of Mr. Yang are the directors and shareholders of
Systematic with a total of 100% interest.
TRANSACTIONS WITH ACL TECHNOLOGY PTE LTD.
During the three months ended September 30, 2004 and 2003, and the nine months
ended September 30, 2004 and 2003, the Company recorded sales of $0, $95,830, $0
and $95,830, respectively, to ACL Technology Pte Ltd. ("ACLT"). Outstanding
accounts receivable from ACLT totaled $0, and $191,566 as at September 30, 2004
and December 31, 2003, respectively.
During the nine months ended September 30, 2004 and 2003, the Company purchased
$206,542 and $52,948 respectively, from ACLT, which offset the outstanding
accounts receivable from ACLT. During the three months ended September 30, 2004
and 2003, the Company purchased $206,542 and $50,298 respectively, from ACLT. As
of September 30, 2004 and December 31, 2003, there was no outstanding accounts
payable to ACLT.
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, 2004 and 2003, and nine months ended
September 30, 2004 and 2003, the Company recognized $0, $0, $166,152, and $0,
respectively, from the sale of memory products to Kadatco Company Ltd.
("Kadatco"), a company owned 100% by Mr. Yang. Outstanding accounts receivable
from Kadatco totaled $0 as of September 30, 2004. The Company has not
experienced any bad debt from this customer in the past.
Mr. Yang is the sole beneficial owner of the equity interest of Kadatco.
LOANS TO CITY ROYAL LIMITED
In August 2004, the Company was in negotiation with The DahSing Bank Limited
(the "DahSing Bank") for an additional amount of its available line of credit.
As a condition to the extension of additional credit to the Company, DahSing
Bank requested additional collateral to secure the increased amount on the line.
In order to meet the increased security requirement, the Company loaned $611,446
to City Royal Limited to pay off the mortgage loan on a residential property
owned by City Royal Limited and pledged to DahSing Bank as collateral to secure
the Company's borrowings from DaSing Bank. In consideration therefor, DahSing
Bank made available additional borrowings of HK$10 million (approximately
US$1,282,000). The loan to City Royal Limited is non-
9
interest bearing, in consideration of which City Royal Limited did not charge an
arrangement fee to the Company in respect of the security pledge in favor of Dah
Sing Bank. The primary purpose of the loan, from the Company's perspective, was
to advance the business of the Company by enabling it to secure additional lines
of financing in excess of the loan amount from DahSing Bank. The Company expects
this loan to be settled in January 2005. The Company believes that the
above-referenced loan does not violate the general prohibition against loans
made by publicly-traded companies to its directors and executive officers set
forth in Section 402 of the Sarbanes-Oxley Act of 2002 ("Section 402") as its
primary purpose was to advance the business of the Company. However, no
assurance can be given that the Securities and Exchange Commission or U.S.
federal government will agree with the Company's position and, in the event such
loan is determined to be a violation of Section 402, the criminal penalties of
the Securities Exchange Act of 1934, as amended, could apply.
Mr. Yang's wife and Mr. Yang's mother-in-law are shareholders of City Royal
Limited with a total of 100% interest.
4. CONVERTIBLE NOTE PAYABLE
On December 31, 2003, the Company issued a 12% subordinated convertible note in
the principal amount of $250,000 (the "Financing Note") to Professional Traders
Fund, Inc. ("PTF"), a financing company. The borrowing amount is due and payable
on December 31, 2004. Interest on the Financing Note is payable in arrears on
March 31, June 30, September 30, and December 31, 2004. In the event of default
on principal and interest payments, interest shall accrue at a rate of 15% from
and after the date of such default, and the Company would be obligated to pay a
default penalty equal to 30% of the then-unpaid principal and accrued interest
owing thereunder. At the option of the debt holder, such unpaid principal,
interest and default penalty can be paid with shares of the Company's common
stock at conversion price, which is defined in the following paragraph.
The Financing Note is convertible, at the option of its holder, in whole or in
part, into shares of common stock of the Company at a conversion price equal to,
with respect to any conversion thereof, 40% of the average closing price of the
stock three trading days immediately prior to the date of the notice of such
conversion, the interest payment date or the debt maturity date, as the case may
be; provided, however, that the conversion price shall not in any case exceed
$1. During the three months ended March 31, 2004, PTF converted principal note
balance of $50,900 into 75,000 shares of common stock. During the three months
ended June 30, 2004, PTF converted principal note balance of $20,000 into 50,000
shares of common stock and accrued interest of $7,026 into 11,538 shares of
common stock. During the three months ended September 30, 2004, PTF converted
principal note balance of $29,100 into 97,980 shared of common stock and accrued
interest of $5,359 into 18,041 shares of common stock.
