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 June 30, 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 (I.R.S. Employer
of incorporation) Identification No.)
B24-B27,1/F., BLOCK B
PROFICIENT INDUSTRIAL CENTRE, 6 WANG KWUN ROAD
KOWLOON, HONG KONG
(Address of principal executive offices)
(852) 2799-1996
(Registrant's telephone number)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The aggregate market value of the voting common equity held by non-affiliates of
the Registrant as of June 30, 2005 was approximately $980,988 based upon the
closing price of $0.18 of the Registrant's common stock on the OTC Bulletin
Board, as of the last business day of the most recently completed second fiscal
quarter (June 30, 2005). (For purposes of determining this amount, only
directors, executive officers, and 10% or greater stockholders have been deemed
affiliates).
Registrant had 27,829,936 shares of common stock, par value $0.001 per share,
outstanding as of August 18, 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 June 30, 2005
(unaudited) and December 31, 2004 1-2
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2005 (unaudited) and
June 30, 2004 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the three
months and six months ended June 30, 2005 (unaudited) and
June 30, 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 14-20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 22
PART II OTHER INFORMATION 22
Item 1 Legal Proceedings 22
Item 6 Exhibits 22
SIGNATURES 23
-1-
ITEM 1. FINANCIAL STATEMENTS.
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
June 30, 2005 December 31,
(Unaudited) 2004
--------------- --------------
Current assets:
Cash and cash equivalents $ 828,734 $ 512,548
Restriced cash 1,025,641 -
Accounts receivable, net of allowance
for doubtful accounts of $0 for 2005 and 2004 1,628,252 1,088,751
Accounts receivable, related parties 3,249,777 4,727,517
Loan receivable, related party 288,983 930,429
Inventories, net 2,059,325 1,520,117
Other current assets 101,206 80,802
--------------- --------------
Total current assets 9,181,918 8,860,164
PROPERTY, EQUIPMENT AND IMPROVEMENTS, net of
accumulated depreciation and amortization 52,176 55,819
ACQUISITION DEPOSITS 1,000,000 1,000,000
OTHER DEPOSITS 350,000 350,000
--------------- --------------
$ 10,584,094 $ 10,265,983
=============== ==============
The accompanying notes are an integral part of these
condensed consolidated financial statements
1
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
As of As of
June 30, 2005 December 31,
(Unaudited) 2005
-------------- --------------
CURRENT LIABILITIES:
Accounts payable $ 5,376,813 $ 5,065,965
Accrued expenses 287,167 456,676
Loan payable, related party 327,919 -
Lines of credit and notes payable 3,537,759 3,469,632
Current portion of long-term debt 207,337 286,032
Convertible note payabe, net of unamortized discount of
$0 and $150,000 for 2005 and 2004 150,000 150,000
Due to stockholders for converted pledged collateral 112,385 112,385
Income tax payable 124,619 145,050
Other current liabilities 21,237 13,610
-------------- --------------
Total current liabilities 10,145,236 9,699,350
Long-term debt, less current portion 39,922 65,522
-------------- --------------
Total liabilities 10,185,158 9,764,872
-------------- --------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Common stock - $0.001 par value, 50,000,000 shares
authorized, 27,829,936 in 2004 and 2003 issued 27,830 27,830
and outstanding
Additional paid in capital 3,360,405 3,360,405
Amount due from stockholder/director (98,638) (102,936)
Accumulated deficit (2,890,661) (2,784,188)
-------------- --------------
Total stockholders' equity 398,936 501,111
-------------- --------------
$ 10,584,094 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2005 2004 2005 2004
-------------- --------------- --------------- ---------------
NET SALES:
Related parties $ 7,882,140 $ 11,951,269 $ 19,526,862 $ 22,789,932
Other 18,674,004 21,352,937 35,690,002 40,091,127
Less discounts to customers (55,530) (19,839) (69,997) (46,817)
-------------- --------------- --------------- ---------------
26,500,614 33,284,367 55,146,867 62,834,242
COST OF SALES 26,250,016 32,793,791 53,933,388 61,067,014
-------------- --------------- --------------- ---------------
GROSS PROFIT 250,598 490,576 1,213,479 1,767,228
OPERATING EXPENSES:
Selling 100,177 11,148 248,832 26,583
General and administrative 456,764 517,495 957,974 1,266,154
-------------- --------------- --------------- ---------------
INCOME (LOSS) FROM OPERATIONS (306,343) (38,067) 6,673 474,491
OTHER INCOME (EXPENSES):
Interest expense (46,022) (94,674) (100,054) (233,616)
Gain on disposal of property and equipment - 128 - 128
Miscellaneous (1,815) (4,324) (3,592) (4,492)
-------------- --------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (354,180) (136,937) (96,973) 236,511
INCOME TAXES (56,815) (26,332) 9,500 26,215
-------------- --------------- --------------- ---------------
NET INCOME (LOSS) $ (297,365) $ (110,605) $ (106,473) $ 210,296
============== =============== =============== ===============
LOSS PER SHARE - BASIC AND DILUTED $ (0.01) $ (0.00) $ (0.00) $ 0.01
============== =============== =============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED 27,829,936 27,829,936 27,829,936 27,829,936
============== =============== =============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
ACL SEMICONDUCTORS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
Six months ended
June 30, June 30,
2005 2004
------------- -----------
Cash flows provided by (used for) operating activities:
Net income (loss) $ (106,473) $ 210,296
------------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Depreciation and amortization 12,815 10,557
Bad debts 6,200 -
Change in inventory reserve 64,102 46,846
Gain on disposal of property and equipment - (128)
Interest expense from discount amortization of convertible note payable - 157,460
Non-cash compensation to shareholder/director - 200,000
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ASSETS
Accounts receivable - other (545,701) (199,826)
Accounts receivable - related parties 1,477,740 (21,087)
Inventories (603,310) 44,575
Other current assets (20,404) (19,230)
