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, 2005.
[ ] 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 [ ]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 31, 2005 was approximately $1,525,982 based upon the
closing price of $0.28 of the registrant's common stock on the OTC Bulletin
Board, as of the last business day of the most recently completed first fiscal
quarter (March 31, 2005). (For purposes of determining this amount, only
directors, executive officers, and 10% or greater stockholders have been deemed
affiliates).
Registrant had 27,829,936 shares of common stock, par value $0.001 per share,
outstanding as of May 19, 2005. Transitional small business disclosure format
(check one) Yes [ ] No [X]
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 2005
(unaudited) and December 31, 2004 1-2
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2005 and March 31, 2004 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and March 31, 2004 (unaudited) 4-5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14-19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19-20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II OTHER INFORMATION 21
Item 1 Legal Proceedings
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
March 31, As of
2005 December 31,
(Unaudited) 2004
-----------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 489,584 $ 512,548
Restricted cash 1,025,641 -
Accounts receivable, net 1,617,402 1,088,751
Accounts receivable, related parties 4,068,027 4,727,517
Loan Receivable from related party 318,983 930,429
Inventories, net 1,858,575 1,520,117
Other current assets 175,761 80,802
------------- ------------
Total current assets 9,553,973 8,860,164
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net of
accumulated depreciation and amortization 53,442 55,819
ACQUISITION DEPOSITS 1,000,000 1,000,000
OTHER DEPOSITS 350,000 350,000
------------- ------------
$ 10,957,415 $10,265,983
============= ============
The accompanying notes are an integral part of these condensed
consolidated financial statements
1
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
As of
March 31, As of
2005 December 31,
(Unaudited) 2004
-----------------------------------
CURRENT LIABILITIES:
Accounts payable $ 5,219,431 $5,065,965
Accrued expenses 433,317 456,676
Loan payable, related party 414,195 -
Lines of credit and notes payable 3,448,837 3,469,632
Current portion of long-term debt 209,706 286,032
Convertible note payable, net 150,000 150,000
Due to stockholders for converted pledged collateral 112,385 112,385
Income tax payable 181,434 145,050
Other current liabilities 46,401 13,610
------------- -----------
Total current liabilities 10,215,706 9,699,350
Long-term debt, less current portion 49,706 65,522
------------- -----------
Total liabilities 10,265,412 9,764,872
------------- -----------
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 (102,936) (102,936)
Accumulated deficit (2,593,296) (2,784,188)
------------- -----------
Total stockholders' equity 692,003 501,111
------------- -----------
$ 10,957,415 $10,265,983
============= ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements
2
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004
---------------------------------------
NET SALES:
Related parties $ 11,644,762 $ 10,838,663
Other 17,015,959 18,738,190
Less discounts to customers (14,467) (26,978)
------------ ------------
28,646,254 29,549,875
COST OF SALES 27,683,372 28,273,223
------------ ------------
GROSS PROFIT 962,882 1,276,652
------------ ------------
OPERATING EXPENSES:
Selling 148,656 15,435
General and administrative 512,031 748,659
------------ ------------
INCOME FROM OPERATIONS 302,195 512,558
OTHER INCOME (EXPENSES):
Interest expense (43,210) (138,942)
Miscellaneous (1,779) (168)
------------ ------------
INCOME BEFORE INCOME TAXES 257,206 373,448
INCOME TAXES 66,314 52,547
------------ ------------
NET INCOME $ 190,892 $ 320,901
============ ============
EARNINGS PER SHARE - BASIC $ 0.01 $ 0.01
============ ============
EARNINGS PER SHARE - DILUTED $ 0.01 $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 27,829,936 27,829,936
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 29,169,222 27,829,936
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements
3
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004
----------------- ----------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 190,892 $ 320,901
----------------- ----------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 6,300 5,125
Change in inventory reserve 3,846 16,078
Interest expense from discount amortization of convertible note payable - 98,296
Non-cash compensation to shareholder/director - 200,000
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS
Accounts receivable - other (528,653) (830,479)
Accounts receivable - related parties 659,492 (642,603)
Inventories (342,304) (1,381,481)
Other current assets (94,959) -
INCREASE (DECREASE) IN LIABILITIES
Accounts payable 153,466 1,944,953
Accrued expenses (23,359) 110,757
Income tax payable 36,384 22,180
Other current liabilities 32,791 (2,137)
----------------- ----------------
Total adjustments (96,996) (459,311)
----------------- ----------------
Net cash provided by (used for)
operating activities 93,896 (138,410)
----------------- ----------------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Loans to stockholders - (27,401)
Increase of restricted cash (1,025,641) -
Cash receipts for loan repayments by related party 611,446 -
Purchases of property, equipment and improvements (3,923) (1,105)
----------------- ----------------
Net cash used for investing activities (418,118) (28,506)
----------------- ----------------
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,
2005 2004
-------------------------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds (repayments) on lines of credit and
notes payable (20,795) 79,346
Principal payments on long-term debt (92,142) (197,034)
Borrowings from related party 414,195 -
---------- ---------
Net cash provided by (used for) financing activities 301,258 (117,688)
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,964) (284,604)
CASH AND CASH EQUIVALENTS, beginning of the period 512,548 467,074
---------- ---------
CASH AND CASH EQUIVALENTS, end of the period $ 489,584 $ 182,470
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 43,210 $ 33,756
========== =========
Income tax paid $ 29,930 $ 30,366
========== =========
The accompanying notes are an integral part of these condensed
consolidated financial statements
5
ACL SEMICONDUCTORS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The condensed consolidated financial statements include the financial
statements of ACL Semiconductors Inc. and its subsidiaries, Atlantic
Components Ltd. and Alpha Perform Technology Limited (collectively, "ACL"
or the "Company"). The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions
to Form 10-Q and do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
of America for complete consolidated financial statements. These condensed
consolidated financial statements and related notes should be read in
conjunction with the Company's audited financial statements for the fiscal
years ended December 31, 2004, 2003 and 2002 filed in the Form 10-K filed
by the Company on April 14, 2005. In the opinion of management, these
condensed consolidated financial statements reflect all adjustments which
are of a normal recurring nature and which are necessary to present fairly
the consolidated financial position of ACL as of March 31, 2005 and
December 31, 2004, and the results of operations for the three-month
periods ended March 31, 2005 and 2004 and the cash flows for the
three-month periods ended March 31, 2005 and 2004. The results of
operations for the three months ended March 31, 2005 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. ("Company" or "ACL") was incorporated under the
State of Delaware on September 17, 2002. Through a reverse-acquisition of
Atlantic Components Ltd., a Hong Kong based company, effective September
30, 2003, the Company's principal activities are distribution of electronic
components under the "Samsung" brandname which comprise DRAM and graphic
RAM, FLASH, SRAM and MASK ROM for the Hong Kong and Southern China markets.