Pursuant to the terms of a Limited Guarantee and Security Agreement, the
Financing Note is guaranteed by 1,200,000 shares of the Company's common stock
beneficially owned by three shareholders of which 700,000 are restricted shares
and 500,000 are freely traded shares. All the shares being converted during the
nine months ended September 30, 2004 were provided through these pledged shares
in the escrow account. Per verbal agreements between these three shareholders
and ACL, the Company agreed to issue 252,559 shares of its common stock to these
shareholders as a return of the pledged shares by these shareholders.
Accordingly, the Company classified the payable of $112,385 as "Due to
Stockholders for Converted Pledged Collateral" in the accompanying condensed
consolidated balance sheet as of September 30, 2004.
Since the Financing Note is convertible into equity at the option of the holder
thereof at conversion rates below prevailing market prices, an embedded
beneficial conversion feature was recorded as a debt discount and amortized over
the life of the debt in accordance with Emerging Issues Task Force No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments." Since the
intrinsic value of the beneficial conversion feature exceeds the proceeds of the
convertible debt, the amount of the discount assigned to the beneficial
conversion feature is limited to the amount of the proceeds of the convertible
debt. Therefore, the Company recorded a discount of $250,000, the face value of
the debt, and accordingly the debt is $0 at December 31, 2003, net of the
unamortized discount. Any unamortized debt discount related to the beneficial
conversion feature is being
10
accreted as interest expense. During the three months and nine months ended
September 30, 2004, the Company recorded, with respect to this Financing Note,
interest expense of $59,217 and $216,677, respectively, under the straight-line
method. The amortization under straight-line method is not materially different
from the amount under the effective interest method. As of September 30, 2004,
outstanding principal amount and unamortized discount of the convertible note
amounted to $150,000 and $33,323, respectively.
In connection with the Financing Note, the Company agreed to file a registration
statement with the Securities and Exchange Commission in respect of the shares
issuable upon conversion thereof within 60 days of the funding of the note and
agreed to use reasonable efforts to cause such registration statement to be
declared effective within 150 days of the funding of the note. If the Company
fails to meet either of such timelines, a 1% penalty per month on the funded
amount of the Financing Note will be levied against the Company. As of November
11, 2004, the Company had not yet filed a registration statement in respect of
such conversion shares. Accordingly, the Company incurred and accrued a penalty
of $7,500 and $22,500 for the three months and nine months ended September 30,
2004.
5. BANK FACILITIES
Pursuant to a debenture deed dated April 20, 2001, Atlantic, a wholly-owned
subsidiary of the Company, pledged its assets as collateral to a bank group in
Hong Kong comprised of Dah Sing Bank Limited, The Hong Kong and Shanghai Banking
Corporation Limited and Overseas Trust Bank Limited for all current and future
borrowings from the bank group by Atlantic. Amounts outstanding under this
borrowing arrangement totaled $4,106,447 as of September 30, 2004. In addition
to the above first priority security over all assets of the Company, such
borrowings are also secured by:
1. a HKD53,550,000 (approximately US$6,865,385) personal guarantee given
by Mr. Yang to the above bank group;
2. a personal guarantee given by Mr. Yang for unlimited amount together
with a key man insurance of Mr. Yang for $1,000,000 denoting Dah Sing
Bank Limited as beneficiary; and
3. a security interest on a residential property located in Hong Kong
owned by City Royal Limited, a related party.
As of September 30, 2004, the Company's general banking facilities were subject
to interest rates of 0.5% to 1.0% above the Best Lending Rate (currently at
5.125% per annum) prevailing in Hong Kong.
6. ECONOMIC DEPENDENCE
The Company's distribution operations are dependent on the availability of an
adequate supply of electronic components under the "Samsung" brand name which
have historically been principally supplied to the Company by Samsung
Electronics H.K. Co., Ltd. ("Samsung HK"), a subsidiary of Samsung Electronics
Co., Ltd., a Korean public company. Samsung HK supplied approximately 79% and
86% of materials to the Company for the nine months ended September 30, 2004 and
2003 respectively. As of September 30, 2004, the Company had outstanding
accounts payable to Samsung HK totaling $3,127,000. 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.
