-----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, MOTSW3eTotiUZLK2UOgnR7nVIZMe+uMPsIjlHd3RZXu1Al3ckFzj3UIgTiHuseJY YuO5O2NUDw9nYceVexBtYQ== /in/edgar/work/0001026700-00-000132/0001026700-00-000132.txt : 20000718 0001026700-00-000132.hdr.sgml : 20000718 ACCESSION NUMBER: 0001026700-00-000132 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAM SW INC CENTRAL INDEX KEY: 0001030860 STANDARD INDUSTRIAL CLASSIFICATION: [3911 ] IRS NUMBER: 621563911 STATE OF INCORPORATION: NV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22049 FILM NUMBER: 673550 BUSINESS ADDRESS: STREET 1: UNIT 25 32 2ND FLOOR BLOCK B FOCAL IND C STREET 2: MAN LOK STREET CITY: HUNGHOM, HONG KONG STATE: K3 ZIP: 12345 BUSINESS PHONE: 0118522766 MAIL ADDRESS: STREET 1: UNIT 25 32 2ND FLOOR BLOCK B FOCAL IND C STREET 2: MAN LOK STREET CITY: KOWLOON, HONG KONG STATE: K3 10-K 1 0001.txt 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended March 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _______________. Commission File No. 0-22049 S.W. LAM, INC. ----------------------------------------------- (Name of registrant as specified in its charter) Nevada 62-1563911 - --------------------------------- ------------------------------- (State or other jurisdiction (I.R.S. Employer Identification of incorporation or organization) Number) Unit 25-32, Second Floor, Block B, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Hong Kong ------------------------------------------------------------------------------- (Address of principal executive offices)(Zip code) Registrant's telephone number, including area code: (852) 2766 3688 Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered ------------------- ----------------------------------------- None None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.001 par value -------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of July 1, 2000, 12,800,000 shares of common stock of the Registrant were outstanding. As of such date, the aggregate market value of the voting and non-voting common equity held by non-affiliates, based on the closing price, was approximately $3,600,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive annual proxy statement to be filed within 120 days of the Registrant's fiscal year ended March 31, 2000 are incorporated by reference into Part III. TABLE OF CONTENTS Page ------ PART I ITEM 1. BUSINESS ................................................ 1 ITEM 2. PROPERTIES...............................................14 ITEM 3. LEGAL PROCEEDINGS........................................14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................14 ITEM 6. SELECTED FINANCIAL DATA..................................15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............16 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................24 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS......................................25 ITEM 11. EXECUTIVE COMPENSATION.............................................25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................25 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................25 SIGNATURES...............................................27 PART I This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in the section entitled "Factors that May Affect Future Results" beginning on page 20 of this Form 10-K. 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 functional currency is Hong Kong Dollars ("HK$"). For the convenience of readers, unless otherwise indicated, all financial information contained herein is presented in United States Dollars ("US$"). Translation of amounts from HK$ into US$ has been made at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2000 of US$1.00 = HK$7.79. No representation is made that the HK$ amounts could have been, or could be, converted into US$ at that rate or at any other rate. ITEM 1. BUSINESS S.W. Lam, Inc. (the "Company"), a Nevada corporation, through its subsidiaries, is engaged in the design, manufacturing and marketing of a broad range of gold products, other precious metal products and jewelry products to customers in Hong Kong, the People's Republic of China (the "PRC" or "China") and other parts of the world. The Company's operations are located in Hong Kong and the PRC. History and Development of the Company The Company's business began with the formation in the 1980's of an unincorporated sole proprietorship by Lam Sai Wing ("Mr. Lam") to manufacture and market jewelry. Subsequently, in 1988, Hang Fung Jewellery Company, a sole proprietorship formed by Mr. Lam, established a modern manufacturing facility in Shenzhen, the PRC (the "Shenzhen Facility"). In 1994, Hang Fung Jewellery Company Limited, a limited company formed by Mr. Lam, entered into a sino-foreign joint venture to manufacture and market jewelry at facilities in Beijing, the PRC (the "Beijing Facility"). In April 1994, Mr. Lam incorporated Macadam Profits Limited ("Macadam"), Priestgill Limited ("Priestgill") and Soycue Limited ("Soycue") in the British Virgin Islands. Whilst Soycue engaged in the jewelry manufacturing and distribution business, Macadam and Priestgill remained inactive since the date of their incorporation. In November 1994, Mr. Lam incorporated Hang Fung Jewellery Company Limited ("Hang Fung Jewellery") in Hong Kong and transferred operations of the Shenzhen Facility to Hang Fung Jewellery. Certain other operations previously conducted by Mr. Lam were also transferred to Hang Fung Jewellery in September 1995. Effective April 1996, Mr. Lam transferred operations of Soycue to Hang Fung Jewellery and ceased operations of Soycue, which has since remained dormant. In December 1996, Mr. Lam and his wife, Chan Yam Fai, Jane ("Ms. Chan") transferred ownership of Hang Fung Jewellery, Macadam, Priestgill, Soycue and Kai Hang Jewellery Company Limited ("Kai Hang Jewellery"), a Hong Kong corporation engaged in jewelry marketing owned by Mr. Lam and Ms. Chan, to Quality Prince Limited ("Quality Prince"), a holding company organized in the British Virgin Islands and also owned by Mr. Lam and Ms. Chan. In September 1998, Quality Prince transferred all of its interest in Priestgill to an independent third party. (Hang Fung Jewellery, Kai Hang Jewellery, Macadam, Quality Prince and Soycue are collectively referred to herein as the "Hang Fung Group"). 1 In December of 1996, Quality Prince 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 April of 1994 in the State of Tennessee under the name New Wine, Inc. ("New Wine"). New Wine was originally engaged in, and later discontinued its efforts, 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. Pursuant to discussions with the shareholders of Quality Prince, 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, S.W. Lam, Inc. entered into an agreement with the shareholders of Quality Prince pursuant to which S.W. Lam, Inc. 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, continued the operations of the Hang Fung Group. In December of 1997, Quality Prince incorporated Hang Fung Gold Technology Limited ("Hang Fung Gold") in Bermuda. Hang Fung Gold remained inactive until February 1999. In May of 1997, Quality Prince entered into an agreement with Phenomenal Limited ("Phenomenal"), an unaffiliated third party, pursuant to which Phenomenal loaned to Quality Prince $10,000,000 and Quality Prince issued to Phenomenal a convertible promissory note (the "Note"). The Note bore interest at 3% per month, and was repayable in a lump sum payment on March 20, 1998. As one of the conditions for the lending, the Company issued a non-detachable warrant (the "Warrant") to Phenomenal to subscribe for 5,263,158 shares of common stock of the Company at an exercise price of $2.19 per share. The Note was secured by personal guarantees provided by Mr. Lam and Ms. Chan and the 53.9% equity interest in the Company owned by Mr. Lam and Ms. Chan. In accordance with the term of the agreement, the Warrant expired in May 1998. On June 4, 1998, Phenomenal agreed to extend the maturity date of the Note from March 20, 1998 to June 4, 1998, and waived its entitlement to interest accrued under the Note during the period from May 20, 1997 (date of issue of the Note) to June 4, 1998. Also, the Company and Phenomenal agreed to restructure and capitalize the Note into redeemable preferred stock of Hang Fung Jewellery. As a result, on June 30, 1998, Hang Fung Jewellery issued 5,263,788 shares of redeemable preferred stock (the "Preferred Stock") at approximately $1.90 per share to Phenomenal in replacement of the Note. Under the revised agreement, Phenomenal was required to redeem the Preferred Stock and to subscribe for common stock of Hang Fung Gold upon satisfaction of certain conditions. Alternatively, Phenomenal had an option to require Hang Fung Jewellery to redeem the Preferred Stock at a redemption amount as determined in accordance with a pre-determined formula, or require Mr. Lam and Ms. Chan to purchase the Preferred Stock held by Phenomenal in case Hang Fung Jewellery defaulted in redeeming the Preferred Stock. Pursuant to the revised agreement with Phenomenal, in February of 1999, the Hang Fung Group effected a corporate reorganization (the "Group Reorganization") with Hang Fung Gold becoming a holding company, excluding Quality Prince, for the Hang Fung Group and Phenomenal's investment being converted into common stock in Hang Fung Gold. Immediately prior to the conversion, dividends on the Preferred Stock in the amount of $1,849,000 were paid. The dividend paid on the Preferred Stock was included, in whole, in the minority interest in the Company's consolidated statement of operations for fiscal 1999. Immediately following the restructuring of the Hang Fung Group, Hang Fung Gold completed an offering of shares in Hong Kong raising approximately HK$59,000,000 (the "Hong Kong Offering") and the shares of Hang Fung Gold were listed on The Stock Exchange of Hong Kong Limited (the "Hong Kong Exchange"). Trading of shares of Hang Fung Gold on the Hong Kong Exchange commenced on March 16, 1999. Following the Group Reorganization and Hong Kong Offering, the Company holds, through Quality Prince, 53.145% of the issued capital stock of Hang Fung Gold, whereas Phenomenal holds 21.855% of the issued capital stock and the investing public holds the remaining 25% of the issued capital stock of Hang Fung Gold. 2 Company Structure The following chart sets forth the organization of the Company and its principal subsidiaries as of March 31, 2000: S.W. Lam, Inc. (incorporated in Nevada, US) 100% Quality Prince Limited (incorporated in the British Virgin Islands) 53.145% Hang Fung Gold Technology Limited (incorporated in Bermuda) 100% Macadam Profits Limited (incorporated in the British Virgin Islands) (Investment holding) 100% 100% Kai Hang Jewellery Company Limited (incorporated in Hong Kong) Hang Fung Jewellery Company Limited (incorporated in Hong Kong) (Manufacturing and selling (Property holding) of jewelry products) 100% Hang Fung Jewllery (Shenzhen) Co., Ltd. (established in the PRC) (Manufacturing of jewelry products) 3 Overview The Company is principally engaged in the design, manufacture and distribution of a broad range of gold products, other precious metal products and jewelry products. Manufacturing operations are carried on in Hong Kong and the PRC. The Company presently markets its products throughout the world including Hong Kong, the PRC, the Middle East, Southeast Asia, Europe and the United States. The Company has increased its sales in recent years as a result of increased marketing. Developments During Fiscal Year 2000 Following the Group Reorganization and Hong Kong Offering during the fourth quarter of fiscal 1999, the Company implemented a number of initiatives designed to increase sales through (1) product branding, (2) establishment of strategic marketing alliances, (3) expansion of wholesale and retail distribution channels in the PRC, and (4) implementation of an Internet marketing strategy. In connection with those initiatives, the Company began efforts to further expand its production facilities and halted contract manufacturing for third parties in order to devote its manufacturing capacity to production of its own products. In January 2000, the Company formed an alliance with The Administration of Shatoujiao Free Trade Zone of Shenzhen (the "Free Trade Administration") to expand its marketing and distribution channels in China. Pursuant to that alliance, the Company established relationships with approximately 1,000 additional wholesale customers in the PRC. At March 31, 2000, The Free Trade Administration sourced and operated eight retail counters, which carry the brand name of Hang Fung Gold, to sell Hang Fung Gold's "Hang Fung 3-D Gold" and "La Milky Way 3-D Silver" branded products in Shenzhen and Hangzhou. Under the terms of our alliance, the Free Trade Administration is entitled, and responsible, to source and sell the Company's products at retail counters carrying the Hang Fung brand name. The Company expects to invest approximately $7.7 million to expand distribution channels and establish retail networks in the PRC and has undertaken to invest approximately $2.6 million to expand its Sha Tau Kok factory and to devote a portion of the production capacity from that factory to supplying product to the PRC market. The Company also hired Mr. Chow Shou Him as Executive Director of its China Business Division to manage marketing and sales efforts in the PRC. As part of the Company's commitment to expand distribution channels, the Company's subsidiary will launch an Internet site in September 2000 to support business-to-business sales of products as well as to promote the Company's brand and support overall marketing efforts. As part of the Company's Internet strategy, in June 2000, Hang Fung Gold entered into a Sale and Purchase Agreement with New Epoch Holdings International Limited. Under the terms of the Sale and Purchase Agreement, Hang Fung Gold will acquire 49.9% of the stock of New Epoch Information (BVI) Limited ("New Epoch") in exchange for shares of common stock of Hang Fung Gold representing approximately 34.1% of the capital stock of Hang Fung Gold following the transaction. Under the terms of the Sale and Purchase Agreement, Hang Fung Gold has an option for a period of three years to acquire the remaining shares of New Epoch. In conjunction with the proposed acquisition of New Epoch, Hang Fung Gold entered into a Facility Agreement pursuant to which Hang Fung Gold agreed to provide to New Epoch a credit facility of up to the higher of (1) HK$50 million, or (2) two-thirds of the net proceeds of equity or debt issuances by Hang Fung Gold from time to time after closing of the acquisition. New Epoch is engaged in developing and facilitating e-commerce trading facilities between the PRC and the rest of the world, using offline trading services to complement its internet B2B platform. New Epoch, through a joint venture with Infoshare of the China International Electronic Commerce Centre -- an information technology arm of the Ministry of Foreign Trade and Economic Co-operation of the PRC, operates a portal under the domain name www.chinatradeworld.com (the "ChinaTradeWorld portal"), a B2B site designed to facilitate international trade with the PRC. Linking with the ChinaTradeWorld portal would enhance the operations of, and accelerate deployment of, the jewelry portal being established by Hang Fung Gold by providing access to an established trading portal with "Supply Chain Management" and "Customer Relationship Management" capabilities. 