Atlantic Components Ltd., its wholly owned subsidiary, was incorporated in
Hong Kong on May 30, 1991 with limited liability. On October 2, 2003, the
Company set up a wholly-owned subsidiary, Alpha Perform Technology Limited
("Alpha"), a British Virgin Islands company, to provide services on behalf
of the Company in jurisdictions outside of Hong Kong. Effective January 1,
2004, the Company has ceased the operations of Alpha and all the related
activities are consolidated with those of Atlantic.
CURRENCY REPORTING
Amounts reported in the accompanying 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 condensed consolidated financial
statements, the financial statements of ACL reported in HKD have been
translated into U.S. Dollars at US$1.00=HKD7.8, a fixed exchange rate
maintained between the United States and China.
6
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, 2005 and 2004, the Company has 1,339,286 and 350,000
shares of common stock equivalents upon conversion of the convertible note
payable based on the quoted market price at the end of each reporting
period. The common stock equivalents for 2004 were excluded from the
computation of diluted loss per share as their effect is antidilutive.
3. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH MR. YANG
As of March 31, 2005, the Company had an outstanding receivable from Mr.
Yang, the President and Chairman of the Board of Directors of the Company
and its largest stockholder, totaling $283,828. As of March 31, 2005 and
December 31, 2004, the Company had an outstanding receivable from Mr. Yang
totaling $102,936 representing advanced compensation. This balance bears no
interest and is payable on demand.
For the three months ended March 31, 2005 and 2004, the Company recorded
$76,923 and $236,076, respectively, and paid $76,923 and $23,076,
respectively, to Mr. Yang as compensation to him.
During the three months ended March 31, 2005 and 2004, the Company paid
rent of $23,077 and $13,462, respectively, for Mr. Yang's personal
residency as additional compensation. In addition, the Company paid him
$3,077 as housing allowance for each of the three months ended March 31,
2005 and 2004.
TRANSACTIONS WITH CLASSIC ELECTRONICS LTD.
During the three months ended March 31, 2005 and 2004, the Company sold
$11,230,380 and $8,286,930, respectively, of memory products to Classic
Electronics Ltd. ("Classic"). During the three months ended March 31, 2005
and 2004, the Company purchased Samsung memory products sourced from other
authorized distributors of $1,062,761 and $781,733, respectively, through
Classic to satisfy part of its demand of insufficient product supply from
Samsung HK. The Company had outstanding accounts receivable from Classic
totaling $3,988,344 and $4,714,057, respectively, as of March 31, 2005 and
December 31, 2004. The Company has not experienced any bad debt from this
customer in the past. Pursuant to a written personal guarantee agreement,
Mr. Yang personally guarantees all the outstanding accounts receivable from
Classic up to $10 million of accounts receivable.
The Company leased two of its facilities and Mr. Yang's personal residency
from Classic. Lease agreements for the two facilities expire on November
30, 2006 while the lease agreement for Mr. Yang's personal residency
expires on March 31, 2008. Monthly lease payments for these 3 leases
totaled $7,372. The Company incurred and paid rent expense of ACL of
$22,115 to Classic for each of the three-month periods ended March 31, 2005
and 2004.
On December 31, 2004, the Company executed an agreement to purchase 100% of
Classic. On April 8 2005, the Company has made the determination to
postpone its acquisition of Classic Electronics Ltd. till second half of
2005. The decision has been agreed by both entities.
7
Mr. Ben Wong, a director of the Company, is a 99.9% shareholder of Classic.
The remaining 0.1% of Classic is owned by a non-related party.
TRANSACTIONS WITH ACL TECHNOLOGY PTE LTD.
In 2004, the Company loaned $318,983 to ACLT, which is classified as loans
receivable from related party in the accompanying condensed consolidated
balance sheet. The loan is unsecured, bears no interest and is outstanding
as of March 31, 2005.