INCREASE (DECREASE) IN LIABILITIES
Accounts payable 310,848 (413,344)
Accrued expenses (169,509) 204,262
Income tax payable (20,431) (4,152)
Other current liabilities 7,627 2,081
------------- -----------
Total adjustments 519,977 8,014
------------- -----------
Net cash provided by operating activities 413,504 218,310
------------- -----------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES:
Loans to stockholders 4,298 (107,655)
Increase of restricted cash (1,025,641) -
Cash receipts for loan repayments by related party 611,446 -
Repayments from related party 30,000
Proceeds received from sale of fixed assets - 128
Purchases of property, equipment and improvements (9,172) (7,569)
------------- -----------
Net cash used for investing activities (389,069) (115,096)
------------- -----------
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)
Six Months Ended
June 30, June 30,
2005 2004
----------- ------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Proceeds on lines of credit and
notes payable 68,127 105,559
Principal payments on long-term debt (104,295) (381,528)
Borrowings from related party 414,195 -
Repayments to related party (86,276) -
----------- ------------
Net cash provided by (used for) financing activities 291,751 (275,969)
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 316,186 (172,755)
CASH AND CASH EQUIVALENTS, beginning of the period 512,548 467,074
----------- ------------
CASH AND CASH EQUIVALENTS, end of the period $ 828,734 $ 294,319
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 43,210 $ 63,771
=========== ============
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 June 30, 2005 and December
31, 2004, and the results of operations for the three-month and six-month
periods ended June 30, 2005 and 2004 and the cash flows for the six-month
periods ended June 30, 2005 and 2004. The results of operations for the
three months and six months ended June 30, 2005 are not necessarily
indicative of the results, which may be expected for the entire year. All
significant intercompany accounts and transactions have been eliminated in
preparation of the condensed consolidated financial statements.
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 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 (LOSS) PER COMMON SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the basic earnings
(loss) per common share is computed by dividing net earnings (loss)
available to common stockholders by the weighted average number of common
shares outstanding. Diluted earnings (loss) per common share is computed
similarly to basic earnings (loss) per common share, except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. For the six
months ended June 30, 2005 and 2004, the Company has 2,121,641 and 581,000
shares of common stock equivalents upon conversion of the convertible note
payable based on the quoted market price at the end of each reporting
years. The common stock equivalents for 2004 were excluded from the
computation of diluted loss per share as their effect it antidilutive.
3. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH MR. YANG
As of June 30, 2005 and December 31, 2004, the Company had an outstanding
receivable from Mr. Yang, the Company"s Chief Executive Officer, majority
shareholder and a director, totaling $98,638 and $102,936 representing
advanced compensation paid. These balances bear no interest and are payable
on demand.
For the three months ended June 30, 2005 and 2004, the Company recorded and
paid $50,000 and $23,077, respectively, to Mr. Yang, and for the six months
ended June 30, 2005 and 2004, the Company recorded $126,923 and 246,153,
respectively, to Mr. Yang as compensation to him.
During the three months ended June 30, 2005 and 2004, and six months ended
June 30, 2005 and 2004, the Company paid rent of $23,077, $23,077, $46,153
and $46,153, respectively, for Mr. Yang"s personal residency as additional
compensation.
TRANSACTIONS WITH CLASSIC ELECTRONICS LTD.
During the three months ended June 30, 2005 and 2004, and six months ended
June 30, 2005 and 2004, the Company sold $5,528,522, $10,030,831,
$16,758,892 and $18,317,761, respectively, of memory products to Classic
Electronics Ltd. ("Classic"). During the three months ended June 30, 2005
and 2004, and six months ended June 30, 2005 and 2004, the Company
purchased Samsung memory products sourced from other authorized
distributors of $2,702,305, $1,261,214, $3,765,066 and $2,042,947,
respectively, from Classic to satisfy part of its demand of insufficient
product supply from Samsung HK. The Company had outstanding accounts
receivable from Classic totaling $3,187,537 and $4,714,057, respectively,
as of June 30, 2005 and December 31, 2004. The Company has not experienced
any bad debt from this customer in the past. Pursuant to a written personal
guarantee agreement, Mr. Yang personally guarantees all the outstanding
accounts receivable from Classic up to $10 million of accounts receivable.
The Company leased one of its facilities and Mr. Yang"s personal residency
from Classic. Lease agreements for the one facility expire on November 30,
2006 while the lease agreement for Mr. Yang"s personal residency expires on
March 31, 2008. Monthly lease payments for these 2 leases totaled $6,684.
The Company incurred and paid rent expense of ACL $21,028, $22,116, 43,144
and $44,231 to Classic during the three months ended June 30, 2005 and 2004
and the six months ended June 30, 2005 and 2004, respectively.
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. until the second half
of 2005. The decision has been agreed to by both entities.
Mr. Ben Wong, a director of the Company, is a director of Classic and a
99.9% shareholder of Classic. The remaining 0.1% of Classic is owned by a
non-related party.
7
TRANSACTIONS WITH ACL TECHNOLOGY PTE LTD.
In 2004, the Company loaned $318,983 to ACLT, which is classified as loans
receivable from related party. During the three months ended June 30, 2005,
this related party repaid $30,000 to the Company. The loan is unsecured,
bears no interest and a balance of $288,983 is outstanding as of June 30,
2005.
Mr. Ben Wong, a director of the Company, is a 99% shareholder of ACLT. The
remaining 1% of ACLT is owned by a non-related party.