4 Closing of the acquisition of New Epoch is subject to satisfaction of a number of conditions, including completion of due diligence, receipt of relevant governmental or regulatory authority's approvals, and approval of the acquisition and the loan by the shareholders of Hang Fung Gold. There can be no assurance that the conditions of closing will be satisfied and that the acquisition of New Epoch will occur on the terms described, or at all. If the acquisition of New Epoch is completed as described, the Company's ownership interest in Hang Fung Gold will be reduced from approximately 53.1% to approximately 35% (32.8% assuming conversion of all share options of the employees). Further, if the acquisition of New Epoch is completed as described, the scope of the Company's operations will expand beyond the jewelry industry to include the trading and Internet activities currently conducted by New Epoch. 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. 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 the following four distinct segments: Gold Products The principal product line of the Company consists of fine gold jewelry and decorative ornaments which are manufactured using mainly fine gold and karat gold. In order to cater to customer demands, gold products manufactured and sold by the Company cover a wide range of weight, ranging from approximately 0.5 grammes to 3,000 grammes (3 kg) and are priced at a range of approximately HK$50 to HK$300,000 per piece of which the prices for the most popular items range from approximately HK$50 to HK$3,000 per piece. Fine gold jewelry items include bracelets, anklets, bangles, necklaces, brooches, pendants, rings and earrings that are made of fine gold and karat gold. The fine gold jewelry items manufactured and sold by the Company include contemporary and innovative designs that are worn as fashion accessories as well as traditional oriental designs that are commonly presented as wedding and birthday gifts in the Asian community. Gold ornaments, including statuettes, memento cards, key chains and other decorative items, are mainly made of fine gold. Gold ornaments may take various different forms and shapes such as cartoon characters, animals, signs of the zodiac as well as religious figures and symbols. The Company also manufactures customized gold memento cards and key chains for corporations as souvenirs in their business promotions. Other Precious Metal Products Other precious metal products manufactured by the Company include jewelry and decorative ornaments that are made of precious metals such as silver and platinum. Depending on the weight and design of such products, these products are sold in a price range of approximately HK$8 to HK$500,000 per piece of which the prices for the most popular items range from approximately HK$100 to HK$500 per piece. Jewelry Products Jewelry products manufactured by the Company are made up of mainly precious stones and gems. Depending on the quality and weight of stones and gems jewelry and design of such products, these products are sold in a price range of approximately HK$200 to HK$200,000 per piece of which the prices for the most popular items range from approximately HK$2,000 to HK$8,000 per piece. 5 Others "Others" include mainly medals, coins and other miscellaneous items. Depending on the weight, design and material used in such products, these products are sold in a price range of approximately HK$50 to HK$4,000 per piece of which the prices for the most popular items range from approximately HK$50 to HK$300 per piece. In US dollars, the Company's products range in wholesale price from approximately $1 to over $65,000. The mean selling price of the Company's products is between $200 and $280. The following table illustrates, in US dollars, the typical range and average wholesale price of the Company's products by segment: Wholesale Average Price Range Wholesale Price ------------- ------------------ Fine gold products................... $10 to $38,000 $200 Other precious metal products........ $1 to $65,000 $40 Jewelry products..................... $25 to $26,000 $650 Others............................... $6 to $100 $20 For the two years ended March 31, 2000, sales by major product category and as a percentage of sales (excluding subcontracting fees) were as follows: 1999 2000 --------------------- ------------------ Amount Amount $'000 Percent $'000 Percent -------- --------- ------ ------- Fine gold products................ 49,927 58.8 71,133 57.8 Other precious metal products..... 21,625 25.4 30,753 25.0 Jewelry products.................. 13,272 15.6 21,031 17.1 Others............................ 181 0.2 198 0.1 -------- ------- --------- ------- 85,005 100.0 123,115 100.0 ======== ======= ========= ======= Product Design and Development The Company currently maintains a team of approximately 10 qualified and experienced staff in its in-house product design and development division in its Hong Kong office. The Company has been a pioneer in the introduction of innovative product designs as well as in the development of new production technology in the gold product industry. The product design and development division continuously monitors market trends and consumer preferences and participates in jewelry fairs, exhibitions and competitions to stimulate new ideas. Employees are also encouraged to attend relevant courses and workshops paid by the Company to strengthen their knowledge of production technology for gold products. The product design and development division currently creates over 2,000 new product designs on an annual basis. In order to maintain its competitiveness in the gold product market, the Company constantly introduces new products. Beginning in 1991, the Company introduced fine gold ornaments such as gold memento cards, key chains and electroformed products to the market. Some of the products of the Company are also designed to suit different geographical market needs. For example, the Chinese twelve signs of the zodiac ornaments and buddha figurines are in high demand in the PRC and other countries in the Asia Pacific region while cartoon characters and innovative jewelry items are in high demand in Europe and the US. 6 Purchasing The primary raw material in the manufacture and assembly of the Company's products is gold bullion. For the year ended March 31, 2000, the cost of gold bullion accounted for approximately 80.9% of the Company's total purchases. The Company sources gold bullion primarily from seven suppliers in Australia, England, Germany and Hong Kong. The Company mainly sources gold bullion from gold bullion traders. Generally, the Company is able to maintain a steady supply of gold bullion from its suppliers, with an average of one day between the placing of an order and the receipt of the gold bullion. Other materials, including silver and color stones, are purchased, primarily, from suppliers in Hong Kong. For the year ended March 31, 2000, purchases of gold from the Company's five largest suppliers accounted for approximately 78.9% of the Company's total purchases. The Company sources gold bullion regularly from its seven suppliers and has not experienced any difficulty in obtaining the raw materials required in the past. The Company has been dealing with its major suppliers for an average period of approximately ten years and maintains a good business relationship with each of them. As the price of precious metals, in particular the price of gold bullion, has generally been decreasing in recent years and since there are numerous alternative sources of gold bullion such as banks and gold bullion dealers, the Company does not maintain any long-term contractual arrangements with its suppliers. Management believes that the Company is in an advantageous position to negotiate for better terms when sourcing gold bullion, as compared to gold bullion suppliers, and that the absence of established contractual relationships with any principal supplier will not have a material adverse effect on the operations or the financial position of the Company. Based on the prevailing market situation with the price of gold bullion remaining relatively steady and given the liquidity of gold bullion in the market, the Company does not engage in any hedging activities with respect to possible fluctuations in gold prices. The Company's management monitors the fluctuation of gold prices closely and should the need for hedging arise in the future, the Company may engage in hedging transactions. Moreover, the Company has been able to fix the purchase price of gold with its largest supplier with reference to the market gold price at the time the Company's gold products are sold to customers. By using this arrangement, the price of gold payable to its largest supplier will be the same as the price of gold charged by the Company to its customers, thereby minimizing the effect of fluctuation of gold prices on the Company. Manufacturing and Assembly Production Facilities At March 31, 2000, the Company operated production facilities which are located in Hunghom in Hong Kong (the "Hunghom Facility"), and in Sha Tau Kok in the PRC (the "Sha Tau Kok Facility"). The Company previously operated production facilities in Beijing, Shanxi and Shenzhen under processing agreements with PRC entities holding requisite permits. 7 - -- Production Facilities in the Hong Kong Hunghom Facility The Hunghom Facility was established in 1988 and is equipped with 12 production lines which are used primarily for the production of molds, gold memento cards and medals and the electroforming of fine gold and karat gold, as well as the production of computer-scanned gold statuettes. The Hunghom Facility is a vertically integrated facility capable of handling all aspects of the production process, from product design to mold-making and from casting to polishing as well as marketing to distribution. The premises at which the Hunghom Facility are leased from an independent third party and have a total gross floor area of approximately 31,500 sq. ft., which are used as the Company's office, showroom, and warehouse as well as production facilities. - -- Production Facilities in the PRC Sha Tau Kok Facility The Sha Tau Kok Facility is operated by, and the premises at which its is situated are leased by, Hang Fung Jewellery (Shenzhen) Co., Ltd., a wholly-owned subsidiary of Hang Fung Jewellery. The Sha Tau Kok Facility is located near the Sha Tau Kok customs office in Shenzhen, the PRC. The Sha Tau Kok Facility was developed in two phases. Development of the first phase was completed, and commercial production commenced, in July 1998. Development of the second phase was completed in November 1999, and commercial production commenced in the same month. The Sha Tau Kok Facility houses 30 production lines primarily for the production of fine and karat gold products and other precious metal products. Production Process The Company combines traditional craftsmanship with advanced computerized technology such as the application of the computerized faceting machine and/or electroforming machine in the manufacturing process of gold products. While faceting and electroforming are automated procedures, the creation of product designs, the making of master wax models and master rubber molds, the carving of individual wax models and the polishing of the finished products are performed by skilled workers manually under the supervision of a team of experienced technicians. The production cycle for gold products takes approximately 7 to 30 days to complete, depending on complexity of product design, any specific requirements of the product, and production volume. - -- Chain Jewelry 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 in diameter. The wire is then stretched to produce a finer wire which is then cut and swirled to form a spiral. The spiral is then cut to rings, which are sized and graded and soldered together afterwards to form a chain. 