Mr. 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 March 31, 2005 and 2004, the Company
recognized $141,620 and $150,152 from the sale of memory products to
Kadatco Company Ltd. ("Kadatco"). Outstanding accounts receivable from
Kadatco totaled $73,200 and $0 as of March 31, 2005 and December 31, 2004,
respectively. 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, 2005 and 2004, the Company sold
$165,140 and $1,995,533, respectively, to Rambo Technologies Ltd.
("Rambo"). Outstanding accounts receivable totaled $0 as of March 31, 2005
and December 31, 2004. The Company has not experienced any bad debt from
this customer in the past.
During the three months ended March 31, 2005 and 2004, the Company
purchased $106,041 and $51,426, respectively, from Rambo Technologies Ltd.
("Rambo"). Outstanding accounts payable due to Rambo totaled $0 and $61,360
as of March 31, 2005 and December 31, 2004, respectively.
Mr. Wong, a director of the Company, is a 60% shareholder of Rambo. The
remaining 40% of Rambo is owned by a non-related party. Mr. Yang is a
director of Rambo.
TRANSACTIONS WITH ARISTO COMPONENTS LTD.
During the three months ended March 31, 2005 and 2004, the Company sold $0
and $90, respectively, to Aristo Components Ltd. ("Aristo"). There was no
outstanding accounts receivable as of March 31, 2005 and December 31, 2004.
The Company has not experienced any bad debt from this customer in the
past.
During the three months ended March 31, 2005 and 2004, the Company
purchased $0 and $500, respectively, from Aristo. There are no outstanding
accounts payable due to Aristo as of March 31, 2005 and December 31, 2004,
respectively.
Mr. Wong, a director of the Company, is a 90% shareholder of Aristo. The
remaining 10% of Aristo is owned by a non-related party. Mr. Yang is a
director of Aristo.
TRANSACTIONS WITH ATLANTIC NETCOM LTD.
During the three months ended March 31, 2005 and 2004, the Company sold
$1,652 and $0, respectively, to Atlantic Netcom Ltd. ("Atlantic Netcom").
Outstanding accounts receivable totaled $0 as of March 31,
2005 and $13,460 as of December 31, 2004. The Company has not experienced
any bad debt from this customer in the past.
Mr. Wong, a director of the Company, is a 60% shareholder of Atlantic
Netcom. The remaining 40% of Atlantic Netcom is owned by a non-related
party. Mr. Yang is a director of Atlantic Netcom.
TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD
During the three months ended March 31, 2005 and 2004, the Company sold
$33,350 and $0, respectively, to Solution Semiconductor (China) Ltd.
("Solution"). Outstanding accounts receivable totaled $0 as of March 31,
2005 and December 31, 2004. The Company has not experienced any bad debt
from this customer in the past.
During the three months ended March 31, 2005 and 2004, the Company
purchased $261 and $0, respectively, from Solution. There are no
outstanding accounts payable due to Solution as of March 31, 2005 and
December 31, 2004.
Mr. 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, 2005 and 2004, the Company sold
$61,910 and $405,958, respectively, to Systematic Information Ltd.
("Systematic"). There are no outstanding accounts receivable due from
Systematic as of March 31, 2005 and December 31, 2004.
The Company has not experienced any bad debt from this customer in the
past.
During the three months ended March 31, 2005 and 2004, the Company
purchased $0, and $77,486, respectively, from Systematic. There are no
outstanding accounts payable due to Systematic as of March 31, 2005 and
December 31, 2004.
On April 1, 2004, the Company entered into a lease agreement with
Systematic pursuant to which the Company leases one residential property
for Mr. Yang's personal use for a monthly lease payment of $3,205 per
month. The lease agreement for this residency expires on March 31, 2008.
The Company incurred and paid an aggregate rent expense of $9,615 to
Systematic during the three months ended March 31, 2005.
Mr. Wong and the wife of Mr. Yang are the directors and shareholders of
Systematic with a total of 100% interest.
TRANSACTIONS WITH GLOBAL MEGA DEVELOPMENT LIMITED
During the three months ended March 31, 2005 and 2004, the Company sold
$9,250 and $0, respectively, to Global Mega Development Limited ("Global
Mega"). Outstanding accounts receivable totaled $6,482 and $0 as of March
31, 2005 and December 31, 2004, respectively.
The Company has not experienced any bad debt from this customer in the
past.
Mr. Yang has majority equity interest in two entities which own 100% of
Global Mega.
9
TRANSACTIONS WITH TFT TECHNOLOGIES LIMITED
During the three months ended March 31, 2005 and 2004, the Company sold
$1,460 and $0, respectively, to TFT Technologies ("TFT").
The Company has not experienced any bad debt from this customer in the
past. There are no outstanding accounts receivable due from Systematic as
of March 31, 2005 and December 31, 2004.
Mr. Yang and his wife own 100% interest of TFT.
TRANSACTIONS WITH CITY ROYAL LTD.