TRANSACTIONS WITH KADATCO COMPANY LTD.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company recognized $2,330,574, $16,000,
$2,472,194 and $166,152 from the sale of memory products to Kadatco Company
Ltd. ("Kadatco"), a company owned 100% by Mr. Yang. Outstanding accounts
receivable from Kadatco totaled $62,240 and $0 as of June 30, 2005 and
December 31, 2004. The Company has not experienced any bad debt from this
customer in the past.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company purchased $0 and $0,
respectively, from Kadatco. As of June 30, 2005 and December 2004, there
were no outstanding accounts payable to Kadatco.
Mr. Yang is the sole beneficial owner of the equity interest of Kadatco.
TRANSACTIONS WITH RAMBO TECHNOLOGIES LTD.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company sold $85, $950,412, $165,225 and
$2,945,945, respectively, to Rambo Technologies Ltd. ("Rambo"). Outstanding
accounts receivable totaled $0 and $0 as of June 30, 2005 and December 31,
2004. The Company has not experienced any bad debt from this customer in
the past.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company purchased $451,804, $162,823,
$557,845 and $214,249, respectively, from Rambo Technologies Ltd.
("Rambo"). Outstanding accounts payable due to Rambo totaled $0 and $61,360
as of June 30, 2005 and December 31, 2004, respectively.
Mr. Ben Wong, a director of the Company, is a 60% shareholder of Rambo. The
remaining 40% of Rambo is owned by a non-related party. Mr. Yang, the
Company"s Chief Executive Officer, majority shareholder and a director, is
a director of Rambo.
TRANSACTIONS WITH ARISTO COMPONENTS LTD.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company sold $0,$0, $0 and $90,
respectively, to Aristo Components Ltd. ("Aristo"). There was no
outstanding accounts receivable as of June 30, 2005 and December 31, 2004.
The Company has not experienced any bad debt from this customer in the
past.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company purchased $0, $0, $0 and $500,
respectively, from Aristo. There are no outstanding accounts payable due to
Aristo as of June 30, 2005 and December 31, 2004, respectively.
Mr. Ben Wong, a director of the Company, is a 90% shareholder of Aristo.
The remaining 10% of Aristo is owned by a non-related party. Mr. Yang, the
Company"s Chief Executive Officer, majority shareholder and a director, is
a director of Aristo.
8
TRANSACTIONS WITH ATLANTIC NETCOM LTD.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company sold $$0, $0, $1,652 and $0,
respectively, to Atlantic Netcom Ltd. ("Atlantic Netcom"). Outstanding
accounts receivable totaled $0 as of June 30, 2005 and December 31, 2004,
respectively. The Company has not experienced any bad debt from this
customer in the past.
Mr. Ben Wong, a director of the Company, is a 60% shareholder of Atlantic
Netcom. The remaining 40% of Atlantic Netcom is owned by a non-related
party. Mr. Yang, the Company"s Chief Executive Officer, majority
shareholder and a director, is a director of Atlantic Netcom.
TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company sold $21,772, $0, $55,112 and $0,
respectively, to Solution Semiconductor (China) Ltd. ("Solution").
Outstanding accounts receivable totaled $0 as of June 30, 2005 and December
31, 2004. The Company has not experienced any bad debt from this customer
in the past.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company purchased $21,758, $0, $22,019
and $0, respectively, from Solution. There are no outstanding accounts
payable due to Solution as of June 30, 2005 and December 31, 2004.
Mr. Ben Wong, a director of the Company, is a 99% shareholder of Solution.
The remaining 1% of Solution is owned by a non-related party.
TRANSACTIONS WITH SYSTEMATIC INFORMATION LTD.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company sold $0, $954,026, $61,910 and
$1,359,984, respectively, to Systematic Information Ltd. ("Systematic").
There are no outstanding accounts receivable due from Systematic as of June
30, 2005 and December 31, 2004. The Company has not experienced any bad
debt from this customer in the past.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company purchased $0, $2,112, $0, and
$79,598, respectively, from Systematic. There are no outstanding accounts
payable due to Systematic as of June 30, 2005 and December 31, 2004.
On April 1, 2004, the Company entered into a lease agreement with
Systematic pursuant to which the Company leases one residential property
for Mr. Yang's personal use for a monthly lease payment of $3,205 per
month. The lease agreement for this residency expires on June 30, 2008.
Monthly lease payment for this lease totaled $3,205. The Company incurred
and paid an aggregate rent expense of $9,615 to Systematic during the three
months ended June 30, 2005.
Mr. Ben Wong, a director of the Company, and the wife of Mr. Yang, the
Company"s Chief Executive Officer, majority shareholder and a Director, are
the directors and shareholders of Systematic with a total of 100% interest.
TRANSACTIONS WITH GLOBAL MEGA DEVELOPMENT LTD.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company sold $1,167, $0, $10,417 and $0,
respectively, to Global Mega Development Ltd. ("Global Mega"). There are no
outstanding accounts receivable due from Global Mega as of June 30, 2005
and December 31, 2004. The Company has not experienced any bad debt from
this customer in the past.
9
Mr. Kenneth Chan, a director of the Company, is a 90% shareholder of Globa
Mega. The remaining 10% of Global Mega is owned by a non-related party.
TRANSACTIONS WITH TFT TECHNOLOGIES LTD.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company sold $0, $0, $1,460 and $0,
respectively, to TFT Technologies Ltd. ("TFT"). There are no outstanding
accounts receivable due from TFT as of June 30, 2005 and December 31, 2004.
The Company has not experienced any bad debt from this customer in the
past.
During the three months ended June 30, 2005 and 2004, and the six months
ended June 30, 2005 and 2004, the Company purchased $0, $0, $0, and $0,
respectively, from TFT. There are no outstanding accounts payable due to
TFT as of June 30, 2005 and December 31, 2004.