8 - -- Ornaments Manufacturing of other jewelry items, including gold ornaments which may be attached to chains, typically involves some, or all, of the following processes: Design and Mold Making The Company's in-house design team begins drawing the design by using computer-aided design software. The data for the design are then electronically transmitted to a computerized mold making machine and a master wax model is produced automatically. The master wax model is of prime importance as its degree of perfection determines the quality of the master rubber mold. A master rubber mold is then constructed by pouring liquified rubber over the master wax model (the "lost wax casting method"). The master rubber mold can be used to produce numerous replica wax models. Waxing Wax is injected into a master rubber mold to obtain the required number of wax models. After final carving, trimming and filing the surfaces and details of individual wax models, the wax models are attached to a metal stem to enable them to be handled without depositing fingerprints and grease on them, which would hinder metal deposition. Electroforming The wax models are then submerged in an electrolyte solution where gold ions are deposited onto the wax models by passing an electric current through the electrolyte solution. The entire process is controlled by computers and the processing time can be adjusted to achieve different thickness of gold layers. Extraction of Wax Models The wax models cast with a layer of gold are then heated in a furnace at a pre-set temperature. The wax model underneath the gold layer melts and is extracted from the gold object. Filing and Tumbling The gold ornaments are then individually hand-filed by skilled workers to ensure smooth contours and surfaces. The base of each gold ornament is also checked and flattened to ensure that the ornament can stand upright. Stone Setting Stones are set using a variety of methods, including the "claw", "channel", "pave" or "bezel" setting methods, as determined by product design and setting requirements. Polishing Jewelry items are again polished automatically by polishing machines. Final Design and Assembly 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. 9 Manufacturing Technology and Development The Company continuously seeks to improve and modify its production technology and facilities in order to achieve better product quality and higher profit margin. Traditionally, the manufacture of gold products has been labor intensive and, therefore, product quality and production time may vary for each production. The Company has successfully combined traditional manual craftsmanship with advanced computerized technology to mass produce quality gold products in a cost efficient manner. Since 1993, the Company has invested significant resources in developing the technology for the electroforming method in the production of fine gold products such as gold decorative ornaments. As one of the first gold product manufacturers to have successfully implemented this new technology, the Company is able to produce gold decorative ornaments of the same size as those produced using the traditional methods, but using less gold and therefore reducing costs. By adopting this new technology in the production of gold products, gold is more evenly spread on the wax model resulting in smoother contours and better appearance. In September 1998, the Company was granted a short-term patent of up to 8 years in Hong Kong in relation to the production technology for the computer-scanned gold statuette, a newly-launched product of the Company. Gold statuettes are produced by scanning the object to be reproduced, such as human features, by a computerized scanner. Details of the contours of the object are scanned and are stored as codes on electronic media. The codes can then be sent electronically to one of the production facilities of the Company and finally to the rapid prototyping system for further production of gold statuettes with the exact features of the scanned object. Besides offering a high degree of resemblance to the original object, the advantage of this production technology is that the amount of manual craftsmanship and production time can be significantly reduced. The Company has also obtained other patents in Hong Kong for other production methods. Quality Control The Company's quality control team consists of 12 persons and is committed to ensure that the products meet the Company's quality standards. All incoming raw materials, such as gold bullion, are inspected by the quality control team for purity before being used in the production process. Quality control checks are also conducted at various stages of production to ensure that product specifications are met. In addition, the Company has trained its production workers to closely inspect products during production. Defective products are either rejected or subject to refinements before entering the next stage of the production process. The production process is also closely monitored by trained technicians. All finished products are subject to final inspection before they are packed and delivered to customers. The Company's marketing staff also check the quality of finished products upon receipt of products before distribution. Moreover, the quality control workers who work at the facilities made available to the Company in the PRC under processing agreements are also trained by the Company to adhere to similar stringent quality control procedures. The Company intends to apply for ISO 9000 certification for its production facilities in the near future. 10 Inventory Policy and Control For gold bullion, in general, it is the Company's policy to maintain a stock holding period of approximately 80 days. The Company generally has a stock level of approximately 1,000 kg of gold reserves for production use. The stock level is monitored by the senior manager of the gold and jewelry division who coordinates the transfer of raw materials and finished goods between the production facilities and the sales and marketing department. Stock movements from the safe or storeroom of each of the production facilities are recorded in the respective stock ledgers and stock movement reports are examined on a regular basis and are submitted to the accounts department of the Hong Kong head offices for consolidation and reconciliation. All movements of stock must be justified by the person making the stock withdrawal. Details, such as stock code, quantity and weight, are completed by the person making the withdrawal on the withdrawal note which will be passed to the senior manager of the gold and jewelry division for approval before the stock withdrawal takes place. The person making the withdrawal, accompanied by another member of staff, must sign the stock withdrawal note to acknowledge receipt of the stock. The person making the withdrawal, the senior manager and the accounting division each respectively keeps one copy of the signed withdrawal note. Goods are stored in safes and storerooms that are installed with a wide range of anti-theft devices. At the production line level, the stock retrieved by a production line supervisor from the storeroom at a production facility is distributed to workers at the production line. The supervisor keeps a record stating particulars such as type and weight of stock distributed to each worker. At the end of each working day, each worker stores his/her stock in a safety box and the locked safety box is returned to the production line supervisor. The supervisor then stores the safety boxes collected from the workers in a subsection designated for the production line in the storeroom master safe. At the end of a production cycle, the workers return the stock to the production line supervisors who will check against their records to ensure that the stock returned matches with the particulars stated in the records. Stock counts are performed on a monthly and ad hoc basis by the accounting division and the results of the stock counts are checked against the stock ledger. Sales and Marketing The Company's marketing and sales activities are carried out by a team of approximately 90 staff members. The Company's sales staff 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 marketing and sales executives regularly attend trade fairs, seminars and exhibitions in Hong Kong and overseas in order to keep abreast of new product developments and market trends, to maintain regular contact with existing customers and to meet potential customers. Through participation in exhibitions, the Company is able to promote its corporate image, increase public awareness of its products and strengthen its competitive position in the gold products market. The Company currently has a showroom at its head office in Hunghom, Hong Kong where its wide range of products are displayed and sold. Other promotional activities undertaken by the Company include the placing of advertisements in trade magazines, journals and other public media as well as direct mailing of product catalogues to existing and potential customers and maintenance of an Internet web site which provides comprehensive product information. In the PRC, potential customers have historically been referred to the Company by the respective PRC parties to the processing agreements or learn about the Company's products from other sources such as advertisements. Customers may place orders to the Company's Hong Kong office by fax, telex, telephone or e-mail. In any event, all deliveries pursuant to confirmed orders from PRC customers are made in Hong Kong to the party designed by the PRC customers located in Hong Kong. The Company does not hold a PRC license to distribute its products in the PRC to customers in the PRC. The Company's PRC customers (being customers who have invoicing addresses in the PRC, and which are believed to be either wholesale distributors or retailers) are responsible for arranging the importation of the products in the PRC. 11 Through the alliance with the Free Trade Administration, the Company's products are sold through eight retail counters sources and operated by the Free Trade Administration in Shenzhen and Hangzhou. Pursuant to the alliance with the Free Trade Administration, the Company focused its sales and marketing efforts in the PRC on expansion of its distribution channels in the PRC, including accessing wholesale customers, establishing its own brands and promotion of sales through its Internet web site. The Company has established solid business relationships with its customers and many of them have in turn introduced new customers to the Company. The Company also sponsors selected customers to attend major gold jewelry trade shows so as to further promote market awareness of the Company's products. The principal markets to which the Company's products are distributed are the PRC, South East Asia, Hong Kong, the United States, the Middle East and Europe. Sales by region (excluding Subcontracting fees) for the three years ended March 31, 2000 have been as follows: 1998 1999 2000 Amount Amount Amount $,000 Percent $,000 Percent $,000 Percent ------- --------- -------- --------- -------- --------- Southeast Asia................. 12,232 21.1 16,562 19.5 17,268 14.0 United States.................. 10,211 17.6 13,920 16.4 19,179 15.6 PRC............................ 10,000 17.2 15,827 18.6 32,659 26.5 Middle East.................... 9,317 16.1 13,947 16.4 10,921 8.9 Europe......................... 5,886 10.2 17,661 20.8 24,142 19.6 Hong Kong...................... 10,348 17.8 7,088 8.3 18,946 15.4 -------- ------- -------- ------- --------- ------- Total....................... 57,994 100.0 85,005 100.0 123,115 100.0 ======== ======= ======== ======= ========= =======
The Company generally adopts a tight credit policy and grants credit only to selected customers depending on their business relationship with the Company. Sales to customers in Hong Kong and overseas, other than the PRC, are mainly settled on an open account basis, with credit periods ranging from seven days to ninety days. All Hong Kong and overseas customers generally settle their accounts on time and no material default has been encountered by the Company. As for the PRC customers, owing to the different business practices prevailing in the PRC, customers normally settle their accounts at a slower pace up to 180 days after sales. Despite the slower payment pattern, the Company has experienced no significant bad debt problems and management believes there are no material collectibility problems. Customers Products manufactured by the Company are principally sold to wholesale distributors or retail chain operators of gold, other precious metal and jewelry products. At March 31, 2000, the Company had approximately 190 regular customers. The Company estimates that, through customers and their extensive distribution networks, the products manufactured by the Company are sold in approximately 2000 retail outlets worldwide. For the year ended March 31, 2000, the Company five largest customers accounted for approximately 17.1% of sales. During fiscal 2000, the Company had no customers which accounted for more than 5% of the Company's revenues. The Company has no long term contracts with any customers. The Company's top five customers have each had a business relationship with the Company for over five years. 12 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 many 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, advanced technology and capital investment in continuous product development and product design and the Company's close relationship with its customers and vendors. Therefore, although the competition is intense, management believes that the Company is well positioned to compete in the jewelry industry. Staff As of March 31, 2000, the Company had approximately 1050 employees, including 10 executive officers, 25 other management personnel, 25 persons in administration, 900 persons in manufacturing and production and 90 persons in sales and marketing. Of the Company's employees, approximately 190 staff members 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. Certain Foreign Operation Considerations The Company's operations are conducted in Hong Kong and the PRC. As a result, the Company'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 transferred from the United Kingdom to the PRC, and Hong Kong became a Special Administrative Region of the PRC (a "SAR"). As provided in the Sino-British Joint Declaration relating to Hong Kong and the Basic Law of the Hong Kong SAR, the Hong Kong SAR will have full economic autonomy and its own legislative, legal and judicial systems for fifty years. The Company's management does not believe that the transfer of sovereignty over Hong Kong will have an adverse impact on the Company'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 Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies operating in North America and Western Europe. These include risks associated with, among other, the political, economic and legal environments and foreign currency exchange. The Company'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 regulation on the import and export of gold, inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. Additionally, a portion of the Company'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. 