In August 2004, the Company was in negotiation with The DahSing Bank
Limited (the "DahSing Bank") for an additional amount of its available line
of credit. As a condition to the extension of additional credit to the
Company, DahSing Bank requested additional collateral to secure the
increased amount on the line. In order to meet the increased security
requirement, the Company loaned $611,446 to City Royal Limited to pay off
the mortgage loan on a residential property owned by City Royal Limited and
pledged to DahSing Bank as collateral to secure the Company's borrowings
from DahSing Bank. In consideration thereof, DahSing Bank made available
additional borrowings of HK$10 million (approximately US$1,282,000). The
loan is unsecured and bears no interest. In February 2005, City Royal
Limited sold the residential property and has repaid the loan through
transferring the entire proceeds from the sale of HK$8,000,000
(approximately $1,025,641) to the Company which was required to be
deposited in DahSing Bank as collateral for the Company's line and the cash
is restricted as to withdraw. Until the facility line is terminated with
the bank, the Company cannot withdraw the funds out, therefore, the amount
of $1,025,641 was classified as "Restricted Cash". The excess of the
proceeds over the loan receivable from City Royal Limited in the amount of
$414,195 was recorded as loan payable to related party in the accompanying
condensed consolidated balance sheet as of March 31, 2005.
The loan to City Royal Limited was non-interest bearing, in consideration
of which City Royal Limited did not charge an arrangement fee to the
Company in respect of the security pledge in favor of Dah Sing Bank. The
primary purpose of the loan, from the Company's perspective, was to advance
the business of the Company by enabling it to secure additional lines of
financing in excess of the loan amount from DahSing Bank. The Company
settled this loan in February 2005 and received payment in the full amount
of $611,446. The Company believes that the above-referenced loan does not
violate the general prohibition against loans made by publicly-traded
companies to its directors and executive officers set forth in Section 402
of the Sarbanes-Oxley Act of 2002 ("Section 402") as its primary purpose
was to advance the business of the Company. However, no assurance can be
given that the Securities and Exchange Commission or U.S. federal
government will agree with the Company's position and, in the event such
loan is determined to be a violation of Section 402, the criminal penalties
of the Securities Exchange Act of 1934, as amended, could apply.
Mr. Yang's wife and Mr. Yang's mother-in-law are shareholders of City Royal
Limited with a total of 100% interest.
(4) CONVERTIBLE NOTE PAYABLE:
On December 31, 2003, the Company issued a 12% subordinated convertible
note in the amount of $250,000 to Professional Traders Fund, Inc. ("PTF").
The borrowing amount is due and payable on December 31, 2004. The interest
is payable in arrears on March 31, June 30, September 30, and December 31,
2004. The Company is in default at December 31, 2004 and accordingly,
interest is accrued at a rate of 15% on and after the date of the default,
and the Company is obligated to pay a default penalty equal to 30% of the
unpaid principal and interest. At the option of the debt holder, such
10
unpaid principal, interest and default penalty can be paid with shares of
the Company's common stock at conversion price, which is defined in the
following paragraph.
The holder of this note, at its option, can convert the outstanding balance
of the debt into shares of common stock at the conversion price, which is
defined as 40% of the average closing price of the stock three trading days
immediately prior to the Notice of Conversion date or the interest payment
date or the debt maturity date. The conversion price shall not in any case
exceed $1 per share.
Pursuant to the terms of a Limited Guarantee and Security Agreement, the
debt is guaranteed by 1.2 million shares of the Company's common stock
beneficially owned by three shareholders of which 700,000 are restricted
shares and 500,000 are freely traded shares.
The Company had agreed to file a registration statement for the conversion
shares within 60 days of the funding of the note and agreed to use
reasonable efforts to cause such registration statement to be declared
effective within 150 days of the funding of the note. If the Company fails
to meet either of such timelines, a 1% penalty per month on the funded
amount of the note will be levied against the Company. Accordingly, the
Company is incurring a 1% penalty per month on the funded amount of the
note.
During the year ended December 31, 2004, PTF converted principal note
balance of $100,000 into 222,980 shares of common stock and outstanding
accrued interest of $12,385 into 29,579 shares of common stock through the
shares pledged by three shareholders. Accordingly, the Company's
shareholders issued directly to PTF a total of 252,559 common shares. The
value of the converted principal and accrued interest, totaling $112,385 at
March 31, 2005, has been recorded as a liability to the shareholders in the
accompanying consolidated balance sheet. As of March 31, 2005 and December
31, 2004, the gross outstanding balance of this note totaled $150,000.
In February 2005, PTF filed a lawsuit against the Company for unpaid note
balance of $150,000, unpaid interest of $4,500, default interest of $938,
liquidated damage of $30,000 and default damage of $55,350 and the related
legal cost. The Company is in the process of negotiating a settlement with
PTF and has accrued the maximum liabilities including all the amounts being
claimed by PTF as of March 31, 2005. The accrued interest and penalties
totaling $90,788 are included in the accrued expenses in the accompanying
consolidated balance sheet. Also, PTF is seeking reimbursement for
attorneys' fees and costs; however, since the attorneys' fees and costs are
unknown and cannot be reasonably estimated, the legal cost was not accrued
as of March 31, 2005.
