-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JhXKFUzfpWgAJ5D5nyui33STZJn7eqdRPPs7DnBY0+nhiqYqc08Yks9wNKjalVaW yfYl1dKAjYmvu42hjVGC/Q== 0001026700-97-000014.txt : 19970127 0001026700-97-000014.hdr.sgml : 19970127 ACCESSION NUMBER: 0001026700-97-000014 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970124 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAM SW INC CENTRAL INDEX KEY: 0001030860 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 621563911 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-12G SEC ACT: 1934 Act SEC FILE NUMBER: 000-22049 FILM NUMBER: 97510189 BUSINESS ADDRESS: STREET 1: UNIT 302-303A, 3RD FL, FU HANG BUILDING STREET 2: NO 1 HOK YUEN ST EAST CITY: KOWLOON, HONG KONG STATE: K3 BUSINESS PHONE: 01185227663688 MAIL ADDRESS: STREET 1: UNIT 302-303A, 3RD FL, FU HANG IND. BLDG STREET 2: NO 1 HOK YUEN STREET EAST CITY: KOWLOON, HONG KONG STATE: K3 10-12G 1 FORM 10-12G SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 S.W. LAM, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Nevada 62-1563911 - --------------------------------- ------------------------------------ (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) Unit 302-303A, 3rd Floor, Fu Hang Industrial Building No. 1 Hok Yuen Street East, Kowloon, Hong Kong ----------------------------------------------------- (Address of principal executive offices)(Zip code) Registrant's telephone number, including area code: (852) 2766 3688 Securities to be registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which to be so registered each class is to be registered ------------------- ------------------------------ None None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value ----------------------------- (Title of class) The Company operates through its various subsidiaries, all of which are located outside of the United States. Unless otherwise indicated or the context otherwise requires, the term Company refers collectively to S.W. Lam, Inc. and its subsidiaries. All references to China or the PRC are to the Peoples' Republic of China. The Company's financial statements are presented in United States Dollars ("US$"). The Company's sales are principally in Hong Kong Dollars ("HK$") and Renminbi ("Rmb"). At December 20, 1996, the prevailing exchange rate of US$ into HK$ and Rmb was US$1.00 = HK$7.733 and US$1.00 = Rmb 8.297. ITEM 1. BUSINESS. S.W. Lam, Inc. (the "Company"), a Nevada corporation, through its subsidiaries, is engaged in the design, manufacturing and marketing of gold and silver jewelry, gold and silver decorative items, and diamond and color stone jewelry and decorative products. All of the Company's operations are located in Hong Kong and the People's Republic of China (the "PRC"). HISTORY AND DEVELOPMENT OF THE COMPANY The Company's business began with the formation by Lam Sai Wing ("Mr. Lam") of an unincorporated sole proprietorship to manufacture and market jewelry at facilities in Dongguan, PRC (the "Dongguan Facility") in 1983. Subsequently, in 1987, Shenzhen Hang Fung Jewellery Factory, a sole proprietorship formed by Mr. Lam, established a modern manufacturing facility in Shenzhen, PRC (the "Shenzhen Facility"). In 1990, Beijing Hang Fung Jewellery Factory, a sole proprietorship formed by Mr. Lam, entered into a sino-foreign joint venture to manufacture and market jewelry in Beijing, PRC (the "Beijing Facility"). In 1991, Mr. Lam transferred operations of the Dongguan Facilities to a third party. In November of 1994, Mr. Lam incorporated Hang Fung Jewellery Company Limited ("Hang Fung Jewellery") in Hong Kong and transferred operations of the Shenzhen Facility and the Beijing Facility to Hang Fung. In October of 1995, Mr. Lam and his wife, Lam Chan Yam Fai, Jane ("Ms. Chan"), transferred ownership of Hang Fung and Kai Hang Jewellery Company Limited, a Hong Kong corporation engaged in jewelry marketing and owned by Mr. Lam and Ms. Chan ("Kai Hang Jewellery"), to Quality Prince Limited, a holding company organized in the British Virgin Islands and owned by Mr. Lam and Ms. Chan ("Quality Price")(Hang Fung Jewellery and Kai Hang Jewellery are collectively referred to herein as the "Hang Fung Group"). In December of 1996, the Hang Fung Group completed a "reverse acquisition" with S.W. Lam, Inc. pursuant to which the companies comprising the Hang Fung Group, representing all of the jewelry manufacturing and marketing operations controlled by Mr. Lam and Ms. Chan, became wholly owned subsidiaries of the Company. S.W. Lam, Inc. was originally incorporated in the State of Tennessee under the name New Wine, Inc. ("New Wine"). New Wine was formed in April of 1994 to develop, finance and produce record albums, cassette tapes and compact discs and videotape and television productions for domestic distribution and foreign licensing; to operate a music publishing firm; and, to engage generally in the business of providing personal business management services for professional entertainers. New Wine completed an offering of common stock in January of 1995 selling 225,000 shares for $45,000 pursuant to Rule 504 under the Securities Act of 1933, as amended (the "Act"). The operations of New Wine proved unsuccessful and New Wine began efforts to acquire or combine with an operating business. Pursuant to discussions with the Hang Fung Group, New Wine reincorporated in the State of Nevada and changed its name to S.W. Lam, Inc. in October of 1996. In December of 1996, New Wine entered into an agreement with the shareholders of Quality Prince, Mr. Lam and Ms. Chan, pursuant to which New Wine agreed to issue 10,500,000 shares of common stock and 100,000 shares of Series A Preferred Stock in exchange for 100% of the issued and outstanding shares of Quality Prince (the "Exchange"). Following the Exchange, management of the Hang Fung Group assumed control of management of the Company and the Company, through its subsidiaries, the Hang Fung Group, is continuing the operations of the Hang Fung Group. 2 OVERVIEW The Company's operations include the manufacturing and sale of gold and silver jewelry and ornamental items in the PRC and Hong Kong. Because of regulatory issues relating to operations and the marketing of gold and silver in the PRC, the Company's production and marketing activities in the PRC are conducted pursuant to a series of agreements with entities having operations or appropriate licenses in the PRC. The principal agreements in that regard are (1) a sub- contracting agreement with Shenzhen Crafts Hang Fung Jewellery Factory ("Shenzhen Crafts") pursuant to which gold and silver products are produced for export, (2) an agreement with Yiu Ping Gold and Silver Manufacturing Factory ("Yiu Ping") pursuant to which Yiu Ping sells gold and silver products on the Company's behalf in the PRC, (3) an Agreement for Jewellery Assembling with China Jewellery Import & Export Co. ("China Jewellery") pursuant to which China Jewellery is responsible for the assembly of gold and silver assembly operations at facilities jointly operated with the Company in Beijing, and (4) a Sales Agency Agreement with China Jewellery pursuant to which China Jewellery acts as the Company's agent in selling jewelry in the PRC in exchange for an agency fee and the Company acts as China Jewellery's agent in selling jewelry in Hong Kong in exchange for an agency fee. Shenzhen Crafts, Yiu Ping and China Jewellery are each state-owned enterprises organized under the laws of the PRC and holding requisite licenses to import, export and sell gold and silver products in the PRC. The Company presently markets its products primarily in Hong Kong and the PRC. The Company plans to expand its business in the near term by (1) expanding the marketing of its products to include the Middle East and Europe, and (2) expanding production and marketing capabilities in the PRC through the construction and relocation of its current manufacturing operations in Beijing to an expanded modern manufacturing facility presently under construction adjacent to the existing manufacturing operations in Beijing. PRODUCTS The Company's products consist of a broad array of gold and silver jewelry products, gold and silver decorative items, semi-precious stone jewelry and other decorative products. Examples of the Company's products include, but are not limited to, bracelets, chains, charms, rings, earrings, ornamental plaques, serving sets and decorative pieces. The Company classifies its products in four distinct segments: (1) fine gold products, consisting of jewelry and ornamental products crafted from 24 carat gold, (2) other gold products, consisting of a broad array of lesser value electro-form casted fine gold jewelry including jewelry incorporating semi-precious stones, (3) non-gold/silver ornamental products, consisting of serving sets, plaques and other decorative or ornamental items crafted from materials other than gold or silver, and (4) silver products, consisting of a broad array of jewelry and decorative or ornamental items otherwise falling within one of the other product segments but crafted from silver. The Company's products range in wholesale price from approximately $10 to over $100,000. The mean selling price of the Company's products is between $200 and $220. The following table illustrates the typical range and average wholesale price of the Company's products by segment:
WHOLESALE AVERAGE PRICE RANGE WHOLESALE PRICE ------------- --------------- Fine gold products................... $20 to $1,000 $300 Other gold products.................. $10 to $1,000 $500 Ornamental products.................. $50 to $1,000 $500 Silver products...................... $2 to $100 $10
3 For the two years ended March 31, 1996, sales by segment and major product line and as a percentage of sales (including subcontracting fees) were as follows:
1996 1995 --------------- -------------- Amount Percent Amount Percent ($'000) ($'000) Fine gold products Bracelets........................... $ 3,762 14 % $3,368 14% Chains.............................. 3,619 13 3,269 14 Rings............................... 4,501 17 4,302 18 Earrings............................ 1,926 7 1,690 7 Ornamental.......................... 5,000 19 4,206 18 Other gold products Bracelets........................... 333 1 189 1 Chains.............................. 502 2 282 2 Rings............................... 1,326 5 726 3 Earrings............................ 982 3 532 2 Other............................... 191 1 142 1 Silver products Bracelets........................... 1,420 5 1,389 6 Chains.............................. 1,438 5 1,427 6 Rings............................... 946 4 921 4 Earrings............................ 485 2 471 2 Ornamental.......................... 437 2 466 2
PRODUCT DESIGN AND DEVELOPMENT The Company maintains an in-house product design and development team in its Hong Kong offices consisting of approximately 10 staff members. The Company's product design staff continuously monitors jewelry trends and consumer preferences and is engaged in ongoing efforts to design new products consistent with such trends and preferences. After conceiving of a new product, the Company's design staff will produce detailed drawings and molds for use in actual production. The Company's design staff currently produces approximately 100 new products annually. PURCHASING The principal materials in the manufacture and assembly of the Company's products are gold, silver and color stones which typically represent approximately 50% to 70% of the total costs of producing the Company's gold products and 30% to 50% of the total costs of producing the Company's silver products. The Company purchases gold primarily from suppliers in South Africa and Hong Kong. Silver purchases are primarily from suppliers in Hong Kong. Color stones are purchased primarily from suppliers in Burma and Thailand. The Company maintains no long term contractual arrangements to purchase materials. Although purchases of raw materials are made from a relatively small number of suppliers, the Company believes there are numerous alternative sources for all materials and products, and that the failure of any principal supplier would not have a material adverse effect on operations or the Company's financial condition. To date, the Company has not experienced any difficulty in securing product. The Company does not presently engage in any hedging activities with respect to possible fluctuations in the prices of raw materials. The Company believes that the risk of not engaging in such activities is minimal, since historically the Company has been able to adjust prices as material fluctuations have occurred. 4 MANUFACTURING AND ASSEMBLY The Company's principal manufacturing and assembly operations are undertaken at facilities located in Shenzhen and Beijing, PRC pursuant to agreements with Shenzhen Crafts and China Jewellery. The Company's largest manufacturing operations take place at the Company's Beijing Facility which is jointly operated with China Jewellery. Pursuant to an Agreement for Jewellery Assembling entered into in November of 1994, formalizing existing manufacturing operations which commenced in 1992, China Jewellery has provided the use of the existing Beijing Facility as well as a labor supply, water, electricity and other support services and the Company has provided equipment, tools, technical expertise and materials necessary to carry on jewelry manufacturing operations. Under the agreement, China Jewellery is responsible for actual jewelry assembly and manufacturing and the Company provides raw materials and technical expertise. The Company pays assembling fees to China Jewellery in an amount equal to HK$1.00 per gram for fine gold jewelry, HK$3.00 per gram for karat-gold jewelry and HK$0.60 per gram for silver jewelry and gem assembling. The Agreement also provides that China Jewellery may perform jewelry manufacturing and assembly operations for other parties using the Beijing Facility provided that such operations do not interfere with the manufacturing and assembly operations and requirements of the Company and provided that such products are manufactured exclusively for domestic consumption within the PRC. The Company is entitled to receive a fee from China Jewellery with respect to all jewelry manufactured for third parties at the Beijing Facility with the amount of such fees to be determined on a case-by-case basis. The Agreement for Jewellery Assembling with China Jewellery expires in November of 2004. The Company also carries on jewelry manufacturing and assembly operations at its Shenzhen Facility pursuant to an agreement with Shenzhen Craft which is substantially similar to the manufacturing arrangement with China Jewellery except on a smaller scale and except that the Shenzhen Facility is used exclusively for manufacturing products for the Company. Shenzhen Craft is paid manufacturing fees in an amount equal to approximately $2,000 per month . The agreement with Shenzhen Craft expires in December of 2010. Actual manufacturing and assembly operations are performed by skilled workers under the supervision of a team of technicians. Before actual manufacturing or assembly commences, product specifications are established, product design is undertaken and raw materials are purchased and inspected. The manufacturing and assembly process is tailored to the specifications of the items being manufactured. Chain jewelry manufacturing begins with the melting of gold or silver into bars which are rolled and elongated on a press. The process is repeated a number of times until the bar is reduced to wire of approximately 20mm. The wire is then stretched to produce a finer wire which is then cut and strung to form chains. The chains are then cut, sized and graded. Manufacturing of other jewelry items, including ornaments which may be attached to chains, typically begins with the construction of a metal prototype. A mold is then formed around the model. Molds are, in turn, used to produce wax models and hardened plastic molds. For solid gold or silver pieces, casting is then performed by filling or injecting molds with melted gold or silver which has been mixed with appropriate alloys to achieve the desired level of purity. As an alternative to the traditional casting method, the Company casts "electro-form" jewelry utilizing a proprietary technique to bond gold to an underlying jewelry form. The plaster mold is then removed and the constituent jewelry parts are cleaned, assembled, soldered and pre-polished. Designs or impressions are affixed to appropriate component parts by stamping, cutting or grinding. Component parts are shaped and assembled to specifications in accordance with the product design. Virtually all final assembly is performed by hand at row tables at which all necessary tools to perform fine assembly operations are available. In addition to manufacturing undertaken to fill the Company's product requirements and manufacturing undertaken by China Jewellery at the Company's Beijing Facility, the Company provides contract jewelry manufacturing for certain customers who provide all product specifications and raw materials. The Company is paid negotiated subcontracting fees for manufacturing such products. The Company presently has adequate facilities and support staff to manufacture and assemble approximately 150,000 pieces of jewelry annually. Manufacturing capacity is expected to increase to approximately 300,000 pieces annually upon moving into the Company's new facilities in Beijing. 5 QUALITY CONTROL Strict quality control procedures are followed before and throughout the manufacturing process to assure that products are manufactured with the highest degree of precision in compliance with the Company's design specifications. Before the commencement of manufacturing, all raw materials undergo a thorough inspection to assure that stones purchased are of the right type, quality and quantity. Trained technicians monitor and the test the purity of all gold to assure the karat accuracy of all gold produced. Quality checks are carried out on all products at each stage of production to ensure that the products meet the Company's quality standards. To ensure the quality of all jewelry produced, all production workers receive production and quality control training and quality control supervisor are present and oversee all production operations and, finally, all finished goods are checked by the Company's quality control team before shipment to customers. INVENTORY POLICY AND CONTROL The Company manufactures products in accordance with customer purchase orders and sales forecasts of management. The Company's production schedule is closely monitored by the production management team. The Company's policy is to manufacture and maintain approximately 20 to 30 days' stocks in inventory to ensure customer's delivery schedules are met. Raw materials are normally purchased based on production schedules and are generally ordered 7 to 14 days before the production commences. At the assembly line, workers are provided only the raw materials required for assembly of scheduled production. Materials are weighed before and after each production run and all production workers are required to account for any losses of stones or gold or silver over prescribed limits. Stocks of raw materials and finished products are stored in secure areas in the Company's Hong Kong offices, access to which is restricted to authorized personnel. SALES AND MARKETING Marketing of the Company's products is carried out by the Company's internal sales and marketing force for all products sold outside of the PRC and by China Jewellery and Yiu Ping for all products sold within the PRC. The Company's internal sales staff is located in the Company's offices in Hong Kong and carries out sales and marketing activities under the guidance of senior management which oversees the sales staff and overall marketing strategy. The Company's sales staff is responsible for establishing and maintaining relations with independent sales representatives and customers as well as marketing the Company's products to potential customers. The Company's senior management and marketing staff regularly attends major jewelry fairs in Hong Kong to promote the Company's products and new customers. Additionally, the Company periodically advertises in jewelry magazines and makes direct mailings of new product catalogues. Marketing of products within the PRC is conducted exclusively through China Jewellery and Yiu Ping as agents for the Company. Both China Jewellery and Yiu Ping possess the requisite licenses to market gold and silver within the PRC. Pursuant to a Sales Agency Agreement with China Jewellery, China Jewellery handles substantially all aspects of marketing the Company's products in the PRC in exchange for an agency fee in the amount of fifteen percent (15%) of the sales price of fashion jewelry, ten percent (10%) of the sales price of silver and karat gold jewelry and Rmb 1.00 per gram on fine gold jewelry. The Company, in turn, acts as agent for China Jewellery with respect to sales of China Jewellery products in Hong Kong, for which the Company is entitled to agency fees in the same amounts payable by the Company to China Jewellery. The Sales Agency Agreement with China Jewellery expires in November of 2004. The Company also sells jewelry in the PRC through Yiu Ping pursuant to an agreement which is similar to the Sales Agency Agreement with China Jewellery. Pursuant to such agreement, the Company pays agency fees to Yiu Ping consisting of approximately 3% to 5% of the sales price of jewelry sold. 6 During the year ended March 31, 1996, the Company's sales and subcontracting fees were approximately $6.7 million, or 25%, in the PRC, $13.4 million, or 50%, in Hong Kong, $2.2 million, or 8% in Europe and $4.6 million, or 17%, elsewhere in Southeast Asia. The Company's presently intends to seek and hire additional sales and marketing personnel in order to expand the Company's marketing efforts in the Middle East and Europe. CUSTOMERS The Company's customers consist principally of a combination of wholesale distributors and jewelry retailers in the PRC, Hong Kong, Europe and Southeast Asia. At December 20, 1996, the Company had approximately 20 regular customers and its products were sold in approximately 2,200 retail outlets in the PRC and Hong Kong. The Company's five largest customers accounted for approximately 50% of net sales during the fiscal year ended March 31, 1996. The Company has no long term contracts with any customers. However, each of the Company's five largest customers has been a customer of the Company since at least 1990. COMPETITION The jewelry industry is highly fragmented, with little significant brand name recognition or consumer loyalty. Selection is generally a function of design appeal, perceived high value and quality in relation to price. While may competitors in the wholesale jewelry manufacturing and distribution business may have a wider selection of products or greater financial resources, the Company believes its competitive position is enhanced by the Company's broad customer base, experienced management team and the Company's close relationship with its customers and vendors. Therefore, although the competition is intense, the Company believes that it is well positioned to compete in the jewelry industry. EMPLOYEES As of December 20, 1996, the Company had approximately 1,080 employees, including 5 executive officers, 20 other management personnel, 40 persons in administration, 947 persons in manufacturing and production and 68 persons in sales and marketing. Of the Company's employees, approximately 80 are located in Hong Kong with the remaining employees being located in the PRC. None of the Company's employees is governed by collective bargaining agreements and the Company considers its relations with its employees to be satisfactory. FACILITIES The Company operates three distinct facilities in Hong Kong and the PRC. The Company's executive offices are located at Unit 302-303A and Unit 410, Fu Hang Industrial Building, 1 Hok Yuen Street East, Hunghom, Hong Kong. Such facility consists of approximately 11,000 square feet of office space. Unit 302-303A is leased from Ms. Chan, an officer and director of the Company, for HK$1.35 million per year pursuant to a lease expiring March 31, 1998. Unit 410 is leased from an unaffiliated third party for HK$300,000 per annum pursuant to a lease expiring September 19, 1998. Such office space also houses certain marketing, product design and high quality gold production operations. The Company's principal production operations are located in facilities located in Shenzhen and Beijing, PRC. The Shenzhen facility consists of a modern five story building of approximately 20,000 square feet. Three floors of the Shenzhen facility house manufacturing operations with one floor being utilized for administrative and office space and one floor serving as staff quarters for employees. The Company leases the physical facility from Shenzhen City Highway Construction Co., Ltd. for a term of 20 years expiring January, 2007. Monthly lease payments on such facility are $6,420. 7 The Company's operations in Beijing are presently housed in a five story 60,000 square foot facility consisting of three floors of manufacturing space, one floor of office and administrative space and one floor of staff quarters. The existing facilities in Beijing are held pursuant to a 20 year lease expiring 2010 with China Jewellery and providing for monthly lease payments of $14,990. Adjacent to the Beijing facility is a 5,000 square foot building which serves as the facility's power plant. A 14-story building is presently under construction adjacent to the Company's facility in Beijing. Upon completion, the Company will lease 3 floors of the new building (approximately 100,000 square feet) and move all of its Beijing operations to the new building. The Company expects to move into the new building by approximately June of 1997 and will sign a 20 year lease on such premises at an anticipated monthly rental rate, including management fees, of $22,500. The Company believes that its existing facilities and facilities under construction will be adequate to support the Company's operations for the foreseeable future. ITEM 2. FINANCIAL INFORMATION. SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following tables present selected historical combined financial data of the Hang Fung Group derived from the combined financial statements of the Hang Fung Group which appear elsewhere herein. The Hang Fung Group was acquired by the Company in December of 1996 in a transaction accounted for as a "reverse acquisition." The operations of the Company prior to acquisition of the Hang Fung Group have been discontinued and the Company's operations presently consist solely of the operations of the Hang Fung Group. The pro forma financial data gives effect to the acquisition of the Hang Fung Group as if such acquisition had occurred as of the beginning of the earliest period presented and the termination of the Company prior operations had occurred at such time. The following data should be read in conjunction with the combined financial statements of the Hang Fung Group, the financial statements of New Wine, Inc. and the pro forma combined financial statements included elsewhere herein.