11
In addition, the Company's operations and business viability are to a large
extent dependent on the provision of management services and financial support
by Mr. Yang.
7. RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 condensed consolidated
financial statements to conform to the 2004 presentation and do not have any
material impact on the previously reported results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS REPORT CONTAIN FORWARD-LOOKING
INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING
INFORMATION.
ANY REFERENCE TO "ACL", THE "COMPANY" OR THE "REGISTRANT", "WE", "OUR"
OR "US" MEANS ACL
SEMICONDUCTORS INC. AND ITS SUBSIDIARIES.
OVERVIEW
CORPORATE BACKGROUND
The Company, through its wholly-owned subsidiaries Atlantic Components
Limited, a Hong Kong corporation ("Atlantic") and Alpha Perform Technology
Limited ("Alpha"), is engaged primarily in the business of distribution of
memory products under "Samsung" brandname which principally comprise DRAM and
Graphic RAM, FLASH, SRAM and MASK ROM for the Hong Kong and Southern China
markets.
As of September 30, 2004, ACL had more than 257 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
U.S. Securities and Exchange Commission ("SEC") Financial Reporting
Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL
ACCOUNTING POLICIES" ("FRR 60"), suggests companies provide additional
disclosure and commentary on their most critical accounting policies. In FRR 60,
the SEC defined the most critical accounting policies as the ones that are most
important to the portrayal of a company's financial condition and operating
results, and require management to make its most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, ACL's most critical accounting
policies include: inventory valuation, which affects cost of sales and gross
margin; policies for revenue recognition, allowance for doubtful accounts, and
stock-based compensation. The methods, estimates and judgments ACL uses in
applying these most critical accounting policies have a significant impact on
the results ACL reports in its consolidated financial statements.
INVENTORY VALUATION. Our policy is to value inventories at the lower of
cost or market on a part-by-part basis. This policy requires us to make
estimates regarding the market value of our inventories, including an assessment
of excess or obsolete inventories. We determine excess and obsolete inventories
based on an estimate of the future demand for our products within a specified
time horizon, generally 12 months. The estimates we use for demand are also used
for near-term capacity planning and inventory purchasing and are consistent with
our revenue forecasts. If our demand forecast is greater than our actual demand,
we may be required to take additional excess inventory charges, which will
decrease gross margin and net operating results in the future.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. ACL maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of ACL's customers to
make required payments. ACL's allowance for doubtful accounts is based on ACL's
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, ACL's history of bad debts, and the general condition of
the industry. If a major customer's credit worthiness deteriorates, or ACL's
customers' actual defaults exceed ACL's historical experience, ACL's estimates
could change and impact ACL's reported results.
13
STOCK-BASED COMPENSATION. ACL records stock-based compensation to outside
consultants at fair market value as operating cost. ACL accounts for
options/warrants to outside consultants under the fair value method on the date
of grant using the Black-Scholes pricing method. This option valuation model
requires input of highly subjective assumptions. Changes in the subjective input
assumptions can materially affect the fair value estimate. In management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of these options/warrants granted to outside consultants.
REVENUE RECOGNITION. The Company derives revenues from resale of computer
memory products. Revenue for resale of computer memory products is recognized
based on guidance provided in Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements," (SAB
104). Computer memory resale revenue is recognized when products have been
shipped and collection is probable.
In December 2003, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104
supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers ("the FAQ") issued with SAB
101 that had been codified in SEC Topic 13, "Revenue Recognition". Selected
portions of the FAQ have been incorporated into SAB 104. While the wording of
SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104, which was effective upon issuance. The adoption of SAB 104 did not
impact the consolidated financial statements.
CONTRACTUAL OBLIGATIONS
The following table presents the Company's contractual obligations as of
September 30, 2004 over the next five years and thereafter:
Payments by Period
--------------------------------------------------------------------------------------------------------------------------
LESS
THAN 1-3 4-5 AFTER 5
AMOUNT 1 YEAR YEARS YEARS YEARS
Operating Leases $42,308 $42,308 $ -- $ -- $ --
Line of credit and notes payable -
short-term 3,580,773 3,580,773 -- -- --
Convertible note payable 150,000 150,000 -- -- --
Long-term Debt 525,674 447,606 78,068 -- --
------------------------------------------------------------------------
Total Contractual Obligations $4,298,755 $4,220,687 $78,068 -- --
========================================================================
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 are recognized upon the transfer of legal title of the electronic
components to the customers.