5. BANK FACILITIES
With respect to all of the above referenced debt and credit arrangements,
pursuant to a debenture deed dated April 20, 2001, the Company pledged its
assets as collateral collectively to a bank group in Hong Kong comprised of
Dah Sing Bank Limited, The Hong Kong and Shanghai Banking Corporation
Limited, and DBS Bank (Hong Kong) Ltd. (formerly Overseas Trust Bank
Limited) for all current and future borrowings from the bank group by the
Company. In addition to the above pledged collateral, the debt is also
secured by:
1. a personal guarantee given by Mr. Alan Chung-Lun Yang ("Mr. Yang")
limited to approximately US$6,900,000 to The Hong Kong and Shanghai
Banking Corporation Limited;
2. a fixed cash deposit of $1,025,641 as collateral for loans from Dah
Sing Bank Limited;
3. a personal guarantee given by Mr. Yang for unlimited amount together
with a key man life insurance policy on Mr. Yang for $1,000,000 and a
personal guarantee to Dah Sing Bank Limited.
11
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 84% and 75% of materials to the Company for the three months
ended March 31, 2005 and 2004 respectively. However, there is no written
supply contract between the Company and Samsung HK and, accordingly, there
is no assurance that Samsung HK will continue to supply sufficient
electronic components to the Company on terms and prices acceptable to the
Company or in volumes sufficient to meet the Company's current and
anticipated demand, nor can assurance be given that the Company would be
able to secure sufficient products from other third party supplier(s) on
acceptable terms. 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.
For the three months ended March 31, 2005 and 2004, the Company purchased
from Samsung HK $23,905,780 and $22,690,948, respectively. At March 31,
2005 and December 31, 2004, included in accounts payable, net of rebate
receivable due from Samsung was $2,450,508 and $3,836,804, respectively.
7. COMMITMENT AND CONTINGENCIES
In April 2005, Friedland Capital, Inc. ("Friedland") filed a lawsuit
against the Company for unpaid services in the amount of approximately
$78,000 and fair value of options plus related interest and legal cost. The
Company is in the process of negotiating a settlement with Friedland and
believes the fair value of the services should not exceed $70,000. The
Company has accrued approximately $78,000 for the settlement and related
expenses during the three months ended March 31, 2005 in the accompanying
condensed financial statements, which is the management's best estimate of
the related liability.
In February 2005, Professional Trader Funds ("PTF") filed a lawsuit against
the Company for repayments of the outstanding note payable in the amount of
$150,000 plus interest, penalties and legal fees. See Note 4 for details.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB issued Statement of Financial Accounting
Standards (FAS) No. 132 (Revised 2003) "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This standard replaces FAS-132
of the same title which was previously issued in February 1998. The revised
FAS-132 was issued in response to concerns expressed by financial statement
users about their need for more transparency of pension information. The
revised standard increases the existing GAAP disclosures for defined
benefit pension plans and other defined benefit postretirement plans.
However, it does not change the measurement or recognition of those plans
as required under: FAS-87, "Employers' Accounting for Pensions"; FAS-88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits"; and FAS-106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Specifically,
the revised standard requires companies to provide additional disclosures
about pension plan assets, benefit obligations, cash flows, and benefit
costs of defined benefit pension plans and other defined benefit
postretirement plans. Also, for the first time, companies are required to
provide a breakdown of plan assets by category, such as debt, equity and
real estate, and to provide certain expected rates of return and target
allocation percentages for these asset categories. The revised FAS-132 is
effective for financial statements with fiscal years ending after December
15, 2003 and for interim periods beginning after December 15, 2003. The
adoption of this Statement is not expected to have a material impact on the
Company's financial position, results of operations, or cash flows.
12
In March 2005, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 107 ("SAB 107"). The interpretations
in SAB 107 express views of the staff regarding the interaction between
Statement of Financial Accounting Standards Statement No. 123 (revised
2004), "Share-Based Payment" ("Statement 123(R)") and certain SEC rules and
regulations and provide the staff's views regarding the valuation of
share-based payment arrangements for public companies. In particular SAB
107 provides guidance related to share-based payment transactions with
nonemployees, the transition from public entity status, valuation methods
(including assumptions such as expected volatility and expected term), the
accounting for certain redeemable financial instruments issued under
share-based payment arrangements, the classification of compensation
expense, non-GAAP financial measures, first-time adoption of Statement
123(R) in an interim period, capitalization of compensation cost related to
share-based payment arrangements, the accounting for income tax effects of
share-based payment arrangements upon adoption of Statement 123(R), the
modification of employee share options prior to adoption of Statement
123(R) and disclosures in Management's Discussion and Analysis subsequent
to adoption of Statement 123(R). The Company is in the process of
evaluating whether the adoption of SAB 107 will have a significant impact
on the Company's overall results of operations or financial position.
9. RECLASSIFICATION
Certain reclassifications have been made to the 2004 condensed consolidated
financial statements to conform to the 2005 presentation. These
reclassification has not effected on the previously reported net income.
13
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"), (and Alpha as it is no longer active during the year of 2004
and during three months ended March 31, 2005), is engaged primarily in the
business of distribution of memory products under "Samsung" brandname which
principally comprise DRAM and Graphic RAM, FLASH, SRAM and MASK ROM for the Hong
Kong and Southern China markets.
As of March 31, 2005, ACL had more than 120 active customers in Hong Kong
and Southern China.