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, ---------------------------------------------------- ------------------ INCOME STATEMENT DATA: 1992 1993 1994 1995 1996 1995 1996 -------- -------- -------- -------- -------- -------- ------- Net sales..................... $ 7,549 $ 10,568 $ 13,197 $ 18,478 $ 19,348 $ 9,190 $ 12,058 Subcontracting fees........... 2,689 2,786 3,481 4,902 7,520 3,379 3,103 ------- -------- -------- -------- -------- ------- -------- Total revenues.............. 10,238 13,354 16,678 23,380 26,868 12,569 15,161 Gross profit.................. 2,866 3,668 4,585 7,004 8,046 3,717 4,460 Operating income.............. 1,764 1,870 2,262 4,609 5,372 2,165 2,817 Other income (expense), net... (162) (169) (185) (274) (329) (17) (98) Income before taxes........... 1,602 1,701 2,077 4,335 5,043 2,148 2,719 Net income.................... $ 936 $ 1,032 $ 1,311 $ 2,863 $ 3,393 $ 1,498 $ 2,007 ======= ======= ======= ======= ======= ======= ======= Net income per share (1)...... $ 0.08 $ 0.09 $ 0.11 $ 0.24 $ 0.28 $ 0.12 $ 0.17 ======= ======= ======= ======= ======= ======= =======
MARCH 31, SEPTEMBER 30, 1995 1996 1996 ------- ------- ------------- BALANCE SHEET DATA: Working capital................ $ 3,024 $ 613 $ 1,724 Total assets................... 17,517 15,676 17,678 Long-term debt, less current portion............... 299 879 873 Stockholders' equity (2)....... 4,531 3,038 5,067
- ----------------------------- (1) Net income per share is computed assuming the issuance of shares in connection with the acquisition of the Hang Fung Group by the Company as of the beginning of each period presented (i.e. 12,000,000 shares outstanding). (2) Stockholders' equity at March 31, 1996 reflects the payment of a dividend in the amount of $5,000,000 by the Hang Fung Group prior to the acquisition of the Hang Fung Group by the Company. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's financial statements, the combined financial statements of the Hang Fung Group and the pro forma financial information appearing elsewhere herein. Prior to December of 1996, the Company's was engaged in limited operations relating to the production and distribution of record albums, cassette tapes and compact discs and videotape and television productions for domestic distribution and foreign licensing; operation of a music publishing firm; and, generally, the business of providing personal business management services for professional entertainers. In December of 1996, the Company acquired the Hang Fung Group and entered into the jewelry manufacturing and distribution business. The acquisition of the Hang Fung Group has been accounted for using the purchase method of accounting with the transaction being accounted for as a "reverse acquisition." The Company does not consider the operations prior to the acquisition of the Hang Fung Group to be material to an understanding of the Company. Accordingly, this discussion will relate the operations of the Hang Fung Group for all periods presented, excluding the former operations of New Wine, Inc. Hang Fung's historical operations have consisted of designing, assembling, merchandising and distributing a full line of gold and silver jewelry products and other ornamental products on a wholesale basis in Hong Kong, China, Europe and Southeast Asia. Revenues from such operations are generated through the manufacturing and wholesaling of the Company's jewelry products and through fees payable to the Company by its business partners in the PRC, China Jewellery, for marketing services outside of China and for use of the Company's manufacturing facilities in the production of jewelry by China Jewellery. The primary cost of operating the Company's jewelry business is the raw material cost of jewelry. The Company assembles or manufactures all of the jewelry which it sells, other than sales made as agent for China Jewellery. The Company constantly compares price and quality of jewelry raw materials and finished products to assure that it is obtaining the best price and quality available. The cost of such products varies with currency fluctuations and other factors beyond the Company's control. While any fluctuations in the Company's price of acquiring raw materials may adversely affect the Company's profit margins, the Company has historically been able to pass such cost fluctuations on to its customers. See "Business - Purchasing." The Company's other significant operating expenses are marketing costs, including participation in advertising programs, customer support, inventory and quality control, jewelry design and general corporate overhead. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Combined Statements of Income expressed as a percentage of total revenues.
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, 1994 1995 1996 1995 1996 ------ ------ ------ ------ ------ Total revenues............... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales................ 72.5 70.0 70.1 70.4 70.6 ---- ---- ---- ---- ----- Gross profit................. 27.5 30.0 29.9 29.6 29.4 Operating expenses........... 13.9 10.2 10.0 12.3 10.8 ---- ---- ---- ---- ----- Income from operations....... 13.6 19.7 20.0 17.2 18.6 Other income (expense)....... (1.1) (1.2) (1.2) (0.1) (0.6) ---- ---- ---- ---- ---- Income before income taxes... 12.5 18.5 18.8 17.1 18.0 Income taxes................. (4.6) (6.3) (6.2) (5.2) (4.8) ---- ---- ---- ---- ---- Net income................... 7.9 12.2 12.6 11.9 13.2 ==== ==== ==== ==== ====
9 SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1995 REVENUES AND GROSS PROFIT. Operating revenues increased by 20.6% to $15.2 million in the six months ended September 30, 1996 as compared to the first half of fiscal 1996. Sales of Company products were up 31.2% to $12.1 million during the first half of fiscal 1997 as compared to $9.2 million in sales during the first half of fiscal 1996. The increase in sales was partially offset by a 8.2% decrease in subcontracting fees to $3.1 million during the first half of fiscal 1997 from $3.4 million during the first half of the prior year. The increase in sales was attributable to growing demand for electro-form jewelry and gold card ornaments as well as increased demand in the PRC resulting from a recovery in the PRC economy. The decrease in subcontracting fees was attributable to increased utilization of the Company's manufacturing facilities for manufacture of Company sold products as opposed to products manufactured on a sub-contract basis or manufactured at such facilities for sale by China Jewellery. Geographically, sales in Hong Kong were up during the first half of fiscal 1997, increasing approximately 50.8% to $7.6 million from $5.0 million in fiscal 1996, sales in the PRC were up during the first half of fiscal 1997, increasing approximately 0.5% to $3.79 million from $3.77 million in fiscal 1996, sales in Europe were down during the first half of fiscal 1997, decreasing approximately 20% to $1.2 million from $1.5 million in fiscal 1996, and sales in Southeast Asia were up during the first half of fiscal 1997, increasing approximately 14% to $2.6 million from $2.2 million in fiscal 1996. Gross profits increased by 20.0% to $4.5 million in the first half of fiscal 1997 from $3.7 million during the six months ended September 30, 1995. The increase in gross profits was attributable to increased sales during the period which were partially offset by a reduction in subcontracting fees and gross margins. Gross margins were down marginally during the period to 29.4% from 29.6%. However, excluding subcontracting fees, profit margins improved on sales of Company products during the period as a result of increased demand and accompanying higher profit margins for electro-form jewelry. OPERATING EXPENSES. Operating expenses totaled $1.6 million during the first half of fiscal 1997, an increase of 5.9% from operating expenses for the same period in fiscal 1995. The increase in operating expenses during the period was primarily attributable to increased marketing expenses associated with higher sales volume and the impact of inflation in certain expenses in Hong Kong and China. OTHER INCOME/EXPENSE. Other income/expense during the period consisted of gains/losses from trading of fashion jewelry, interest income and interest expense. Net other expense totaled $98,000 during the period as compared to $17,000 in 1996. The increase in net other expense during the period was attributable to increased interest expense associated with higher production and sales and capital leases of equipment. INCOME TAXES. Income taxes increased by 9.5% from approximately $650,000 in the first half of fiscal 1996 to $712,000 during the six months ended September 30, 1996. The increase in income taxes during the period was attributable to the increase in the taxable earnings of the Company. YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995 REVENUES AND GROSS PROFIT. Operating revenues increased by 14.9% to $26.9 million during the fiscal year ended March 31, 1996 as compared to $23.4 million during fiscal 1995. Sales of Company products were up 4.7% to $19.3 million during fiscal 1996 as compared to $18.5 million in sales during fiscal 1995. The Company also reported a 53.4% increase in subcontracting fees to $7.5 million during fiscal 1996 from $4.9 million during the prior year. The increase in sales was attributable to increased sales of electro-form items and gold card ornaments as well as market expansion in Europe. The increase in subcontracting fees was attributable to increased demand for gold products which resulted in the addition of new sub-contract manufacturing customers and an increase in manufacturing by China Jewellery at the Company's facilities on behalf of its customers. Geographically, sales in Hong Kong were up during fiscal 1996, increasing approximately 43.6% to $13.4 million from $9.4 million in fiscal 1995, sales in the PRC were down during fiscal 1996, decreasing approximately 4.2% to $6.7 million from $7.0 million in fiscal 1995, sales in Europe were down during fiscal 1996, decreasing approximately 23.4% to $2.15 million from $2.8 million 10 in fiscal 1995, and sales in Southeast Asia were up during fiscal 1996, increasing approximately 8.5% to $4.6 million from $4.2 million in fiscal 1995. Gross profits increased by 14.9% to $8.0 million in fiscal 1996 from $7.0 million during fiscal 1995. The increase in gross profits was attributable to increased sales during the period and an improvement in gross margins. Gross margins were up during the period to 30.0% from 27.5%. OPERATING EXPENSES. Operating expenses totaled $2.7 million during fiscal 1996, an increase of 11.6% from fiscal 1995. The increase in operating expenses during the period was primarily attributable to increased marketing expenses associated with increased sales and expenses for expansion in overseas markets. OTHER INCOME/EXPENSE. Other income/expense during the period consisted of gains/losses from trading of fashion jewelry, interest income and interest expense. Net other expense totaled $329,000 during the period as compared to $274,000 in 1995. The increase in net other expense during the period was attributable to interest expense associated with capital leases of new equipment. INCOME TAXES. Income taxes increased by 12.1% from approximately $1.5 million in fiscal 1995 to $1.7 million during fiscal 1996. The increase in income taxes during the period was attributable to the increase in the taxable earnings of the Company. YEAR ENDED MARCH 31, 1995 COMPARED TO YEAR ENDED MARCH 31, 1994 REVENUES AND GROSS PROFIT. Operating revenues increased by 40.2% to $23.4 million during the fiscal year ended March 31, 1995 as compared to $16.7 million during fiscal 1994. Sales of Company products were up 40.0% to $18.5 million during fiscal 1995 as compared to $13.2 million in sales during fiscal 1994. The Company also reported a 40.8% increase in subcontracting fees to $4.9 million during fiscal 1995 from $3.5 million during the prior year. The increase in sales was attributable to the development of lower priced but higher margin electro-form jewelry which experienced strong acceptance among younger consumers. The increase in subcontracting fees was attributable to strong demand for moderately priced electro-form gold jewelry which resulted in increased subcontract manufacturing work being performed for the Company's customers and by China Jewellery at the Company's facilities on behalf of its customers. Geographically, sales in Hong Kong were up during fiscal 1995, increasing approximately 40.0% to $9.4 million from $6.7 million in fiscal 1994, sales in the PRC were up during fiscal 1995, increasing approximately 40.0% to $7.0 million from $5.0 million in fiscal 1994, sales in Europe were up during fiscal 1995, increasing approximately 40% to $2.8 million from $2 million in fiscal 1994, and sales in Southeast Asia were up during fiscal 1995, increasing approximately 40% to $4.2 million from $3 million in fiscal 1994. Gross profits increased by 52.8% to $7.0 million in fiscal 1995 from $4.6 million during fiscal 1994. The increase in gross profits was attributable to increased sales during the period which were partially offset by a minimal reduction in gross margins. Gross margins were down marginally during the period to 29.9% from 30.0%. However, excluding subcontracting fees, profit margins decreased on sales of Company products during the period as a result of promotional pricing of newly developed products to establish market share for those new products. OPERATING EXPENSES. Operating expenses totaled $2.4 million during fiscal 1995, an increase of 3.1% from operating expenses in fiscal 19945. The increase in operating expenses during the period was primarily attributable to increased marketing expenses associated with increased sales. OTHER INCOME/EXPENSE. Other income/expense during the period consisted of gain/loss from trading of fashion jewelry, interest income and interest expense. Net other expense totaled $274,000 during the period as compared to $185,000 in 1994. The increase in net other expense during the period was attributable to increased interest expense associated with increased capital leases of equipment. INCOME TAXES. Income taxes increased by 92.2% from approximately $0.8 million in fiscal 1994 to $1.5 million during fiscal 1995. The increase in income taxes during the period was attributable to the increase in the taxable earnings of the Company. 11 TRENDS AND CONTINGENCIES Future operating results are expected to be impacted by the ongoing expansion of manufacturing operations in Beijing. Expanded modern manufacturing facilities are presently being constructed which are expected to increase the Company's overall manufacturing capacity by approximately 100%. Completion of such facilities is presently anticipated by September of 1997. In conjunction with the expansion of manufacturing capacity, the Company is presently planning to expand its marketing efforts into the Middle East and Europe during 1997. The expansion of manufacturing operations and marketing efforts will entail certain increased operating costs, including one-time costs associated with such new operations, which may adversely impact operating margins in the short-term. However, management believes that such expansion will improve operating efficiency adding to revenues, net income and net margins in the coming years. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Company had cash balances totaling $47,000 and a working capital balance of $1.7 million. This compares to a cash balance of $244,000 and working capital of $0.6 million at March 31, 1996. The Company's primary liquidity needs are to fund accounts receivable and inventories as well as to fund the Company's planned expansion. The Company has historically funded its operations through a combination of internally generated cash and short-term borrowings under bank lines of credit. The Company's expansion plans have been funded by bank loan facilities and internally generated cash. In December of 1996, the Company raised approximately $1.0 million from a sale of common stock to fund certain costs associated with construction of the Beijing facility and working capital requirements. The Company is presently evaluating other possible efforts to raise additional capital but has no commitments in that regard. The Company's accounts receivable increased to $3.9 million at September 30, 1996 as compared to approximately $3.0 million, or 11.1% of fiscal 1996 revenues, at March 31, 1996 and approximately $5.6 million, or 23.8% of fiscal 1995 revenues, at March 31, 1995. The increase in accounts receivable during the first six months of fiscal 1997 was attributable to increased sales levels. The decrease in accounts receivable, in aggregate and as a percentage of revenues, from fiscal 1995 to fiscal 1996 was attributable to increased sales of jewelry on a cash or short-term credit basis. At September 30, 1996, the Company had no material capital commitments other than those necessary to support its existing operations and to carry out planned expansion of its Beijing operations. The total cost of establishment of the new manufacturing facilities in Beijing is expected to be less than $1,000,000. None of such costs had been paid as of September 30, 1996. The cost of such facility is expected to be financed through internally generated cash. The Company has no other material commitments to expend capital resources outside of ordinary operating expenses. However, the Company intends to use available funds as needed to expand its jewelry distribution operations into the Middle East and Europe. At September 30, 1996, the Company's capital resources consisted of various bank credit facilities and certain capital leases, in addition to funds on hand. The Company's bank credit facilities consist of a combination of term loans, lines of credit, letters of credit, bank guarantees, overdraft, revolving and similar credit facilities generally utilized in the jewelry industry. The Company's bank credit facilities are used to fund purchases of raw materials and inventory and to finance accounts receivable and overdrafts. Such facilities are consistent with credit facilities generally available to operators in the jewelry industry in terms of interest rates and fees, collateral, repayment terms, and renewal. The Company's total available bank credit facilities at September 30, 1996 were approximately $3.3 million of which approximately $3 million had been used at such date. Management believes that such bank credit facilities are adequate to meet the Company's bank credit needs for at least the next 12 months and that such facilities can be readily renewed or replaced as they come due. 12 At September 30, 1996, the Company also had a number of capital leases and operating leases pursuant to which the Company holds various facilities and equipment. At September 30, 1996, the Company's capital lease obligations totaled $908,000 of which $93,000 was attributable to current lease obligations. Obligations under operating leases require minimum annual rental payments by the Company of approximately $9,000 in fiscal 1997. The Company believes that the available trade credit, bank credit facilities, funds on hand and funds generated from operations, will be sufficient to satisfy the Company's anticipated working capital requirements for at least the next 12 months. SEASONALITY The jewelry business is highly seasonal, with the third and fourth calendar quarters (second and third fiscal quarters), which includes the Christmas shopping season, historically contributing the highest sales. Seasonality cannot be predicted or counted upon, and the results of any interim period are not necessarily indicative of the results that might be expected during a full fiscal year. The following table sets forth the Company's unaudited net sales for the periods indicated (dollar amounts are in thousands):
Fiscal Year Ended March 31, ---------------------------------------------------- 1994 1995 1996 --------------- --------------- ---------------- Amount % Amount % Amount % ------- ----- ------- ----- ------- ----- 1st Quarter (4/1-6/30) $ 3,719 22.3 $ 5,097 21.8 $ 5,961 22.3 2nd Quarter (7/1-9/30) 4,170 25.0 5,868 25.1 6,608 25.2 3rd Quarter (10/31-12/31) 4,820 28.9 6,804 29.1 7,684 28.6 4th Quarter (1/1-3/31) 3,969 23.8 5,611 24.0 6,615 23.9 ------- ----- ------- ----- ------- ----- Total $16,678 100.0 $23,380 100.0 $26,868 100.0 ======= ===== ======= ===== ======= =====
INFLATION Inflation has historically not had a material effect on the Company's operations. When the price of gold or other raw materials has increased, these costs historically have been passed on to the customer. Furthermore, as the Company does not have either long-term supply contracts or long-term contracts with customers, prices are quoted based on the prevailing prices for semi-precious gemstones or metals. Accordingly, the Company does not believe inflation will have a material effect on its future operations. ITEM 3. PROPERTIES. All of the Company's material properties are described in Item 1. above. 13 ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. COMMON STOCK The following table is furnished as of December 20, 1996, to indicate beneficial ownership of shares of the Company's Common Stock by (1) each shareholder of the Company who is known by the Company to be a beneficial owner of more than 5% of the Company's Common Stock, (2) each director and named officer of the Company, individually, and (3) all officers and directors of the Company as a group. The information set out in the following table was supplied by such persons.
NUMBER OF SHARES BENEFICIALLY NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED PERCENT - --------------------------------------------------- ------------ ---------- Good Day Holdings, Ltd (2)........................... 6,600,000(2) 55.0% Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg. No. 1 Hok Yuen Street East, Kowloon, Hong Kong Lam Mo Wan........................................... 1,800,000 15.0% Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg. No. 1 Hok Yuen Street East, Kowloon, Hong Kong Chan Wai Sum......................................... 1,800,000 15.0% Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg. No. 1 Hok Yuen Street East, Kowloon, Hong Kong Lam Sai Wing (2)..................................... 6,600,000(2) 55.0% Chan Yam Fai, Jane................................... 300,000 2.5% Ng Yee Mei........................................... -0- - Cheng Wa On.......................................... -0- - All officers and directors as a group (4 persons)............................. 6,900,000(2) 57.5%
- ----------------------------- (1) Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares shown opposite the name of such person or group. (2) Good Day Holdings Ltd. is controlled 100% by Lam Sai Wing, an officer and director of the Company. Accordingly, Mr. Lam may be deemed to be the beneficial owner of the shares held by Good Day Holdings Ltd. PREFERRED STOCK SERIES A PREFERRED STOCK. The following table is furnished as of December 20, 1996 to indicate beneficial ownership of the Company's Series A Preferred Stock by each shareholder of the Company who is known by the Company to be a beneficial owner of more than 5% of the Company's Series A Preferred Stock.
NUMBER OF SHARES BENEFICIALLY NAME AND ADDRESS OF BENEFICIAL OWNER (1) OWNED PERCENT - --------------------------------------------------- ------------ ---------- Good Day Holdings Ltd.............................. 100,000(2) 100.0% Unit 302-303A, 3rd Floor, Fu Hang Industrial Bldg. No. 1 Hok Yuen Street East, Kowloon, Hong Kong Lam Sai Wing....................................... 100,000(2) 100.0%
- ----------------------------- (1) Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares shown opposite the name of such person or group. (2) Good Day Holdings Ltd. is controlled 100% by Lam Sai Wing, an officer and director of the Company. Accordingly, Mr. Lam may be deemed to be the beneficial owner of the shares held by Good Day Holdings Ltd. 14 ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS. IDENTIFICATION OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES The following table sets forth certain information regarding the directors and executive officers of the Company.