13 ITEM 2. PROPERTIES The Company's executive offices are located at Unit 25-32, Second Floor, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Hong Kong. This facility consists of approximately 31,500 square feet of office space, and is leased from an unaffiliated third party for approximately HK$2,289,000 (US$293,000) per year pursuant to four leases which range in expiration from November 1999 to March 2001. This office space also houses certain marketing, product design and high quality gold production operations. The Company's principal production operations are conducted at facilities located in Sha Tau Kok, the PRC. The Company's principal production facilities are described in Item 1. Business under Manufacturing and Assembly, Production Facilities. The Company believes that its existing facilities will be adequate to support the Company's operations for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders through the solicitation of proxies, or otherwise, during the fourth quarter of the Company's fiscal year ended March 31, 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information While the Company's Common Stock is listed on the OTC Electronic Bulletin Board under the symbol "CHRM.OB", there is no established trading market in the Company's Common Stock and trading therein is sporadic. The last reported bid price of the Company's Common Stock, as of July 7, 2000, was $1.875. Holders At July 7, 2000, there were approximately 110 record holders of the Company's Common Stock. Dividends While the Hang Fung Group paid a one-time dividend of approximately $5 million during fiscal 1996, prior to the Exchange, the Company has not paid any dividends since its inception and presently anticipates that all earnings, if any, will be retained for development of the Company's business and that no dividends on the shares of Common Stock will be declared in the foreseeable future. Any future dividends will be subject to the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements, general business conditions and other pertinent facts. Therefore, there can be no assurance that any dividends on the Common Stock will be paid in the future. 14 ITEM 6. SELECTED FINANCIAL DATA The following tables present selected historical consolidated financial data derived from the consolidated financial statements of the Company which appear elsewhere herein. Quality Prince was acquired by the Company in December of 1996 in a transaction accounted for as a recapitalization of Quality Prince with Quality Prince as the acquirer (a "reverse acquisition"). On this basis, the historical consolidated financial statements of the Company prior to December 31, 1996 are those of Quality Prince and its subsidiaries and the historical shareholders' equity of the Company as of March 31,1996 has been retroactively restated to reflect the equivalent number of shares of the Company issued for such acquisition. The acquisition of the various members of the Hang Fung Group by Quality Prince in December of 1996 has been accounted for as a reorganization of entities under common control, similar to a pooling of interests. The following data should be read in conjunction with the consolidated financial statements of the Company included elsewhere herein. Year Ended March 31, 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ (amounts stated in US$,000, except per share data) Income Statement Data (1): Net sales............................... $22,903 $36,825 $57,994 $ 85,005 $ 123,115 Subcontracting fees..................... 3,965 4,133 4,308 2,195 - -------- -------- -------- --------- --------- Total revenues........................ 26,868 40,958 62,302 87,200 123,115 Gross profit............................ 8,046 10,971 15,143 22,117 27,996 Operating income........................ 4,402 6,190 8,207 11,341 13,312 Other income (expense), net............. (329) ( 741) (636) (1,570) (2,130) Income before taxes..................... 4,073 5,449 7,571 9,771 11,182 Minority interests...................... -- -- -- (2,013) (5,997) Net income.............................. $ 3,393 $ 4,475 $ 6,285 $ 5,856 $ 6,781 ========= ========= ======== ========= ========== Net income per share (2)................ $ 0.32 $ 0.40 $ 0.49 $ 0.46 $ 0.53 ========= ========= ======== ========= ========== Weighted average shares outstanding (2)........................ 10,500,000 11,075,000 12,800,000 12,800,000 12,800,000 =========== ============ =========== =========== ============ Balance Sheet Data (1): Working capital......................... $ 613 $ 2,768 $ (1,170) $ 19,555 $ 24,960 Total assets............................ 15,676 21,409 45,667 73,698 95,165 Long-term debt, less current portion........................ 879 1,834 4,405 3,363 3,422 Stockholders' equity (3)................ 3,038 8,017 14,278 20,134 26,811
- ------------- (1) The Company's functional currency is Hong Kong Dollars ("HK$"). Translation of amounts from HK$ into US$ is for the convenience of readers and has been made at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2000 of US$1.00 = HK$7.79. No representation is made that the HK$ amounts could have been, or could be, converted into US$ at that rate or at any other rate. (2) Net income per share is computed assuming (i) the 10,500,000 shares issued pursuant to the Exchange were outstanding for all periods presented, (ii) the 1,275,000 shares issued in connection with initial formation of New Wine were issued December 31, 1996 and (iii) the 225,000 shares issued by New Wine pursuant to a Rule 504 offering were issued December 31, 1996. (3) 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. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in the section entitled "Factors that May Affect Future Results" beginning on page 20. General The following discussion should be read in conjunction with the Company's financial statements appearing elsewhere herein. On December 19, 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 relates to the operations of the Hang Fung Group, for all periods presented, excluding the former operations of New Wine, Inc. In May of 1997, Quality Prince, a wholly-owned subsidiary of the Company, entered into an agreement with Phenomenal, an unaffiliated third party, pursuant to which Phenomenal loaned to Quality Prince $10,000,000 and Quality Prince issued to Phenomenal a convertible promissory note (the "Note"). The Note bore interest at 3% per month, and was repayable in a lump sum payment on March 20, 1998. As one of the conditions for the lending, the Company issued a non-detachable warrant (the "Warrant") to Phenomenal to subscribe for 5,263,158 shares of common stock of the Company at an exercise price of $2.19 per share. The Note was secured by personal guarantees provided by Mr. Lam and Ms. Chan and the 53.9% equity interest in the Company owned by Mr. Lam and Ms. Chan. In accordance with the term of the agreement, the Warrant expired in May 1998. On June 4, 1998, Phenomenal agreed to extend the maturity date of the Note from March 20, 1998 to June 4, 1998, and waive its entitlement to interest accrued under the Note during the period from May 20, 1997 (date of issue of the Note) to June 4, 1998. Also, the Company and Phenomenal agreed to restructure and capitalize the Note into redeemable preferred stock of Hang Fung Jewellery Company, a wholly owned intermediate subsidiary of the Company. As a result, on June 30, 1998, Hang Fung Jewellery issued 5,263,788 shares of redeemable preferred stock (the "Preferred Stock") at approximately $1.90 per share to Phenomenal in replacement of the Note. Under the revised agreement, Phenomenal was required to redeem its interest in the Preferred Stock and to subscribe for the common stock of Hang Fung Gold, upon satisfaction of certain conditions. Alternatively, Phenomenal had an option to require Hang Fung Jewellery to redeem the Preferred Stock at a redemption amount as determined in accordance with a pre-determined formula, or require Mr. Lam and Ms. Chan to purchase the Preferred Stock held by Phenomenal in case Hang Fung Jewellery defaulted in redeeming the Preferred Stock. Pursuant to the revised agreement with Phenomenal, in February of 1999, the Hang Fung Group effected a corporate reorganization (the "Group Reorganization") with Hang Fung Gold becoming a holding company for the Hang Fung Group, excluding Quality Prince, and Phenomenal redeemed its interest in the Preferred Stock and subscribed for the common stock in Hang Fung Gold. Immediately following the restructuring of the Hang Fung Group, Hang Fung Gold completed an offering of securities in Hong Kong raising approximately HK$59,000,000 (the "Hong Kong Offering") and the shares of Hang Fung Gold were listed on The Stock Exchange of Hong Kong Limited (the "Hong Kong Exchange"). Trading of shares of Hang Fung Gold on the Hong Kong Exchange commenced on March 16, 1999. Following the Group Reorganization and Hong Kong Offering, the Company holds, through Quality Prince, 53.145% of the issued capital stock of Hang Fung Gold, whereas Phenomenal holds 21.855% of the issued capital stock and the investing public holds the remaining 25% of the issued capital stock of Hang Fung Gold. 16 Hang Fung Group's operations consist of designing, manufacturing and distributing a full line of gold and silver jewelry products and other ornamental products on a wholesale basis to customers in Hong Kong, China, Europe, the Middle East, Southeast Asia, and the United States. Revenues from such operations are generated through the manufacturing and wholesaling of the Company's jewelry products, and, beginning from May 1999, retail sales from showrooms. Prior to fiscal 2000, Hang Fung Gold conducted subcontract jewelry manufacturing for selected customers and received fees in connection with the subcontract manufacturing ("Subcontracting fees"). 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 certain business partners. The Company constantly compares costs and quality of jewelry raw materials to assure that it is obtaining the best purchase price and quality available. The cost of such raw materials and products varies with currency fluctuations and other factors beyond the Company's control. While any fluctuations in cost 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 Consolidated Statements of Operations expressed as a percentage of total revenues. Year Ended March 31, -------------------------------- 1998 1999 2000 ------ ------ ------ Net sales............................. 93.1% 97.5% 100.0% Subcontracting fees................... 6.9 2.5 0.0 Total revenues...................... 100.0 100.0 100.0 Cost of sales......................... 75.7 74.6 77.3 Gross profit.......................... 24.3 25.4 22.7 Operating expenses.................... 11.1 12.4 11.9 Income from operations................ 13.2 13.0 10.8 Other income (expense)................ (1.0) (1.8) (1.7) Income before income taxes............ 12.2 11.2 9.1 Income taxes.......................... (2.1) (2.2) 1.3 Minority interest..................... 0.0 (2.3) (4.9) Net income............................ 10.1 6.7 5.5 Year Ended March 31, 2000 Compared to Year Ended March 31, 1999 Revenues and Gross Profit. Operating revenues increased by 41.2% to $123.1 million for the year ended March 31, 2000 as compared to $87.2 million for fiscal 1999. Sales of Company products were up 44.8% to $123.1 million during fiscal 2000 as compared to $85.0 million during fiscal 1999. Subcontracting fees decreased from $2.2 million during fiscal 1999 to nil during fiscal 2000. The increase in sales during fiscal 2000 was attributable to increased product volumes resulting from an increase in production capacity, the introduction of new products and investments in marketing efforts across geographical regions. As part of our commitment to expand distribution channels, our Hang Fung group plans to launch an Internet site in Hong Kong to support business-to-business sales of our products as well as to promote our brand and support our overall marketing efforts. The decrease in Subcontracting fees was attributable to a determination to concentrate on the manufacturing of products designed by the Company as opposed to products manufactured on a subcontract basis in order to raise the Company's brand name recognition. 