14
The quantities of memory products the Company sells fluctuate with
changes in demand from its customers. The prices set by Samsung that the Company
must charge its customers are expected to fluctuate as a result of prevailing
economic conditions and their impact on the market. Since the second half of
year 2003, the Company has experienced increased demand for Samsung memory
products among personal and corporate users in the Hong Kong and Southern China
regions due to a recovery of their economies, in particular for the first
quarter of 2004. Although there was an unexpected world-wide pricing pressure on
memory products during the period from May 2004 to September 2004 among major
memory products manufacturers, the market is now stabilized and results in
stimulated strong demand of memory products in the Hong Kong and Southern China
markets. The Company expects the profit margin of its products will improve
during the fourth quarter of 2004.
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, 2004 and 2003 were comprised of sales and marketing and
general and administrative expenses only.
Sales and marketing expenses consisted primarily of internal
commissions paid to internal sales personnel and costs associated with
advertising and marketing activities.
General and administrative expenses include all corporate and
administrative functions that serve to support the Company's current and future
operations and provide an infrastructure to support future growth. Major items
in this category include management and staff salaries, rent/leases,
professional services, and travel and entertainment. The Company expects these
expenses to stay at the 2004 levels or slightly higher as a result of
anticipated expansion by the Company of its business operations. Sales and
marketing expenses are expected to fluctuate as a percentage of sales due to the
addition of sales personnel and various marketing activities planned throughout
the year.
Interest expense, including finance charges, relates primarily to ACL'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
in percent for the three months and nine months ended September 30, 2004 and
2003 and should be read in conjunction with the "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's
financial statements and the related notes appearing elsewhere in this document.
15
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 98.29% 91.41% 97.58% 93.68%
----------- ----------- ----------- -----------
Gross profit 1.71% 8.59% 2.42% 6.32%
Operating expenses:
Sales and marketing 0.01% 0.05% 0.03% 0.32%
General and administrative 2.57% 4.84% 2.21% 3.29%
Merger cost 13.57% 5.26%
----------- ----------- ----------- -----------
Income (loss) from operations -0.87% -9.87% 0.18% -2.55%
Other income (expenses):
Interest expenses -0.27% -0.21% -0.33% -0.43%
Gain (loss) on disposal of
property and equipment 0.00% -0.09% 0.00% -0.04%
Miscellaneous -0.01% 0.01% -0.01% -0.00%
----------- ----------- ----------- -----------
Loss before income taxes -1.15% -10.16% -0.16% -3.02%
Income taxes expense (benefit) -0.10% 0.63% -0.01% 0.39%
----------- ----------- ----------- -----------
Net loss -1.05% -10.79% -0.15% -3.41%
=========== =========== =========== ===========
UNAUDITED THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30,
NET SALES
Sales increased by $14,422,084 or 71.1% to $34,715,179 in the three
months ended September 30, 2004 from $20,293,095 in the three months ended
September 30, 2003. This increase resulted primarily from the aggressive pricing
strategy imposed by Samsung with the assistance of ACL for newly launched 1
Gigabyte memory products during August 2004 to September 2004 to prevent the
entrance of other major memory product manufacturers in the Hong Kong and
Southern China markets which stimulated a strong demand of such newly launched
memory products.
COST OF SALES
Cost of sales increased $15,570,162, or 83.9%, to $34,120,204 for the
three months ended September 30, 2004 from $18,550,042 for the three months
ended September 30, 2003. The increase in cost of sales resulted from the
increase in sales during the three months ended September 30, 2004. As a
percentage of sales, cost of sales increased to 98.3% of sales in the three
months ended September 30, 2004 from 91.4% of sales in the three months ended
September 30, 2003.
GROSS PROFIT
16
Gross profit decreased by $1,148,078 or 65.9%, to $594,975 for the
three months ended September 30, 2004 from $1,743,053 for the three months ended
September 30, 2003. The Company's gross profit decreased from 8.6% of sales in
the three months ended September 30, 2003 compared to 1.7% of sales in the three
months ended September 30, 2004, as a result of aggressive pricing strategy
imposed by Samsung with the assistance of ACL for newly launched 1 Gigabyte
memory products during the period from August 2004 to September 2004 to prevent
the entrance of other major memory products manufacturers in the Hong Kong and
Southern China markets.