NAME AGE POSITION - --------------------- --- -------------------------------------------- Lam Sai Wing........ 41 Chairman, Chief Executive Officer and President Chan Yam Fai, Jane.. 33 Vice President, Chief Financial Officer and Director Ng Yee Mei.......... 34 Vice President and Director Cheng Wa On......... 34 Director
TERMS OF OFFICE The directors of the Company hold office until the next annual meeting of stockholders of the Company or until their successors in office are elected and duly qualified. All officers serve at the discretion of the Board of Directors except as set forth in employment agreements. FAMILY RELATIONSHIPS Lam Sai Wing and Chan Yam Fai, Jane are husband and wife. BUSINESS EXPERIENCE LAM SAI WING has served as Chairman of the Board, Chief Executive Officer and President of the Company since the Exchange in December of 1996 and of the Company's predecessor and operating subsidiaries, the Hang Fung Group since founding the Hang Fung Group in 1986. CHAN YAM FAI, JANE has served as Vice President, Chief Financial Officer and a Director of the Company since the Exchange in December of 1996 and of the Hang Fung Group since 1990. NG YEE MEI has served as Vice President and a Director of the Company since the Exchange in December of 1996 and of the Hang Fung Group since 1991. CHENG WA ON has served as a Director of the Company since the Exchange in December of 1996. Mr. Cheng has been employed by the Hang Fung Group as Export Manager since 1986. 15 ITEM 6. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION TABLE The following table sets forth information as to the compensation paid or accrued to each officer and director receiving compensation of at least $100,000 and the Chief Executive Officer for the three years ended March 31, 1996:
ANNUAL COMPENSATION -------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) COMPENSATION - --------------------------- ---- ------- ----- -------------- ------------ Lam Sai Wing 1996 $55,000 $-0- $15,000 $-0- Chief Executive Officer, 1995 45,000 -0- 15,000 -0- Chairman of the Board 1994 40,000 -0- 15,000 -0- and President
- ----------------------------- (1) Mr. Lam assumed the positions indicated, including the position of Chief Executive Officer, following the Exchange in December of 1996. The compensation indicated represents amounts paid by the Hang Fung Group during each of the years indicated. Mr. Claude Smith served as Chief Executive Officer of the Company during each of the years indicated and up until the Exchange in December of 1996 at which time Mr. Lam assumed the position of Chief Executive Officer. (2) Mr. Lam's other annual compensation consists of a housing allowance, vacation pay and other fringe benefits. DIRECTOR'S COMPENSATION No compensation has been paid to any directors for service in such capacity in the past and no such compensation is presently payable to directors. At such time as the Board of Directors deems appropriate, the Company intends to adopt an appropriate policy to compensate non-employee directors in order to attract and retain the services of qualified non-employee directors. EMPLOYMENT AGREEMENTS The Company has employment agreements with Lam Sai Wing and Chan Yam Fai, Jane. Each of these agreements expires December 31, 2003. The employment agreements provide for a base salary and bonus of HK$420,000 annually for Mr. Lam and HK$280,000 for Ms. Chan including a housing allowance and participation in all other benefit plans adopted by the Company. PENSION PLAN The Company's subsidiaries in Hong Kong have adopted a voluntary defined contribution pension plan (the "Plan") for its employees in Hong Kong. The Plan generally covers all employees of the Company's operating subsidiaries (excluding contract workers in the PRC) who have completed three months of service with the Company. Employees electing to participate in the Plan defer, in the form of a contribution to the Plan, an amount equal to five percent (5%) of their monthly salary and the Company makes a matching contribution on behalf of each participating employee. Participating employees are always fully vested with respect to contributions made by them to the Plan and earnings or increases thereon. Employees become vested in contributions made by the Company ratably over ten years. 16 ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company's predecessor and subsidiary, Hang Fung Group, has, from time to time entered into transactions with officers and directors of the Company and companies controlled by officers and directors of the Company. During the fiscal years ended March 31, 1995 and 1996, the Hang Fung Group reported sales of $112,000 and $83,000, respectively, to Hang Fung Jewellery Co., Inc. ("HFJCI"). Prior to October 1, 1996, HFJCI was beneficially owned by Lam Sai Wing and was engaged in marketing of products of the Hang Fung Group in the United States. Effective October 1, 1996, Mr. Lam disposed of all of his holdings in HFJCI to an unrelated party. During the fiscal years ended March 31, 1995 and 1996, the Hang Fung Group paid rental payments totaling $174,000 and $199,000, respectively, to Chan Yam Fai, Jane in connection with the lease of the Company's principal executive offices in Hong Kong. The Hang Fung Group has from time to time advanced funds to Lam Sai Wing. Receivables from Mr. Lam totaled $1,056,000 at March 31, 1996 and $398,000 at September 30, 1996. Such loans are unsecured, non-interest bearing and without pre-determined repayment terms. Lam Sai Wing and Chan Yam Fai, Jane have personally guaranteed the existing banking facilities of the Hang Fung Group and have pledged certain real estate as collateral to secure such banking facilities. With the exception of the non-interest bearing loans to Lam Sai Wing, all of the above transactions are believed by management to be on terms at least as favorable to the Company as may have been obtained from unaffiliated third parties. The Company has no present policy governing related party transactions but intends to implement a policy such that all future and ongoing transactions between the Company and its directors, officers, principal stockholders or affiliates will be on terms no less favorable to the Company than may be obtained from unaffiliated from third parties, and any such transactions will be approved by a majority of disinterest directors of the Company. ITEM 8. LEGAL PROCEEDS. The Company is from time to time a party to lawsuits incidental to its business. The Company and its management are not presently aware of any pending or threatened proceedings which, individually or in the aggregate, are believed to be material. ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION There is no established public trading market for the Company's Common Stock. The Common Stock trades on a sporadic basis in the over-the-counter market. While the Company intends commence trading of its shares on the NASD Electronic Bulletin Board, there is no assurance that a trading market will develop or that any such market which may develop will be sustained. HOLDERS At December 20, 1996, there were approximately 103 record holders of the Company's Common Stock. 17 DIVIDENDS While the Hang Fung Group paid a one-time dividend of $5 million during fiscal 1996, prior to the Exchange, the Company has not paid any dividends since its inception and presently anticipates that all earnings, if any, will be retained for development of the Company's business and that no dividends on the shares of Common Stock will be declared in the foreseeable future. Any future dividends will be subject to the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements, general business conditions and other pertinent facts. Therefore, there can be no assurance that any dividends on the Common Stock will be paid in the future. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES. Since its inception in April of 1994, the Company sold the following unregistered securities without the use of underwriters and without the payment of any discounts or commissions: (1) In April of 1994, the Company issued an aggregate of 1,275,000 shares of common stock to the founders of the Company for $114,631 in cash and professional services valued at $175,500. (2) In September of 1995, the Company issued an aggregate of 225,000 shares of common stock for $45,000 in cash to various investors. (3) In December of 1996, the Company issued an aggregate of 10,500,000 shares of common stock and 100,000 shares of Series A Preferred Stock to the then shareholders of the Hang Fung Group in exchange for all of the issued and outstanding shares of the Hang Fung Group. The issuance of the above securities to the founding shareholders and to the shareholders of the Hang Fung Group were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act based on the limited number of purchasers and based on representations from the purchasers that they were acquiring for investment only and not with a view to or for sale and restrictive legends were affixed to the share certificates issued in such transactions. The issuance of the securities referred to in (2) above was deemed to be exempt from registration under the Securities Act in reliance on Rule 504 of the Securities Act based on the limited size of the offering and the filing of a Form D. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED. COMMON STOCK GENERAL. The Company is authorized to issue 25,000,000 shares of Common Stock, $.001 par value per share ("Common Stock"). At December 20, 1996, there were 12,000,000 shares issued and outstanding. All shares of Common Stock outstanding are validly issued, fully paid and non-assessable. VOTING RIGHTS. Each share of Common Stock entitles the holder thereof to one vote, either in person or by proxy, at meetings of shareholders. The holders are not permitted to vote their shares cumulatively. The voting rights of the holders of Common Stock are subject to the rights of the outstanding Series A Preferred Shares which, as a class, is entitled to thirty-percent voting control of the Company. Accordingly, the holders of Common Stock and Series A Preferred Shares holding, in the aggregate, more than fifty percent (50%) of the total voting rights can elect all of the directors of the Company. DIVIDEND POLICY. All shares of Common Stock are entitled to participate ratably in dividends when and as declared by the Company's Board of Directors out of the funds legally available therefor and subject to the rights, if any, of the holders of outstanding shares of preferred stock. Any such dividends may be paid in cash, property or additional shares of Common Stock. The Company has not paid any dividends since its inception and presently anticipates that all earnings, if any, will be retained for development of the Company's business and that no dividends on the shares of Common Stock will be declared in the foreseeable future. Any future dividends will be subject to 18 the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements, general business conditions and other pertinent facts. Therefore, there can be no assurance that any dividends on the Common Stock will be paid in the future. MISCELLANEOUS RIGHTS AND PROVISIONS. Holders of Common Stock have no preemptive or other subscription rights, conversion rights, redemption or sinking fund provisions. In the event of the dissolution, whether voluntary or involuntary, of the Company, each share of Common Stock is entitled to share ratably in any assets available for distribution to holders of the equity of the Company after satisfaction of all liabilities and payment of the applicable liquidation preference of any outstanding shares of Preferred Stock. PREFERRED STOCK The Company has 25,000,000 authorized shares of preferred stock, $0.001 par value. The Board of Directors has the authority, without action by the shareholders, to create one or more series of preferred stock and to determine the dividend rights, dividend rate, rights and terms of redemption, liquidation preferences, sinking fund terms, conversion and voting rights of any such series, the number of shares constituting any such series and the designation thereof and the price therefor. Series A Preferred Shares. Pursuant to the authority granted in the Company's Articles of Incorporation, the Board of Directors has authorized a series of preferred stock designated as Series A Preferred Stock (the "Series A Preferred Shares"). A total of 100,000 Series A Preferred Shares were authorized and issued entitling the holders thereof to a liquidation preference of $.001 per share and to thirty percent voting control, as a class, of the Company in all matters voted on by shareholders. Except to the extent declared by the Board of Directors from time to time, if ever, no dividends are payable with respect to the Series A Preferred Shares. With the exception of the foregoing, the holders of the Series A Preferred Shares have no preferences or rights in excess of those generally available to the holders of Common Stock. TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the Company's Common Stock is OTC Stock Transfer, Inc., 231 East 2100 South, Salt Lake City, Utah 84115. ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Articles of Incorporation provide that the Company shall indemnify its directors and officers against any damages arising out of their actions as agents of the Company except in cases where such directors or officers are adjudged to be liable for negligence or misconduct. Additionally, the Company's Bylaws provide that the Company shall, to the fullest extent permitted by Nevada law, indemnify its directors, officers, employees or agents against any expense, liability or loss by reason of their status or service as directors, officers, employees or agents of the Company. Section 78.751 of the Nevada Revised Statutes provides that a corporation may indemnify directors, officers, employees and agents against all liability, judgments, and expenses actually incurred by reason of his service in such capacity provided that he acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. At present, there is no pending litigation or proceeding involving a director, officer, employee or agent of the Company where indemnification will be required or permitted and the Company is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. 19 ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 15 below for a list of financial statements included herewith. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Following the acquisition of Hang Fung Jewellery Company Limited and Kai Hang Jewellery Company Limited by the Company, on December 20, 1996, the Company's Board of Directors selected Arthur Andersen to serve as its new independent accountants and dismissed Albright, Persing & Associates, Ltd., Certified Public Accountants, of Reno, Nevada which previously served as the independent accountants for the Company. Albright, Persing & Associates' reports on the financial statements of the Company for the fiscal years ended December 31, 1994 and 1995 contain no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with its audits for fiscal years 1994 and 1995 and through December 20, 1996, there were no disagreements with Albright, Persing & Associates on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Albright, Persing & Associates would have caused them to make reference thereto in its reports on the financial statements for such years. Arthur Andersen served as the principal accounting firm for Hang Fung Jewellery Company Limited and Kai Hang Jewellery Company Limited with respect to the financial statements of such companies for fiscal years ended March 31, 1994, 1995 and 1996. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS. (A) FINANCIAL STATEMENTS THE HANG FUNG GROUP
Page ---- Report of Independent Public Accountants................................ F-1 Combined Statements of Operations for the Years Ended March 31, 1996, 1995 and 1994................................................... F-2 Combined Balance Sheets as of March 31, 1996 and 1995................... F-3 Combined Statements of Cash Flows for the Years Ended March 31, 1996, 1995 and 1994................................................... F-4 Combined Statements of Changes in Equity for the Years Ended March 31, 1996, 1995 and 1994............................................... F-5 Notes to Combined Financial Statements.................................. F-6 Combined Balance Sheet as of September 30, 1996 (unaudited)............. F-17 Combined Statements of Operations for the Three and Six Months Ended September 30, 1996 and 1995 (unaudited)......................... F-18 Combined Statements of Cash Flows for the Six Months Ended September 30, 1996 and 1995 (unaudited)............................... F-19 Notes to Combined Financial Statements (unaudited)...................... F-20
20 NEW WINE, INC.
Page ---- Independent Auditors' Report............................................ F-21 Balance Sheets as of June 30, 1996 and December 31, 1995 and 1994....... F-22 Income Statements for the Six Months Ended June 30, 1996 and the Years Ended December 31, 1995 and 1994 and for the Period from Inception (April 12, 1994) to June 30, 1996........................... F-23 Statements of Cash Flows for the Six Months Ended June 30, 1996 and the Years Ended December 31, 1995 and 1994 and for the Period from Inception (April 12, 1994) to June 30, 1996........................... F-24 Statements of Stockholders' Equity for the Six Months Ended June 30, 1996 and the Years Ended December 31, 1995 and 1994 and for the Period from Inception (April 12, 1994) to June 30, 1996............... F-25 Notes to Financial Statements........................................... F-26 Balance Sheet as of September 30, 1996 (unaudited)...................... F-30 Income Statements for the Three and Nine Months Ended September 30, 1996 and 1995 (unaudited)............................................. F-31 Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 (unaudited)............................................. F-32 Notes to Financial Statements (unaudited)............................... F-33 PRO FORMA COMBINED FINANCIAL INFORMATION Introduction to Pro Forma Combined Financial Information................ F-34 Pro Forma Unaudited Combined Balance Sheet.............................. F-35 Notes to Pro Forma Unaudited Financial Information...................... F-36
(B) EXHIBITS EXHIBIT NO. DESCRIPTION 2.1 Acquisition Agreement between S.W. Lam, Inc. and the shareholders of Hang Fung Jewellery Company Limited and Kai Hang Jewellery Company Limited 3.1 Articles of Incorporation 3.2 Bylaws 4.1 Certificate of Designation for Series A Preferred Stock 10.1 Employment Agreement with Lam Sai Wing dated January 1, 1994 10.2 Employment Agreement with Chan Yam Fai, Jane dated January 1, 1994 10.3 Sales Agency Agreement between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. 10.4 Agreement for Jewellery Assembling between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. 10.5 Sales Cooperation Agreement between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. 10.6 Confirmation Agreement between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. 10.7 Lease Agreement between Chan Yam Fai, Jane and Hang Fung Jewellery Co., Ltd. re: executive offices 21.1 Subsidiaries 27.1 Financial Data Schedules 21 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. S.W. LAM, INC. (Registrant) Date: January 15, 1997 By: /s/ Lam Sai Wing ----------------------- Lam Sai Wing, President 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of New Wine, Inc.: We have audited the accompanying combined balance sheets of the companies as described in Note 2 to the accompanying combined financial statements (the "Group") as of March 31, 1995 and 1996, and the related combined statements of operations, cash flows and changes in equity for the years ended March 31, 1994, 1995 and 1996. These financial statements are the responsibility of the management of the Group. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Group as of March 31, 1995 and 1996, and the results of its operations and its cash flows for the years ended March 31, 1994, 1995 and 1996, in conformity with generally accepted accounting principles in the United States of America. /s/ Arthur Andersen & Co. ------------------------- Arthur Andersen & Co. Hong Kong, October 26, 1996. F-1 THE HANG FUNG GROUP COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (Expressed in United States dollars)
1994 1995 1996 ------- -------- ----- $'000 $'000 $'000 Revenues Net sales 13,197 18,478 19,348 Subcontracting fees 3,481 4,902 7,520 ------- ------ ------- Total revenues 16,678 23,380 26,868 Cost of sales and services (12,093) (16,376) (18,822) ------- ------ ------- Gross profit 4,585 7,004 8,046 Selling, general and administrative expenses (2,323) (2,395) (2,674) ------- ------ ------ Operating income 2,262 4,609 5,372 Interest expenses (224) (346) (403) Interest income 11 17 11 Other income, net 28 55 63 ------- ------ ------ Income before income taxes 2,077 4,335 5,043 Provision for income taxes (766) (1,472) (1,650) ------- ------ ------- Net income 1,311 2,863 3,393 ======= ====== =======
The accompanying notes are an integral part of these financial statements. F-2 THE HANG FUNG GROUP COMBINED BALANCE SHEETS AS OF MARCH 31, 1995 AND 1996 (Expressed in United States dollars)
1995 1996 ------- ------- $'000 $'000 ASSETS Current assets: Cash 400 244 Accounts receivable, net 5,562 2,989 Inventories 8,248 8,069 Prepayments and other current assets 14 14 Due from a director 1,487 1,056 ------ ------ Total current assets 15,711 12,372 Property, plant and equipment, net 1,806 3,304 ------ ------ Total assets 17,517 15,676 ====== ====== LIABILITIES AND EQUITY Current liabilities: Short-term bank borrowings 2,025 1,616 Long-term bank loans, current portion 968 381 Capital lease obligations, current portion 2 50 Accounts payable 187 1,353 Accrued expenses 172 329 Deposit from customers 6,990 4,016 Income taxes payable 2,343 4,014 ------ ------ Total current liabilities 12,687 11,759 Long-term bank loans, non-current portion 286 851 Capital lease obligations, non-current portion - 28 Deferred income taxes 13 - ------ ------ Total liabilities 12,986 12,638 ------ ------ Equity: Capital 1 66 Retained earnings 4,474 2,867 Cumulative translation adjustments 56 105 ------ ------ Total equity 4,531 3,038 ------ ------ Total liabilities and equity 17,517 15,676 ====== ======
The accompanying notes are an integral part of these financial statements. F-3 THE HANG FUNG GROUP COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (Expressed in United States dollars)
1994 1995 1996 ------ ------ ------ $'000 $'000 $'000 Cash flows from operating activities: Net income 1,311 2,863 3,393 Adjustments to reconcile net income to net cash (used in) provided by operating activities - Depreciation of property, plant and equipment 207 373 678 Provision for bad and doubtful debts 124 202 114 Provision for deferred income taxes 2 (5) (13) (Increase) Decrease in operating assets - Accounts receivable (1,552) (1,773) 2,455 Inventories (1,637) 490 179 Prepayments and other current assets 9 (4) - Due from a director (3,304) (1,440) 431 Increase (Decrease) in operating liabilities- Accounts payable (703) (6) 1,166 Accrued expenses 73 50 157 Deposit from customers 4,137 (904) (2,974) Income taxes payable 707 1,515 1,671 ------ ------ ------ Net cash (used in) provided by operating activities (626) 1,361 7,257 ------ ------ ------ Cash flows from investing activities: Additions to property, plant and equipment (728) (1,297) (2,090) ----- ------ ------ Net cash used in investing activities (728) (1,297) (2,090) ----- ------ ------ Cash flows from financing activities: Issuance of common stock - - 65 Payment of dividends - - (5,000) Net increase (decrease) in short-term bank borrowings 842 (57) (409) Repayment of capital lease obligations (36) (24) (27) Additions of long-term bank loans 1,074 129 1,257 Repayment of long-term bank loans (292) (418) (1,279) ------ ------ ------ Net cash provided by (used in) financing activities 1,588 (370) (5,393) ------ ------ ------ Effect of exchange rate changes on cash 1 89 70 ------ ------ ------ Net increase (decrease) in cash 235 (217) (156) Cash, as of beginning of year 382 617 400 ------ ------ ------ Cash, as of end of year 617 400 244 ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-4 THE HANG FUNG GROUP COMBINED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED MARCH 31, 1994, 1995 AND 1996 (Expressed in United States dollars)
Cumulative Retained Translation Capital Earnings Adjustments ------- -------- ----------- $'000 $'000 $'000 Balance as of March 31, 1993 1 300 - Net income - 1,311 - Translation adjustments - - (31) ----- ------ --- Balance as of March 31, 1994 1 1,611 (31) Net income - 2,863 - Translation adjustments - - 87 ----- ------ --- Balance as of March 31, 1995 1 4,474 56 Issuance of common stock 65 - - Net income - 3,393 - Dividends - (5,000) - Translation adjustments - - 49 ----- ------ --- Balance as of March 31, 1996 66 2,867 105 ===== ====== ===
The accompanying notes are an integral part of these financial statements. F-5 THE HANG FUNG GROUP NOTES TO THE COMBINED FINANCIAL STATEMENTS (Amounts expressed in United States dollars unless otherwise stated) 1. ORGANIZATION AND OPERATIONS The Hang Fung Group (the "Group") composed of companies/entities owned and controlled by Mr. Lam Sai Wing and Ms. Chan Yam Fai, husband and wife. During the years ended March 31, 1994, 1995 and 1996, the Group had the following companies/entities:
Place of Name of company/entity Incorporation Principal activities - ----------------------------------- ---------------- ----------------------------- Hang Fung Jewellery Co., Limited Hong Kong Manufacturing and selling of ("HFJCL") (Note a) jewellery products Kai Hang Jewellery Co., Limited Hong Kong Selling of jewellery products ("KHJCL") (Note a) Hang Fung Jewellery Company Hong Kong Dormant ("HFJC") (Note a) Hang Fung Manufacturing Company Hong Kong Dormant ("HFMC") (Note a) Beijing Huarong Jewellery Co., Ltd. The People's Dormant ("BHJCL") (Note b) Republic of China ("PRC")
- ----------------------------- Notes: a. HFJCL took over the businesses previously undertaken by HFJC (effective September 1995) and HFMC (effective November 1994). HFJCL and KHJCL were jointly owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai. HFJC was an unincorporated sole-proprietorship entity owned by Mr. Lam Sai Wing. HFMC was an unincorporated sole-proprietorship entity owned by Ms. Chan Yam Fai. b. BHJCL is a contractual joint venture incorporated in the PRC to be operated for 20 years up to 2013. It was registered to engage in the manufacturing and trading of jewellery products. However, the Company has not commenced operation since incorporation. F-6 1. ORGANIZATION AND OPERATIONS (Continued) The Group is principally engaged in the production and selling of jewellery products to customers in Hong Kong, the PRC and other parts of the world. The Group's production and selling activities in the PRC are mainly operated through arrangements with China National Pearl, Diamond, Gem and Jewellery Import and Export Corporation ("CNPIEC"), a PRC state-owned enterprise, which is one of the few entities authorized to trade gold and silver products in the PRC. During the year ended March 31, 1996, approximately 45% of the Group's sales and approximately 53% of the Group's subcontracting fees resulted from its business conducted in the PRC under this arrangement. The key transactions with CNPIEC were as follows: a. Under a subcontracting agfeement dated November 18, 1994 and subsequent supplemental agreement entered into between HFJCL and CNPIEC, HFJCL has operated a plant in Beijing, the PRC ("the Beijing Plant") to produce jewellery products for sales to customers outside the PRC. b. The Beijing Plant also provides subcontracting services to PRC customers at the instruction and on behalf of CNPIEC, and shares a portion of the subcontracting fees received by CNPIEC. During the years ended March 31, 1994, 1995 and 1996, HFJCL's share of these subcontracting fees amounted to approximately $3,113,000, $3,566,000 and $3,966,000, repectively. c. Under an agency agreement and a co-operative selling agreement both dated November 18, 1994 and a subsequent supplemental agreement for these two agreements entered into between HFJCL and CNPIEC, HFJCL has appointed CNPIEC as its agent for sales of its gold and silver products in the PRC. In return, HFJCL pays to CNPIEC an agency fee determined on a fixed percentage of the sales proceeds collected by CNPIEC. During the years ended March 31, 1994, 1995 and 1996, agency fees paid to CNPIEC amounted to approximately $207,000, $196,000 and $88,000, respectively. d. Other transactions with CNPIEC were as follows:
1994 1995 1996 ------ ------ ------ $'000 $'000 $'000 Purchases of gold and silver from CNPIEC 3,714 2,961 2,461 Management fees paid to 87 115 84 CNPIEC ===== ===== =====