17 Geographically, within Southeast Asia (including Hong Kong and the PRC) the Company's sales increased 74.4% to $68.9 million in fiscal 2000 from $39.5 million in fiscal 1999. Sales within Southeast Asia accounted for 55.9% of total sales during fiscal 2000 as compared to 46.4% in fiscal 1999. Percentage of total sales of the region were favorably impacted by renewed economic strength in Southeast Asia during fiscal 2000 and increased marketing efforts in the region. Sales in Hong Kong increased 166.2% to $18.9 million during fiscal 2000 from $7.1 million during fiscal 1999. Sales in the PRC were up during fiscal 2000 due to a substantial increase in our marketing efforts in the region, increasing 107% to $32.7 million from $15.8 during fiscal 1999. Sales in Southeast Asia (not including Hong Kong and the PRC) during fiscal 2000 were up due to strong regional demand accompanying renewed economic strength in the region, increasing 4.2% to $17.3 million from $16.6 million during fiscal 1999. Outside of Asia (in the United States, Europe and the Middle East), the Company experienced a 19.1% increase in sales with these sales accounting for 44.1% of total sales in fiscal 2000 as compared to 53.6% of total sales in fiscal 1999. The increase in sales outside of Asia was driven by increased marketing efforts and strong product demand which accompanied strong economic conditions in those regions. Sales in Europe increased approximately 36.2% to $24.1 million in fiscal 2000 from $17.7 million in fiscal 1999. Sales in the Middle East were down during fiscal 2000, due to concentration of efforts on expansion of the Company's market in Southeast Asia, decreasing approximately 21.6% to $10.9 million from $13.9 million in fiscal 1999. Sales in the United States increased approximately 38.1% to $19.2 million during fiscal 2000 from $13.9 million in fiscal 1999. Gross profits increased by 26.7% to $28 million in fiscal 2000 from $22.1 million during fiscal 1999. The increase in gross profits was mainly attributable to increased sales across geographic regions which were partially offset by a reduction in gross margins. Gross margins decreased to 22.7% in fiscal 2000 from 25.4% in fiscal 1999. The decrease in gross profit percentage during fiscal 2000 was primarily attributable to adoption of a more competitive pricing strategy to enhance competitiveness and revenue. Operating Expenses. Operating expenses totaled $14.7 million during fiscal 2000, an increase of 36.1% from $10.8 million in fiscal 1999. The increase in operating expenses during the period was primarily attributable to increased marketing expenses associated with the expanded selling efforts, increased corporate overhead and depreciation expense on investment in machinery and equipment to support the increase in sales volumes. Other Income (Expense), Net. Other income(expense), net during fiscal 2000 and 1999 consisted of a loss on reduction in equity interest in a subsidiary associated with the Group Reorganization and Hong Kong Offering of Hang Fung Gold during fiscal 1999, bank charges, and interest income and interest expense. Net other expenses increased approximately 31.2% to $2.1 million during fiscal 2000 from $1.6 million during fiscal 1999. The increase was primarily attributable to (1) an increase in interest expense during the fiscal year of $1 million which resulted from an increase in banking facilities to support the business expansion during fiscal 2000, and (2) an adverse swing in other expenses of $205,000 which resulted mainly from increases in bank charges during fiscal 2000; which was partially offset by a $383,000 increase in interest income during fiscal 2000 attributable to increased cash generated by operations and a $271,000 loss during fiscal 1999 attributable to the dilution of the Company's ownership interest in Hang Fung Gold from 100% to 53.15% as a result of the Group Reorganization and Hong Kong Offering. Minority Interest. Minority interest of $6.0 million was reported during fiscal 2000 and $2.0 million was reported during fiscal 1999. Minority interest reflects the Group Reorganization, including the conversion of the Note of Phenomenal into shares in the Company's previously wholly-owned subsidiary, Hang Fung Gold (including a dividend of $1,849,000 paid to Phenomenal with respect to the Preferred Stock), and the Hong Kong Offering pursuant to which additional shares of Hang Fung Gold were sold in fiscal 1999. Minority interest reflects the proportionate interest in the earnings of the Hang Fung Group not owned by the Company from February 27, 1999, the date of the Group Reorganization. Income Taxes. The Company reported a tax benefit of $1.6 million in fiscal 2000 compared to income tax expense of $1.9 million in fiscal 1999. The tax benefit reported during fiscal 2000 was attributable to the favorable settlement of a "50:50 offshore claim" in Hong Kong pursuant to which the Company recovered a $2.7 million tax provision previously recorded for Hong Kong profits tax after resolution of the Company's claim. 18 Year Ended March 31, 1999 Compared to Year Ended March 31, 1998 Revenues and Gross Profit. Operating revenues increased by 40.0% to $87.2 million for the year ended March 31, 1999 as compared to $62.3 million for fiscal 1998. Sales of Company products were up 46.6% to $85.0 million during fiscal 1999 as compared to $58.0 million during fiscal 1998. Subcontracting fees decreased by 49.0% to $2.2 million during fiscal 1999 from $4.3 million during fiscal 1998. The increase in sales during fiscal 1999 was attributable to increased product volumes resulting from an increase in production capacity, the introduction of new products and investments in marketing efforts across geographical regions. The decrease in Subcontracting fees was attributable to increased concentration on the manufacturing of products designed by the Company as opposed to products manufactured on a subcontract basis in order to raise the Company's brand name recognition. Geographically, within Southeast Asia (including Hong Kong and the PRC) the Company's sales increased 21.2% to $39.5 million in fiscal 1999 from $32.6 million in fiscal 1998. Sales within Southeast Asia accounted for 46.4% of total sales during fiscal 1999 as compared to 56.2% in fiscal 1998. Percentage of total sales of the region were adversely impacted by continuing economic weakness in Southeast Asia during the second half of fiscal 1998 and all of fiscal 1999, which weakness was offset by increased marketing efforts. Sales in Hong Kong declined 31.4% to $7.1 million during fiscal 1999 from $10.3 million during fiscal 1998. Sales in the PRC were up during fiscal 1999 due to stable economic conditions relative to the region, increasing 58.2% to $15.8 million from $10.0 during fiscal 1998. Sales in Southeast Asia (not including Hong Kong and the PRC) during fiscal 1999 were up due to strong demand in the Taiwan market, increasing 35.5% to $16.6 million from $12.2 million during fiscal 1998. Outside of Asia (in the United States, Europe and the Middle East), the Company experienced a 79.2% increase in sales with these sales accounting for 53.6% of total sales in fiscal 1999 as compared to 43.8% of total sales in fiscal 1998. The increase in sales outside of Asia was driven by increased marketing efforts and strong product demand which accompanied strong economic conditions in those regions. Sales in Europe increased approximately 200% to $17.7 million in fiscal 1999 from $5.9 million in fiscal 1998. Sales in the Middle East were up during fiscal 1999, increasing approximately 49.8% to $13.9 million from $9.3 million in fiscal 1998. Sales in the United States increased approximately 36.3% to $13.9 million during fiscal 1999 from $10.2 million in fiscal 1998. Gross profits increased by 46.1% to $22.1 million in fiscal 1999 from $15.1 million during fiscal 1998. The increase in gross profits was mainly attributable to increased sales, and expansion into the United States market which were partially offset by a reduction in gross margins. Gross margins increased to 25.4% in fiscal 1999 from 24.3% in fiscal 1998. The increase in gross profit percentage during fiscal 1999 was primarily attributable to cost control measures implemented by management. Operating Expenses. Operating expenses totaled $10.8 million during fiscal 1999, an increase of 56% from $6.9 million in fiscal 1998. The increase in operating expenses during the period was primarily attributable to increased marketing expenses associated with the expanded selling efforts, increased corporate overhead and depreciation expense on investment in machinery and equipment to support the increase in sales volumes. Other Income (Expense), Net. Other income(expense), net during fiscal 1999 and 1998 consisted of a loss on reduction in equity interest in a subsidiary associated with the Group Reorganization and Hong Kong Offering of Hang Fung Gold during fiscal 1999, bank charges, and interest income and interest expense. Net other expenses increased approximately 146.9% to $1.6 million during fiscal 1999 from $0.6 million during fiscal 1998. The increase was primarily attributable to (1) an increase in interest expense during the fiscal year of $784,000 which resulted from an increase in banking facilities to support the business expansion during fiscal 1999, (2) an adverse swing in other expenses of $159,000 which resulted from increases in bank charges during fiscal 1999 and the recognition of the nonrecurring gain from an insurance claim during fiscal 1998, and (3) a $271,000 loss during fiscal 1999 attributable to the dilution of the Company's ownership interest in Hang Fung Gold from 100% to 53.15% as a result of the Group Reorganization and Hong Kong Offering; which was partially offset by a $280,000 increase in interest income during fiscal 1999 attributable to increased cash generated by operations. 19 Minority Interest. Minority interest of $2.0 million was reported during fiscal 1999. No minority interest was reported during fiscal 1998. Minority interest reflects the Group Reorganization, including the conversion of the Note of Phenomenal into shares in the Company's previously wholly-owned subsidiary, Hang Fung Gold (including a dividend of $1,849,000 paid to Phenomenal with respect to the Preferred Stock), and the Hong Kong Offering pursuant to which additional shares of Hang Fung Gold were sold. Minority interest reflects the proportionate interest in the earnings of the Hang Fung Group not owned by the Company from February 27, 1999, the date of the Group Reorganization, through March 31, 1999. Income Taxes. Income taxes increased by 48.0% from approximately $1.3 million in fiscal 1998 to $1.9 million in fiscal 1999. The increase in income taxes during the period was primarily attributable to the increase in taxable earnings of the Company. Factors that May Affect Future Results The Company's quarterly and annual operating results have been, and will continue to be, affected by a wide variety of factors that could have a material adverse effect on revenues and profitability during any particular period, including the level of orders which are received and can be shipped in a quarter, the rescheduling or cancellation of orders by its customers, competitive pressures on selling prices, changes in product or customer mix, availability and cost of raw materials, loss of any strategic relationships, the Company's ability to introduce new products and implement new or expanded manufacturing technologies on a timely basis, new product introductions by the Company's competitors, fluctuations in exchange rates, changes in consumer tastes and spending patterns and general economic conditions, among others. The Company's future operating results are particularly dependent upon several specific factors, in addition to the general factors noted above, including (1) substantial dependence upon manufacturing and, to a certain extent, marketing arrangements in the PRC, (2) ability to secure adequate financing to support planned increases in production and marketing of products, (3) the Company's ability to sell adequate volumes of product at sufficient profit margins in the PRC to recoup the Company's substantial investment plan in expanding distribution channels in the PRC and (4) the Company's ability to manage projected revenue growth. Management believes that the Company's ability to sustain its current margins and level of profitability is due, to a significant degree, to its establishment of favorable manufacturing arrangements in the PRC and marketing arrangements in the PRC with PRC government authorized entities. If, for any reason, the Company were to be unable to continue its existing manufacturing activities in the PRC or contractual relationships in the PRC, or to replace those relationships with similar arrangements, it is possible that the Company's operating costs could increase reducing both the Company's margins and profitability. Management believes that the Company's recent growth, and anticipated future growth, is a result of investments, and planned investments, in new and expanded production capacity and expanded marketing efforts. The Company has invested substantial amounts in new machinery and the opening of the Sha Tau Kok Facility. The Company has also invested substantial amounts to expand marketing efforts in the PRC, the United States, the Middle East and Europe. In order to continue to grow revenues and profitability, the Company plans to invest substantial additional funds to expand production capacity further and to support further increases in marketing efforts, particularly in the PRC. The Company previously secured $10 million of funding through the sale of the Note to Phenomenal and subsequent Group Reorganization and secured an additional $7.6 million of funding through the Hong Kong Offering. While funding from those sources was adequate to support planned facility expansions and increased marketing efforts, there can be no assurance that the Company will not require additional funding to support future planned expansion. See "-- Liquidity and Capital Resources." As a result of the Group Reorganization and Hong Kong Offering, the Company's ownership interest in the Hang Fung Group (where substantially all of the Company's operations are conducted and revenues generated) has decreased from 100% to approximately 53%. For periods subsequent to the Group Reorganization and Hong Kong Offering, the Company's operating results will reflect minority interest relating to the interest in the Hang Fung Group not owned by the Company. Thus, while the Company's consolidated revenues may continue to grow at a rapid rate, the minority interest will effectively remove approximately 47% of the future earnings of the Hang Fung Group from the Company's future net income. Accordingly, in order for the Company to maintain its current level of net earnings, the Hang Fung Group must approximately double its existing earnings. 