Mr. Yang, the Company"s Chief Executive Officer, majority shareholder and a
director, and his wife are the directors and shareholders of TFT with a
total of 100% interest.
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 ("City
Royal") 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 sold the residential property and has repaid the loan
through transferring the entire proceeds from the sale of HK$8,000,000
(approximately $1,025,641) to DahSing Bank as collateral for the Company"s
line.
The loan to City Royal is non-interest bearing, in consideration of which
City Royal did not charge an arrangement fee to the Company in respect of
the security pledge in favor of Dah Sing Bank. The primary purpose of the
loan, from the Company's perspective, was to advance the business of the
Company by enabling it to secure additional lines of financing in excess of
the loan amount from DahSing Bank. The Company settled this loan in
February 2005 and received payment in the full amount of $611,446. City
Royal loaned $414,195 to the Company during the three months ended March
31, 2005 and the Company repaid $86,276 to City Royal during the three
months ended June 30, 2005. The outstanding loan balance due to City Royal
was $327,919 as of June 30, 2005. The Company believes that the
above-referenced loan to City Royal in 2004 does not violate the general
prohibition against loans made by publicly-traded companies to its
directors and executive officers set forth in Section 402 of the
Sarbanes-Oxley Act of 2002 ("Section 402") as its primary purpose was to
advance the business of the Company. However, no assurance can be given
that the Securities and Exchange Commission or U.S. federal government will
agree with the Company's position and, in the event such loan is determined
to be a violation of Section 402, the criminal penalties of the Securities
Exchange Act of 1934, as amended, could apply.
Mr. Yang's wife and Mr. Yang's mother-in-law are shareholders of City Royal
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
unpaid principal, interest
10
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.
In addition, since this debt is convertible into equity at the option of
the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and amortized using the
effective interest method over the life of the debt in accordance with
Emerging Issues Task Force No. 00- 27, "Application of Issue No. 98-5 to
Certain Convertible Instruments." Since the intrinsic value of the
beneficial conversion feature exceeds the proceeds of the convertible debt,
the amount of the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds of the convertible debt. Therefore,
the Company recorded a discount of $250,000, the face value of the debt in
2003. The Company fully amortized the discount of $250,000 during the year
ended December 31, 2004.
Pursuant to the terms of a Limited Guarantee and Security Agreement, the
debt is guaranteed by 1.2 million shares of the Company"s common stock
beneficially owned by three shareholders of which 700,000 are restricted
shares and 500,000 are freely traded shares.
The Company has agreed to file a registration statement for the conversion
shares within 60 days of the funding of the note and agreed to use
reasonable efforts to cause such registration statement to be declared
effective within 150 days of the funding of the note. If the Company fails
to meet either of such timelines, a 1% penalty per month on the funded
amount of the note will be levied against the Company. Accordingly, the
Company is incurring a 1% penalty per month on the funded amount of the
note.
During the year ended December 31, 2004, PTF converted principal note
balance of $100,000 into 222,980 shares of common stock and outstanding
accrued interest of $12,385 into 29,579 shares of common stock through the
shares pledged by three shareholders. Accordingly, the Company"s
shareholders issued directly to PTF a total of 252,559 common shares. The
value of the converted principal and accrued interest, totaling $112,385 at
June 30, 2005 and December 2004, has been recorded as a liability to the
shareholders in the accompanying consolidated balance sheet. As of June 30,
2005 and December 31, 2004, the gross outstanding balance of this note was
$150,000.
On May 25, 2005, a Default Judgment was issued by United States District
Court, Southern District of New York that the Company is demanded to pay
PTF totally US$251,088 which comprises of principal amounting to
US$150,000; interest amounting to US$10,541; penalties amounting to
US$85,350; attorney fees amounting to US$4,781; and costs and disbursements
of taking action against the Company amounting to US$416. The Company
accrued the entire claimed amount as of June 30, 2005.
On August 16, 2005, the Company entered into a settlement agreement with
PTF. See Note 8, "Subsequent Event" for details.
5. BANK FACILITIES
With respect to all of the above referenced debt and credit arrangements,
pursuant to a debenture deed dated April 20, 2001, the Company pledged its
assets as collateral collectively to a bank group in Hong Kong comprised of
Dah Sing Bank Limited, The Hong Kong and Shanghai Banking Corporation
Limited, and DBS Bank (Hong Kong) Ltd. for all current and future
borrowings from the bank group by the Company. In addition to the above
pledged collateral, the debt is also secured by:
1. a personal guarantee given by Mr. Yang, limited to
approximately US$6,900,000, to The Hong Kong and Shanghai
Banking Corporation Limited;
11
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.
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 June 30, 2005 and 2004 respectively. However, there is no written
supply contract between the Company and Samsung HK and, accordingly, there
is no assurance that Samsung HK will continue to supply sufficient
electronic components to the Company on terms and prices acceptable to the
Company or in volumes sufficient to meet the Company"s current and
anticipated demand, nor can assurance be given that the Company would be
able to secure sufficient products from other third party supplier(s) on
acceptable terms. 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 June 30, 2005 and 2004, and the six months ended
June 30, 2005 and 2004, the Company purchased $18,937,732, $25,439,913,
$42,843,512 and $48,131,245, respectively, from Samsugn HK. At June 30,
2005 and December 2004, included in accounts payable were $3,090,562 and
$3,836,804, respectively.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 2005, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 107 ("SAB 107"). The interpretations
in SAB 107 express views of the staff regarding the interaction between
Statement of Financial Accounting Standards Statement No. 123 (revised
2004), "Share-Based Payment" ("Statement 123(R)") and certain SEC rules and
regulations and provide the staff's views regarding the valuation of
share-based payment arrangements for public companies. In particular 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).