e. Pursuant to an agreement between HFJCL and CNPIEC, CNPIEC has agreed to undertake and pay for all of HFJCL's PRC tax liabilities, including value-added tax, if any, relating to HFJCL's operations under the above-mentioned activities. F-7 1. ORGANIZATION AND OPERATIONS (Continued) Under an agreement dated December 1, 1994, HFJCL has appointed Yiu Ping Gold and Silver Manufacturing Factory ("YPGSMF"), another PRC state-owned enterprise which is licensed to sell gold and silver products in the PRC, as its agent for sales of its gold and silver products in the PRC. In return, HFJCL pays to YPGSMF an agency fee determined on a fixed percentage of the sales effected by YPGSMF. During the years ended March 31, 1994, 1995 and 1996, agency fees paid to YPGSMF amounted to approximately $34,000, $35,000 and $48,000, respectively. In addition, HFJCL also entered into a subcontracting agreement with Shenzhen Crafts Hang Fung Jewellery Factory ("SCHFJF"), another PRC state-owned enterprise, for the production of HFJCL's gold and silver products in Shenzhen, the PRC, for shipments out of the PRC. During the years ended March 31, 1994, 1995 and 1996, subcontracting fees paid to SCHFJF amounted to approximately $263,000, $240,000 and $240,000, respectively. 2. BASIS OF PRESENTATION The combined financial statements include the financial statements of the following companies/entities, which are all owned and controlled by Mr. Lam Sai Wing and Ms. Chan Yam Fai: o Hang Fung Jewellery Co., Limited o Kai Hang Jewellery Co., Limited o Hang Fung Jewellery Company o Hang Fung Manufacturing Company o Beijing Huarong Jewellery Co., Ltd. Significant transactions and balances among the companies/entities have been eliminated on combination. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The combined financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. Significant accounting policies are summarized below: a. Revenues Revenues comprise (i) the net invoiced value of goods supplied to customers, which are recognized upon delivery of goods, passage of title to customers and the expiration of any right of return, and (ii) subcontracting fees which are recognized when the subcontracting service is rendered. F-8 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) b. Income taxes Income taxes are provided under the provisions of Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. c. Inventories Inventories are stated at the lower of cost, on a first-in first-out basis, or market. Costs of finished goods include direct materials, direct labor and an attributable portion of production overheads. d. Property, plant and equipment Property, plant and equipment are stated at cost. Depreciation for financial reporting purposes is provided using the straight-line method over the asset's estimated useful life after taking into account the estimated residual value. The estimated useful lives are as follows: Leasehold land 70 years Building 20 years Machinery and equipment 5 - 10 years Motor vehicles 5 years Furniture, fixtures and office equipment 5 years Machinery and equipment held under capital leases are depreciated on the same basis as described above. e. Foreign currency translation The translation of the financial statements of group companies into United States dollars is performed for balance sheet accounts using closing exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during each reporting period. The gains or losses resulting from translation are included in equity separately as cumulative translation adjustments. Aggregate (loss) gain from foreign currency transactions included in the results of operations were ($1,721), $3,463 and $942 for the year ended March 31, 1994, 1995 and 1996, respectively. F-9 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) f. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 4. PROVISION FOR INCOME TAXES The group companies are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. Companies/entities operating in Hong Kong are subject to Hong Kong profits tax at rates ranging from 15% to 16.5%, and companies/entities operating in the PRC are subject to PRC income taxes at a rate of 33%. The components of provision for income taxes are:
1994 1995 1996 ------ ------ ------ $'000 $'000 $'000 Provision for current tax - Hong Kong 70 39 21 - The PRC 694 1,438 1,642 Provision for (Write-back of) deferred tax 2 (5) (13) --- ----- ----- 766 1,472 1,650 === ===== =====
The reconciliation of the statutory income tax rate to the effective income tax rate as stated in the combined statements of operations is as follows:
1994 1995 1996 ------ ------ ------ Weighted average statutory tax rate 32.3% 32.3% 32.3% Permanent differences arising from non-deductible items 4.6% 1.7% 0.4% ----- ----- ----- Effective income tax rate 36.9% 34.0% 32.7% ===== ===== =====
F-10 5. ACCOUNTS RECEIVABLES Accounts receivable comprised: 1995 1996 ------ ------ $'000 $'000 Trade receivables 5,896 3,441 Less: Allowance for doubtful accounts (334) (452) ----- ----- Accounts receivable, net 5,562 2,989 ===== ===== 6. INVENTORIES Inventories comprised: 1995 1996 ------ ------ $'000 $'000 Raw materials 1,530 2,784 Finished goods 3,153 3,317 Consigned finished goods 3,565 1,968 ----- ----- 8,248 8,069 ===== ===== 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment comprised: 1995 1996 ------ ------ $'000 $'000 Leasehold land and building 255 255 Machinery and equipment 1,721 3,737 Motor vehicles 184 88 Furniture, fixtures and office equipment 555 312 ----- ------ 2,715 4,392 Less: Accumulated depreciation (909) (1,088) ----- ------ 1,806 3,304 ===== ====== Certain machinery and equipment with a net book value of approximately $22,000 and $131,000 as of March 31, 1995 and 1996, respectively, were held under capital leases. F-11 8. SHORT-TERM BANK BORROWINGS Short-term bank borrowings comprised : 1995 1996 ------ ------ $'000 $'000 Bank overdraft 1,836 518 Import trust receipt loans 189 1,098 ----- ----- 2,025 1,616 ===== ===== Short-term bank borrowings were secured by mortgages over certain real estate properties owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, and personal guarantees given by Mr. Lam Sai Wing and Ms. Chan Yam Fai. Interest on these borrowings was charged at Hong Kong prime lending rate plus 1.5% to 3%, which was 10% to 11.5% per annum as of March 31, 1996. Supplemental information with respect to the short-term bank borrowings was: 1995 1996 ------ ------ $'000 $'000 Maximum amount outstanding 2,065 2,025 Average amount outstanding 1,856 1,443 Weighted average interest rate per annum 11.9% 10.5% ===== ===== 9. ACCRUED EXPENSES Accrued expenses comprised: 1995 1996 ------ ------ $'000 $'000 Accruals for operating expenses - Employee salaries 84 122 - Others 88 207 --- --- 172 329 === === 10. LONG-TERM BANK LOANS Long-term bank loans were secured by mortgages over the Group's real estate property (leasehold land and building), mortgages over real estate properties owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, and personal guarantees given by Mr. Lam Sai Wing and Ms. Chan Yam Fai. They bear average interest rates of approximately 10.5% per annum. F-12 10. LONG-TERM BANK LOANS (Continued) Aggregate maturities of long-term bank loans are as follows: 1996 ------ $'000 Year ending March 31, 1997 381 1998 88 1999 98 2000 108 2001 121 Thereafter 436 ----- 1,232 ===== 11. CAPITAL LEASE OBLIGATIONS Future minimum lease payments under the capital leases together with the present value of the minimum lease payments are as follows: 1995 1996 ------ ------ $'000 $'000 Payable during the following period: Within one year 3 59 Over one year but not exceeding two years - 29 ----- ---- Total minimum lease payments 3 88 Less: Amount representing future interest (1) (10) ----- ---- Present value of minimum lease payments 2 78 Less: Current portion (2) (50) ----- ---- Non-current portion - 28 ===== ===== 12. SUPPLEMENTAL DISCLOSURE TO COMBINED STATEMENTS OF CASH FLOWS 1994 1995 1996 ------ ------ ------ $'000 $'000 $'000 Cash paid for interest expenses 224 347 392 Cash received from interest income 11 17 11 === === === Capital lease obligations of Nil, Nil and approximately $103,000 were incepted during the years ended March 31, 1994, 1995 and 1996 when the Group entered into leases for new machinery and equipment. F-13 13. PENSION SCHEME The Group's employees in the PRC are all hired on a contractual basis and consequently the Group has no obligation for pension liabilities of these employees. The Group has arranged a voluntary defined contribution pension scheme for its employees in Hong Kong. Seven out of the approximately eighty employees have joined the scheme and the aggregate amounts of the Group's contribution to the scheme for the years ended March 31, 1994, 1995 and 1996 were approximately $10,000, $7,000 and $2,000, respectively. 14. LEASE COMMITMENTS The Group leases various staff quarters, factory premises and warehouses under non-cancelable operating leases which expire at various dates through 1997. Rental expenses for the years ended March 31, 1994, 1995 and 1996 were approximately $181,000, $213,000 and $257,000, respectively. Future minimum rental payments as of March 31, 1996, under agreements classified as operating leases with noncancelable terms in excess of one year and payable within next year, are approximately $9,000. 15. OPERATING RISKS a. Dependence Gold and silver products are restricted commodities in the PRC and special authorization is required to trade gold and silver products in the PRC. The PRC government has only granted a few licences to PRC state-owned enterprises to trade gold and silver products. The Group's present operations in the PRC are conducted through various agreements with three PRC state-owned enterprises as described in Note 1. Any changes in any of these strategic relationships would have a material adverse effect on the revenue and profitability of the Group and would potentially limit the Group's ability to continue to conduct business in the PRC. b. Concentration The Group's sales and subcontracting services are made to customers on an open account basis and generally no collateral is required. Details of individual customers accounting for more than 10% of the Group's total revenues are as follows: Percentage of total revnues -------------------------------------------------- 1994 1995 1996 --------------- --------------- --------------- CNPIEC 14.4% 18.0% 14.5% Tai Seng Ho Silver & Gold Jewellery Co., Ltd. - - 27.1% =============== =============== =============== F-14 15. OPERATING RISKS (Cont'd) b. Concentration of credit risk and major customers (Continued) Concentration of accounts receivable as of March 31, 1995 and 1996 is as follows: Percentage of accounts receivable ----------------------------------- 1 9 9 5 1 9 9 6 --------------- --------------- Five largest accounts receivable 47.1% 32.3% =============== =============== TheGroup performs ongoing credit evaluation of each customer's financial condition and maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations. c. Concentration of suppliers Details of individual suppliers accounting for more than 10% of the Group's purchases are as follows: Percentage of purchases -------------------------------------------------- 1994 1995 1996 --------------- --------------- --------------- CNPIEC 30.0% 21.3% 13.2% Heraeus Ltd. 27.3% 36.5% 32.7% =============== =============== =============== d. Country risk The Group's operations are conducted in Hong Kong and the PRC. As a result, the Group's business, financial condition and results of operations may be influenced by the political, economic and legal environments in Hong Kong and the PRC, and by the general state of the Hong Kong and the PRC economies. On July 1, 1997, sovereignty over Hong Kong will be transferred from the United Kingdom to the PRC, and Hong Kong will become a Special Administrative Region of the PRC (an "SAR"). As provided in the Sino-British Joint Declaration relating to Hong Kong and the Basic Law of the Hong Kong SAR of the PRC, the Hong Kong SAR will have full economic autonomy and its own legislative, legal and judicial systems for fifty years. The Group's management does not believe that the transfer of sovereignty over Hong Kong will have an adverse impact on the Group's financial and operating environments. There can be no assurance, however, that changes in political or other conditions will not result in such an adverse impact. The Group's operations in the PRC are subject to special considerations and significant risks not typically associated with companies operating in North American and Western European. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Group's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. In addition, a portion of the Group's revenue is denominated in Renminbi ("Rmb") which must be converted into other currencies before remittance outside the PRC. Both the conversion of Renminbi into foreign currencies and the remittance of foreign currencies abroad require approvals of the PRC government. F-15 16. RELATED PARTY TRANSACTIONS a. The Group entered into the following transactions with related parties: 1 9 9 4 1 9 9 5 1 9 9 6 --------- --------- --------- $'000 $'000 $'000 Sales to a related company - - Hang Fung Jewellery Co., Inc. ("HFJCI") 201 112 83 Rental paid to Ms. Chan Yam Fai 149 174 199 Salaries paid to - - Mr. Lam Sai Wing 40 45 55 - - Ms. Chan Yam Fai 40 45 55 ==== ==== ==== Prior to [October 1, 1996], HFJCI was beneficially owned by Mr. Lam Sai Wing and was principally engaged in the provision of marketing service for HFJCL in the United States of America. Effective from [October 1, 1996], Mr. Lam Sai Wing disposed all of his shareholdings in HFJCI to an unrelated party. b. The amounts due from Mr. Lam Sai Wing of approximately $1,487,000 and $1,056,000 as of March 31, 1995 and 1996, respectively, were unsecured, non-interest bearing and without pre-determined repayment terms. c. The Group's banking facilities were secured by, among others, mortgages over real estate properties owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai and personal guarantees given by Mr. Lam Sai Wing and Ms. Chan Yam Fai. 17. OTHER SUPPLEMENTAL INFORMATION 1994 1995 1996 ------ ------ ------ $'000 $'000 $'000 Depreciation of fixed assets - - owned assets 196 362 663 - - assets held under capital leases 11 11 15 Provision for bad and doubtful debts 124 202 114 ==== ==== ==== F-16 THE HANG FUNG GROUP COMBINED BALANCE SHEETS (UNAUDITED) (AMOUNTS EXPRESSED IN UNITED STATES $`000)
September 30, March 31, 1996 1996 ------------- --------- ASSETS Current assets: Cash $ 47 $ 244 Accounts receivable, net 3,873 2,989 Inventories 9,110 8,069 Prepayments and other current assets 34 14 Due from directors 398 1,056 ------- ------- Total current assets 13,462 12,372 Property plant and equipment, net 4,216 3,304 ------- ------- Total assets $17,678 $15,676 ======= ======= LIABILITIES AND EQUITY Current liabilities: Short-term bank borrowings $ 1,418 $ 1,616 Current portion of long-term debt 310 381 Current portion of lease obligations 93 50 Accounts payable 1,277 1,353 Accrued expenses 247 329 Deposits 4,014 4,016 Income taxes payable 4,379 4,014 -------- ------- Total current liabilities 11,738 11,759 Long-term loans 815 851 Capital lease obligations 31 28 Deferred income taxes 27 - -------- ------- Total liabilities 12,611 12,638 -------- ------- Shareholders equity Common Stock, $.001 par value 66 66 Retained earnings 4,874 2,867 Cumulative translation adjustments 127 105 ------- ------- Total shareholders equity 5,067 3,038 ------- ------- Total liabilities and shareholders equity $17,678 $15,676 ======= =======
See accompanying notes to condensed combined financial statements F-17 THE HANG FUNG GROUP COMBINED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30 (AMOUNTS EXPRESSED IN UNITED STATES $`000)
Three Months Ended Six Months Ended September 30, September 30, 1996 1995 1996 1995 ------ ------ ------ ------ Net sales $6,413 $4,874 $12,058 $ 9,190 Subcontracting fee 1,585 1,734 3,103 3,379 ------ ------ ------- ------ Total revenues 7,998 6,608 15,161 12,569 Cost of sales and services 5,722 4,659 10,701 8,852 ----- ------ ------- ------- Gross profit 2,276 1,949 4,460 3,717 Selling, general and administrative expenses 824 832 1,643 1,552 ----- ------ ------- ------- Operating income 1,452 1,117 2,817 2,165 Interest income (expense), net (77) (29) (133) (45) Other income, net 17 8 35 28 ----- ------ ------- ------- Income before taxes 1,392 1,096 2,719 2,148 Provision for income taxes 360 330 712 650 ----- ------ ------- ------- Net income $1,032 $ 766 $ 2,007 $ 1,498 ====== ====== ======= =======
See accompanying notes to condensed combined financial statements F-18 THE HANG FUNG GROUP COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED SEPTEMBER 30 (AMOUNTS EXPRESSED IN UNITED STATES DOLLARS $`000)
Six Months Ended September 30, ------------------------------ 1996 1995 -------- -------- Cash flows from operating activities Net income $ 2,007 $ 1,498 Adjustments to reconcile net income to net cash (used in) provided by operating activities Depreciation of property, plant and equipment 228 339 Provision for bad and doubtful debts 57 57 Provision for deferred income taxes 27 (7) (Increase) decrease in operating assets Account receivable (884) 1,228 Inventories (1,041) 90 Prepayments and other current assets (20) - Due from a director 658 216 Increase (decrease) in operating liabilities Accounts payable (76) 583 Accrued expenses (82) 79 Deposit from customers (2) (1,487) Income taxes payable 365 836 -------- ------- Net cash provided by (used in) operating activities 1,237 3,434 -------- ------- Cash flows from investing activities: Additions to property, plant and equipment (1,148) (1,045) --------- -------- Net cash used in investing activities (1,148) (1,045) -------- -------- Cash flows from financing activities: Issuance of common stock - 33 Payment of dividends - (2,600) Net increase (decrease) in short-term bank borrowings (198) (205) Repayment of capital lease obligations (3) (14) Additions of long-term bank loans 539 629 Repayment of long-term bank loans (646) (640) ------- -------- Net cash provided by (used in) financing activities (308) (2,797) ------- -------- Effect of exchange rate changes on cash 22 35 ------- -------- Net increase (decrease) in cash (197) (373) Beginning cash balance 244 400 ------- -------- Ending cash balance $ 47 $ 28 ======= ========
See accompanying notes to condensed combined financial statements F-19 THE HANG FUNG GROUP NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (UNAUDITED) 1. INTERIM FINANCIAL PRESENTATION The March 31, 1996 balance sheet data was derived from audited financial statements of the Hang Fung Group but does not include all disclosures required by generally accepted accounting principles. The interim financial statements and notes thereto should be read in conjunction with the financial statements and notes for the year ended March 31, 1996. In the opinion of management, the interim financial statements reflect all adjustments of normal recurring nature necessary for a fair presentation of the results for the interim periods presented. 2. CURRENCY PRESENTATION AND FOREIGN CURRENCY TRANSLATION Assets and liabilities of foreign subsidiaries are translated at period and exchange rates, while revenues and expenses are translated at average exchange rates during the period. Adjustments arising from translating foreign currency financial statements are reported as a separate component of stockholders' equity. Gains and losses from foreign currency translations are included in income. Aggregate net foreign currency gains or losses were immaterial for all periods. The financial statements of the Company are maintained, and its financial statements are expressed, in Hong Kong dollars. The translations of HK dollar amounts into US dollars are for convenience only and have been made at the rate of HK$7.73 to US$1, the approximate free rate of exchange at September 30, 1996. Such translations should not be construed as representations that the Hong Kong dollar amount could be converted into US dollars, at that rate or any other rate. F-20 INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors New Wine, Inc. We have audited the accompanying balance sheets of New Wine, Inc. (a development stage Company) as of June 30, 1996, December 31, 1995 and 1994, and the related statements of income, stockholders' equity and cash flows for the period ended June 30, 1996, December 31, 1995 and 1994 and for the period from inception (April 12, 1994) to June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of New Wine, Inc. (a development stage Company) as of June 30, 1996, December 31, 1995 and 1994, and the results of its operations and its cash flows for the years ended June 30, 1996, December 31, 1995 and 1994 and for the period from inception (April 12, 1994) to June 30, 1996 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to this matter are to raise additional capital and acquire any and all types of assets, properties and businesses, which management expects will result in profitable operations for the Company. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of these uncertainties. /s/ Albright, Persing & Associates, Ltd. - ---------------------------------------- Albright, Persing & Associates, Ltd. Reno, Nevada August 2, 1996 F-21 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS JUNE 30, 1996, DECEMBER 31, 1995 AND 1994 (SEE INDEPENDENT AUDITORS' REPORT) ASSETS
Years Ended ---------------------------------------- June 30, December 31, December 31, 1996 1995 1994 --------- ------------ ------------ Current Assets Cash $ - $ 60 $ 2,454 --------- --------- --------- Other Assets Deferred tax asset, net of valuation allowance (Note 4) - - - --------- --------- --------- - - - --------- --------- --------- Total Assets $ - $ 60 $ 2,454 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY/DEFICIT Stockholders' Equity/Deficit Common stock, par value $.01/share authorized 3,000,000 shares, issued and outstanding 1,500,000 shares at June 30, 1996, December 31, 1995, and 1,275,000 at December 31, 1994 $ 15,000 $ 15,000 $ 12,750 Additional paid-in-capital 320,131 320,131 277,381 Deficit accumulated during the development stage (335,131) (335,071) (274,261) --------- --------- --------- - 60 15,870 Less: Subscriptions receivable - - (13,416) --------- --------- ---------- Total Liabilities and Stockholders' Equity $ - $ 60 $ 2,454 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-22 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) INCOME STATEMENT FOR THE YEARS ENDED JUNE 30, 1996, DECEMBER 31, 1995 AND 1994 AND INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996 (SEE INDEPENDENT AUDITORS' REPORT)
Cumulative Years Ended During June 30, December 31 Development 1996 1995 1994 Stage ---------- ---------- ---------- ----------- Net Sales $ - $ - $ - $ - ---------- ---------- ---------- ---------- Cost of Goods Sold - - - - ---------- ---------- ---------- ---------- Gross Profit - - - - ---------- ---------- ---------- ---------- Costs and expenses Advertising - 4,755 856 5,611 Auto expenses - 3,419 407 3,826 Bank Charges - 122 32 154 Contributions (donations) - 219 - 219 Dues and subscriptions - 38 250 288 Insurance - 672 - 672 Maintenance - 1,757 - 1,757 Miscellaneous 24 159 97 280 Office expense 16 4,149 673 4,838 Outside labor - 163 - 163 Professional Services - 22,741 270,126 292,867 Rent - 15,470 1,030 16,500 Studio time - 22 150 172 Taxes and licenses - 798 - 798 Telephone - 4,579 390 4,969 Travel 20 767 250 1,037 Utilities - 1,004 - 1,004 ---------- ---------- ---------- ---------- 60 60,834 274,261 335,155 Net Loss Before Debt Forgiveness Income (60) (60,834) (274,261) (335,155) Debt Forgiveness Income (Note 5) - 24 - 24 ---------- ---------- ---------- ---------- Net (loss) before income taxes (60) (60,810) (274,261) (335,131) Income Taxes (Note 4) - - - - ---------- ---------- ---------- ---------- Net (loss) $ (60) $ (60,810) $ (274,261) $ (335,131) ========== ========== ========== ========== Net income (loss) per common share Continuing operations $ (.00) $ (.05) $ (.22) $ (.24) ========== ========== ========== ========== Weighted average shares outstanding $1,500,000 $1,343,425 $1,275,000 $1,382,746 ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-23 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1996, DECEMBER 31, 1995 AND 1994 AND INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996 (SEE INDEPENDENT AUDITORS' REPORT)
Cumulative Years Ended During June 30, December 31 Development 1996 1995 1994 Stage ------ --------- --------- ----------- Cash Flows from/(for) Operating Activities: Continuing operations Net income (loss) $(60) $(60,810) $(274,261) $(335,155) ---- -------- --------- --------- Noncash items included in net income (loss) Stock issued for professional services rendered - - 269,565 269,565 Changes in assets and liabilities: Increase in deferred tax asset (9) (9,122) (41,139) (50,270) Increase in valuation allowance 9 9,122 41,139 50,270 ---- -------- --------- --------- Net Adjustments - - 269,565 269,565 ---- -------- --------- --------- Cash (Used) by Operating Activities (60) (60,810) (4,696) (65,666) ---- -------- --------- --------- Cash Flows from/(for) Financing Activities: Proceeds from stockholder advances - 45,000 7,150 52,150 Decrease in stock subscriptions receivable - 13,416 - 13,416 ---- -------- --------- --------- Cash Provided by Investing Activities - 58,416 7,150 65,566 ---- -------- --------- --------- Net change in cash (60) (2,394) 2,454 0 Cash at beginning of period 60 2,454 - - ---- -------- --------- --------- Cash at end of period $ 0 $ 60 $ 2,454 $ 0 ==== ======== ========= =========
The accompanying notes are an integral part of these financial statements. F-24 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIT FOR THE YEARS ENDED JUNE 30, 1996, DECEMBER 31, 1995 AND 1994 AND INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996 (SEE INDEPENDENT AUDITORS' REPORT)
Deficit Accumulated Additional During the Common Stock Paid-in Development Shares Amount Capital Stage Total --------- -------- -------- ----------- ---------- Issuance of shares of common stock on April 12, 1994, for professional services rendered 877,500 $ 8,775 $166,725 $ - $ 175,500 Issuance of shares of common stock on April 12, 1994 for cash 397,500 3,975 110,656 - 114,631 Net loss for 1994 - - - (274,261) (274,261) --------- ------- ------- --------- ---------- Balance - December 31, 1994 1,275,000 12,750 277,381 (274,261) 15,870 Issuance of shares of common stock on September 11, 1995 for cash 225,000 2,250 42,750 - 45,000 Net loss for 1995 - - - (60,810) (60,810) --------- ------- ------- --------- --------- Balance - December 31, 1995 1,500,000 $15,000 $320,131 $(335,071) $ 60 Net loss for the six months ended June 30, 1996 - - - (60) (60) --------- ------- -------- --------- --------- Balance - June 30, 1996 1,500,000 $15,000 $320,131 $(335,131) $ - ========= ======= ======== ========= =========
The accompanying notes are an integral part of these financial statements. F-25 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FROM INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996 (SEE INDEPENDENT AUDITORS' REPORT) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY This summary of significant accounting policies of New Wine, Inc. (the Company) is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Business Activity The Company, a Tennessee corporation located in Broken Bow, Oklahoma, was incorporated on April 12, 1994, and is currently in the development stage. The sole purpose for organizing the Company was to provide a shell corporation for possible future mergers with privately-held companies seeking to go public. Noncash Securities Issuance Shares of common stock issued for other than cash have been assigned amounts equivalent to the fair value of the services received in exchange. Accounting Method The Company's financial statements are prepared using the accrual method of accounting. Income (Loss) per Share The computation of income (loss) per share of common stock is based on the weighted average number of shares outstanding during the periods presented. Statement of Cash Flows The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. F-26 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FROM INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996 (SEE INDEPENDENT AUDITORS' REPORT) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY - Continued Income Taxes Effective January 1, 1993, New Wine, Inc. adopted SFAS No. 109, "Accounting for Incomes Taxes," which requires a liability approach to financial accounting and reporting for incomes taxes. The differences between the financial statement and tax bases of assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce deferred tax asset accounts to the amounts that will more likely than not be realized. Income tax expense is the current tax payable or refundable for the period, plus or minus the net change in the deferred tax asset and liability accounts. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities, (2) disclosure of contingent assets and liabilities at the date of the financial statements, and (3) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - BASIS OF PRESENTATION AND CONSIDERATIONS RELATED TO CONTINUED EXISTENCE The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred net losses of $335,131 for the period from inception (April 12, 1994) to June 30, 1996. This factor, among others, raises substantial doubt as to the Company's ability to obtain additional long-term debt and/or equity financing and achieve profitable operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. In the interim period, management is still seeking additional investment capital to support its entrance into a new business venture and provide the capital needed to operate. F-27 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FROM INCEPTION (APRIL 12, 1994) TO JUNE 30, 1996 (See Independent Auditor's Report) NOTE 4 - DEVELOPMENT STAGE COMPANY The Company is a development stage company as defined in Financial Accounting Standards Board Statement No. 7. It has yet to commence full-scale operations. From inception through the date of these financial statements, the Company did not have any revenues or earnings. At the current time, the Company has no assets or liabilities. If a public market develops for the Company's shares, certain privately-held companies or business opportunities may be interested in merging with the Company because the Company's securities would be publicly traded, thereby allowing the privately-held company to become publicly traded through the merger. At the current time, the Company has no agreement, understanding or arrangement to acquire or participate in any specific business opportunity nor has it identified any opportunities for investigation. The Company's potential future success depends upon its management and its continuing search for a business opportunity. NOTE 4 - INCOME TAXES Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or noncurrent, depending on the classification of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. Amounts for deferred tax assets are as follows:
Year Ended ---------------------------------- June 30, December 31, 1996 1995 1994 -------- -------- -------- Deferred tax asset, net of valuation allowance of $50,270 in 1996, $50,261 in 1995 and $41,139 in 1994 $ - $ - $ - ===== ===== =====
F-28 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FROM INCEPTIONS (APRIL 12, 1994) TO JUNE 30, 1996 (See Independent Auditor's Report) NOTE 4 - INCOME TAXES - Continued The following temporary differences gave rise to the deferred tax asset at June 30, 1996, December 31, 1995 and 1994:
Year Ended June 30, December 31, 1996 1995 1994 -------- -------- -------- Tax benefit of net operating loss carryforward $ 9 $ 9,122 $ 41,139 Valuation allowance for judgement of realizability of net operating loss carryforward in future years (9) (9,122) (41,139)
Because the Company has not generated taxable income since its inception, no provision for income taxes has been made. The Company can carry forward its $335,131 net operating loss as follows: Year Ended December 31, ------------ 2009.........................$274,261 2010......................... 60,810 2011......................... 60 -------- $335,131 NOTE 5 - RELATED PARTY TRANSACTIONS During the year ended December 31, 1995, the principal shareholder of the corporation loaned money to the corporation. While most of the monies loaned to the corporation were repaid, $24 of the loan balance remained. On December 31, 1995, the shareholder forgave the remaining debt due and accordingly, the corporation has recorded this as debt-forgiveness income. F-29 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (UNAUDITED) ASSETS
September 30, December 31, 1996 1995 ------------- ------------ Current Assets Cash $ - $ 60 --------- --------- Other Assets - - --------- --------- Total Assets $ - $ 60 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY/DEFICIT Stockholders's Equity/Deficit Common stock, par value, $.01 per share; authorized 3,000,000 shares, issued and outstanding 1,500,000 shares $ 15,000 $ 15,000 Additional paid-in capital 320,131 320,131 Deficit accumulated during the development stage (335,131) (335,071) -------- -------- - 60 -------- -------- Total Liabilities and Stockholders' Equity $ - $ 60 ======== ========
The accompanying notes are an integral part of these financial statements F-30 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) INCOME STATEMENTS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1996 1995 1996 1995 ---------- ----------- ---------- ---------- Net Sales $ 0 $ 0 $ - $ - ---------- ---------- ---------- ---------- Cost of Goods Sold 0 0 - - ---------- ---------- ---------- ---------- Gross Profit 0 0 - - ---------- ---------- ---------- ---------- Selling, General and Administrative expenses 0 15,209 60 45,626 ---------- ---------- ---------- ---------- Net Loss Before Debt Forgiveness Income 0 (15,209) (60) (45,626) Debt Forgiveness Income 0 6 - 18 ---------- ---------- ---------- ---------- Net (loss) before income taxes 0 (15,203) (60) (45,608) Income Taxes 0 0 - - ---------- ---------- ---------- ---------- Net (loss) $ 0 $ (15,203) $ (60) $45,608) ========== ========== ========== ========== Net income (loss) per common share $ 0 $ (0.01) $ (.00) $ (.03) ========== ========== ========== ========== Weighted average shares outstanding 1,500,000 1,500,000 1,500,000 1,500,000 ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements F-31 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
September 30, ----------------- 1996 1995 ---- --------- Cash Flows from Operating Activities: Net income (loss) $(60) $(45,608) ---- -------- Noncash items included in net income (loss) Changes in assets and liabilities: Increase in deferred tax asset (9) (9,122) Increase in valuation allowance 9 9,122 ---- -------- Net Adjustments - - ---- -------- Cash (Used) by Operating Activities (60) (45,608) ---- -------- Cash Flows from/(for) Financing Activities: Proceeds from stockholder advances - 45,000 Decrease in stock subscription receivable - 13,416 ---- -------- Cash provided by Financing Activities - 58,416 ---- -------- Net change in cash (60) 12,808 Cash at beginning of period 60 2,454 ---- -------- Cash at end of period $ - $ 15,262 ==== ========
The accompanying notes are an integral part of these financial statements F-32 NEW WINE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (Unaudited) 1. Interim Financial Presentation The interim financial statements are prepared pursuant to the requirements for reporting on Form 10-Q. The December 31, 1995 balance sheet data was derived from audited fianancial statements but does not include all disclosures required by generally accepted accounting principles. The interim financial statements and notes thereto should be read in conjuntion with the audited financial statements and footnotes thereto for the year ended December 31, 1995. In the opinin of managment, the interim finanial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for the interim periods presented. F-33 S.W. LAM, INC. PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma condensed combined financial information reflects the December, 1996 acquisition by S.W. Lam, Inc. (formerly New Wine, Inc.) (the "Company") of 100% of the stock of Quality Prince Limited and Subsidiaries ("Quality Prince") in exchange for the issuance of 10,500,000 shares of common stock and 100,000 shares of Series A preferred stock. Quality Prince is a British Virgin Island corporation whose principal subsidiaries (the "Hang Fung Group") are engaged in the manufacture and sale of jewelry. The Hang Fung Group's operations are located in Hong Kong and the People's Republic of China ("PRC"). The pro forma balance sheet data at September 30, 1996 assumes the acquisition of Quality Prince as of September 30, 1996. Pro forma statement for operations data is not presented herewith as the operating results of the Company on a pro forma basis for both the year ended March 31, 1996 and the six months ended September 30, 1996, assuming consummation of the acquisition as of April 1, 1995, would have been substantially identical to the operating results reported by the Hang Fung Group during these periods. Pro forma earnings per share assuming completion of the acquisition as of April 1, 1995 were $.28 for the year ended March 31, 1996 and $.17 for the six months ended September 30, 1996 based on 12,000,000 shares outstanding following the acquisition. The historical financial information of Quality Prince as of and for the period ended September 30, 1996 have been derived from the financial statements of the Hang Fung Group included elsewhere herein and such information with respect to the Company has been derived from the financial statements of the Company for such period. The pro forma financial information should be read in conjunction with the accompanying notes thereto and with the financial statements of the Company and Quality Prince. The pro forma condensed combined financial information does not purport to be indicative of the financial position or operating results which would be achieved had the acquisition of Quality Prince been consummated as of the dates indicated and should not be construed as representative of future financial position or operating results. In management's opinion, all adjustments necessary to reflect the effects of the transactions described have been made. F-34 S.W. LAM, INC. PRO-FORMA CONDENSED COMBINED BALANCE SHEET As of September 30, 1996 (Amounts in United States $`000) (Unaudited)
S. W. The Hang Proforma Proforma Lam, Inc. Fung Group Adjustments Combined --------- ---------- ----------- -------- ASSETS Current assets: Cash $ 0 $ 47 $ - $ 47 Accounts receivable 0 3,873 - 3,873 Inventories 0 9,110 - 9,110 Other 0 432 - 432 ----- ------- ------ ------- Total current assets 0 13,462 - 13,462 Property, net 0 4,216 - 4,216 ----- ------- ------ -------- Total assets $ 0 $17,678 $ - $17,678 ===== ======= ====== ======= Current liabilities: Income tax payable $ 0 $ 4,379 $ - $ 4,379 Deposits 0 4,014 - 4,014 Short-term bank borrowings 0 1,418 - 1,418 Accounts payable 0 1,277 - 1,277 Other 0 650 - 650 ----- ------- ------ ------- Total current liabilities 0 11,738 - 11,738 Long-term bank loans 0 815 - 815 Capital lease obligations 0 31 - 31 Deferred income taxes 0 27 - 27 Shareholders' equity: Common stock 15 66 (69)(1) 12 Preferred stock 0 0 1 (1) 1 Additional paid-in capital 320 0 68 (1) 53 (335)(2) Retained earnings (deficit) (335) 4,874 335 (2) 4,874 Cumulative translation adjustments 0 127 - 127 ----- ------- ------ ------- Total shareholders' equity 0 5,067 0 5,067 ----- ------- ------ ------- Total liabilities and shareholders' equity $ 0 $17,678 $ 0 $17,678 ===== ======= ====== =======
The accompanying notes are an integral part of this proforma condensed combined balance sheet. F-35 S.W. LAM, INC. NOTES TO CONDENSED COMBINED FINANCIAL INFORMATION The proforma adjustments were made under the assumption that the proforma combined financial information has been prepared using the purchase method as a reverse acquisition whereby the company issuing its shares to effect a business combination is determined to be the acquiree in the business combination. Accordingly, The Hang Fung Group is deemed to be the acquirer and the assets of the company deemed to be acquired, S.W. Lam, Inc., are required to be adjusted to fair value on acquisition. As S.W. Lam had no assets, no fair value adjustments are required. 1. To record the issue of 10,500,000 shares of common stock and 100,000 shares of Series A preferred stock in exchange for the entire issued share capital of Quality Prince Limited. 2. To eliminate the deficit of S.W. Lam, Inc. F-36 EX-2.1PLANOFACQUISIT 2 EXHIBIT 2.1 - ACQUISITION AGREEMENT ACQUISITION AGREEMENT AGREEMENT, dated as of ___________, 1996, but effective as of _________, 1996 by and between S.W. Lam, Inc. a Nevada corporation (hereinafter "S.W. LAM"), and all of the shareholders (hereinafter "Shareholders") of Quality Prince Limited (hereinafter "Quality"), the controlling shareholders of Hang Fung Jewellery Company Limited and Kai Hang Jewellery Company Limited (hereinafter referred to collectively as "Hang Fung" or the "Hang Fung Group.") RECITALS WHEREAS, the Shareholders own or control in their respective capacities and have the right to sell, transfer and exchange all of the capital stock of Quality; WHEREAS, S.W. LAM, wishes to acquire all of the issued and outstanding capital stock of Quality in exchange for 10,500,000 shares of S.W. LAM common stock, par value $.001 per share (hereinafter referred to as the S.W. LAM Common Stock") representing approximately 87.5% of the issued and outstanding shares of S.W. LAM immediately following the exchange, and 100,000 shares of Class A Preferred Stock with a superior voting right as a class always equivalent to 30% of the total vote (hereinafter called "Class A Preferred Stock") on all corporate matters of S.W. LAM; WHEREAS, the Shareholders wish to exchange their shares of Quality for S.W. LAM Common Stock and Class A Preferred Stock; NOW THEREFORE, in consideration of the premises herein contained, and the mutual covenants hereinafter set forth, the parties hereto have agreed, and by these presents, do hereby contract as follows: 1 I. EXCHANGE OF SECURITIES Subject to the terms and conditions hereinafter set forth, at the time of the closing referred to in Article V hereof (hereinafter the "Closing Date"), S.W. LAM will issue and deliver to the Shareholders, 10,500,000 shares of S.W. LAM's Common Stock, and 100,000 shares of Class A Preferred Stock as designated in the Shareholder Ownership Schedule (further described below), in exchange for which the Shareholders will deliver, to S.W. LAM all of the issued and outstanding stock of Quality. Immediately following the exchange, the Shareholders will own approximately 87.50% of the issued and outstanding shares of S.W. LAM; and Quality will own 100% of the Class B shares of each member of the Hang Fung Group. II. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS The Shareholders represent and warrant to S.W. LAM, all of which representations and warranties shall be true and complete at the Closing Date, and shall survive the Closing Date for a period for three (3) years except those set forth in subsection 6 which shall survive the later of twelve months from the Closing Date, or twelve months from the date the accounts receivable become due and payable, that: 1. Organization. Both Quality and each member of the Hang Fung Group are corporations duly organized the validly existing and in good standing under the laws of the jurisdiction of their incorporation and each has the corporate power to own its property and carry on its businesses and activities as and where they are now being conducted. Certified copies of the Memorandum and Articles of Association of each member of the Hang Fung Group are attached hereto as Exhibit 1 and constitute true and correct copies of the Memorandum and Articles of Association of each company and include all amendments thereto to the date hereof. 2 2. Capital Stock (a) Quality Prince Limited. The authorized capital stock Quality Prince Limited consist of US$50,000 consisting of one class of common stock, US$1.00 per value each, of which 70 shares are authorized have been validly issued each are now outstanding. (b) Hang Fung Jewellery Company Limited. The authorized capital stock of Hang Fung Jewellery Company Limited consists of HK$500,000 divided into two classes: non-voting Class A shares, HK$1.00 par value each, of which two shares are authorized and have been validly issued and are now outstanding; and Class B voting shares, HK$1.00 par value each, of which 499,998 shares are authorized and 2 shares have been validly issued and are now outstanding. (c) Kai Hang Jewellery Company Limited. The authorized capital stock of Kai Hang Jewellery Company Limited consists of HK$11,000 divided into two classes: non-voting Class A shares, HK$1.00 par value each of which 10,000 shares are authorized and have been validly issued and are now outstanding; voting Class B voting shares, HK$1.00 par value each, of which 1,000 shares are authorized and 2 shares have been validly issued and are now outstanding. (d) Shareholder Ownership Schedule. The Shareholders represent and warrant that all of the Shareholders of Quality, and their respective number of shares owned is correctly designated in the Shareholder Ownership Schedule attached hereto and incorporated herein. These shareholders collectively own 100% of the capital stock of Quality. Further more the 10,500,000 S.W. LAM common shares, and the S.W. LAM Class A Preferred stock to be exchanged is to be allocated according to the designations on the Shareholder Ownership Schedule. 3 3. Authority. The Shareholders have the full power and authority to exchange the shares of the capital stock of Quality upon the term and conditions provided for in this Agreement, and all such shares have been validly issued, are fully paid and non-assessable, and are free and clear of any and all liens or other encumbrances. 4. Financials. The combined financial statements audited by Arthur Andersen & Co., Certified Public Accountants, at and for the year ended March 31, 1996, attached hereto as Exhibit 2, are true and correct statements as of the date thereof of the financial condition of Quality and each member of the Hang Fung Group and of their assets and liabilities prepared in accordance with generally accepted accounting principles consistently applied. From March 31, 1996, and until the Closing Date, no dividends or distributions of capital, surplus or profits shall be paid or declared by Quality or any other member of the Hang Fung Group nor will there be any redemption of any member's outstanding shares or otherwise, other than in the ordinary course of business, nor has any additional debt or equity securities been issued by Quality or any other member of the Hang Fung Group, nor have any agreements or commitments been entered into for the issuance of any such securities. 5. Inventories. The inventories of the Hang Fung Group as shown in Exhibit 2, and as specifically set forth in separate schedules dated as of March 31, 1996, and September 30, 1996 and attached hereto as Exhibit 3 are valued at the lower of cost or net realizable value. 6. Accounts Receivable. The accounts receivable of the Hang Fung Group shown in Exhibit 2, and detailed on a separate schedule as of September 30, 1996, specifically set forth in Exhibit 4, or those which are due and payable after the Closing Date shall be valid and collectible pursuant to their terms, and can reasonably be anticipated to be paid within 12 months after the Closing Date or the date when the accounts receivable are due and payable. 4 7. Other transactions. Since March 31, 1996, neither Quality nor any other member of the Hang Fung Group has engaged in any transaction other than transactions in the normal course of the operations of their businesses, except as specifically authorized by S.W. LAM in writing. Since March 31, 1996 no member of the Hang Fung Group has sold, assigned, or transferred any patent rights formulas, trademarks trade names copyrights licenses or other intangible assets. 8. Litigation. Neither Quality nor any other member of the Hang Fung Group is involved in any pending or threatened litigation which would materially affect the consolidated financial condition as shown by the respective balance sheets of March 31, 1996, shown on Exhibit 2 hereto, which has not been provided for on such balance sheets, or referred to in such balance sheets or footnotes attached thereto, or disclosed to S.W. LAM in writing. 9. Title. Quality and each member of the Hang Fung Group has and will have at the Closing Date, good and marketable title to all of their property and assets shown on Exhibit 2 hereto, free and clear of any and all liens or encumbrances or restrictions, except as shown on Exhibit 2 hereto, except for taxes and assessments due and payable after the Closing Date, or easements or minor restrictions which do not materially effect the present value or use of such real property. Additionally, Quality and each member of the Hang Fung Group have and will have at the Closing Date, good and marketable title to all of the property and assets shown on Exhibit 2 hereto, free and clear of any and all liens, encumbrances or restrictions, except as shown on Exhibit 2 hereto, except for taxes and assessments due and payable after the Closing Date or easements or minor restrictions which do not materially affect the present value or use of such real property. 5 10. Compliance with Securities Law. In connection with their acquisition of shares of S.W. LAM, each of the Shareholders hereby make the representations and warranties set forth in Article V, and such are incorporated herein. 11. Taxes. Quality and each member of the Hang Fung Group have filed all federal state or their equivalent income tax returns in each state, country or jurisdiction where they are qualified doing business, or incorporated and have filed all franchise tax returns or their equivalent which are required to be filed under applicable law and each member of the Hang Fung Group have paid all taxes as shown on such returns as such taxes have become due and payable and have paid all assessments received thereon that have become due. 12. Brokers/Finder's Fees. Neither Quality nor any member of the Hang Fung Group have retained or otherwise utilized the services of any broker or finder in connection with the transaction contemplated by this agreement. Furthermore, neither Quality nor any member of the Hang Fung Group has done any act to give rise to any valid claim(s) against S.W. LAM for a brokerage commission, finder's fee or similar charge. 13. Subsequent Actions. Between the date hereof and the Closing Date, both Quality and each member of the Hang Fung Group shall conduct their business as in the same manner in which they had theretofore been conducted and the Shareholders will not permit Quality or any other member of the Hang Fung Group to (1) enter into any contract, etc., other than in the ordinary course of business, or (2) declare or make any distribution of any kind to the Shareholders without first obtaining the written consent of S.W. LAM. 6 III. REPRESENTATIONS AND WARRANTIES OF S.W. LAM S.W. LAM represents and warrants to the Shareholders, all of which representations and warranties shall be true as of the Closing Date, and shall survive the Closing Date for a period of three (3) years that : 1. Organization. S.W. LAM is a corporation duly organized and validly existing and in good standing under the laws of the State of Nevada and has the corporate powers to own its properties and carry on its business as now being conducted and has authorized 50,000,000 capital stock consisting of 25,000,000 shares of Common Stock, $.001 par value per share, and 25,000,000 Preferred stock also having a $.001 par value. 1,500,000 shares of Common Stock are issued and outstanding as of the date hereof and there does not now exist nor will there exist at the Closing Date any agreement or commitment to issue any such securities. As of the Closing Date, there shall be 1,500,000 issued and outstanding shares of Common Stock, $.001 par value and as of such date, there shall be no other debt or equity securities of S.W. LAM outstanding and no agreement or commitment by S.W. LAM to issue any such securities. True and correct copies of S.W. LAM's Articles of Incorporation and Bylaws as amended through the date hereof, are attached hereto as Exhibit 5 and no amendment shall occur through the Closing Date. 2. Authorization. S.W. LAM has the corporate power to execute and perform this Agreement and to deliver the stock required to be delivered to the Shareholders hereunder. The execution and delivery of this Agreement, and the issuance of the stock required hereunder will have been duly authorized by all necessary corporate actions and neither the execution and delivery of this Agreement, the issuance of the stock, nor the performance, observance or compliance with the terms and provisions of this Agreement will violate any 7 provision of law, an order of any court or other government agency, the Articles of Incorporation or Bylaws of S.W. LAM, or any indenture, agreement or other instrument to which S.W. LAM is a party, or by which S.W. LAM is bound or by which any of its property is bound. 3. Common Stock. The shares of S.W. LAM's Common Stock deliverable hereunder will upon delivery in accordance with the terms hereof, be duly authorized, validly issued, fully paid and non-assessable, and free and clear of any and all liens, claims or other encumbrances. Such shares will be restricted and cannot be sold or exchanged except pursuant to registration or an exemption therefrom. 4. Financials. The financial statements prepared by Albright, Persing & Associates, Ltd., Certified Public Accountants, for the year ending June 30, 1996, attached hereto as Exhibit 7 constitute true and correct statements as of such date of the financial condition of S.W. LAM and of its assets, liabilities and income prepared in accordance with generally accepted accounting principles consistently applied. From June 30, 1996, and until the Closing Date, no dividend or distribution of capital, surplus, or profit have been paid or declared by S.W. LAM in redemption of any of its outstanding shares or otherwise. 5. Material Liabilities. Except as previously described to the shareholders in writing, S.W. LAM has no material liabilities of any nature except: (a) Liabilities reflected or reserved for in the S.W. LAM financial statements attached hereto; (b) Liabilities incurred by S.W. LAM subsequent to the date of the latest statement of financial condition submitted as part of the S.W. LAM financial statements but incurred in the ordinary course 8 of business and consistent with past practice and disclosed in writing to the shareholders. As used in this section, "material" means amounts of $5,000 or more. 6. Subsequent Actions. Since June 30, 1996, S.W. LAM has not engaged in any transaction other than transactions in the normal course of the operations of its business, except as specifically authorized by the Shareholders in writing. Except as previously disclosed to the Shareholders in writing, there has not been since June 30, 1996, nor shall there be through and including the Closing Date any of the follow: (a) Any event, condition or state of facts, which individually or in the aggregate, has resulted in any known adverse material change in condition (financial or otherwise) of the assets, liabilities, prospects or business taken as a whole; (b) Any declaration, setting aside payment, directly or indirectly, or a distribution of assets in the nature of dividends or a partial liquidation, pro rata or otherwise; (c) Any damages, destruction, loss or other casualty, whether or not covered by insurance, or any strike, work stoppage, slowdown, or other labor trouble materially adversely affecting the business or properties considered as a whole; (d) Any material change in the method of record keeping employed; (e) Any issuance or sale of any capital stock, bond debentures, notes or other securities; (f) Any discharge or satisfaction of any lien or encumbrance or the payment of any obligation or liability, accrued, absolute or contingent, in excess of $5,000 in the aggregate other than liabilities shown in the latest S.W. LAM financial statements and liabilities arising out of obligations incurred since June 30, 1996, in the ordinary course of business or disclosed in writing to the Shareholders prior to the execution of this agreement. 9 (g) Any amendment or termination or receipt of notice of any proposed amendment or termination of any material contract, franchise, agreement, plan lease, license or permit to which S.W. LAM is a party or by which it may be bound which materially affects or will affect its business as presently conducted. (h) Any mortgage, pledge or subjection of any lien, charge, option or other encumbrance upon any of the property or assets, tangible or intangible of S.W. LAM. (i) Any sale, assignment, transfer or agreement to sell, assign, or transfer any of the assets of S.W. LAM, or the making of any commitment or the incurring of any material liability, or the cancellation or compromise or agreement to cancel or compromise any of the debts or claims of either such entity; (j) Any sale, assignment, transfer or agreement to sell, assign, or transfer any trademark or trade name, or application therefore, or computer software or hardware or other proprietary information; or (k) Any other material transaction or event by S.W. LAM other than in the ordinary course of business. 7. Litigation S.W. LAM is not involved in any pending or threatened litigation which would materially adversely affect its financial condition as shown by its balance sheet as of June 30, 1996, attached hereto as Exhibit 7, which has not been provided for on such balance sheet, or referred to in the footnotes of such balance sheet or described in Exhibit 7 hereto. 8. Representations. No representation, warranty or covenant of S.W. LAM made in this agreement or any certificate or other document furnished or to be furnished by S.W. LAM pursuant to this agreement contains or will contain a 10 material misstatement of fact, omit or will omit a material fact necessary to make the statements contained therein or herein not misleading. No officer or director of S.W. LAM has knowledge of any act or matter which may have a material adverse effect upon S.W. LAM or its securities. 9. SEC Reports. The 1,500,000 issued and outstanding shares of S.W. LAM were issued pursuant to an exemption from registration under Rule 504 of the Securities Act of 1933. 10. Compliance with Securities Laws. In connection with its acquisition of Quality, S.W. LAM also make the representations and warranties in Article V and such are incorporated herein. 