ACL is in the mature stage of operations. As a result, the relationships
between sales, cost of sales, and operating expenses reflected in the financial
information included in this document to a large extent represent future
expected financial relationships. Much of the cost of sales and operating
expenses reflected in our financial statements are recurring in nature.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") recently issued Financial
Reporting Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL
ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide additional
disclosure and commentary on their most critical accounting policies. In FRR 60,
the SEC defined the most critical accounting policies as the ones that are most
important to the portrayal of a company's financial condition and operating
results, and require management to make its most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, ACL's most critical accounting
policies include: inventory valuation, which affects cost 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. 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
14
worthiness deteriorates, or ACL's customers' actual defaults exceed ACL's
historical experience, ACL's estimates could change and impact ACL's
reported results.
CONTRACTUAL OBLIGATIONS
The following table presents the Company's contractual obligations as of March
31, 2005 over the next five years and thereafter:
Payments by Period
LESS
THAN 1-3 4-5 AFTER 5
AMOUNT 1 YEAR YEARS YEARS YEARS
-----------------------------------------------------------
Operating Leas 66,346 34,615 31,731 --- ---
Line of credit and notes payable-
short term notes 3,448,837 3,448,837 --- --- ---
Convertible note payable 150,000 150,000 --- --- ---
Long-term Debt 259,412 209,706 49,706 --- ---
-----------------------------------------------------------
Total Contractual Obligations $3,924,595 $3,843,158 $81,437 $ --- $ ---
===========================================================
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 are recognized upon the transfer of legal title of the
electronic components to the customers. At March 31, 2005, ACL had more than 120
active customers.
The quantities of memory products the Company sells fluctuate with changes
in demand from its customers. The prices set by Samsung that the Company must
charge its customers are expected to fluctuate as a result of prevailing
economic conditions and their impact on the market. Since the second half of
year 2003, the Company has experienced increased demand for Samsung memory
products among personal and corporate users in the Hong Kong and Southern China
regions due to a recovery of their economies, in particular for the first
quarter of 2004. The Company believes that increased market demand in Hong Kong
and Southern China exceeds the planned production of most memory products
manufacturers in the world and has resulted in upward pressure in average
pricing of the memory products offered by the Company in these regions. The
Company expects this upward trend in average pricing of the available memory
products in these regions to continue over the next 12 months. Due to
insufficient allocation of memory products from Samsung HK, Atlantic's principal
supplier of Samsung memory products, during the three months ended March 31,
2005, the Company had to source certain Samsung memory products from other
Samsung memory products importers rather than directly from Samsung HK. For PC
field, due to DDR2 memory standard started up and compete with old type DDR,
most of PC makers were torn between the Intel market planning. There was
uncertainty in early first quarter of 2005, Intel aggressively promoted DDR2 but
not successful, therefore, Intel switched back to support DDR+DDR2 combo
products near end of the first quarter of 2005. Overall supply was then slow
down by selection and decision from PC makers. Also, end customers were
hesitated to buy new PC between 3 standards of DDR, DDR +DDR2, and DDR2 only. In
the first quarter of 2004, such different selections do not exist which caused
the demand in PC memory revenue be stronger during the three months ended March
31, 2004 compared to the three months ended March 31, 2005. However, the
revenues are expected to be increased and stabilized for the rest of 2005 as
DDR2 is expected to become the main stream products.
15
For Consumer products, there was a surge of NAND Flash demand for MP3
player, Flash card (Data storage) products, and a growth of 50% of revenue came
as a result. There is forecast of increase in NAND Flash demand through out this
year, and the consumption of density 1G bit and 2G bit will switch to 2G bit and
4G bit as main stream in the second and the third quarters of 2005; and 8G bit
will domain at the fourth quarter of 2005. Sales revenue is expect to increase
significantly in remaining of 2005.
However, the drop of PC memory revenue in the first quarter of 2005
exceeded the gain of NAND Flash, and an overall drop of 3.1% occurred.
COST OF SALES
Cost of sales consists of costs of goods purchased from Samsung HK, and
purchases from other Samsung authorized distributors. Many factors affect the
Company's gross margin, including, but not limited to, the volume of production
orders placed on behalf of its customers, the competitiveness of the memory
products industry and the availability of cheaper Samsung memory products from
overseas Samsung distributors due to regional demand and supply situations.
Nevertheless, the Company's procurement operations are supported by Samsung HK,
although there is no written long-term supply agreement in place between
Atlantic and Samsung HK.
OPERATING EXPENSES
The Company's operating expenses for the three months ended March 31, 2005
and 2004 were comprised of sales and marketing and general and administrative
expenses only.
Sales and marketing expenses consisted primarily of salaries and external
commissions paid to external sales personnel and costs associated with
advertising and marketing activities.
General and administrative expenses include all corporate and
administrative functions that serve to support the Company's current and future
operations and provide an infrastructure to support future growth. Major items
in this category include management and staff salaries, rent/leases,
professional services, and travel and entertainment. The Company expects these
expenses to increase as a result of increased legal and accounting fees
anticipated in connection with the Company's compliance with ongoing reporting
and accounting requirements of the Securities and Exchange Commission and as a
result of anticipated expansion by the Company of its business operations. Sales
and marketing expenses are expected to fluctuate as a percentage of sales due to
the addition of sales personnel and various marketing activities planned
throughout the year.
Interest expense, including finance charges, relates primarily to
Atlantic's short-term and long-term bank borrowings, which the Company intends
to reduce, and amortization of discount on the convertible debenture.