20 The Company has formed an alliance with the Free Trade Administration pursuant to which the Company has committed to devote substantial resources and efforts to increasing distribution channels in the PRC. Countries in the Asia Pacific region experienced significant weaknesses in their currency, banking and equity markets in 1996 through 1998. While those economies have since recovered, because those economies are less mature than western economies, they remain subject to higher risk than western economies and any future weakness in the region, and the PRC in particular, could adversely affect, among other things, consumer demand for luxury goods in the region (perhaps including the Company's products which may be considered luxury consumer goods), and the U.S. dollar value of the Company's foreign currency denominated sales. In addition, the Company's interest income and expense is sensitive to fluctuations in the general level of Hong Kong interest rates. Any regional weakness, particularly in the PRC, could adversely impact the results of the Company's efforts to increase distribution channels in the PRC and could lead to our inability to recoup the investment in that regard. The Company has invested heavily in increasing production capacity and distribution channels in an effort to rapidly grow its revenues. While the anticipated revenue growth is subject to various risks discussed herein, even if the Company is successful in growing its revenues as anticipated, there is no assurance that the Company has adequate management and other resources to manage that growth. Failure to satisfactorily manage the revenue growth could result in poor customer service and low levels of retention of customers which could in turn depress future revenues. In addition, the Company's policy is to denominate all its sales and assets in U.S. dollars or Hong Kong dollars. The Hong Kong Government has, throughout fiscal 1998 and since the beginning of fiscal 1999, repeatedly assured the public that the "peg" of Hong Kong dollar to the U.S. dollar will not be changed and the Hong Kong dollar will not be devalued. Similarly, the governor of the PRC's central bank has reassured the public that the Renminbi will not be devalued. Therefore, based on information available to management at this time, management does not anticipate significant fluctuations in the exchange rate between the U.S. dollar and the Hong Kong dollar in the foreseeable future. As the Company makes its purchases of raw materials in local currencies, and those currencies have generally exhibited weakness since mid-1997 when compared to the U.S. dollar, management does not believe the Company is exposed to undue amount of risk arising from fluctuations of the exchange rates between those currencies and the U.S. dollar. The Company does not enter into foreign exchange forward contracts or currency options to hedge against foreign exchange fluctuations or interest rate swaps, interest rate forward contracts and other derivatives to hedge against interest rate exposures. The Company monitors its exchange and interest rate risks on a continuous basis, both on a stand-alone basis and in conjunction with each other, from both an accounting and an economic perspective. Given the horizons of the Company's risk management activities, there may be adverse financial impacts resulting from unfavorable movements in either foreign exchange or interest rates. Overall, the Company believes it is well positioned to minimize material adverse impact that the recent economic developments in the Asia Pacific region may have on the Company. Potential Acquisition of New Epoch As part of the Company's Internet strategy, in June 2000, Hang Fung Gold entered into a Sale and Purchase Agreement with New Epoch Holdings International Limited. Under the terms of the Sale and Purchase Agreement, Hang Fung Gold will acquire 49.9% of the stock of New Epoch Information (BVI) Limited ("New Epoch") in exchange for shares of common stock of Hang Fung Gold representing approximately 34.1% of the capital stock of Hang Fung Gold following the transaction. Under the terms of the Sale and Purchase Agreement, Hang Fung Gold has an option for a period of three years to acquire the remaining shares of New Epoch. In conjunction with the proposed acquisition of New Epoch, Hang Fung Gold entered into a Facility Agreement pursuant to which Hang Fung Gold agreed to provide to New Epoch a credit facility of up to the higher of (1) HK$50 million, or (2) two-thirds of the net proceeds of equity or debt issuances by Hang Fung Gold from time to time after closing of the acquisition. 21 New Epoch is engaged in developing and facilitating e-commerce trading facilities between the PRC and the rest of the world, using offline trading services to complement its internet B2B platform. New Epoch, through a joint venture with Infoshare of the China International Electronic Commerce Centre -- an information technology arm of the Chinese Ministry of Foreign Trade and Economic Co-operation of the PRC, operates the ChinaTradeWorld portal, a B2B site designed to facilitate international trade with the PRC. Linking with the ChinaTradeWorld portal would enhance the operations of, and accelerate deployment of, the jewelry portal being established by Hang Fung Gold by providing access to an established trading portal with "Supply Chain Management" and "Customer Relationship Management" capabilities. Closing of the acquisition of New Epoch is subject to satisfaction of a number of conditions, including completion of due diligence, receipt of relevant governmental or regulatory authority's approvals, and approval of the acquisition and the loan by the shareholders of Hang Fung Gold. There can be no assurance that the conditions of closing will be satisfied and that the acquisition of New Epoch will occur on the terms described, or at all. If the acquisition of New Epoch is completed as described, the Company's ownership interest in Hang Fung Gold will be reduced from approximately 53.1% to approximately 35% (32.8% assuming conversion of all share options to emloyees). Further, if the acquisition of New Epoch is completed as described, the scope of the Company's operations will expand beyond the jewelry industry to include the trading and Internet activities currently conducted by New Epoch. With the potential acquisition of New Epoch, the Company would add revenue streams from the trading and distribution operations of New Epoch outside of the Company's traditional revenues from jewelry operations. The Company would also add operating expenses associated with New Epoch. It is possible that New Epoch will incur substantial operating losses which could materially offset operating profits from the Company's jewelry operations. In addition to the potential adverse impact on the Company's operating results from the proposed acquisition of New Epoch, as a result of the reduction in the Company's ownership interest in Hang Fung Gold following the acquisition of New Epoch, following the acquisition, the Company's financial results will reflect a larger minority interest which will reduce reported net operating results in future periods. There can be no assurance that the acquisition of New Epoch will be completed as contemplated. Year 2000 Issue The Company experienced no material failures or expenses as a result of the Year 2000 Issue and does not expect to incur any material failures or expenses in that regard in the future. Liquidity and Capital Resources At March 31, 2000, the Company had cash balances totaling $19.6 million and working capital of $24.9 million. This compares to a cash balance of $16.7 million and a working capital balance of $19.6 million at March 31, 1999. The increase in cash and in working capital were primarily attributable to the net income for the year. Cash provided by operations decreased to $5.4 million during fiscal 2000 from $6.0 million during fiscal 1999. The decrease in cash provided by operations was primarily due to (1) a substantial increase in inventories, and (2) a decrease in taxation payable. The Company's accounts receivable increased to $19.5 million, or approximately 15.8% of fiscal 2000 revenues, as compared to $15.7 million, or approximately 18.0% of fiscal 1999 revenues. The increase in accounts receivable during fiscal 2000 was attributable to increased sales. Days sales outstanding in receivables decreased to 54 days for fiscal 2000, from 57 days for fiscal 1999. Inventories increased to $26.6 million at March 31, 2000 from $16.9 million at March 31, 1999. The increase in year end inventories was required to support growing sales. The Company used $10.7 million, $8.7 million and $11.9 million for investing activities respectively in fiscal 2000, 1999 and 1998. The investment of cash in each of those periods related primarily to acquisitions of machinery and equipment to increase the Company's production capacity in order to support growing sales. 22 Financing activities provided $8.2 million in fiscal 2000 as compared to $17.3 million in fiscal 1999. Cash generated from financing activities in fiscal 2000 consisted primarily of increased bank borrowing which was partially offset by repayments of obligations and payment of preferred stock dividends to Phenomenal. Cash generated from financing activities in fiscal 1999 consisted primarily of the proceeds from the Hong Kong Offering pursuant to which the Company's subsidiary, Hang Fung Gold, sold common equity in an amount equal to 25% of the post-offering shares outstanding for net proceeds of $7.6 million. The Company's primary liquidity needs are to fund accounts receivable and inventories as well as to fund periodic purchases of machinery, equipment and expansion of production facilities. Prior to Phenomenal's investment in Hang Fung Group and receipt of proceeds from the Hong Kong Offering, the Company had historically funded its operations through a combination of internally generated cash, short-term borrowings under bank lines of credit and hire purchase financing. At March 31, 2000, the Company had no material capital commitments. However, the Company intends to use available funds as needed to (1) expand its production capacity and jewelry distribution operations in Europe, the Middle East and the United States, (2) invest up to $7.7 million in the expansion of distribution channels and establishment of retail networks in the PRC, (3) invest approximately $2.6 million to expand the Sha Tau Kok Facility, and (4) establish a credit facility for New Epoch, discussed below. At March 31, 2000, 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 March 31, 2000 were approximately $35.9 million of which approximately $31.0 million had been used at such date. At March 31, 2000, the Company also had a number of capital leases and operating leases pursuant to which the Company holds various facilities and equipment. At March 31, 2000, the Company's capital lease obligations totaled $2.5 million of which $1.6 million was attributable to current lease obligations. Obligations under operating leases require minimum annual rental payments by the Company of approximately $303,000 in fiscal 2001. 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 bank credit needs and anticipated working capital requirements for at least the next 12 months. In addition to its normal financing requirements, the Company's subsidiary, Hang Fung Gold, has undertaken to establish a credit facility for New Epoch, in connection with Hang Fung Gold's agreement to acquire New Epoch, of the greater of (1) HK$50 million, or (2) two-thirds of all net proceeds of equity or debt issuances by Hang Fung Gold from time to time following closing of the acquisition of the shares of New Epoch. There is no assurance that Hang Fung Gold will be able to establish and maintain the required credit facility for New Epoch or that the establishment of such a credit facility will not adversely impact the ability of Hang Fung Gold to finance, and grow, its existing jewelry operations. Seasonality The jewelry business is highly seasonal, with the third and fourth calendar quarters (second and third fiscal quarters), which includes the Christmas shopping season, historically contributing the highest sales. Seasonality cannot be predicted or counted upon, and the results of any interim period are not necessarily indicative of the results that might be expected during a full fiscal year. 23 The following table sets forth the Company's unaudited net sales for the periods indicated: Fiscal Year Ended March 31, --------------------------------------------------------- 1998 1999 2000 (US$,000) (US$,000) (US$,000) Amount % Amount % Amount % ---------- ------ --------- ----- ---------- ------ 1st Quarter (4/1-6/30) $13,926 22.4 $ 16,482 18.9 $24,398 19.8 2nd Quarter (7/1-9/30) 15,458 24.8 16,177 18.6 28,892 23.5 3rd Quarter (10/1-12/31) 17,706 28.4 28,331 32.5 31,098 25.3 4th Quarter (1/1-3/31) 15,212 24.4 26,210 30.0 38,727 31.4 ------- ----- ------- ------ -------- ----- Total $ 62,302 100.0 $ 87,200 100.0 $123,115 100.0 ======= ===== ======= ====== ======== =====