11. Contracts. During the period commencing with date hereof and ending with the closing date, S.W. LAM will not enter into any such agreement, contract or commitment, or be subject of any such approval, consent order, registration, authorization, license permit, or the application without the prior written consent of the Shareholders. Except as previously disclosed to the Shareholders in writing, S.W. LAM is not a party to any of the following : (a) Collectively bargaining agreements involving its employees; (b) Bonus, deferred compensation, pension, profit sharing, stock option, stock purchase, incentive or retirement plans or other employee benefit arrangement; (c) Employment agreement, contracts or commitments not terminable at will without penalty, with or between S.W. LAM and a director, officer or employee of S.W. LAM; (d) Agreements of guaranty or indemnification to any person or entity; 11 (e) Agreements, contracts or commitments containing any covenant limiting the right of S.W. LAM to engage in any line of business or compete with any person or entity; (f) Agreements, contracts or commitments to which it is a party or by which it is bound evidencing or providing for loans to others; (g) Agreements, contracts or commitments relating to material future payments; (h) Agreements, contracts or commitments relating to a merger, recapitalization, reorganization or the acquisition of assets or capital stock of any business enterprise; (i) Government or government agency or authority approvals, consents, orders registrations, authorizations, licenses and permits, and applications, with respect thereto which are material to its business and operations; (j) Agreements, contracts or commitments which may require consent by any other person or entity in connection with the consummation of the transactions contemplated hereby either to prevent a breach or to continue the effectiveness thereof; 12. Board Approval. Subject to the terms and condition hereof, the board of directors of S.W. LAM has duly approved this agreement and its execution and the carrying out of the transactions contemplated herein and represents that shareholder approval is not necessary in conjunction with the execution and carrying out of the transactions contemplated herein, or has been obtained if required. 13. Other negotiations. Prior to the Closing Date, S.W. LAM shall not negotiate or directly or indirectly solicit or propose to enter into any negotiations which have as their sole purpose the sale of the S.W. LAM common stock or all or any material portion of the assets of, or make a tender offer, merger or other acquisition proposal involving S.W. LAM, or its assets, with any person or entity other than the Shareholders. 12 14. Interim operations. S.W. LAM agree except as other wise consented to or approved by the Shareholder in writing that prior to the closing date it will: (a) Operate its business substantially as now operated and only in the ordinary course and that it will use its best efforts to preserve its relationships with persons having business dealings with it; (b) Maintain all of its properties in customary repair, order and condition, reasonable wear and tear excepted; (c) Maintain its books, accounts, and records in the usual, regular and ordinary manner and in accordance with generally accepted accounting principles of the United States applied on a consistent basis; (d) Timely file all federal, state, local tax returns and reports including without limitation, income, excise, ad valorem, and other taxes with respect to their business and properties, and to pay all taxes or assessments, except taxes being contested in good faith by appropriate proceedings, as they become due; (e) Maintain insurance upon its properties in accordance with current practice; (f) Comply in all material respect with all laws, regulations rules ordinances applicable to it and to the conduct of its business; and (g) Comply with any contracts, agreements, commitments, mortgages and similar instruments to which it is a party. 15. Brokers/Finder's fees. S.W. LAM has not retained or otherwise utilized the services of any broker or finder in connection with the transaction 13 contemplated by this agreement, nor has done anything to give rise to any valid claim(s) against the Shareholders for a brokerage commission, finder's fee or similar charge in connection with this transaction. IV. CONDITIONS TO THE OBLIGATIONS OF S.W. LAM The obligations of S.W. LAM hereunder shall be subject to the conditions that: 1. Error or Misstatement. S.W. LAM shall not have discovered any material error or misstatement in any of the representations and warranties made by the Shareholders and all the terms and conditions of this Agreement to be performed and complied with by the Shareholders on or prior to the Closing Date shall have been performed and complied with; 2. Legal Opinions. S.W. LAM shall have received the opinion of Messrs. Vanderkam and Sanders, legal counsel for Quality and each member of the Hang Fung Group to the effect that (a) each is duly organized and validly existing under the laws of the jurisdiction of its incorporation and has the power and authority to own its properties and to carry on its respective business wherever the same may be located and operated as of the Closing Date, and (b) the Agreement has been duly executed, and when delivered by the Shareholders is enforceable in accordance with its terms, subject to the general principles of equity and the valid exercise of police power. In rendering such opinion, Vanderkam and Sanders may rely on opinions of counsel licensed to practice law in applicable jurisdictions where Vanderkam and Sanders is not so licensed. V. CONDITIONS TO THE OBLIGATIONS OF THE SHAREHOLDERS The obligations of the Shareholders hereunder are subject to the conditions that: 1. Representations. All representations or warranties of S.W. LAM shall be true and correct as of the date made and as of the Closing Date, and all other terms and conditions of this agreement to performed and complied with by S.W. 14 LAM on or prior to the Closing Date shall have been performed and complied by the Closing Date; 2. Changes. There shall have been no substantial adverse changes in the conditions, financial, business or otherwise of S.W. LAM from June 30, 1996 to the Closing Date, and between such dates the business and assets of S.W. LAM shall not have been materially adversely affected as the result of any fire, explosion, earthquake, flood, accident, strike, lockout, combination or workmen, environmental concerns, taking over of any such assets by any governmental authorities, riot, activities or armed forces, or acts of God or of the public enemies. 3. Legal Opinion. The Shareholders shall have received the opinion of _____________, counsel for S.W. LAM, to the effect that (a) S.W. LAM is a corporation duly organized and validly existing under the laws of the State of Nevada, and has the power to own and operate its properties wherever the same shall be located as of the Closing Date; (b) the execution delivery and performance of S.W. LAM has been duly authorized by all necessary corporate action and such constitutes a legal, valid and binding obligation of S.W. LAM and is enforceable in accordance with its terms; (c) the stock to be delivered to the Shareholders pursuant to the terms of this Agreement has been validly issued, is fully paid and non-assessable; and (d) the exchange of the stock herein contemplated does not require the registration of the S.W. LAM's Common Stock pursuant to any Federal law dealing with the issuance, sale, transfer, and/or exchange of corporate securities. V. CLOSING 1. Closing Date. The closing shall take place at 10:00 A.M. Central Standard Time, on December ___, 1996, at the offices of Vanderkam & Sanders, Houston, Texas, or at such other time and place as the parties hereto shall 15 agree upon. The Agreement shall be effective as of the close of business on the Closing Date. 2. Actions at Closing. At the closing, S.W. LAM and the Shareholders will each deliver, or cause to be delivered to the other, the securities to be exchanged in accordance with Section 1 of this Agreement and each party shall pay any and all Federal and State taxes required to be paid in connection with the issuance and the delivery of such. In addition, the following transactions will take place. (a) S.W. LAM will deliver to the Shareholders: (i) Duly certified copies all corporate resolutions and other corporate proceedings taken by S.W. LAM to authorize the execution, delivery and performance of this Agreement. (ii) The opinion of ____________, counsel for S.W. LAM, as provided in Article IV of this Agreement. (iii)A Certificate executed by a principal officer of S.W. LAM attesting to the fact that all of the representations and warranties of S.W. LAM are true and correct as of the Closing Date, and that all of the conditions to the obligations of the Shareholders to performed by S.W. LAM have been performed as of the Closing Date. (iv) A Certificate of Incumbency and Signatures of the officers of S.W. LAM dated as of the date of this Agreement. (v) The written resignations of all directors and such officers and auditors of S.W. LAM as are requested by the Shareholders, which resignations shall contain an acknowledgment from each resignee that they have no claims against S.W. LAM for loss of office or otherwise. 16 (vi) All registration certificates, statutory books, minutes books and common seals of S.W. LAM, all accounts books and all documents of title relating to S.W. LAM's assets (unless already in the possession of the Shareholders) as are required by the Shareholders. (vii)Stock certificates in an aggregate amount of 10,500,000 of S.W. LAM common stock, $.001 par value and stock Certificates in an aggregate amount of 100,000 shares of Class A preferred Stock, as set forth in Article I and as designated in the Shareholder Ownership Schedule. (b) The Shareholders will deliver to S.W. LAM: (i) The opinion of Vanderkam and Sanders, counsel for the Shareholders, as provided for in Article IV hereof. (ii) A certificate of corporate good standing from the jurisdiction of incorporation as a recent date for Quality and each other member of the Hang Fung Group. (iii)A certificate of the Shareholders signed by each Shareholder that each of representations and warranties of the Shareholders are true and correct as of the Closing Date and that all of the conditions to the obligations of S.W. LAM to be performed by the Shareholders have been performed as of the Closing Date. (iv) All of the outstanding common share certificates of Quality, duly endorsed to S.W. LAM. VI. COMPLIANCE WITH SECURITIES LAWS 1. Shareholder representations. Each Shareholder acknowledges that the shares of S.W. LAM to be delivered to each Shareholder pursuant to this agreement have not been registered under the Securities Act of 1993 as amended, referred to in this agreement as the "Securities Act," or the laws of any other jurisdiction, and that therefore the stock is not fully transferable except as 17 permitted under various exemptions, if any contained in the act and the rules of the Securities and Exchange Commission interpreting the act. The provisions contained in this paragraph are intended to ensure compliance with the Securities Act. Under US law, S.W. LAM Common Stock cannot be sold or transferred by the Shareholder unless they are subsequently registered under applicable law or an exemption from registration is available. S.W. LAM is not required to register or assist in the registration of the S.W. LAM Common Stock or to make any exemption from registration available. Each Shareholder represents and warrants to S.W. LAM that: (a) the Shareholder is acquiring the shares of S.W. LAM common stock under this agreement for the Shareholder's own account for investment, and not for the purpose of resale or any other distribution of such shares. (b) the Shareholder has no present intention of disposing of all or any part of such shares at any particular time, for any particular price or on the happening of any particular circumstances. (c) the Shareholder has such knowledge and experience in financial and business matters that the Shareholder is capable of evaluating the merits and risks of an investment in S.W. LAM. (d) the Shareholder acknowledges that S.W. LAM is relying on the truth and accuracy of these warranties and representations in issuing the shares without first registering the shares under the Securities Act. (e) none of the shares of S.W. LAM capital stock to be issued to the Shareholder pursuant to this agreement, will be offered, sold, assigned, pledged, transferred, or otherwise disposed of except after full compliance with all of the applicable provisions of the Securities Act and the rules and regulations of the Securities and Exchange Commission under the Securities Act. 18 (f) the Shareholder agrees not to sell or otherwise dispose of any of the shares of S.W. LAM's common stock received pursuant to this agreement unless the Shareholder: (i) has delivered to S.W. LAM a written legal opinion in form and substance satisfactory to counsel for S.W. LAM to the effect that the disposition is permissible under the terms of the Securities Act and regulations interpreting the act; (ii) has complied with the registration and prospectus requirements of the Securities Act relating to such disposition; or (iii) has presented S.W. LAM satisfactory evidence that such a disposition is exempt from registration under the act. (g) the Shareholder understands, and agrees that S.W. LAM shall place a stop transfer order against transfers of shares until one of the conditions set forth in this paragraph have been met. (h) the certificates evidencing the shares that the Shareholder will receive under this agreement will contain the following legend: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN TAKEN FOR INVESTMENT, THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE UNLESS A REGISTRATION STATEMENT UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED IS IN EFFECT FOR THE SECURITIES, OR AN EXEMPTION FROM REGISTRATION REQUIREMENTS OF SUCH ACT IS IN FACT APPLICABLE TO SUCH OFFER OR SALE, AND SUCH EXEMPTION IS EVIDENCED BY AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER. 2. Representations of S.W. LAM. S.W. LAM acknowledges that the shares of Quality to be delivered pursuant to this agreement have not been registered under the Securities Act or the laws of any other jurisdiction, and that therefore the stock is not fully transferable except as permitted under various 19 exemptions, if any contained in the act and the rules of the Securities and Exchange Commission interpreting the act. The provisions contained in this paragraph are intended to ensure compliance with the Securities Act. Under US law, Quality Common Stock cannot be sold or transferred by S.W. LAM unless it is subsequently registered under applicable law or an exemption from registration is available. Quality is not required to register or assist in the registration of the Quality Common Stock or to make any exemption from registration available. S.W. LAM represents and warrants to the Shareholders of Quality that: (a) it is acquiring the shares of Quality common stock under this agreement for its own account for investment, and not for the purpose of resale or any other distribution of such shares. (b) it has no present intention of disposing of all or any part of such shares at any particular time, for any particular price or on the happening of any particular circumstances. (c) it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in Quality. (d) it acknowledge that Quality and the Shareholders are relying on the truth and accuracy of these warranties and representations in issuing the shares without first registering the shares under the Securities Act. (e) none of the shares of Quality capital stock to be issued to S.W. LAM pursuant to this agreement, will be offered, sold, assigned, pledged, transferred, or otherwise disposed of except after full compliance with all of the applicable provisions of the Securities Act and the rules and regulations of the Securities and Exchange Commission under the Securities Act. 20 (f) it agrees not to sell or otherwise dispose of any of the shares of Quality common stock received pursuant to this agreement unless (i) it has delivered to Quality a written legal opinion in form and substance satisfactory to counsel for Quality to the effect that the disposition is permissible under the terms of the Securities Act and regulations interpreting the act; (ii) it has complied with the registration and prospectus requirements of the Securities Act relating to such disposition; or (ii) it has presented Quality satisfactory evidence that such a disposition is exempt from registration under the act. (g) it understands and agrees that Quality will place a stop transfer order against transfers of shares until one of the conditions set forth in this paragraph has been met. (h) the certificates, evidencing the shares that S.W. LAM will receive under this agreement will contain the following legend: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN TAKEN FOR INVESTMENT. THE SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE UNLESS A REGISTRATION STATEMENT UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED IS IN EFFECT FOR THE SECURITIES, OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS IN FACT APPLICABLE TO SUCH OFFER OR SALE, AND SUCH EXEMPTION IS EVIDENCED BY AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER. VII. DISSOLUTION OF THE BOARD OF DIRECTORS Upon completion of the acquisition, the existing Board of Directors of S.W. LAM will be dissolved or resign and a new board shall be constituted by Quality. VIII. ACCESS TOT HE PROPERTIES AND BOOKS The Shareholders hereby grant to S.W. LAM and its duly authorized representatives during normal business hours between the date hereof and the Closing Date, the right of full and complete access to the properties of Quality 21 and each member of the Hang Fung Group, full opportunity to examine their books and records. A similar access to S.W. LAM's properties, books and records in granted to the Shareholders, and their duly authorized representatives. IX. CONFIDENTIAL MATTERS 1. Covenants. S.W. LAM acknowledges and agrees that during, and as a result of any discussions furnishing of documents, their own investigation and otherwise, that it will have access to certain confidential information (as hereinafter defined.) Therefore, S.W. LAM agrees for itself and for each of its officers, directors, employees agents, representatives and affiliates: (a) To keep secret and confidential and not to use directly or indirectly for its own benefit or the benefit of others or to the detriment of the Shareholders or Quality or any other members of the Hang Fung Group, each and every item of the Confidential Information, and to use the Confidential Information solely for the purpose of evaluating the transactions described herein; (b) To restrict access to the Confidential Information to those of its officers, directors, employees, agents, representatives, consultants, financial advisors, and potential investors who, in the performance of its or their duties, reasonably require access to the Confidential Information; (c) To the best of its ability ensure that its officers, directors, employees, agents, representatives, consultants, financial advisors, and potential investors and potential lenders who obtain access to the Confidential Information maintain the secrecy and confidentiality thereof and do not use directly or indirectly any such Confidential Information for its or their own benefit or the benefit of others or disclose any of the Confidential Information to any person or entity not entitled to the same pursuant to the terms hereof or any written consent of the Shareholders and Quality; and 22 (d) To use the Confidential Information for no other purposes than those specifically authorized hereunder. 2. Definition. For purposes of this agreement "Confidential Information" shall include but not limited to (a) all subsequent, prior and derivative drafts hereof, and all information contained or described in the exhibits and schedules attached hereto; (b) the identity of the Shareholders or the members of the Hang Fung Group; (c) the nature, structure and terms of the transactions described herein and contemplated hereby and any arrangement related thereto; (d) all information pertaining to or related to, or arising out of or in connection with, any of the foregoing, regardless of the source of such information, projections, financial margins, or any other information relating to the transactions described herein and the Shareholders or Quality or any other member of the Hang Fung Group including but not limited to customer lists, trade secrets, computer programs, products being developed, marketed and distributed by the Shareholders or Quality or any member of the Hang Fung Group engineering, technical and scientific data, tapes, designs, skills, procedures, formulations, methods, drawings, facilities, information and know-how, and other confidential information regarding the Shareholders or Quality or any other member of the Hang Fung Group. 3. Dissemination. S.W. LAM further agree that they will deliver to the Shareholders and their counsel for their approval all proposed press releases, reports or forms to be filed with the Securities and Exchange Commission and other statements disclosures or reports, regarding the transactions or matters described herein, contemplated hereby or related hereto. 23 4. Survival. The provisions of this article and the agreements of S.W. LAM as set forth in this Article shall apply whether or not the Shareholders actually acquire controlling interest of S.W. LAM and accordingly, shall continue to apply after termination, of the discussions regarding these acquisitions for whatever reasons and shall have no termination or expiration date. 5. Injunctive Relief. S.W. LAM agrees that disclosure of any Confidential Information would cause immediate and irreparable harm to the Shareholders, Quality and any other member of the Hang Fung Group for which damages would not constitute adequate compensation and that in the event that S.W. LAM has violate or is about to violate any provision of this agreement, either the Shareholders, Quality, or any other member of the Hang Fung Group may bring an action for and obtain injunctive relief in any court having jurisdiction over S.W. LAM or their assets without providing a bond or other security. The Shareholders and/or Quality, or any other member of the Hang Fung Group may recover their attorneys fees and other costs of successfully enforcing this agreement or their rights hereunder or in recovering damages for the breach thereof. X. COSTS AND EXPENSES Each party hereto shall pay its own expenses and costs incident to the preparation of this Agreement and to the consummation of the transaction contemplated herein. XI. MISCELLANEOUS 1. Choice of Law. This Agreement shall be controlled, construed and enforced in accordance with the laws of the State of Nevada. 2. Assignment. This Agreement shall not be assignable by either party without the prior written consent of the other. 24 3. Headings. All paragraph headings herein are inserted for the parties convenience in identifying the provisions of this Agreement, and shall not affect the construction or interpretation of the provisions of this Agreement. 4. Entire Agreement. This Agreement sets forth the entire understanding between the parties, there being no terms, conditions, warranties or representations other than those contained herein, and no amendments hereto shall be valid unless made in writing and signed by the parties hereto. 5. Binding Successors. This Agreement shall be binding upon and shall inure to the benefit of the heirs, executors, administrators and assigns of all parties. 6. Notices. All notices, requests, instructions, or other documents to be given hereunder shall be in writing and sent by registered mail: If to Shareholders: Lam Sai Wing Chan Yam Fai, Jane Unit 302-303A, 3rd Floor Fu Hang Industrial Building No. 1 Hok Yuen Street East Hung Hom, Kowloon, Hong Kong If to S.W. LAM S.W. Lam, Inc. 2440 South Progress Drive Salt Lake City, Utah 84119 with copies to : Messrs. Vanderkam & Sanders 440 Louisiana, Suite 475 Houston, Texas 77002 7. Signatures. For purposes of this Agreement only, facsimile signatures shall be considered original signatures. 8. Multiple Counterparts. This agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be original, and all of which taken together shall constitute one and the same agreement. 25 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date and year first above written. S.W. Lam, Inc. -------------------------- By: ----------------------- President SHAREHOLDERS OF QUALITY PRINCE LTD. /s/ illegible ---------------------------- Lam Sai Wing /s/ illegible ---------------------------- Chan Yam Fai, Jane 26 Country: ----------------- On December ____, 1996, before me the undersigned authority personally appeared Lam Sai Wing who, after being sworn, on oath did state that he was executing this agreement upon such authority, and for the considerations therein stated. -------------------------- Notary Public [SEAL] Country: ----------------- On December ____, 1996, before me the undersigned authority personally appeared Chan Yam Fai, Jane, who, after being sworn, on oath did state that she was executing this agreement upon such authority, and for the considerations therein stated. -------------------------- Notary Public [SEAL] STATE OF COUNTRY OF On December ____, 1996 personally appeared before me, a Notary Public, ________________, who acknowledged that he executed the above document, and that he is the ____________ of S.W. Lam Inc., duly authorized to execute this document on its behalf. -------------------------- Notary Public [SEAL] 27 EX-3.IARTICLESOFINCO 3 EXHIBIT 3.1 - ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION OF S.W. LAM, INC. The undersigned natural persons of the age of eighteen (18) years or more acting as incorporator of a corporation under the Nevada Revised Civil Statute 78, hereby adopts the following Articles of Incorporation: ARTICLE I NAME The name of the corporation (hereinafter called "Corporation") is S.W. Lam, Inc. ARTICLE II PERIOD OF DURATION The period of duration of the Corporation is perpetual. ARTICLE III PURPOSES AND POWERS The purpose for which this Corporation is organized is to engage in the business of investing in investments of all forms and nature and to engage in any and all other lawful business. ARTICLE IV CAPITALIZATION The total number of shares of stock which the Corporation shall have the authority to issue is fifty million (50,000,000) shares, consisting of twenty-five million (25,000,000) shares of Common Stock having a par value of $.001 per share and twenty-five million (25,000,000) shares of Preferred Stock having a par value of $.001 per share. A. Preferred Stock The Board of Directors is authorized, subject to the limitations prescribed by law and the provisions of this Article, to provide for page 1 the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Nevada, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. 1. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: a. The number of shares constituting that series and the distinctive designation of that series; b. The dividend rate on the shares of that series, whether dividends shall be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; c. Whether that series shall have voting rights, in addition to the voting rights provided by law, and if so, the terms of such voting rights; d. Whether that series shall have conversion privileges and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; e. Whether or not the shares of that series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; f. Whether that series shall have a sinking fund for the redemption or purchase of shares of that series and, if so, page 2 the terms and amount of such sinking fund; g. The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and h. Any other relative rights, preferences and limitations of that series. 2. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set apart for payment, before any dividends shall be paid or declared and set apart for payment on Common Stock with respect to the same dividend period. 3. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. 4. Unless otherwise provided in any resolution of the Board of Directors providing for the issuance of any particular series of Preferred Stock, no holder of Preferred Stock shall have any pre-emptive right as such holder to subscribe for, purchase or receive any part of any new or additional issue of capital stock of any class or series, including unissued and treasury stock, or obligations or other securities convertible into or exchangeable for capital stock of any class or series, or warrants or other instruments evidencing rights or options to subscribe for, purchase or receive any capital stock of any class or series, whether now or hereafter authorized and whether issued for cash or other consideration or by way of dividend. page 3 B. Common Stock 1. Subject to the prior and superior rights of the Preferred Stock and on the conditions set forth in the foregoing parts of this Article or in any resolution of the Board of Directors providing for the issuance of any particular series of Preferred Stock, and not otherwise, such dividends (payable in cash, stock or otherwise) as may be determined by the Board of Directors may be declared and paid on the Common Stock from time to time out of any funds legally available therefor. 2. Except as otherwise provided by law, by this Certificate of Incorporation or by the resolution or resolutions of the Board of Directors providing for the issue of any series of the Preferred Stock, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, each holder of the Common Stock being entitled to one vote for each share held. 3. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, and after the holders of the Preferred Stock of each series shall have been paid in full the amount to which they respectively shall be entitled, or a sum sufficient for such payments in assets of the Corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective rights and interests, to the exclusion of the holders of the Preferred Stock. ARTICLE V REGISTERED OFFICE AND AGENT The name and address of the corporation's registered agent and address is The Corporation Trust Company of Nevada, One, East First Street, Reno, Nevada 89501. page 4 ARTICLE VI DIRECTORS The Corporation shall be governed by a Board of Directors consisting of such number of directors as shall be fixed the Corporation's bylaws. The number of directors constituting the initial board of directors of the corporation is one and the name and address of the director is as follows: NAME ADDRESS - --------------- ------------------------- Hank Vanderkam 440 Louisiana, Suite 475 Houston, Texas 77002 ARTICLE VII DENIAL OF PREEMPTIVE RIGHTS There shall be no preemptive right to acquire unissued and/or treasury shares of the stock of the Corporation. ARTICLE VIII LIABILITY OF OFFICERS AND DIRECTORS A director or officer of the Corporation shall not be liable to the Corporation or its shareholders for damages for breach of fiduciary duty as a director or officer unless the act or omission involves intentional misconduct, fraud, a knowing violation of law or the payment of an unlawful dividend in violation of NRS 78.300. ARTICLE IX INDEMNIFICATION OF DIRECTORS AND OFFICERS The Corporation shall indemnify any and all persons who may serve or who have served at any time as directors or officers or who, at the request of the Board of Directors of the Corporation, may serve or at any time have served as directors or officers of another corporation in which the Corporation at such time owned or may own shares of stock or of which it was or may be a creditor, and their respective heirs, administrators, successors and assigns, against any and all expenses, including amounts paid upon judgments, counsel fees and amounts paid in settlement (before or after suit is commenced), actually and page 5 necessarily by such persons in connection with the defense or settlement of any claim, action, suit or proceeding in which they, or any of them, are made parties, or a party, or which may be asserted against them or any of them, by reason of being or having been directors or officers of the Corporation, or of such other corporation, except in relation to matters as to which any such director or officer of the Corporation, or of such other corporation or former director or officer or person shall be adjudged in any action, suit or proceeding to be liable for his own negligence or misconduct in the performance of his duty. Such indemnification shall be in addition to any other rights to which those indemnified may be entitled under any law, by law, agreement, vote of shareholder or otherwise. DATED this 10th day of October, 1996. Incorporator: /s/ William Erwin ------------------------ William Erwin CT Corporation System 811 Dallas Ave. Houston, Texas 77002 STATE OF TEXAS } } COUNTY OF HARRIS } On October 4, 1996, personally appeared before me, a Notary Public, William Erwin, who acknowledged that he executed the above document in his capacity as duly authorized agent of the C T Corporation System and Incorporator S.W. Lam, Inc. /s/ Ann Siebert ------------------------ Notary Public Certificate of Acceptance of Appointment of Resident Agent The Corporation Trust Company of Nevada hereby accepts appointment as Resident Agent for the above named corporation. Dated: October 10, 1996 Corporation Trust Company of Nevada /s/ illegible - --------------------------- By: K. S. Hood Title: Assistant Secretary page 6 EX-3.IIBY-LAWS 4 EXHIBIT 3.1 - BYLAWS OF S.W. LAM, INC. BYLAWS OF S.W. LAM, INC. ARTICLE I OFFICES 1.01 REGISTERED OFFICE AND AGENT The registered office of the Corporation shall be maintained at The Corporation Trust Company in Nevada, One East First Street, Reno, Nevada 89501 in the State of Nevada. The registered office or the registered agent, or both, may be changed by resolution of the Board of Directors, upon filing the statement required by law. 1.02 PRINCIPAL OFFICE The principal office of the Corporation shall be at Unit 302-303A, 3rd Floor, Fu Hang Industrial Building, No. 1 Hok Yuen Street East, Kowloon, Hong Kong provided that the Board of Directors shall have power to change the location of the principal office in its discretion. 1.03 OTHER OFFICES The Corporation may also maintain other offices at such places within or without the State of Nevada as the Board of Directors may from time to time appoint or as the business of the Corporation may require. ARTICLE II SHAREHOLDERS 2.01 PLACE OF MEETING All meetings of shareholders, both regular and special, shall be held either at the registered office of the Corporation, or at such other place as shall be designated in the notice of the meeting. -1- 2.02 ANNUAL MEETING The annual meeting of shareholders for the election of directors and for the transaction of all other business which may come before the meeting shall be held within 180 days after the end of each fiscal year, on the date and at the hour specified in the notice of meeting as determined by the Board of Directors. If the election of directors shall not be held on the day above designated for the annual meeting, the Board of Directors shall cause the election to be held as soon thereafter as conveniently may be at a special meeting of the shareholders called for the purpose of holding such election. The annual meeting of shareholders may be held for any other purpose in addition to the election of director which may be specified in a notice of such meeting. The meeting may be called by resolution of the Board of Directors or by a writing filed with the secretary signed either by a majority of the directors or by shareholders owning a majority in amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote at any such meeting. 2.03 NOTICE OF SHAREHOLDERS' MEETING A written or printed notice stating the place, day and hour of the meeting, and in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the president, secretary or the officer or person calling the meeting, to each shareholders of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the share transfer books of the Corporation, with postage thereon prepaid. 2.04 VOTING OF SHARES Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the Articles of Incorporation or by law. Treasury shares, shares of its own stock owned by another corporation the majority of the voting stock of which is owned or controlled by this Corporation, and shares of its own stock held by this Corporation in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time. -2- A shareholder may vote either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable, and in no event shall it remain irrevocable for a period of more than eleven (11) months. At each election for directors, every shareholder entitled to vote at such election shall have the right to vote, in person or by proxy, the number of shares owned by him for as many persons as there are directors to be elected and for whose election he has a right to vote, or if authorized by the Articles of Incorporation, to cumulate his votes by giving one candidate as many votes as the number of such directors multiplied by the number of his shares shall equal, or by distributing such votes on the same principal among any number of such candidates. Any shareholder who intends to cumulate his votes as herein authorized shall give written notice of such intention to the secretary of the Corporation on or before the day preceding the election at which such shareholder intends to cumulate his votes. 2.05 CLOSING TRANSFER BOOKS AND FIXING RECORD DATE For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may provide that the share transfer books shall be closed for a stated period not exceeding sixty (60) days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer books, the ByLaws or, in the absence of an applicable ByLaw, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, not later than sixty (60) days and, in case of a meeting of shareholders, not earlier than ten (10) days, prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the share transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except where the determination has been made through the closing of share transfer books and the stated period of closing has expired. -3- 2.06 QUORUM OF SHAREHOLDERS Unless otherwise provided in the Articles of Incorporation, the holders of a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders, but in no event shall a quorum consist of the holders of less than one-third (1/3) of the shares entitled to vote and thus represented at such meeting. The vote of the holders of a majority of the shares entitled to vote and thus represented at a meeting at which a quorum is present shall be the act of the shareholders' meeting, unless the vote of a greater number is required by law, the Articles of Incorporation or the ByLaws. 2.07 VOTING LISTS The officer or agent having charge of the share transfer books for the shares of the Corporation shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholders at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share transfer books shall be prima-facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. 2.08 ACTION BY CONSENT OF SHAREHOLDERS In lieu of a formal meeting, action may be taken by written consent of such number of the shareholders as is required by either State law or the Corporation's Bylaws for passage of such corporate action. ARTICLE III DIRECTORS 3.01 BOARD OF DIRECTORS The business and affairs of the Corporation shall be managed by a Board of Directors. Directors need not be residents of the State of Nevada or shareholders in the Corporation. -4- 3.02 NUMBER AND ELECTION OF DIRECTORS The number of directors shall be not less than three (3) nor more than nine (9). The number of directors constituting the board shall be fixed from time to time by the Directors provided that the number may be increased or decreased from time to time by an amendment to these ByLaws, but no decrease shall have the effect of shortening the term of any incumbent director. At each annual election the shareholders shall elect directors to hold office until the next succeeding annual meeting. 3.03 VACANCIES Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of the remaining directors, though less than a quorum of the Board. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors shall be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose. 3.04 QUORUM OF DIRECTORS A majority of the Board of Directors shall constitute a quorum for the transaction of business. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. 3.05 ANNUAL MEETING OF DIRECTORS Within thirty (30) days after each annual meeting of shareholders, the Board of Directors elected at such meeting shall hold an annual meeting at which they shall elect officers and transact such other business as shall come before the meeting. 3.06 REGULAR MEETING OF DIRECTORS A regular meeting of the Board of Directors may be held at such time as shall be determined from time to time by resolution of the Board of Directors. 3.07 SPECIAL MEETINGS OF DIRECTORS The secretary shall call a special meeting of the Board of Directors whenever requested to do so by the President or by two directors. Such special meeting shall be held at the time specified in the notice of meeting. -5- 3.08 PLACE OF DIRECTORS MEETINGS All meetings of the Board of Directors (annual, regular or special) shall be held either at the principal office of the Corporation or at such other place, either within or without the State of Nevada, as shall be specified in the notice of meeting. 3.09 NOTICE OF DIRECTORS MEETINGS All meetings of the Board of Directors (annual, regular or special) shall be held upon five (5) days written notice stating the date, place and hour of meeting delivered to each director either personally or by mail or at the direction of the president or the secretary or the officer or person calling the meeting. In any case where all of the directors execute a waiver of notice of the time and place of meeting, no notice thereof shall be required, and any such meeting (whether annual, regular or special) shall be held at the time and at the place (either within or without the State of Nevada) specified in the waiver of notice. Attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where the directors attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 3.10 COMPENSATION Directors, as such, shall not receive any stated salary for their services, but by resolution of the Board of Directors a fixed sum and expenses of attendance, if any, may be allowed for attendance at each annual, regular or special meeting of the Board, provided, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 3.11 ACTION BY CONSENT OF DIRECTORS In lieu of a formal meeting, action may be taken by written consent of such number of the directors as is required by either State law or the Corporation's Bylaws for passage of such corporate action. -6- 3.12 COMMITEES The board of directors may, by resolution passed by a majority of the whole board, designate an executive committee and one or more other committees, each committee to consist of one or more of the directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to making, altering or repealing any bylaw of the Corporation; electing or appointing any director, or removing any officer or director; submitting to shareholders any action that requires shareholders' approval; or amending or repealing any resolution theretofore adopted by the board which by its terms is amendable or repealable only by the board. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. ARTICLE IV OFFICERS 4.01 OFFICERS ELECTION The officers of the Corporation shall consist of a president, one or more vice presidents, a secretary, and a treasurer. All such officers shall be elected at the annual meeting of the Board of Directors provided for in Article III, Section 5. If any office is not filled at such annual meeting, it may be filled at any subsequent regular or special meeting of the Board. The Board of Directors at such annual meeting, or at any subsequent regular or special meeting may also elect or appoint such other officers and assistant officers and agents as may be deemed necessary. Any two or more offices may be held by the same person, except the offices of president and secretary. All officers and assistant officers shall be elected to serve until the next annual meeting of directors (following the next annual meeting of shareholders) or until their successors are elected; provided, that any officer or assistant officer elected or appointed by the Board of Directors may be removed with or without cause at any regular or special meeting of the Board whenever in the judgment of the Board of Directors the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any agent appointed shall serve for such term, not longer than the next annual meeting of the Board -7- of Directors, as shall be specified, subject to like right of removal by the Board of Directors. 4.02 VACANCIES If any office becomes vacant for any reason, the vacancy may be filled by the Board of Directors. 4.03 POWER OF OFFICERS Each officer shall have, subject to these ByLaws, in addition to the duties and powers specifically set forth herein, such powers and duties as are commonly incident to his office and such duties and powers as the Board of Directors shall from time to time designate. All officers shall perform their duties subject to the directions and under the supervision of the Board of Directors. The president may secure the fidelity of any and all officers by bond or otherwise. 4.04 PRESIDENT The president or such other person as the Board of Directors may appoint, shall be the chief executive officer of the Corporation. He shall preside at all meetings of the directors and shareholders. He shall see that all orders and resolutions of the Board are carried out, subject however, to the right of the directors to delegate specific powers, except such as may be by statute exclusively conferred on the president, to any other officers of the Corporation. He or any vice president shall execute bonds, mortgages and other instruments requiring a seal, in the name of the Corporation, and, when authorized by the Board, he or any vice president may affix the seal to any instrument requiring the same, and the seal when so affixed shall be attested by the signature of either the secretary or an assistant secretary. He or any vice president shall sign certificates of stock. The president shall be ex-officio a member of all standing committees. He shall submit a report of the operations of the Corporation for the year to the directors at their meeting next preceding the annual meeting of the shareholders and to the shareholders at their annual meeting. -8- 4.05 VICE PRESIDENT The vice president shall, in the absence or disability of the president, perform the duties and exercise the powers of the president, and they shall perform such other duties as the Board of Directors shall prescribe. 4.06. SECRETARY AND ASSISTANT SECRETARIES The secretary shall attend all meetings of the Board and all meetings of the shareholders and shall record all votes and the minutes of all proceedings and shall perform like duties for the standing committees when required. He shall give or cause to be given notice of all meetings of the shareholders and all meetings of the Board of Directors and shall perform such other duties as may be prescribed by the Board. He shall keep in safe custody the seal of the Corporation, and when authorized by the Board, affix the same to any instrument requiring it, and when so affixed, it shall be attested by his signature or by the signature of an assistant secretary. The assistant secretary shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary, and they shall perform such other duties as the Board of Directors shall prescribe. In the absence of the secretary or an assistant secretary, the minutes of all meetings of the Board and shareholders shall be recorded by such person as shall be designated by the president or by the Board of Directors. 4.07 TREASURER AND ASSISTANT TREASURERS The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements. He shall keep and maintain the Corporation's books of account and shall render to the president and directors an account of all of his transactions as treasurer and of the financial condition of the Corporation and exhibit his books, records and accounts to the president or directors at any time. He shall disburse funds for capital expenditures as authorized by the Board of Directors and in accordance with the orders of the president, and present to the president for his attention any requests for disbursing funds if in the judgment of the treasurer any such request is not properly authorized. He shall perform such other duties as may be directed by the Board of Directors or by the president. -9- If required by the Board of Directors, he shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. The assistant treasurers in the order of their seniority shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer, and they shall perform such other duties as the Board of Directors shall prescribe. ARTICLE V CERTIFICATES OF STOCK: TRANSFER, ETC. 5.01 CERTIFICATES OF STOCK The certificates for shares of stock of the Corporation shall be numbered and shall be entered in the Corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the president or a vice president and the secretary or an assistant secretary or if the Board of Directors determines, by any one of the afore named officers and shall be sealed with the seal of the Corporation or a facsimile thereof. If the Corporation has a transfer agent or a registrar, other than the Corporation itself or an employee of the Corporation, the signatures of any such officer may be facsimile. In case any officer or officers who shall have signed or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before said certificate or certificates shall have been issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person or persons who signed such certificates or whose facsimile signature or signatures shall have been used thereon had been such officer or officers at the date of its issuance. Certificates shall be in such form as shall in conformity to law be prescribed from time to time by the Board of Directors. The Corporation may appoint from time to time transfer agents and registrars, who shall perform their duties under the supervision of the secretary. -10- 5.02 TRANSFERS OF SHARES Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. 5.03 REGISTERED SHAREHOLDERS The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 5.04 LOST CERTIFICATE The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost. When authorizing such issue of a new certificate or certificates, the Board of Directors in its discretion and as a condition precedent to the issuance thereof, may require the owner of such lost or destroyed certificate or certificates or his legal representative to advertise the same in such manner as it shall require or to give the corporation a bond with surety and in form satisfactory to the Corporation (which bond shall also name the Corporation's transfer agents and registrars, if any, as obligees) in such sum as it may direct as indemnity against any claim that may be made against the Corporation or other obligees with respect to the certificate alleged to have been lost or destroyed, or to advertise and also give such bond. ARTICLE VI DIVIDEND 6.01 DECLARATION The Board of Directors may declare at any annual, regular or special meeting of the Board and the Corporation may pay, dividends on the outstanding shares in cash, property or in the shares of the Corporation to the extent permitted by, and subject to the provisions of, the laws of the State of Nevada. -11- 6.02 RESERVES Before payment of any dividend there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time in their absolute discretion think proper as a reserve fund to meet contingencies or for equalizing dividends or for repairing or maintaining any property of the Corporation or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may abolish any such reserve in the manner in which it was created. ARTICLE VII MISCELLANEOUS 7.01 INFORMAL ACTION Any action required to be taken or which may be taken at a meeting of the shareholders, directors or members of the executive committee, may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by such number of the shareholders, directors, or members of the executive committee as is required by law, as the case may be, entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a vote of the shareholders, directors, or members of the executive committee, as the case may be, at a meeting of said body. 7.02 SEAL The corporate seal shall be circular in form and shall contain the name of the Corporation, the year of its incorporation and the words "State of Nevada", and "CORPORATE SEAL". The seal may be used by causing it or a facsimile to be impressed or affixed or in any other manner reproduced. The corporate seal may be altered by order of the Board of Directors at any time. 7.03 CHECKS All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 7.04 FISCAL YEAR The fiscal year of the Corporation shall begin on the 1st day of April in each and every year. -12- 7.05 DIRECTORS ANNUAL STATEMENT The Board of Directors shall present at each annual meeting of shareholders a full and clear statement of the business and condition of the Corporation. 7.06 AMENDMENTS These ByLaws may be altered, amended or repealed in whole or in part by the affirmative vote of the Board of Directors. ARTICLE VIII INDEMNIFICATION OF OFFICERS AND DIRECTORS Every person who was or is a party to, or is threatened to be made a party to, or is involved in any action, suit or proceedings, whether civil, criminal,. administrative or investigative, by reason of the fact that he or a person to whom he is the legal representative is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless, to the fullest extent legally permissible under the laws of the State of Nevada, against all expenses, liability and loss, including attorney's fees, judgements, fines and amounts paid or to be paid in settlement, reasonably incurred or suffered by him in connection therewith, all pursuant to Section 78.151 of the Nevada Revised Statutes. Such right of indemnification shall be a contract right which may be enforced in any manner desired by such person. This indemnification is intended to provide at all times the fullest indemnification permitted by the laws of the State of Nevada and the corporation may purchase and maintain insurance on behalf of any person who is or was serving at the request of the corporation as a director or officer of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred in any such capacity or arising out of such status, whether or not the corporation would have the power to indemnify such person. -13- EX-4.1INSTRUMENTSDEF 5 EXHIBIT 4.1 - CERTIFICATE OF DESIGNATION S.W. LAM, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF A SERIES OF 100,000 SHARES OF PREFERRED STOCK, $.001 PAR VALUE, DESIGNATED "SERIES A PREFERRED STOCK" S.W. Lam, Inc., a Nevada Corporation (the "Corporation"), by way of this Certificate of Designation, Preferences and Rights (as it may hereafter be amended, modified or supplemented upon vote of the Board of Directors of the Corporation and approval of all holders of Series A Preferred Stock, as such term is hereinafter defined, this ("Certificate") certifies that, pursuant to the authority expressly vested in the Board of Directors by the Corporation's Articles of Incorporation, and in accordance with the provisions of Section 78.195 of the Nevada Revised Statutes, the Board of Directors of the Corporation has duly adopted the following resolutions creating a series of its Preferred Stock designated as Series A Preferred Stock: RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation by the provisions of the Articles of Incorporation of the Corporation, as amended, this Board of Directors hereby creates a series of Preferred Stock, $.001 par value, and this Board of Directors hereby fixes the designation and the voting power, preferences and rights, and the qualifications, limitations or restrictions thereof, of the shares of such series (in addition to the powers, preferences and rights, and the qualifications, limitations or restrictions thereon, set forth in the Articles of Incorporation, as amended, which are applicable to all series of Preferred Stock of the Corporation) as follows: One hundred thousand (100,000) shares of Preferred Stock, par value $.001 per share, of the Corporation are hereby constituted as a series of Preferred Stock designated as Series A Preferred Stock (the "Series A Preferred Stock") with the voting powers and the preferences and rights hereinafter set forth: SECTION 1. DIVIDENDS. The holders of shares of Series A Preferred Stock (the "Preferred Shares") shall be entitled to receive out of the assets of the Corporation legally available for dividends such dividends in cash, stock or property as the board of directors shall, in its discretion, declare from time to time. SECTION 2. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of the Preferred Shares shall be entitled to be paid first out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes an amount equal to $.001 per share of Series A Preferred Stock, and no more, before any distribution shall be made to the holders of the Common Stock or any other class of capital stock or series thereof ranking junior to the Preferred Shares with respect to the -1- distribution of assets. If the assets of the Corporation shall be insufficient to permit the payment in full to the holders of the Preferred Shares of the amounts thus distributable, then the entire assets of the Corporation available for such distribution shall be distributed ratably among the holders of the Preferred Shares in proportion to the full preferential amount each such holder is otherwise entitled to receive. SECTION 3. VOTING RIGHTS. The holders of the Series A Preferred Stock shall, as a class, be entitled to such number of votes as shall constitute thirty percent (30%) of the total eligible votes in all matters voted on by the shareholders of the Corporation an shall be further entitled to such voting rights as may be expressly required by law. Without the approval of holders of a majority of the outstanding Preferred Shares, the Corporation shall not (a) authorize, create or issue any shares of any class or series ranking senior to the Preferred Shares as to liquidation rights, (b) amend, alter or repeal, by any means, the Certificate of Incorporation if the powers, preferences, or special rights of the Preferred Shares would be adversely affected, or (c) become subject to any restriction on the Preferred Shares, other than restrictions arising solely under the General Corporation Law of the State of Nevada or existing under the Certificate of Incorporation as in effect on October 10, 1996. SECTION 4. RIGHTS OTHERWISE IDENTICAL. In all other respects, each share of the Series A Preferred Stock and the share of any other series, if any, shall have identical rights and privileges in every respect. IN WITNESS WHEREOF, S.W. Lam, Inc. has caused this Certificate to be duly executed and attested effective as of the day of October, 1996. S.W. LAM, INC. /s/ Hank Vanderkam -------------------------- By: Hank Vanderkam Name: Hank Vanderkam Title: President ATTEST: /s/ Michele Hanlon - ----------------------- Michele Hanlon Secretary -2- STATE OF TEXAS } } COUNTY OF HARRIS } I, ANDREA BENSON, a Notary Public, do hereby certify that on this 10TH day of October, 1996, personally appeared before me HANK VANDERKAM, who, being by me first duly sworn declared that he is the PRESIDENT of S.W. LAM, INC., that he signed the foregoing document as PRESIDENT of the corporation, and that the statements therein contained are true and correct. /s/ illegible ----------------------------- Andrea Benson Notary Public in and for the State of Texas Andrea V. Benson ----------------------------- Printed Name of Notary Public My Commission Expires: 9/12/99 -3- EX-10.1MATERIALCONTR 6 EXHIBIT 10.1 - EMPLOYMENT CONTRACT EMPLOYMENT CONTRACT (Translation) Parties to the Contract : A. Hang Fung Jewellery Co., Ltd., its business address is at Unit 302-303A, 3/F., Fu Hang Industrial Building, 1 Hok Yuen Street East, Hung Hom. ("Party A") B. Mr. Lam Sai Wing, H.K. I.D. No. D526157(1). 