OPERATING EXPENSES
Sales and marketing expenses decreased by $6,120 or 58.7%, to $4,304
for the three months ended September 30, 2004 from $10,424 for the three months
ended September 30, 2003. This decrease was principally attributable to the
restructuring of the compensation structure of the Company pursuant to which the
Company ceased paying sales commissions to the marketing staff effective during
the quarter ended December 31, 2003 in favor of the payment of performance
linked discretionary bonuses. As a percentage of sales, sales and marketing
expenses decreased to 0.01% of sales for the three months ended September 30,
2004 when compared to 0.05% of sales for the three months ended September 30,
2003.
General and administrative expenses decreased by $89,399 or 9.11% to
$891,805 for the three months ended September 30, 2004 from $981,204 for the
three months ended September 30, 2003. This decrease was principally
attributable to minimal payment of performance-linked bonuses. 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 general and
administrative expenses would have decreased by $475, 591 if this event had not
occured.
Loss from operations for the Company was $301,134 for the three months
ended September 30, 2004 compared to the loss of $2,002,195 for the three months
ended September 30, 2003, a decrease of loss by $1,701,061. The decrease of loss
was primarily due to merger cost of $2,753,620 incurred in September 2003
related to the acquisition of Atlantic.
OTHER INCOME (EXPENSES)
Interest expense increased by $49,582, or 115.62%, from $42,884 in the
three months ended September 30, 2003, to $92,466 in the three months ended
September 30, 2004. Excluding $59,217 of 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. Excluding the
above-mentioned amortization of discount on convertible note payable, interest
expense actually decreased for the three months ended September 30, 2004 when
compared with the three months ended September 30, 2003 due to lower average
loan balances during 2004 through the continuous pay-down of its bank loans.
INCOME TAX
Income tax decreased by $163,189 from income tax expense of $128,327
for the three months ended September 30, 2003 to income tax benefit of $34,862
for the three months ended September 30, 2004, due to pretax loss recorded in
the three months ended September 30, 2004. Such reduction was due to pretax loss
in the Company's Hong Kong operations incurred during the three months ended
September 30, 2004. In the three months ended September 30, 2003, the Company
had pretax income from the operations of its Hong Kong operations which was
subject to the local income tax. The loss in the three months ended September
30, 2003 was related to the merger cost incurred by the U.S. registrant, and
such loss could not be used to offset the profit generated from the Hong Kong
operations.
17
The Company's net loss decreased by $1,828,337 to $361,246 for the
three months ended September 30, 2004 from $2,189,583 for the three months ended
September 30, 2003 due primarily to the merger cost incurred in September 30,
2003. We expect our net profit margin for the fourth quarter of year 2004 to
increase back to similar level as in last year as a result of the pricing
strategy of 1 Gigabyte memory products.
UNAUDITED NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30,
NET SALES
Sales increased by $45,202,975 or 86.4% to $97,549,421 in the nine
months ended September 30, 2004 from $52,346,446 in the nine months ended
September 30, 2003. This increase resulted primarily from the unexpected
world-wide pricing pressure on memory products during the period from May 2004
to September 2004 among major memory products manufacturers which stimulated the
strong demand of memory products in the Hong Kong and Southern China markets. We
expect our sales in the year ending December 31, 2004 to increase to more than
$100 million given the stimulated strong demand for Samsung memory products.
COST OF SALES
Cost of sales increased $46,147,472, or 94.1%, to $95,187,218 for the
nine months ended September 30, 2004 from $49,039,746 for the nine months ended
September 30, 2003. The increase in cost of sales resulted from primarily the
increase of sales recorded during the nine months ended September 30, 2004. As a
percentage of sales, cost of sales increased to 97.6% of sales in the nine
months ended September 30, 2004 from 93.7% of sales in the nine months ended
September 30, 2003. We expect our cost of sales in fiscal year 2004 to increase
as a result of our expectation of an increase in sales.