RESULTS OF OPERATIONS
The following table sets forth unaudited statements of operations data for the
three months ended March 31, 2005 and 2004 and should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's financial statements and the related
notes appearing elsewhere in this document.
16
For the Three Months Ended March 31,
------------------------------------
(US$) (Unaudited)
2005 2004
--------------------------
Net sales 100% 100%
Cost of sales 96.64% 95.68%
----- -----
Gross profit 3.36% 4.32%
----- -----
Operating expenses:
Sales and marketing 0.52% 0.05%
General and administrative 1.79% 2.53%
----- -----
Total operating expenses 2.31% 2.58%
Income from operations 1.05% 1.73%
----- -----
Other expenses:
Interest expenses -0.15% -0.47%
Miscellaneous 0.00% 0.00%
----- -----
Total other expenses -0.15% -0.47%
Income taxes 0.23% 0.18%
----- -----
Net income 0.67% 1.09%
===== =====
UNAUDITED THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2004
NET SALES
Sales decreased by $903,621 or 3.1% from $29,549,875 in the three months ended
March 31, 2004 to $28,646,254 in the three months ended March 31, 2005. This
decrease resulted primarily from the recession of IT industry, especially in PC
field and consumer products for the first quarter of 2005.
COST OF SALES
Cost of sales decreased by $589,851, or 2.1%, from $28,273,223 for the three
months ended March 31, 2005 to $27,683,372 for the three months ended March 31,
2004. The decrease in cost of sales decreased in proportion to the decrease of
sales stated above. As a percentage of sales, cost of sales increased slightly
to 96.6% of sales in the three months ended March 31, 2005 from 95.7% of sales
in the three months ended March 31, 2004.
GROSS PROFIT
Gross profit decreased by $313,770 or 24.6%, from $1,276,652 for the three
months ended March 31, 2004 to $962,882 for the three months ended March 31,
2005. The decrease in gross profits resulted primarily from the decrease in
sales by the Company for the three months ended March 31, 2005. The Company's
gross profit % decreased slightly to 3.3% of sales in the three months ended
March 31, 2005 from 4.3% of sales in the three months ended March 31, 2004, as a
result of slight recession of IT industry for the first quarter of 2005.
OPERATING EXPENSES
Sales and marketing expenses increased by $133,221 or 863.1%, from $15,435 for
the three months ended March 31, 2004 to $148,656 for the three months ended
March 31, 2005. This increase was principally attributable to the sales
commission expenses incurred for the first quarter of 2005. As a percentage of
sales, sales and marketing expenses increased to 0.5% of sales for the three
months ended March 31, 2005 when compared to
17
0.05% of sales for the three months ended March 31, 2004. We expect sales and
marketing expenses to increase in fiscal 2005 due to an expected increase in
sales and potential consolidation of Classic upon our acquisition expected to
occur in the year of 2005.
General and administrative expenses decreased $236,628 or 31.6% from
$748,659 in the three months ended March 31, 2004 to $512,031 in the three
months ended March 31, 2005. This decrease was principally attributable to
professional costs for services performed after the Company became a publicly
traded company. Majority of the accounting and legal services were performed
during the three months ended March 31, 2004. We expect the general and
administrative expenses to remain at the current level until the consolidation
of Classic taking place.
Income from operations for the Company was $302,195 for the three months
ended March 31, 2005 compared to an income of $512,558 for the three months
ended March 31, 2004, decrease of income by $210,363 or 41.0%. This decrease was
primarily the result of decrease of gross profit during the first quarter of
2005.
OTHER INCOME (EXPENSES)
Interest expense decreased by $95,732, or 68.9%, to $43,210 in the three
months ended March 31, 2005, from $138,942 in the three months ended March 31,
2004. Excluding $98,296 interest expense incurred in the three months ended
March 31, 2004 related to amortization of discount on convertible note payable
which is non- cash in nature, as a percentage of sales, interest expense was
$40,646 in the three months ended March 31, 2004. Excluding the above-mentioned
amortization of discount on convertible note payable, interest expense of ACL
increased to 0.2% of sales for the three months ended March 31, 2005 from 0.1%
for the three months ended March 31, 2004 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 2005.
The Company's net income decreased by $130,009 or 40.5% from $320,901 for
the three months ended March 31, 2004 to an income of $190,892 for the three
months ended March 31, 2005 due primarily to drop in gross profit.
INCOME TAX
Income tax increased by $13,767 or 26.2% from $52,547 for the three months
ended March 31, 2004 to $66,314 for the three months ended March 31, 2005,
representing, however, an increase in our effective tax rate to 19.8% from 14.1%
for such respective periods. Such increase resulted from the fact that during
the first three months of 2004, a portion of income was attributed to technical
support and procurement services and allocated to Alpha. Such services were
performed out of Hong Kong which was not subject to Hong Kong income tax in
accordance with Hong Kong income tax laws.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have historically been cash
provided by operations, bank lines of credit and credit terms from suppliers.
The Company's principal uses of cash have been for operations and working
capital. The Company anticipates these uses will continue to be its principal
uses of cash in the future. See Note 5 of the Notes to Financial Statements for
a description of the Company's banking arrangements.