1. Title and Period of Employment Title : Director Commencement of Employment : January 1, 1994 Employment period : 10 years 2. Terms of Contract Mr. Lam is responsible for the internal and external management, operations and stratagic planning of the Company. 3. Remuneration - Salary per annum is HK$420,000.00 - Increment rate is 30% per annum 4. Annual Leave and Welfare - Public holidays. - Annual leave of 14 days. - Housing allowance. - Other welfare scheme determined by the Board of Directors. -1- Signed and Agreed by: - ----------------------------- ------------------------------------ Hang Fung Jewellery Co., Ltd. Mr. Lam Sai Wing Date : January 1, 1994 -2- EX-10.2MATERIALCONTR 7 EXHIBIT 10.2 - EMPLOYMENT CONTRACT EMPLOYMENT CONTRACT (Translation) Parties to the Contract : A. Hang Fung Jewellery Co., Ltd., its business address is at Unit 302-303A, 3/F., Fu Hang Industrial Building, 1 Hok Yuen Street East, Hung Hom. ("Party A") B. Mrs. Lam Chan Yam Fai, H.K.I.D. No. G293329(1) 1. Title and Period of Employment Title : Director Commencement of Employment : January 1, 1994 Employment period : 10 years 2. Terms of Contract Mrs. Lam Chan Yam Fai is responsible for the internal and external management, operations and stratagic planning of the Company. 3. Remuneration - Salary per annum is HK$280,000.00 - Increment rate is 30% per annum 4. Annual Leave and Welfare - Public holidays. - Annual leave of 14 days. - Housing allowance. - Other welfare scheme determined by the Board of Directors. -1- Signed and Agreed by: - ----------------------------- -------------------------------------- Hang Fung Jewellery Co., Ltd. Mrs. Lam Chan Yam Fai Date : January 1, 1994 -2- EX-10.3MATERIALCONTR 8 EXHIBIT 10.3 - SALES AGENCY AGREEMENT SALES AGENCY AGREEMENT (TRANSLATION) Party A: China Jewellery Import & Export Co. Party B: Hang Fung Jewellery Co., Ltd. As the two parties had very successful cooperation in the past years, both parties agreed to jointly develop domestic and international market and to further expand their business cooperation. Through friendly consultation, the following Sales Agency Agreement is worked out: 1. Agency services (1) Party A appoints Party B as its agent for selling (wholesale or retail) its gold, silver and karat-gold jewellery in Hong Kong. (2) Party B appoints Party A as its agent for selling (wholesale or retail) its gold, silver and karat-gold Jewllery in China. (3) Party B appoints Party A as it agent for selling the gold, silver and karat-gold jewellery it assembles and which are approved to be sold in China. 2. Responsibilities of Both Parties (1) Party A - Handling the import procedures and documentary work for each lot of jewelry to be sold by Party A as the agent for Party B - Handling the procedures and documentary work for selling Party B's products in China - Promotion and business coordination - For the goods Party B appointed Party A to sell and which are approved to be sold in China, Party A shall be responsible for providing invoices and all other required documents - Providing market information in China to Party B Party B shall assist Party A to establish sales network in China and provide labor, management and sales techniques. (2) Party B Regarding the sales that Party B act as Party A's agent, Party B shall be responsible for the following: -1- - Handling related customs procedures for each lot of jewellery that Party B acts Party A's agent to sell - Promotion and business coordination - Providing market information in Hong Kong to Party A 3. Undertaking of Party A (1) Party A is a legitimate company incorporated in China. (2) Party A is approved to conduct gold and silver jewellery business, and import & export gold and silver jewellery in China. It is also approved to act as an agent for the above-mentioned jewellery import & export business. (3) Party A has the power to enter into this agreement. 4. Prices of the Products The prices of the products will be determined by both parties based on market situation. 5. Agency fees (1) For Party A's products appointed to Party B to sell, Party A shall pay the following agency fees to Party B: Silver and karat-gold jewellery 10% of sales revenue Fine gold jewellery RMB 1.00 per gram (2) For Party B's products appointed to Party A to sell, Party B shall pay the following agency fees to Party A: Fashion jewellery 15% of sales revenue Silver and karat-gold jewellery 10% of sales revenue Fine gold jewellery RMB 1.00 per gram (3) Both parties shall be responsible for the respective taxes regarding the agency fees. 6. Tenure of Agency (1) This agreement shall have a tenure of 10 years. (2) Should either one party ceased its business or declared bankruptcy, or due to force majeure, this agreement shall be terminated. 8. Governing Laws The interpretation and execution of this agreement shall be governed by the laws of the People's Republic of China. -2- 9. Settlement of Disputes Any disputes arising between Party A and Party B shall be settled through friendly consultation between the two parties. In case no settlement can be reached through consultation, either party shall have the right to submit the dispute to the China Council For Promotion of International Trade for arbitration. Arbitration shall be carried out in Beijing. The arbitrage award shall be final and binding upon both parties. 10. This Agreement is written in Chinese and have two copies. Both copies shall be equally binding. 11. This Agreement shall come into force after signing by both parties. Signed on November 18, 1994 -3- EX-10.4MATERIALCONTR 9 EXHIBIT 10.4 - JEWELLERY ASSEMBLING AGREEMENT AGREEMENT FOR JEWELLERY ASSEMBLING (TRANSLATION) Party A: China Jewellery Import & Export Co. Party B: Hang Fung Jewellery Co., Ltd. Since 1992, both parties had successful cooperation in assembling of gold, silver and karat-gold jewelry. Through friendly consultation, both parties have renewed their original agreement and have worked out the following agreement. 1. Responsibilities of Both Parties 1.1 Party A Provide factory premises, water & electricity supply, labor and other supporting facilities, transportation and declaration for import & export of equipment, machinery, materials and products; assist Party B in applying for required legal documents. 1.2 Party B Provide the equipment, tools, and materials to the assembling and processing plant, Yi Lan Jewellery Factory, in Beijing for jewellery assembling. The total value of the equipment and material contributed shall be HK$25,000,000. Party B shall have the ownership right of all the equipment and material it provided and has the right to re-allocate, use or withdraw these equipment and material. 1.3 Party B shall send its technical staff to Yi Lan Jewellery Factory to give advice in aspects of technology, production and management. 2. Scope of Operations 2.1 Assembling of imported materials which are provided by Party B. 2.2 Provided it does not interfere the normal operations of Yi Lan Jewellery Factory, Party A may be subcontracted by other local customers to assemble jewellery using domestic materials. 3. Assembling of Imported Material for Re-export 3.1 Party B shall have the ownership right for the material it provided for assembling. Party B shall also have the ownership right for the assembled semi-product and final products. 3.2 Assembling fees Party B shall pay to Party A assembling fees based on the following schedule: -1- Fine gold jewellery HK$1.00/gram Karat-gold jewellery HK$3.00/gram Silver jewellery (gem assembling) HK$0.60/gram 3.3 Incoming material and delivery date - Party B will provide sufficient material to Party A for assembling based on the quantity specified in this agreement. - Party A guarantees to deliver the assembled goods according to the terms of each individual order. 3.4 Payment of assembling fees (1) Format of payment - Telegraphic transfer (2) Time of payment - Within one month from the date of statement 3.5 Assembling With Imported Material Party A may appoint Yi Lan Jewellery Factory to assemble the gold and silver it imports. If the final products are exported through Party B, jewelry made with 10% of the imported material may be sold in the domestic market. 4. Assembling of Domestic Material 4.1 Party B agreed that Party A may perform assembling work with domestic material for other local customers provided that it does not interfere the normal operations of Yi Lan Jewellery Factory. 4.2 (1) Party B agrees that Party A may perform assembling work of gold, silver and karat-gold jewelry for other customers in China. (2) Party B shall assist Party A in business negotiation with customers. Party B may negotiate with customers in the name of Party A regarding product price, quantity and style and other issues. (3) Party A shall be responsible for the civil liabilities, if any, regarding the above-mentioned business. If any loss or damages incurred due to Party B's fault, Party B shall compensate Party A for all the losses. 4.3 Regarding the jewelry assembled as subcontracted by other customers, Party A may also be act as their agent to sell the products in domestic market. 4.4 Payment of Fees (1) For the assembling work subcontracted to Party A by other local customers, Party A agrees to pay fees to Party B as the fees for using Party B's equipment and technology. The actual fees standard shall be determined by both parties later. (2) For the assembling work secured by Party B on behalf of Party A, the assembling fees to be charged shall be determined by both parties depending on the terms of each particular order. -2- 5. Guaranteed Assembling Income 5.1 Party B guarantees that it shall provide sufficient material for Party A to assemble so that Party A can get at least HK$2 million of assembling fees in 1992 and at least HK$4 million in the following year. From the third year onwards, the total assembling fees Party A would earn shall increase by 10% every year. 6. Warranties by Party A 6.1 For the purpose of the assembling work stipulated in this agreement, Party A hereby warrants that:- (1) Party A is a legal entity incorporated in the People's Republic of China according to relevant laws. (2) Party A has the right to conduct import and export business of gold and silver jewelry in China and has the right to carry out assembling work for gold and silver jewelry with imported material. 7. Tenure 7.1 This agreement shall have a tenure of 10 years. Upon expiry of the tenure, unless one party proposes in writing to discharge this agreement, this agreement shall continue to be valid and binding upon both parties. 7.2 Termination of tenure before expiry Should either one party ceased its business or declared bankruptcy, or due to force majeure, this agreement shall be terminated. 8. Governing Laws The interpretation and execution of this agreement shall be governed by the laws of the People's Republic of China. 9. Settlement of Disputes Any disputes arising between Party A and Party B shall be settled through friendly consultation between the two parties. In case no settlement can be reached through consultation, either party shall have the right to submit the dispute to the China Council For Promotion of International Trade for arbitration. Arbitration shall be carried out in Beijing. The arbitrage award shall be final and binding upon both parties. 10. This Agreement is written in Chinese and have two copies. Both copies shall be equally binding. 11. This Agreement shall come into force after signing by both parties. Should any registration or approval process be required, Party A shall be responsible for handling these matters. Signed by Party A and Party B November 18, 1994 -3- EX-10.5MATERIALCONTR 10 EXHIBIT 10.5 - SALES COOPERATION AGREEMENT SALES COOPERATION AGREEMENT (Translation) Party A: China Jewellery Import & Export Co. Party B: Hang Fung Jewellery Co., Ltd. WHEREAS (1) Party A has the legitimate right to import, export and sell gold, silver and karat-gold jewelry in China. It intends to expand its business through cooperation with Party B. (2) Party B has well-developed relationship with many jewelry manufacturers, wholesalers and retailers in China. It has also extensive experience, technology and customer network in gold, silver and karat-gold jewelry. (3) Party B has many years' experience in production of gold, silver and karat-gold jewelry and has many products suitable for selling in the China market. It intends to expand its market in China through cooperation with Party A. (4) Party B hopes to sell its assembled products which are approved to sell in domestic market through the cooperation with Party A. (5) Party A and Party B have signed a "Sales Agency Agreement" on November 18, 1994. This Sales Cooperation Agreement further stipulates the rights and obligations of both parties based on the Sales Agency Agreement. Through friendly consultation, both parties have worked out the following agreement regarding the establishment of distribution network for gold, silver, and karat-gold jewelry in China. 1. Cooperation Project Party B shall assist Party a to establish distribution network for selling gold, silver and karat-gold jewelry in China. Party B shall also provide labor, management and sales techniques to facilitate the selling of the products. 2. Responsibilities of Both Parties RESPONSIBILITIES OF PARTY A (1) Regarding the cooperative project, based on the decision after consultation between both parties, Party A shall provide all documents necessary for the establishment of sales outlets and for the selling of gold, silver and karat-gold jewelry. (2) To coordinate and assist Party B in handling all necessary procedures. -1- (3) To provide invoices and other documents related to tax and commerce issue regarding the domestic sale of gold, silver and karat-gold jewelry stipulated in this agreement. (4) For the activities carried out by Party B which are after consultation with Party A and as assistance to Party A or acting on behalf of Party A in accordance with this Cooperation Agreement, Party A shall be responsible for any civil liabilities incurred. If any loss or damages incurred due to Party B's fault, Party B shall compensate Party A for all the losses. RESPONSIBILITIES OF PARTY B (1) Through its well-developed business relationship in China and its extensive experience in gold and silver jewelry, Party B shall establish a distribution and sales network for Party A selling Party A's jewelry and the jewelry products it acts as an agent to sell. (2) After the establishment of the distribution and sales network, Party A shall assign expertise and recruit local sales people to assist Party A to sell the jewelry products. (3) To provide sales, marketing and management techniques for Party A to assist Party A to sell the jewelry products. Through discussion between both parties, Party B shall assist Party A to carry out promotional activities for gold, silver and karat-gold jewelry. 3. Warranties by Party A For this Cooperation Agreement, Party A hereby warrants that: (1) Party A is a legal entity incorporated in the People's Republic of China according to relevant laws. (2) Party A has the right to conduct import and export business of gold and silver jewelry in China and has the right to sell these products in China. Party A also has the right to be entrusted or act as an agent for the above-mentioned import and export business of gold and silver jewelry. (3) Party A has the legal authority to execute this Agreement. 4. Compensation Both parties agree that, as compensation for Party B's assistance to Party A in selling the gold, silver and karat-gold jewelry, for Party B's gold, silver, and karat-gold jewelry products (including those which are approved to sell in China) which are entrusted to Party A to sell, Party A shall not charge for additional fees except for the sales agency fees as stipulated in Clause 5.2(1) of the "Sales Agency Agreement". -2- 5. Cooperation Tenure (1) This Cooperation Agreement shall have a tenure of 10 years. Any party who intends to extend the tenure shall have to propose in writing to the other party one month prior to the expiry of the cooperation tenure. (2) Should either one party ceased its business or declared bankruptcy, or due to force majeure, this agreement shall be terminated. 6. Governing Laws The interpretation and execution of this agreement shall be governed by the laws of the People's Republic of China. 7. Settlement of Disputes Any disputes arising between Party A and Party B shall be settled through friendly consultation between the two parties. In case no settlement can be reached through consultation, either party shall have the right to submit the dispute to the China Council For Promotion of International Trade for arbitration. Arbitration shall be carried out in Beijing in Chinese language. The arbitrage award shall be final and binding upon both parties. 8. This Agreement is written in Chinese and have two copies. Both copies shall be equally binding. 9. This Agreement shall come into force after signing by both parties. Signed by Party A and Party B Date: November 18, 1994 Beijing, China -3- EX-10.6MATERIALCONTR 11 EXHIBIT 10.6 - CONFIRMATION AGREEMENT CONFIRMATION AGREEMENT 1. According to Section 5 of the Agreement for Jewellery Assembling signed by China Jewellery Import & Export Co. and Hang Fung Jewellery Co., Ltd. on November 18, 1994, "Party B undertakes and warrants that it will provide sufficient material for Party A to assemble so that Party A can get at least HK$2 million of assembling fees in 1992 and at least HK$4 million within the following year. From the third year onwards, the total assembling fees Party A earns will increase by 10% every year." China Jewellery Import & Export Co. hereby confirms that it will not claim any of the above-mentioned guaranteed assembling fees from Hang Fung until further agreement between both parties. 2. Regarding the following three agreements signed by China Jewellery Import & Export Co. and Hang Fung Jewellery Co., Ltd. on November 18, 1994:- (1) Agreement for Jewellery Assembling (2) Sales Agency Agreement (3) Sales Cooperation Agreement China Jewellery Import & Export Co. hereby confirms that it will bear all the tax liabilities arisen from the execution of these agreements. 3. According to Section 5(2) of the Sales Agency Agreement signed by China Jewellery Import & Export Co. and Hang Fung Jewellery Co., Ltd. on November 18, 1994, it is stated that "For Party B's products appointed Party A to sell, Party B will pay the following agency fees to Party A: Fashion jewellery - 15% of sales revenue; silver and karat-gold jewellery - 10% of sales revenue; fine gold jewellery - RMB1.00 per gram" Both parties agree to amend this clause as follows:- "For Party B's jewellery products and its assembled jewellery products which are approved to sell in the domestic market and which are appointed to Party A to sell, Party B will pay the following agency fees to Party A: Fashion jewellery - 15% of sales income received by Party A on behalf of Party B; karat gold jewellery - 10% of sales income received by Party A on behalf of Party B; fine gold jewellery - RMB1.00 per gram of gold, on sales income received by Party A on behalf of Party B." This Confirmation Agreement will be effective from October 1, 1992. Signed by China Jewellery Import Export Co. Hang Fung Jewellery Co., Ltd. EX-10.7MATERIALCONTR 12 EXHIBIT 10.7 - LEASE AGREEMENT LEASE AGREEMENT LANDLORD (LESSOR) MRS. LAM CHAN YAM FAI ------------------------------------------------ TENANT (LESSEE) HANG FUNG JEWELLERY CO., LTD. ------------------------------------------------ UNIT 302-303A FU HANG INDUSTRIAL BLDG. ------------------------------------------------ HOUSE IN 1 HOK YUEN ST. EAST, HUNGHOM, KOWLOON ------------------------------------------------ NO. ------------------------------------------------ TERM FIVE (5) YEARS ------------------------------------------------ RENT HK$1,350,000.00 PER YEAR ------------------------------------------------ COMMENCING 1ST APRIL 1993 ------------------------------------------------ EXPIRES 31ST MARCH 1998 ------------------------------------------------ -1- LEASE AGREMENT An Agreement made this First day of April , one thousand nine hundred and ninety-three between Mrs. Lam Chan Yam Fai (hereinafter called the "Landlord") of the one part and HANG FUNG JEWELLERY CO., LTD. of Unit 302-303A, Fu Hang Industrial Building, No. 1, Hok Yuen Street East, Hunghom, Kowloon. (hereinafter called the "Tenant") of the other part. IT IS HEREBY MUTUALLY AGREED as follows, that is to say: 1.--The Landlord shall let and the Tenant shall take ALL that messuage or tenement and dwelling house situated at Kowloon and known as No. 302 - 303A Fu Hang Industrial Building, No. 1, Hok Yuen Street East, Hunghom, Kowloon. built on a portion of Section A Lot No. 113 together with the out-offices, easements and appurtenances thereunto belonging or appertaining for the term of 5 year(s) from the First (1st) of April One thousand nine hundred and NINETY-THREE (93) at the yearly rent of Dollars ONE MILLION THREE HUNDRED FIFTY THOUSAND ONLY. (HK$1,350,000.00) * * * * payable in equal Calendar monthly payments of Dollars * * * * * * * * * * * each on the first day of each and every Calendar month which includes all rates, taxes, assessments, charges and impositions now or hereafter to be rated, taxed assessed, charged or imposed by the Government of Hong Kong or other lawful authority for or in respect of the said premises or any part thereof. 2.--TheTenant shall pay the said rent to the Landlord at the times and in manner aforesaid without any deduction whatsoever and shall also well and truly pay all rates, taxes, assessment, charges and impositions as are before mentioned (the Crown Lessee's rent alone excepted). 3.--The Landlord shall keep the roofs and all exterior walls of the said premises in a proper tenantable state or repair and amendment at his own cost. -2- 4.--The Tenant shall, at all times during his tenancy, keep in good repair and condition at his own cost the Windows, Jalousies, Fire Grates, Locks, Bolts, Bars, and all interior portions of the said house and premises and at the expiration of the said term deliver up the said premises in a good, clean, tenantable and proper state of repair and amendment, damages done by typhoon, fire or white-ants, ordinary wear and tear not attributable to the negligence of the Tenant excepted. 5.--The Tenant shall not store Gunpowder, Saltpetre, Kerosene or other Explosive or Combustible Substance in any part of the said premises, and shall be answerable and responsible for the consequence of any breach of local Ordinances by lessee, tenant, or inmate. 6.--The Tenant shall not underlet or part with the said premises to any other person or make any alterations or additions, to the said premises, without having first obtained the written licence and consent of the Landlord thereto, but such consent shall not be unreasonably withheld by him. 7.--The Tenant shall not use the said Messuage for any other purpose than that of a Dwelling House/Storage/Office/Showroom and shall not do or suffer, or permit to be done any act or thing which may become a nuisance, or cause annoyance to persons occupying the house adjoining or contiguous to the said Messuage or Dwelling House. 8.--The Tenant shall not place or leave in the Entrances or any of the passages of the premises used in common with other tenants of the Landlord, any boxes, furniture or rubbish or otherwise incumbar the same. 9.--The Tenant shall not use nor permit to be used any balconies included in the said premises to be let, for the purpose of washing, drying or airing -3- clothes, or goods of any description. 10.--The Tenant shall not erect any aerial on the exterior or roof of the said premises without first obtaining the written consent of the Landlord. Should such consent have been obtained, work must be carried out under the supervision of a representative of the Landlord. 11.--The Tenant shall do nothing in contravention to the stipulations of the Crown Lease under which the Landlord holds the said premises, and shall be deemed to hold the same subject to power of the Crown thereby reserved. 12.--The Tenant shall at all times during the said term at the expense of the Tenant keep the lavatories and water apparatus thereof when used exclusively by the Tenant and the servants or workmen of The Tenant in good clean and tenantable state and in proper repair and condition to the satisfaction of the Medical Department or Urban Council, or other Government Authority concerned. 13.--The Tenant shall pay on demand to the LANDLORD the cost incurred by the Landlord in cleansing and clearing any of the drains choked or stopped up owing to careless use by the Tenant or his servants. 14.--The Tenant shall pay all charges in respect of gas, electric light and power which shall be consumed or supplied on or to the premises hereby agreed to be let and also shall pay if applicable a due proportion of the Water Rate (Say at $ per month). Separate Meter. 15.--It is agreed that the monthly charges for the disposal of garbage, caretakers expenses and general maintenance ($ 1,500.00 ) are to be borne by the Tenant this payment is subject to adjustment when and if necessary. 16.--It is agreed that the Stamp Duty for this Lease Agreement is to be shared equally by both parties. -4- 17.--Three months before the expiration of this Lease Agreement the Landlord will have the right to show the flat to the intending Tenants, provided that this is done during reasonable hours. 18.--Provided always and these presents are upon this express condition, that if the rent hereby reserved or any part thereof shall be unpaid for the space of fifteen days next after any of the days on which the same ought to have been paid (although no formal or legal demand shall have been made thereof) or in case of the breach or non-performance of any of the stipulations and agreements herein contained on the part of the Tenant to be kept done or performed, then and from thenceforth and in either of such cases it shall be lawful for the Landlord to enter into and upon the said premises or any part thereof in the name of the whole to re-enter and the same to have again re-possess and enjoy as in his former estate, and as if these presents had not been made and executed. 19.--The Tenant hereby expressly declares that at the expiration or sooner determination of this Lease Agreement the Tenant will not invoke or seek to avail himself of any protection which may or shall hereafter be afforded by any ordinance or regulation of the Colony of Hong Kong protecting tenant or lessee from eviction but will promptly and punctually quit and deliver up possession of the said premises at the expiration of this Lease Agreement or sooner determination as aforesaid. 20.--The Tenant hereby expressly agrees to waive any notice to quit required by the Tenancy (Notice of Termination) Ordinance (Cap. 335) for the determination of the tenancy hereby granted and the parties hereto agree jointly to apply to the Secretary for Home Affairs for the ratification of such agreement. 21.--Upon the signing of this Lease Agreement the Tenant is required to pay -5- the Landlord deposit the sum of Dollars HK$100,000.00 to secure the due performance and observance of the terms and conditions herein contained. The said sum will be refunded without interest to the Tenant after he has cleared all rates, rents, bills of gas, electricity, water, etc., before departure and observed and performed all his terms and conditions herein stated. 22.--Any notice to the Lessee shall be sufficiently served if left addressed to him at the said premises or sent to him at his last known address in Hong Kong by ordinary or registered post and any notice to the lessor shall be sufficiently served if delivered to him personally or sent to him at this last known address by ordinary or registered post. RECEIVED the day and year first above written of and from the Tenant the sum of DOLLARS ONE HUNDRED THOUSAND ONLY (HK$100,000.00) only being the deposit money hereinbefore expressed to be paid by the Tenant to the Landlord. WITNESS: AS WITNESS the hands of the said parties the day and year first above written. MRS. LAM CHAN YAM FAI HANG FUNG JEWELLERY CO., LTD. /s/ illegible /s/ illegible - -------------------------------- ---------------------------------- (Landlord) (Tenant) WITNESS to the signature of the WITNESS to the signature of the above named above named /s/ illegible /s/ illegible - -------------------------------- ---------------------------------- -6- EX-21.1SUBSIDIARIESO 13 EXHIBIT 21.1 LIST OF SUBSIDIARIES S.W. LAM, INC. LIST OF SUBSIDIARIES
Name Jurisdiction - ----------------------------------- ----------------------- Quality Prince Limited British Virgin Islands Hang Fung Jewellery Company Limited Hong Kong Kai Hang Jewellery Company Limited Hong Kong
EX-27 14 FINANCIAL DATA SCHEDULE
5 0001030860 S. W. Lam, Inc. 1,000 12-mos 6-mos MAR-31-1996 MAR-31-1997 APR-01-1995 APR-01-1996 MAR-31-1996 SEP-30-1996 244 47 0 0 3,441 3,873 452 0 8,069 9,110 12,372 13,462 4,392 4,216 1,088 0 15,676 17,678 11,759 11,738 851 815 0 0 1 1 12 12 3,025 5,054 15,676 17,678 26,868 15,161 26,942 15,196 18,822 10,701 18,822 10,701 2,674 1,643 0 0 403 133 5,043 2,719 1,650 712 3,393 2,007 0 0 0 0 0 0 3,393 2,007 .28 .17 .28 .17
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