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 believes inflation will not have a material effect on its future operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's sales are denominated in Renminbi (the "Rmb"), U.S. dollars or Hong Kong dollars. Any material fluctuation in the value of the Rmb, the Hong Kong dollars relative to the U.S. dollars would have significant impact on the Company's operating results. In order to minimize the Company's exposure to fluctuations in the exchange rate of Rmb, the Company utilities its Rmb revenue to settle the expenses denominated in Rmb incurred in the purchase of raw materials and its production facilities in the PRC. Only the unused Rmb may be subjected to exchange risk. In addition, the Company's currency risk in fiscal 2000 was immaterial as a result of the "peg" of Hong Kong dollars to the U.S. dollars and therefore no derivative contracts such as forward contracts and options to hedge against foreign exchange fluctuations was considered or made. The Company's interest expense is subject to the fluctuations of Hong Kong interest rates. The interest rates on the bank installment loans of the Company, in the principal amount of approximately $2.6 million, ranged from Hong Kong prime lending rate plus 0.25% to 3.25% in fiscal 2000. The Company does not currently hedge its interest rate exposure as the Company believes that there are (i) no significant changes in Hong Kong interest rates in the foreseeable future, and (ii) no adversely effects on its operation and cash flow even if the applicable interest rate is increased by 1% in Hong Kong prime lending rate. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company, together with the independent auditors' report thereon of Arthur Andersen & Co ("Arthur Andersen"), Certified Public Accountants, appears on pages F-1 through F-24 of this report. See Index to Financial Statements on page 28 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable 24 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of the Company's fiscal year. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of the Company's fiscal year. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of the Company's fiscal year. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after the close of the Company's fiscal year. Such information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: (1) Consolidated Financial Statements: See Index to Financial Statements on page 28 of this report for financial statements and supplementary data filed as part of this report. (2) Financial Statement Schedules None (3) Exhibits Exhibit Number Description of Exhibit - ---------- ------------------------------- 2.1 Acquisition Agreement between S.W. Lam, Inc. and the shareholders of Hang Fung Jewellery Company Limited and Kai Hang Jewellery Company Limited (1) 3.1 Articles of Incorporation (1) 3.2 Bylaws (1) 4.1 Certificate of Designation for Series A Preferred Stock (1) 10.1++ Employment Agreement with Lam Sai Wing dated January 1, 1994 (1) 10.2++ Employment Agreement with Chan Yam Fai, Jane dated January 1, 1994 (1) 10.3 Sales Agency Agreement between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. (1) 10.4 Agreement for Jewellery Assembling between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. (1) 25 10.5 Sales Cooperation Agreement between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. (1) 10.6 Confirmation Agreement between Hang Fung Jewellery Co., Ltd. and China Jewellery Import & Export Co. (1) 10.7 Lease Agreement between Chan Yam Fai, Jane and Hang Fung Jewellery Co., Ltd. re: executive offices (1) 10.8++ Supplementary Employment Contract with Lam Sai Wing and Lam Chan Yam Fai (2) 10.9 Warrant Agreement with Phenomenal Limited (3) 10.10 Convertible Note with Phenomenal Limited (3) 10.11 Deed Amendment (3) 10.12++ Employment Agreement between Hang Fung Gold and Lam Sai Wing dated February 27, 1999 (4) 10.13++ Employment Agreement between Hang Fung Gold and Chan Yam Fai, Jane dated February 27, 1999 (4) 10.14++ Employment Agreement between Hang Fung Gold and Ng Yee Mei dated February 27, 1999 (4) 10.15* Agreement between Hang Fung Gold Technology Limited, New Epoch Holdings International Limited, and Quality Prince Limited dated June 24, 2000 10.16* Facility Agreement between Hang Fung Gold Technology Limited and New Epoch Information (BVI) Limited dated June 24, 2000 27.1* Financial Data Schedule - -------------------- ++ Compensatory plan or management agreement. * Filed herewith (1) Incorporated by reference to the respective exhibits filed with Registrant's Registration Statement on Form 10 (Commission File No. 0-22049) (2) Incorporated by reference to the respective exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended March 31, 1997 (3) Incorporated by reference to the respective exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (4) Incorporated by reference to the respective exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended March 31, 1999 (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 2000. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. S.W. LAM, INC. By: /s/ Lam Sai Wing ------------------------------------- Lam Sai Wing President and Chief Executive Officer Dated: July 14, 2000 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date ----------- ------- ------ /s/ Lam Sai Wing - ----------------------- President, Chief Executive Officer July 14, 2000 Lam Sai Wing (Principal Executive Officer) and Chairman of the Board /s/ Chan Yam Fai - ----------------------- Vice President, Chief Financial July 14, 2000 Chan Yam Fai, Jane Officer (Principal Accounting and Financial Officer) and Director /s/ Ng Yee Mei - ----------------------- Vice President and Director July 14, 2000 Ng Yee Mei /s/ Cheng Wa On - ----------------------- Director July 14, 2000 Cheng Wa On 27 S.W. LAM, INC. Index to Consolidated Financial Statements Page ------ Report of Independent Public Accountants............................ F-1 Consolidated Balance Sheets as of March 31, 1999 and 2000........... F-2 Consolidated Statements of Operations for the Years ended March 31, 1998, 1999 and 2000.......................................... F-3 Consolidated Statements of Cash Flows for the Years ended March 31, 1998, 1999 and 2000.......................................... F-4 Consolidated Statements of Changes in Shareholders' Equity for the Years ended March 31, 1998, 1999 and 2000.................... F-5 Notes to Consolidated Financial Statements.......................... F-6 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of S. W. Lam, Inc.: We have audited the accompanying consolidated balance sheets of S. W. Lam, Inc. (incorporated in the State of Nevada, the United States of America; "the Company") and Subsidiaries ("the Group") as of March 31, 1999 and 2000, and the related consolidated statements of operations, cash flows and changes in shareholders' equity for the years ended March 31, 1998, 1999 and 2000. 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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of S. W. Lam, Inc. and Subsidiaries as of March 31, 1999 and 2000, and the results of their operations and their cash flows for the years ended March 31, 1998, 1999 and 2000, in conformity with generally accepted accounting principles in the United States of America. ARTHUR ANDERSEN & CO Certified Public Accountants Hong Kong Hong Kong, July 14, 2000. F-1 S. W. LAM, INC. CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND 2000 Note 1 9 9 9 2 0 0 0 ------ --------- --------------------- HK$'000 HK $'000 US $'000 ASSETS Current assets: Cash and bank deposits 17 129,444 152,385 19,562 Accounts receivable, net 5 121,328 151,517 19,450 Prepayments and deposits 6 4,644 3,048 391 Inventories, net 7 131,513 207,249 26,604 --------- --------- -------- Total current assets 386,929 514,199 66,007 Property, machinery and equipment and 8 184,227 227,137 29,158 capital leases, net --------- --------- -------- Total assets 571,156 741,336 95,165 ========= ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term bank borrowings 9 128,066 221,898 28,485 Long-term bank loans, current portion 10 2,812 2,123 273 Capital lease obligations, current portion 11 9,487 12,747 1,636 Accounts payable 26,639 28,579 3,668 Accrued liabilities 12 6,672 9,657 1,240 Due to a director 18 3,101 4,426 568 Taxation payable 13 58,604 40,326 5,177 --------- --------- -------- Total current liabilities 235,381 319,756 41,047 Long-term bank loans, non-current portion 10 8,390 6,272 805 Capital lease obligations, non-current portion 11 7,727 6,993 898 Deferred taxation 13 9,945 13,394 1,719 --------- --------- -------- Total liabilities 261,443 346,415 44,469 --------- --------- -------- Minority interests 153,672 186,060 23,885 --------- --------- -------- Shareholders' equity: Common stock, par value US$0.001 each: - authorized - 25,000,000 shares - outstanding and fully paid - 12,800,000 101 101 13 shares Preferred stock, par value US$0.001 each: - authorized - 25,000,000 shares - outstanding and fully paid - Series A - - - preferred stock - 100,000 shares Additional paid-in capital 3,960 3,960 508 Retained earnings 151,980 204,800 26,290 --------- --------- -------- Total shareholders' equity 156,041 208,861 26,811 --------- --------- -------- Total liabilities and shareholders' equity 571,156 741,336 95,165 ========= ========= ========
The accompanying notes are an integral part of these financial statements. Translation of amounts from Hong Kong dollars ("HK$") into United States dollars ("US$") is for the convenience of readers and has been made at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2000 of US$1.00 = HK$7.79. No representation is made that the Hong Kong dollars amounts could have been, or could be, converted into United States dollars at that rate or at any other rate. S. W. LAM, INC. F-2 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000 Note 1 9 9 8 1 9 9 9 2 0 0 0 ------ ---------- ---------- ---------------------- HK$'000 HK$'000 HK $'000 US $'000 Revenues Net sales 19.a 449,236 658,790 959,070 123,115 Contract processing fees 33,360 17,012 - - --------- --------- --------- --------- Total revenues 482,596 675,802 959,070 123,115 Cost of sales and services (365,249) (504,391) (740,978) (95,119) --------- --------- --------- --------- Gross profit 117,347 171,411 218,092 27,996 Selling, general and (53,540) (83,508) (114,390) (14,684) administrative expenses Interest expense (5,513) (11,588) (19,492) (2,502) Interest income 1,065 3,234 6,216 798 Other income (expenses), net (480) (1,716) (3,322) (426) Loss on reduction in equity - (2,100) - - interest in a subsidiary14 --------- --------- --------- --------- Income before income 58,879 75,733 87,104 11,182 taxes Provision for income taxes 13 (9,963) (14,747) 12,432 1,596 --------- --------- --------- --------- Income before 48,916 60,986 99,536 12,778 minority interests Minority interests - (15,601) (46,716) (5,997) --------- --------- --------- --------- Net income and 48,916 45,385 52,820 6,781 comprehensive ========= ========= ========= ========= income Earnings per common stock HK$ 3.82 HK$ 3.55 HK$ 4.13 US$ 0.53 =========== ========== ========== ========== Weighted average number of 12,800,000 12,800,000 12,800,000 12,800,000 common stocks ============ =========== =========== ===========
The accompanying notes are an integral part of these financial statements. Translation of amounts from Hong Kong dollars ("HK$") into United States dollars ("US$") is for the convenience of readers and has been made at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2000 of US$1.00 = HK$7.79. No representation is made that the Hong Kong dollars amounts could have been, or could be, converted into United States dollars at that rate or at any other rate. F-3 S. W. LAM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000 1 9 9 8 1 9 9 9 2 0 0 0 --------- --------- ----------------------------- HK$'000 HK$'000 HK $'000 US $'000 Cash flows from operating activities: Net income 48,916 45,385 52,820 6,781 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation of property, machinery and 23,147 39,605 55,580 7,135 equipment Loss on disposal of fixed assets - 49 - - Loss on reduction in equity interest in a - 2,100 - - subsidiary Minority interests - 15,601 46,716 5,997 (Increase) Decrease in operating assets - Accounts receivable, net (39,851) (41,907) (30,189) (3,876) Prepayments and deposits (1,961) (1,580) 1,596 205 Inventories, net (35,402) (30,368) (75,736) (9,722) Due from a director 3,681 - - - Increase (Decrease) in operating liabilities - Accounts payable 9,773 4,318 1,940 249 Deposits from customers (9,107) - - - Accrued liabilities 977 3,764 2,985 383 Due to a director 8,014 (4,909) 1,325 170 Taxation payable (1,442) 14,600 (18,278) (2,346) Deferred taxation 7,742 - 3,449 443 -------- -------- ---------- --------- Net cash provided by operating activities 14,487 46,658 42,208 5,419 -------- -------- ---------- --------- Cash flows from investing activities: Additions to property, machinery and (92,465) (67,781) (83,420) (10,709) equipment -------- -------- ---------- --------- Cash flows from financing activities: Dividend paid to a minority shareholder of a - - (14,328) (1,839) subsidiary Net proceeds from issuance of convertible note 77,500 - - - Cash proceeds received from minority interests - 58,671 - - (Decrease) Increase in bank overdrafts (434) 1,538 (1,953) (251) Increase in trust receipts bank loans 26,342 80,988 85,785 11,012 New short-term bank loans - 2,000 12,000 1,540 Repayment of short-term bank loans - - (2,000) (257) New long-term bank loans 2,155 2,000 - - Repayment of long-term bank loans (2,193) (2,288) (2,807) (360) Repayment of capital element of capital lease (9,881) (8,559) (12,544) (1,610) obligations -------- -------- ---------- --------- Net cash provided by financing activities 93,489 134,350 64,153 8,235 -------- -------- ---------- --------- Net increase in cash and bank deposits 15,511 113,227 22,941 2,945 Cash and bank deposits, as of beginning of year 706 16,217 129,444 16,617 -------- -------- ---------- --------- Cash and bank deposits, as of end of year 16,217 129,444 152,385 19,562 ======== ======== ========== =========
The accompanying notes are an integral part of these financial statements. Translation of amounts from Hong Kong dollars ("HK$") into United States dollars ("US$") is for the convenience of readers and has been made at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2000 of US$1.00 = HK$7.79. No representation is made that the Hong Kong dollars amounts could have been, or could be, converted into United States dollars at that rate or at any other rate. S. W. LAM, INC. F-4 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000 Common Stock Series A Preferred Stock Number of Number of Additional Retained shares Amount Shares Amount paid-in-capital earnings '000 HK$'000 '000 HK$'000 HK$'000 HK$'000 ----------- -------- ---------- --------- --------------- ---------- Balance as of March 31, 1997 12,800 101 100 - 3,960 57,679 Net income - - - - - 48,916 -------- ----- ----- ------ ------- --------- Balance as of March 31, 1998 12,800 101 100 - 3,960 106,595 Net income - - - - - 45,385 -------- ----- ----- ------ ------- --------- Balance as of March 31, 1999 12,800 101 100 - 3,960 151,980 Net income - - - - - 52,820 -------- ----- ----- ------ ------- --------- Balance as of March 31, 2000 12,800 101 100 3,960 204,800 ======== ===== ===== ====== ======= =========