The Company may require additional financing in order to reduce its
short-term and long-term debts and implement its business plan. The Company
currently anticipates a need of approximately $3.5 million in additional
financing to repay bank borrowings. In order to meet anticipated demand for
Samsung's memory
18
products in the Southern China market over the next 12 months, the Company
anticipates an additional need of working capital of at least $2.0 million to
finance the cash flow required to finance the purchase of Samsung memory
products from Samsung HK one day in advance of the release of goods from Samsung
HK's warehouse before receiving payments from customers upon physical delivery
of such goods in Hong Kong which, in most instances, takes approximately two
days from the date of such delivery. In certain limited instances, customers of
Atlantic are permitted up to thirty (30) days to make payment for purchased
memory products. As the anticipated cash generated by the Company's operations
are insufficient to fund its growth requirements, it will need to obtain
additional funds. There can be no assurance that the Company will be able to
obtain the necessary additional capital on a timely basis or on acceptable
terms, if at all. The Company's business growth and prospects would be
materially and adversely affected. As a result of any such financing, if it is
an equity financing, the holders of the Company's common stock may experience
substantial dilution. In addition, as its results may be negatively impacted and
thus delayed as a result of political and economic factors beyond the
management's control, the Company's capital requirements may increase.
The following factors, among others, could cause actual results to differ
from those expected caused by: pricing pressures in the industry; a downturn in
the economy in general or in the memory products sector; an unexpected decrease
in demand for Samsung's memory products; a decrease in its ability to attract
new customers; an increase in competition in the memory products market; and the
ability or inability of some of ACL's customers to obtain financing. These
factors or additional risks and uncertainties not known to ACL or that it
currently deems immaterial may impair business operations and may cause ACL's
actual results to differ materially from its historical operating results.
Although ACL believes its expectations of future growth are reasonable, it
cannot guarantee future results, levels of activity, performance or
achievements. ACL is under no duty to update its expectation after the date of
this report to confirm them to actual results or to make changes in its
expectations.
In the three months ended March 31, 2005, net cash provided by operating
activities was $93,896 while in the three months ended March 31, 2004, net cash
used for operating activities was $138,410, an increase of $232,306. Increase
was primarily due to decrease of accounts receivable.
In the three months ended March 31, 2005, net cash used for investing
activities was $418,118 while in the three months ended March 31, 2004, ACL used
$28,506 in investing activities, an increase cash used of $389,612. Increase was
primarily due to the restricted cash held by the bank as collateral for
borrowings.
In the three months ended March 31, 2005, net cash provided by financing
activities was $301,258 while in the three months ended March 31, 2004, net cash
used in financing activities was $117,688, an increase of $418,946. Increase was
primarily due to the borrowings from City Royal Limited as cash collateral for
its facility line.
An essential element of the Company's growth in the future will be to
obtain adequate additional working capital to meet anticipated market demand
from PC users (business and personal) in the southern part of China.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ACL is exposed to market risk for changes in interest rates as its bank
borrowings accrue interest at floating rates of 0.5% to 1.0% over the Best
Lending Rate (currently at 5.5% per annum) prevailing in Hong Kong. For the
three months ended March 31, 2005, ACL did not generate any material interest
income or incurred material interest expense. Accordingly, ACL believes that
changes in interest rates will not have a material effect on its liquidity,
financial condition or results of operations.
19
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) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their
evaluation as of March 31, 2005, our chief executive officer and chief financial
officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b) CHANGES IN INTERNAL CONTROLS. In connection with the evaluation of the
Company's internal controls as of March 31, 2005, the Company's Principal
Executive Officer and Principal Financial Officer have determined that there are
no changes to the Company's internal controls over financial reporting that has
materially affected, or is reasonably likely to materially effect, the Company's
internal controls over financial reporting.
20
PART II
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business we may be subject to litigation from
time to time. There is no past, pending or, to our knowledge, threatened
litigation or administrative action (including litigation or action
involving our officers, directors or other key personnel) which in our
opinion has, had, or is expected to have, a material adverse effect upon
our business, prospects financial condition or operations.
Professional Traders Fund, LLC ("PTF") filed a complaint, dated February 8,
2005, against us in the Southern District of New York alleging breach of
contract for the nonpayment of a 12% subordinated convertible note from us
to PTF in the principal amount of $250,000. PTF seeks $239,850 plus default
interest, costs and attorneys fees. We have not filed an answer to such
action by PTF. PTF has moved in the action to hold us in default.
Friedland Capital, Inc. ("Friedland") filed a complaint, dated May 3, 2005,
against us in the Superior Court of New Castle County, State of Delaware
alleging breach of an agreement whereby Friedland agreed to provide
advisory services for a fee of $15,000 per month. Friedland seeks
$78,225.35 and certain options to purchase shares of common stock. We have
not filed an answer to such action by Friedland. We are currently
negotiating settlement terms.
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 current reports on Form 8-K
during the period from January 1, 2005 to May 20, 2005:
Form 8-K filed January 19, 2005 relating to items 1.01, 2.01 and 9.01.
Form 8-K/A filed April 12, 2005 to the Form 8-K filed January 19, 2005
relating to items 1.02 and 2.01.
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 23, 2005 By: /s/ Chung-Lun Yang
-----------------------------
Chung-Lun Yang
Chief Executive Officer
Date: May 23, 2005 By: /s/ Kenneth Lap-Yin Chan
-----------------------------
Kenneth Lap-Yin Chan
Chief Financial Officer
22