In May 2005, the FASB issued SFAS No.154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 "
("SFAS No. 154"). SFAS No. 154 requires retrospective application to prior
periods" financial statements of a voluntary change in accounting principle
unless it is impracticable. APB Opinion No. 20 "Accounting Changes,"
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. SFAS No. 154
is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005; however earlier adoption is
permitted for accounting changes and corrections of errors made in fiscal
years beginning after the date of issuance of SFAS No 154. The Company is
in the process of evaluating whether the adoption of SFAS 154 will have a
significant impact on the Company"s overall results of operations or
financial position.
12
8. SUBSEQUENT EVENT:
On August 16, 2005, the Company entered into a settlement agreement with
PTF. The settlement amount of $255,291.50 covers the outstanding loan
balance, unpaid interest and penalties and will be repaid in seven
installments through February 28, 2006.
9. RECLASSIFICATION:
Certain reclassifications have been made to the 2004 condensed consolidated
financial statements to confirm to the 2005 presentation.
13
ITEM 2. MANAGEMENT"S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY HAS INCLUDED IN THIS QUARTERLY REPORT CERTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 CONCERNING THE COMPANY"S BUSINESS, OPERATIONS AND FINANCIAL CONDITION.
"FORWARD-LOOKING STATEMENTS" CONSIST OF ALL NON-HISTORICAL INFORMATION, AND THE
ANALYSIS OF HISTORICAL INFORMATION, INCLUDING THE REFERENCES IN THIS QUARTERLY
REPORT TO FUTURE REVENUE GROWTH, FUTURE EXPENSE GROWTH, FUTURE CREDIT EXPOSURE,
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION, FUTURE
PROFITABILITY, ANTICIPATED CASH RESOURCES, ANTICIPATED CAPITAL EXPENDITURES,
CAPITAL REQUIREMENTS, AND THE COMPANY"S PLANS FOR FUTURE PERIODS. IN ADDITION,
THE WORDS "COULD", "EXPECTS", "ANTICIPATES", "OBJECTIVE", "PLAN", "MAY AFFECT",
"MAY DEPEND", "BELIEVES", "ESTIMATES", "PROJECTS" AND SIMILAR WORDS AND PHRASES
ARE ALSO INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
COMPANY"S FORWARD-LOOKING STATEMENTS DUE TO NUMEROUS KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, INCLUDING, AMONG OTHER THINGS, UNANTICIPATED TECHNOLOGICAL
DIFFICULTIES, THE VOLATILE AND COMPETITIVE ENVIRONMENT FOR DRUG DELIVERY
PRODUCTS, CHANGES IN DOMESTIC AND FOREIGN ECONOMIC, MARKET AND REGULATORY
CONDITIONS, THE INHERENT UNCERTAINTY OF FINANCIAL ESTIMATES AND PROJECTIONS, THE
UNCERTAINTIES INVOLVED IN CERTAIN LEGAL PROCEEDINGS, INSTABILITIES ARISING FROM
TERRORIST ACTIONS AND RESPONSES THERETO, AND OTHER CONSIDERATIONS DESCRIBED AS
"RISK FACTORS" IN OTHER FILINGS BY THE COMPANY WITH THE SEC INCLUDING ITS ANNUAL
REPORT ON FORM 10-K. SUCH FACTORS MAY ALSO CAUSE SUBSTANTIAL VOLATILITY IN THE
MARKET PRICE OF THE COMPANY"S COMMON STOCK. ALL SUCH FORWARD-LOOKING STATEMENTS
ARE CURRENT ONLY AS OF THE DATE ON WHICH SUCH STATEMENTS WERE MADE. THE COMPANY
DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING
STATEMENT TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE ON WHICH ANY SUCH
STATEMENT IS MADE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
ANY REFERENCE TO "ACL", THE "COMPANY" OR THE "REGISTRANT", "WE", "OUR" OR
"US" MEANS ACL SEMICONDUCTORS INC. AND ITS SUBSIDIARIES.
OVERVIEW
CORPORATE BACKGROUND
The Company, through its wholly-owned subsidiaries Atlantic Components
Limited, a Hong Kong corporation ("Atlantic") and Alpha Perform Technology
Limited ("Alpha"), and Alpha as it is no longer active, in this three months
ended June 30, 2005, is engaged primarily in the business of distribution of
memory products under "Samsung" brandname which principally comprise DRAM and
Graphic RAM, FLASH, SRAM and MASK ROM for the Hong Kong and Southern China
markets.
As of June 30, 2005, ACL had more than 120 active customers in Hong Kong
and Southern China.
ACL is in the mature stage of operations. As a result, the relationships
between sales, cost of sales, and operating expenses reflected in the financial
information included in this document to a large extent represent future
expected financial relationships. Much of the cost of sales and operating
expenses reflected in our financial statements are recurring in nature.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") recently issued
Financial Reporting Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE
ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company"s financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, ACL"s most critical
accounting policies include: inventory valuation, which affects cost of sales
and gross margin; policies for revenue recognition and allowance for doubtful
accounts. The methods,
14
estimates and judgments ACL uses in applying these most critical accounting
policies have a significant impact on the results ACL reports in its
consolidated financial statements.