GROSS PROFIT
Gross profit decreased by $944,497 or 28.6%, to $2,362,203 for the nine
months ended September 30, 2004 from $3,306,700 for the nine months ended
September 30, 2003. The decrease in gross profit resulted primarily from the
increase in cost of sales by the Company for the nine months ended September 30,
2004. The Company's gross profit margin decreased from 6.3% of sales in the nine
months ended September 30, 2003 compared to 2.4% of sales in the nine months
ended September 30, 2004, as a result of ACL's efforts to assist Samsung to
capture the market share for the Hong Kong and Southern China markets during May
2004 to July 2004 and as a result of aggressive pricing strategy imposed by
Samsung with the assistance of ACL for newly launched 1 Gigabyte memory products
during the period from August 2004 to September 2004. In October 2004, the
Company recorded significant improvements in profit margins due to the
successful pricing strategy of the 1 Gigabyte memory products.
OPERATING EXPENSES
Sales and marketing expenses decreased by $134,205 or 81.3%, from
$165,092 for the nine months ended September 30, 2003 to $30,887 for the nine
months ended September 30, 2004. This decrease was principally attributable to
the restructuring of the compensation scheme of the Company pursuant to which
the Company ceased paying sales commissions to the marketing staff effective
during the quarter ended December 31, 2003 in favor of the payment of
performance linked discretionary bonuses. As a percentage of sales, sales and
marketing expenses decreased to 0.03% of sales for the nine months ended
September 30, 2004 when compared to 0.32% of sales for the nine months ended
September 30, 2003. We expect sales and marketing expenses to increase in fiscal
year 2004 due to an expected increase in sales.
18
General and administrative expenses increased by $433,491 or 25.1% to
$2,157,959 in the nine months ended September 30, 2004 from $1,724,468 in the
nine months ended September 30, 2003. This increase was principally due to an
uninsured robbery of goods-in-transit which occurred in August, 2004 causing a
loss of $475,591. Due to anticipated financing and acquisition activities in
2004 and the anticipated consolidation of general and administrative expenses of
Classic in the fourth quarter of 2004, we expect that general and administrative
expenses will increase.
Income from operations for the Company was $173,357 for the nine months
ended September 30, 2004 compared to loss of $1,336,480 for the nine months
ended September 30, 2003, an increase of income by $1,509,837 or 113.0%. This
increase was the result of non-recurrence of merger cost incurred during the
nine months ended September 30, 2003.
OTHER INCOME (EXPENSES)
Interest expense increased by $99,422, or 43.9%, from $226,660 in the
nine months ended September 30, 2003, to $326,082 in the nine months ended
September 30, 2004. Excluding $216,677 interest expense incurred in the nine
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. Excluding the
above-mentioned amortization of discount on convertible note payable, interest
expense of ACL decreased to 0.2% of sales for the nine months ended September
30, 2004 from 0.3% for the nine months ended September 30, 2003 due to a
reduction by the Company of its need to open and draw down on letters of credits
to obtain goods from its suppliers. We expect our interest expense excluding the
amortization of convertible note to continue to decrease as we repay our
long-term bank borrowings, which decrease is expected to be offset by
consolidation of the line-of-credit and long-term bank borrowings of Classic
after our acquisition anticipated in the fourth quarter of 2004.
INCOME TAX
Income tax decreased by $213,378 from income tax expenses of $204,731
for the nine months ended September 30, 2003 to a tax benefit of $8,647 for the
nine months ended September 30, 2004. Such reduction was due to pretax loss in
the Company's Hong Kong operations incurred during the nine months ended
September 30, 2004. In 2003, the Company had a pretax income from the operations
of its Hong Kong operations. The loss in 2003 was related to the merger cost
incurred by the U.S. registrant, and such loss could not be used to offset the
profit generated from the Hong Kong operations.
The Company's net loss decreased by $1,637,511 from $1,788,461 for the
nine months ended September 30, 2003 compared to loss of $150,950 for the nine
months ended September 30, 2004 or 91.6%. This decrease was the result of
non-recurrence of merger cost incurred during the nine months ended September
30, 2003. We expect our net profit margin for the fourth quarter of year 2004
will increase back to similar level as in last year as a result of the pricing
strategy of 1 Gigabyte memory products which already led to significant profit
margins recorded by the Group during October 2004.
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 the unaudited
condensed consolidated financial statements for a description of the Company's
banking arrangements.