INVENTORY VALUATION. ACL"s policy is to value inventories at the lower of
cost or market on a part-by-part basis. This policy requires ACL to make
estimates regarding the market value of our inventories, including an assessment
of excess or obsolete inventories. ACL determines excess and obsolete
inventories based on an estimate of the future demand for its products within a
specified time horizon, generally 12 months. The estimates ACL uses for demand
are also used for near-term capacity planning and inventory purchasing and are
consistent with ACL"s revenue forecasts. If ACL demands forecast is greater than
ACL"s actual demand it may be required to take additional excess inventory
charges, which will decrease gross margin and net operating results in the
future.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. ACL maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of ACL"s customers to
make required payments. ACL"s allowance for doubtful accounts is based on ACL"s
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, ACL"s history of bad debts, and the general condition of
the industry. If a major customer"s credit worthiness deteriorates, or ACL"s
customers" actual defaults exceed ACL"s historical experience, ACL"s estimates
could change and impact ACL"s reported results.
CONTRACTUAL OBLIGATIONS
The following table presents the Company's contractual obligations as of June
30, 2005 over the next five years and thereafter:
Payments by Period
------------------------------------------------------------------------------------------------------------
LESS
THAN 1-3 4-5 AFTER 5
AMOUNT 1 YEAR YEARS YEARS YEARS
------ ------ ----- ----- -----
Operating Leases 78,825 22,523 56,302 --- ---
Line of credit and notes payable --
short-term 3,537,759 3,537,759 --- ---
Convertible note payable 150,000 150,000 --- ---
Long-term Debt 247,259 207,337 39,922 --- ---
--------------------------------------------------------------
Total Contractual Obligations 4,013,843 3,917,619 96,224 $ --- $ ---
==============================================================
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 June 30, 2005, ACL had more than 120
active customers.
The quantities of memory products the Company sells fluctuate with changes
in demand from its customers. The prices set by Samsung that the Company must
charge its customers are expected to fluctuate as a result of prevailing
economic conditions and their impact on the market.
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
15
as main stream in the third quarters of 2005; and 8G bit will domain at the
fourth quarter of 2005. Sales revenue is expected to increase significantly in
remaining of 2005.
The market is expected to grow from the third quarter of 2005. Big OEM
companies, such as Dell, IBM, etc. have already set up business plans for third
and fourth quarters of 2005. Purchase activities and orders flood into memory
makers gradually. Though there may not be any instant impact on production, this
would be the right time to keep inventories to a high level in order to meet
future demand or usage.
General demand of IC components grew rapidly in July 2005. We expect the
upwards trend be lasting to December 2005. In the second quarter of 2005, most
memory manufacturers do not release inventories because of low unit selling
prices due to slow overall market. General performance of the industry was poor
during the second quarter of 2005. The market condition is expected to improve
significantly in the second half of 2005 which will substantially increase the
Company"s gross margin and net profit for the year of 2005.
Demands for flash components is expected to exceed supplies in the second
of 2005, especially for products such as MP3, PMP, storage, etc. and such demand
is expected to drive the prices up. Supplies of these products are expected to
be stabilized by the end of 2005.
As Intel releases new cheap version M/B chipset i915PL/GL and stops output
of i865. The market has clear direction on DDR2-533/667/800 technology, DDR2
memory products demand and price will rise together in coming quarters. Since
output of old type DDR-266/333/400 memory will become less and less, they are
expected to be phrased out of the market in the near future.
Low density traditional SDRAM will become active again. Because of the end
of life of 16Mbit, most consumer products and hard disk (PC usage) will be
shifted to use 64Mbit. 64Mbit demand will then increase rapidly in the near
future.
Overall market is expected to grow after the slow season in the second
quarter, the opportunity of business growth in the last two quarters of 2005 is
obvious. The Company expects a 25% increase of sales in the second half of 2005
compared to the sales for of the first two quarters of 2005.
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 six months ended
June 30, 2005 and 2004 were comprised of sales and marketing and general and
administrative expenses only.
Sales and marketing expenses consisted primarily of and external
commissions paid to external sales personnel and costs associated with
advertising and marketing activities.
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
16
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 and six months ended June 30, 2005 and 2004 and should be read
in conjunction with the "MANAGEMENT"S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the Company"s financial statements and
the related notes appearing elsewhere in this document.
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ----------- ------------- -------------
(Unaudited)
Net Sales 100% 100% 100% 100%
Cost of sales 99.05% 98.53% 97.8% 97.19%
Gross Profit 0.95% 1.47% 2.20% 2.81%
Operating expenses:
Sales and marketing 0.38% 0.03% 0.45% 0.04%
General and administrative 1.68% 1.55% 1.74% 2.01%
Total operating expenses 2.06% 1.58% 2.19% 2.05%
Income (loss) from operations -1.11% -0.11% 0.01% 0.76%
Other expenses:
Interest expenses -0.21% -0.28% -0.18% -0.37%
Miscellaneous -0.01% -0.02% -0.01% -0.01%
Income (loss) before income taxes -1.33% -0.41% -0.18% 0.38%
Income taxes expenses (benefits) -0.21% -0.08% 0.02% 0.05%
Net income (loss) -1.12% -0.33% -0.20% 0.33%
UNAUDITED THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2004
NET SALES
Net sales decreased by $6,783,754 or 20.4% from $33,284,367 in the three
months ended June 30, 2004 to $26,500,613 in the three months ended June 30,
2005. This decrease resulted primarily from the recession of IT industry,
especially in PC field and consumer products for the second quarter of 2005.
COST OF SALES
Cost of sales decreased by $6,543,775 or 20.0% from $32,793,791 in the
three months ended June 30, 2004 to $26,250,016 in the three months ended June
30, 2005. The cost of sales decreased in proportion to the decrease of net
sales.
17
GROSS PROFIT
Gross profit decreased by $239,979 or 48.9% from $490,576 in the three
months ended June 30, 2004 to $250,598 in the three months ended June 30, 2005.