The Company may require additional financing in order to reduce its
short-term and long-term debts and implement its business plan. The Company
currently anticipates a need of approximately $4.1 million in additional
financing to repay its short-term and long-term bank borrowings. In order to
meet anticipated demand
19
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 ACL are permitted up to thirty (30) days to make payment
for purchased memory products. As the anticipated cash generated by the
Company's operations are insufficient to fund its growth requirements, it will
need to obtain additional funds. There can be no assurance that the Company will
be able to obtain the necessary additional capital on a timely basis or on
acceptable terms, if at all. The Company's business growth and prospects would
be materially and adversely affected. As a result of any such financing, if it
is an equity financing, the holders of the Company's common stock may experience
substantial dilution. In addition, as its results may be negatively impacted and
thus delayed as a result of political and economic factors beyond the
management's control, the Company's capital requirements may increase.
The following factors, among others, could cause actual results to
differ from those expected caused by: pricing pressures in the industry; a
downturn in the economy in general or in the memory products sector; an
unexpected decrease in demand for Samsung's memory products; a decrease in its
ability to attract new customers; an increase in competition in the memory
products market; and the ability or inability of some of ACL's customers to
obtain financing. These factors or additional risks and uncertainties not known
to ACL or that it currently deems immaterial may impair business operations and
may cause ACL's actual results to differ materially from its historical
operating results.
Although ACL believes its expectations of future growth are reasonable,
it cannot guarantee future results, levels of activity, performance or
achievements. ACL is under no duty to update its expectation after the date of
this report to confirm them to actual results or to make changes in its
expectations.
In the nine months ended September 30, 2004, net cash provided by
operating activities was $119,423 while in the nine months ended September 30,
2003, ACL used net cash of $504,888 in operating activities, an increase of
$624,311. This increase was caused primarily by decrease of net income in 2004,
compared to the net income in 2003, excluding the merger cost. During the nine
months ended September 30, 2003, the net income excluding non-cash merger cost
approximated $965,000 compared to net loss of $151,000 during the nine months
ended September 30, 2004, a difference of $1,116,000 which caused majority part
of the difference in cash provided by (used for) operating activities.
In the nine months ended September 30, 2004, net cash used for
investing activities was $632,689 while in the nine months ended September 30,
2003, net cash used for investing activities was only $40,506. The Company
loaned $611,446 to a related party to pay off a mortgage on a residential
property which was used by the Company as a collateral to secure additional
borrowings on a line of credit. No such transactions took place during the nine
months ended September 30, 2003.
In the nine months ended September 30, 2003, net cash provided by
financing activities was $868,629 while in the nine months ended September 30,
2003, net cash provided by financing activities was $484,621. The increase was
due to increase of net borrowings of $869,000 during the nine months ended
September 30, 2004 compared to net repayments of $251,000 during the nine months
ended September 30, 2003. The difference of $1,120,000 was partially offset by
$736,000 of advances to the Company by a related party.
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.
20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ACL is exposed to market risk for changes in interest rates as its bank
borrowings accrue interest at floating rates of 0.5% to 1.0% over the Best
Lending Rate (currently at 5.125% per annum) prevailing in Hong Kong. For the
nine months ended September 30, 2004 and 2003, ACL did not generate any material
interest income. Accordingly, ACL believes that an increase in interest rates
will have a material negative effect on its liquidity, financial condition and
results of operations.
IMPACT OF INFLATION
ACL believes that its results of operations are not significantly
impacted by moderate changes in inflation rates as it expects it will be able to
pass these costs by component price increases to its customers.
SEASONALITY
ACL has not experienced any material seasonality in sales fluctuations
over the past 2 years in the memory products markets.
ITEM 4. CONTROLS AND PROCEDURES
The Company has established disclosure controls and procedures to
ensure that material information relating to the Company, including Atlantic, is
made known to the officers who certify the Company's financial reports and to
other members of senior management and the Board of Directors.
(a) Based on their evaluation as of a date within 90 days of the filing
date of this Quarterly Report on Form 10-Q, our chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) There were no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation. Although there were no significant deficiencies or material
weaknesses, there were some areas where room for improvement was noted and
management has committed to improving in these areas. The Company has adopted
many of the formal and informal suggestions of our auditors, Stonefield
Josephson, Inc., and are implementing weekly and monthly checks to assure that
these disclosure controls and internal controls stay in place.
21
PART II
ITEM 6. EXHIBITS
(a) Exhibits:
21.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
21.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
22
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, 2004 By: /s/ Chung-Lun Yang
------------------------
Chung-Lun Yang
Chief Executive Officer
Date: November 14, 2004 By: /s/ Kenneth Lap-Yin Chan
------------------------
Kenneth Lap-Yin Chan
Chief Financial Officer
23