The decrease in gross profit was of the same reason of net sales as stated
above. The gross profit % reduced slightly by 0.5% from 1.5% in the three months
ended June 30, 2005 to 1.0% in the three months ended June 30, 2005. The Company
adopted the policy of sacrifice of gross profit to maximize sales in order to
continue to expand its market share.
OPERATING EXPENSES
Selling and marketing expenses increased by $89,029 or 798.6% from $11,148
in the three months ended June 30, 2004 to $100,177 in the three months ended
June 30, 2005. The increase was primarily attributable to the sales commission
expenses incurred for the second quarter of 2005.
General and administrative expenses decreased by $60,731 or 11.7% from
$517,495 in the three months ended June 30, 2004 to $456,764 in the three months
ended June 30, 2005. This decrease was principally attributable to professional
costs for services performed after the Company became a publicly trade company.
Majority of the accounting and legal services were performed during the three
months ended June 30, 2004. The Company anticipates the general and
administrative expenses to remain at the current level until the consolidation
of Classic taking place.
LOSS FROM OPERATIONS
Loss from operations decreased by $268,276 or 704.7% from $38,067 in the
three months ended June 30, 2004 to $306,343 in the three months ended June 30,
2005. The decrease was mainly due to decrease in gross profit which as mentioned
above decreased by $239,978.
OTHER INCOME (EXPENSES)
Interest expense decreased by $48,652 or 51.4% from $94,674 in the three
months ended June 30, 2004 to $46,022 in the three months ended June 30, 2005.
Excluding $59,164 interest expense incurred in the three months ended June 30,
2004 related to amortization of discount on convertible note payable which is
non-cash in nature, interest expense was $35,510 in the three months ended June
30, 2004. After deducting the said $59,164, interest expense increased by
$10,512. Such increase is mainly due to increase in interest rates.
INCOME TAX
Income tax benefit increased by $30,483 or 115.8% from $26,332 in the three
months ended June 30, 2004 to $56,815 in the three months ended June 30, 2005
due to higher loss during the three months ended June 30, 2005.
NET LOSS
Net loss increased by $186,760 or 168.9% from a loss of $110,605 in the
three months ended June 30, 2004 to $297,364 in the three months ended June 30,
2005. It is mainly due to decrease in gross profit. The Company anticipates that
its sales for the third and fourth quarters of year 2005 will increase back to
normal level as in last year because the market is expected to grow for the
remaining quarters of year 2005.
UNAUDITED SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2004
NET SALES
Net sales decreased by $7,687,375 or 12.2% from $62,834,242 in the six
months ended June 30, 2004 to $55,146,868 in the six months ended June 30, 2005.
This decrease resulted primarily from the recession of IT industry, especially
in PC field and consumer products for the first half year of 2005.
18
COST OF SALES
Cost of sales decreased by $7,133,626 or 11.7% from $61,067,014 in the six
months ended June 30, 2004 to $53,933,388 in the six months ended June 30, 2005.
The cost of sales decreased in proportion to the decrease of net sales.
GROSS PROFIT
Gross profit decreased by $553,749 or 31.3% from $1,767,228 in the six
months ended June 30, 2004 to $1,213,479 in the six months ended June 30, 2005.
The decrease in gross profit was of the same reason of net sales as stated
above. The gross profit % reduced slightly by 0.6% from 2.8% in the six months
ended June 30, 2004 to 2.2% in the six months ended June 30, 2005. The Company
adopted the policy of sacrifice of gross profit to maximize sales in the
recessive economies.
OPERATING EXPENSES
Selling and marketing expenses increased by $222,249 or 836.1% from $26,583
in the six months ended June 30, 2004 to $248,832 in the six months ended June
30, 2005. The increase was primarily attributable to the sales commission
expenses incurred for the first half year of 2005.
General and administrative expenses decreased by $308,180 or 24.3% from
$1,266,154 in the six months ended June 30, 2004 to $957,974 in the six months
ended June 30, 2005. This decrease was principally attributable to professional
costs for services performed after the Company became a publicly trade company.
Majority of the accounting and legal services were performed during the six
months ended June 30, 2004. The Company expects the general and administrative
expenses to remain at the current level until the consolidation of Classic
taking place.
INCOME FROM OPERATIONS
Income from operations decreased by $467,818 or 98.6% from $474,491 in the
six months ended June 30, 2004 to $6,673 in the six months ended June 30, 2005.
The decrease was mainly due to decrease in gross profit which as mentioned above
decreased by $553,749.
OTHER INCOME (EXPENSES)
Interest expense decreased by $133,562 or 57.2% from $233,616 in the six
months ended June 30, 2004 to $100,054 in the six months ended June 30, 2005.
Excluding $157,460 interest expense incurred in the three months ended June 30,
2004 related to amortization of discount on convertible note payable which is
non-cash in nature, interest expense was $76,156 in the six months ended June
30, 2004. After deducting the said $157,460, interest expense increased by
$23,898. Such increase is mainly due to interest expense to Professional Traders
Fund, LLC and increase in interest rates.
INCOME TAX
Income tax decreased by $16,715 or 63.8% from $26,215 in the six months
ended June 30, 2004 to $9,500 in the six months ended June 30, 2005 due to loss
incurred for the six months ended June 30, 2005.
NET INCOME (LOSS)
Net income decreased by $316,769 or 150.6% from a profit of $210,296 in the
six months ended June 30, 2004 to a loss of $106,473 in the six months ended
June 30, 2005. It is mainly due to decrease in gross profit together with
reduction of operating and interest expenses. The Company anticipates that its
sales for the third and fourth quarters of year 2005 will increase back to
normal level as in last year because the market is expected to grow for the
remaining quarters of year 2005.
19
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 $3.0 million in additional financing to repay
long-term bank borrowings. In order to meet anticipated demand for Samsung"s
memory products in the Southern China market over the next 12 months, the
Company anticipates an additional need of working capital of at least $2.0
million to finance the cash flow required to finance the purchase of Samsung
memory products from Samsung HK one day in advance of the release of goods from
Samsung HK"s warehouse before receiving payments from customers upon physical
delivery of such goods in Hong Kong which, in most instances, takes
approximately two days from the date of such delivery. In certain limited
instances, customers of Atlantic are permitted up to thirty (30) days to make
payment for purchased memory products. As the anticipated cash generated by the
Company"s operations are insufficient to fund its growth requirements, it will
need to obtain additional funds. There can be no assurance that the Company will
be able to obtain the necessary additional capital on a timely basis or on
acceptable terms, if at all. The Company"s business growth and prospects would
be materially and adversely affected. Additionally, if such financing was an
equity financing, the holders of the Company"s common stock 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 six months ended June 30, 2005, net cash provided by operating act
ivities was $413,504 while in the six months ended June 30, 2004, net cash
provided by operating activities was $218,310, an increase of $195,194. Increase
was primarily due to decrease of accounts receivable which was partially offset
by increase of accounts payable.
In the six months ended June 30, 2005, net cash used for investing
activities was $389,069 while in the six months ended June 30, 2004, ACL used
$115,096 in investing activities, an increase cash used of $273,973. Increase
was primarily due to the restricted cash held by the bank as collateral for
borrowings which was partially offset by loan received from a related party.
In the six months ended June 30, 2005, net cash provided by financing
activities was $291,751 while in the six months ended June 30, 2004, net cash
used for financing activities was $275,696, an increase of $567,447. 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.
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 6.5%per annum) prevailing in Hong Kong. For the six
months ended June 30, 2005 and the six months ended June 30, 2004, Atlantic did
not generate any material interest income (expense). Accordingly, ACL believes
that changes in interest rates will not have a material effect on its liquidity,
financial condition or results of operations.
IMPACT OF INFLATION
ACL believes that its results of operations are not significantly impacted
by moderate changes in inflation rates as it expects it will be able to pass
these costs by component price increases to its customers.
SEASONALITY
ACL has not experienced any material seasonality in sales fluctuations over
the past 2 years in the memory products markets.
ITEM 4. CONTROLS AND PROCEDURES
The Company has established disclosure controls and procedures to ensure
that material information relating to the Company, including Atlantic, is made
known to the officers who certify the Company's financial reports and to other
members of senior management and the Board of Directors.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation
as of June 30, 2005, our chief executive officer and chief financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")) are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROLS. In connection with the evaluation of the
Company's internal controls as of June 30, 2005, the Company's Principal
Executive Officer and Principal Financial Officer have determined that there are
no changes to the Company's internal controls over financial reporting that has
materially affected, or is reasonably likely to materially effect, the Company's
internal controls over financial reporting.
The regulations implementing Section 404 of the Sarbanes-Oxley Act of 2002
require an assessment of the effectiveness of the Company"s internal controls
over financial reporting beginning with our Annual Report on Form 10-K for the
fiscal year ending September 30, 2006. The Company"s independent auditors will
be required to confirm in writing whether management"s assessment of the
effectiveness of the internal controls over financial reporting is fairly stated
in all material respects, and separately report on whether they believe
management maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2006.
As part of the assessment of the Company"s internal controls in connection
with the process required by Section 404 of the Sarbanes-Oxley Act of 2002,
management intends to continue to review, evaluate and strengthen our controls
and processes. Management cannot state that material weaknesses in internal
controls will not be determined. Management also cannot state that the process
of evaluation and the auditor"s attestation will be completed on time. If a
material weakness is discovered, corrective action may be time consuming, costly
and further divert the attention of management. The disclosure of a material
weakness, even if quickly remedied, could reduce the market"s confidence in the
Company"s financial statements and harm the Company"s stock price, especially if
a restatement of financial statements for past periods is required.
21
PART II
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business the Company may be subject to litigation
from time to time. There is no past, pending or, to the Company"s
knowledge, threatened litigation or administrative action (including
litigation or action involving the Company"s officers, directors or other
key personnel) which in the Company"s opinion has, had, or is expected to
have, a material adverse effect upon its business, prospects financial
condition or operations.
Professional Traders Fund, LLC ("PTF") had filed a complaint, dated
February 8, 2005, against the Company in the Southern District of New York
alleging breach of contract for the nonpayment of a 12% subordinated
convertible note from the Company to PTF in the principal amount of
$250,000. PTF was seeking $239,850 plus default interest, costs and
attorneys fees. On August 16, 2005, the Company and PTF entered into a
settlement agreement whereby the Company agreed to pay PTF pursuant to a
payment schedule a total of $255,291.50, which amount includes all post
judgment legal expenses and payment by PTF of $1,400 to the stock transfer
agent.
Friedland Capital, Inc. ("Friedland") filed a complaint, dated May 3, 2005,
against the Company 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 was
seeking $78,225.35 and certain options to purchase shares of common stock.
In June 2005, the complaint was settled pursuant to a mutual release
agreement whereby by the Company paid Friedland $55,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q
(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.
(b) Reports on Form 8-K. The Company filed the following current reports on Form
8-K during the second quarter of 2005 through the date hereof:
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.
Form 8-K filed June 1, 2005 relating to item 2.03.
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: August 19, 2005 By: /s/ Chung-Lun Yang
-------------------------------------
Chung-Lun Yang
Chief Executive Officer
Date: August 19, 2005 By: /s/ Kenneth Lap-Yin Chan
-------------------------------------
Kenneth Lap-Yin Chan
Chief Financial Officer/
Principal Accounting Officer
23