The accompanying notes are an integral part of these financial statements. F-5 S. W. LAM, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------- 1. ORGANIZATION AND OPERATIONS --------------------------- S. W. Lam, Inc. ("the Company"), formerly known as New Wine Inc., was incorporated on April 12, 1994 in the State of Tennessee, the United States of America. On October 10, 1996, the Company effected a change of domicile by reincorporating in the State of Nevada, the United States of America, and changed its name from New Wine Inc. to S.W. Lam, Inc. The Directors consider Good Day Holdings Limited, a company incorporated in the British Virgin Islands, to be the ultimate holding company. The Company and its subsidiaries ("the Group") are principally engaged in the production and selling of jewellery products to customers in Hong Kong, the People's Republic of China ("the PRC") and other parts of the world. The Group maintains its head office in Hong Kong where it coordinates the Group's marketing and selling functions. Its production facilities are located in Hong Kong and the PRC. Prior to April 1, 1999, the Group's business activities in the PRC were conducted through a series of contract processing arrangements with China National Pearl, Diamond, Gem and Jewellery Import and Export Corporation ("CNPIEC"), Tai Yuan Jewellery Crafts Factory ("TYJCF") and Shenzhen Jia Yi Jewellery Co., Ltd. ("SJYJC"), which are among the few entities authorized to engage in the production and trading of gold and silver products in the PRC. Pursuant to the contract processing agreements with CNPIEC and TYJCF, the Group operated production plants in Beijing and Tai Yuan, the PRC, to produce jewellery products. The Beijing and Tai Yuan plants also provided contract processing services to PRC customers at the instruction and on behalf of CNPIEC and TYJCF, and shared a portion of the contract processing fees received by them. In accordance with the contract processing agreements, CNPIEC and TYJCF have undertaken to pay for all of the Group's PRC tax liabilities, if any, relating to the Group's operations under the above-mentioned activities. In addition, the Group entered into an agreement with SJYJC for the production of gold and silver products in Shenzhen, the PRC. During the year ended March 31, 2000, the Group ceased to conduct business activities in the PRC through the contract processing agreements with CNPIEC, TYJCF and SJYJC. On May 28, 1998, the Group established its own production facility in Sha Tau Kok, Shenzhen, the PRC ("the Sha Tau Kok Facility"). The Sha Tau Kok Facility was operated by Hang Fung Fung Jewellery (Shenzhen) Co., Ltd. ("HFJSC"), a wholly owned subsidiary of the Company. The Sha Tau Kok Facility commenced commercial production in July 1998. On December 4, 1997, Hang Fung Gold Technology Limited ("HFGTL") was incorporated as an exempted company under the Companies Act 1981 of Bermuda (as amended) and became a wholly owned subsidiary of the Company. On February 27, 1999, HFGTL became the holding company of the subsidiaries of the Company, except for Quality Prince Limited, pursuant to a group reorganization scheme which included exchanges of shares. On March 16, 1999, HFGTL was listed on The Stock Exchange of Hong Kong Limited. F-6 2. BASIS OF PRESENTATION --------------------- Since HFGTL and the subsidiaries of the Company were owned by the same shareholders immediately before and after the reorganization, it has been accounted as a reorganization of entities under common control similar to a pooling of interest. 3. SUBSIDIARIES ------------ Details of the Company's subsidiaries (which together with the Company are collectively referred to as "the Group") as of March 31, 2000 were as follows: Place of Percentage of incorporation/ equity interest Principal Name operations held activities ------ -------------- --------------- ------------- Quality Prince Limited British Virgin 100% Investment Islands holding Hang Fung Gold Technology Bermuda 53.145% Investment Limited holding Hang Fung Jewellery Company Hong Kong 53.145% Production and Limited selling of jewellery products Hang Fung Jewellery The PRC 53.145% Processing of (Shenzhen) Co., Limited jewellery products Kai Hang Jewellery Company Hong Kong 53.145% Property Limited holding Macadam Profits Limited British Virgin 53.145% Investment Islands holding Soycue Limited British Virgin 53.145% Inactive There is no restriction on the distribution of the subsidiaries' retained earnings.
F-7 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of consolidation ---------------------- The consolidated financial statements include the accounts of the Company and its subsidiaries. The results of subsidiaries acquired or disposed of during the year are recorded from or to their effective dates of acquisition or disposal. All material intra-group transactions and balances have been eliminated on consolidation. b. Subsidiaries ------------ A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of its voting share capital for the long term. c. Inventories ----------- Inventories are stated at the lower of cost, on a first-in, first-out basis, and market value. Costs of work-in-progress and finished goods include direct materials, direct labour and an attributable portion of production overheads. d. Property, machinery and equipment and capital leases ---------------------------------------------------- Property, machinery and equipment and capital leases are recorded at cost. Gains or losses on disposals are reflected in current operations. Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets as follows: Leasehold land 50 years Building 20 years Machinery and equipment 5 to 10 years Motor vehicles 5 years Furniture, fixtures and office equipment 5 years Major expenditures for betterments and renewals are capitalized. All ordinary repair and maintenance costs are expensed as incurred. Impairment loss on property, machinery and equipment is recognized when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges) indicates that future operations will not produce sufficient revenue to cover the related future costs, and when the carrying amount of the asset cannot be realized through sale. Measurement of the impairment loss is based on fair value of the assets. e. Sales ----- Sales comprise (i) the invoiced value of merchandise supplied to customers, net of sales returns and allowances, which are recognized when merchandise is shipped and title is passed to customers, (ii) contract processing fees, which are recognized when the contract processing service is rendered, and (iii) rental income, which is recognized on a straight-line basis over the period of the relevant lease. Deposits or advanced payments from customers prior to passage of title of goods and the expiration of right of return are recorded as deposits from customers. F-8 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) ------------------------------------------ f. Advertising and promotion costs ------------------------------- The costs of advertising and promotion are expensed in the period in which they are incurred. g. Staff retirement benefits ------------------------- Costs of staff retirement benefits are recognized as an expense in the period in which they are incurred. h. Borrowing costs --------------- Borrowing costs are recognized as an expense in the period in which they are incurred. i. Income taxes ------------ The Group accounts for income tax under the provisions of Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for the 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 temporary differences between the tax and financial statement bases of assets and liabilities. j. Leases ------ Capital leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets are transferred to the Group. Fixed assets held under capital leases are initially recorded at the present value of the minimum payments at the inception of the leases, with equivalent liabilities categorized as appropriate under current or non-current liabilities. Interest expenses, which represent the difference between the minimum payments at the inception of the finance leases and the corresponding fair value of the assets acquired, are allocated to accounting periods over the period of the leases to produce a constant rate of charge on the outstanding balance. Operating leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets remain with the lessors. Rental payments under operating leases are charged to expense on the straight-line basis over the period of the relevant leases. k. Off-balance-sheet instruments ----------------------------- Off-balance-sheet instruments arise from futures, forward, swap and option transactions undertaken by the Group in the foreign exchange, interest rate, commodity and equity markets. The accounting for these instruments is dependent upon whether the transactions are undertaken for speculative or hedging purposes. Financial instruments undertaken for speculative purposes are marked to market and any gain or loss is recognized in the statements of operations. F-9 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) ------------------------------------------ l. Comprehensive income -------------------- The Group has adopted Statement of Financial Accounting Standard No. 130, which establishes guidance for the reporting and display of comprehensive income and its components. The purpose of reporting comprehensive income is to report a measure of all changes in equity that resulted from recognized transactions and other economic events of the period other than transactions with shareholders. Adoption of the standard had no impact on the Group's consolidated financial position, results of operations or cash flows since the Group had no items of other comprehensive income other than those recorded in the consolidated statements of operations. m. Foreign currency translation ---------------------------- A substantial portion of the Group's sales, purchases and expenses are in Hong Kong dollars. Management believes that maintaining books and records in Hong Kong dollars will enable financial results and relationships to be measured with more relevance and reliability. In the financial statements of the individual companies, transactions in other currencies during the year are translated into Hong Kong dollars at the applicable rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in other currencies are translated into Hong Kong dollars at the applicable rates of exchange in effect at the balance sheet date. All such exchange differences are dealt with in the individual companies' statements of operations. The net (loss) gain from foreign currency transactions included in the statements of operations was approximately HK$(12,000), HK$149,000 and HK$127,000 for the years ended March 31, 1998, 1999 and 2000, respectively. n. Earnings per common stock ------------------------- Basic earnings per common stock is computed in accordance with Statement of Financial Accounting Standards No. 128 by dividing net income for each year by the weighted average number of shares of common stock outstanding during the years. The numerator in calculating basic earnings per common share for each year is the reported net income. The denominator is based on the weighted average number of common stocks of 12,800,000 shares for the years ended March 31, 1998, 1999 and 2000. o. 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. p. Fair value of financial instruments ----------------------------------- All financial instruments of the Group are carried at cost, which approximate their fair values. F-10 5. ACCOUNTS RECEIVABLE ------------------- Accounts receivable consisted of: 1 9 9 9 2 0 0 0 ----------- ----------------------- HK $'000 HK $'000 US $'000 Trade receivables 127,354 159,017 20,413 Less: Allowance for bad (6,026) (7,500) (963) and doubtful accounts --------- --------- --------- Accounts receivable, net 121,328 151,517 19,450 ========= ========= ========= a: During the year ended March 31, 2000, the Group wrote off trade receivables of approximately HK$3,526,000, which was charged against allowance for bad and doubtful accounts. 6. PREPAYMENTS AND DEPOSITS ------------------------ Prepayments and deposits consisted of: 1 9 9 9 2 0 0 0 ---------- ---------------------------- HK $'000 HK $'000 US $'000 Deposits for acquisition of raw materials and equipment 3,709 2,115 272 Rental and utility deposits 513 515 66 Prepayments 219 137 17 Others 203 281 36 ------- ------- ------- 4,644 3,048 391 ======= ======= ======= F-11 7. INVENTORIES ----------- Inventories consisted of: 1 9 9 9 2 0 0 0 -------- ----------------------- HK $'000 HK $'000 US $'000 Raw materials 58,734 86,937 11,160 Finished goods 74,779 122,312 15,701 --------- --------- -------- 133,513 209,249 26,861 Less: Allowance for obsolete (2,000) (2,000) (257) and slow-moving --------- --------- -------- inventories Inventories, net 131,513 207,249 26,604 ========= ========= ======== As of March 31, 1999 and 2000, inventories of approximately HK$121,542,000 and HK$207,327,000, respectively, were held under trust receipts bank loans. 8. PROPERTY, MACHINERY AND EQUIPMENT AND CAPITAL LEASES ---------------------------------------------------- Property, machinery and equipment and capital leases consisted of: 1 9 9 9 2 0 0 0 ---------- ----------------------- HK $'000 HK $'000 US $'000 Property, machinery and equipment: Leasehold land & building 1,973 1,973 253 Machinery &equipment 186,081 240,784 30,910 Motor vehicles 920 920 118 Furniture, fixtures & officer equipment 39,540 64,682 8,303 Capital leases: Machinery & equipment 38,178 56,823 7,295 --------- --------- -------- Cost 266,692 365,182 46,879 Less Accumulated depreciation Property, machinery & equipment (65,499) (112,053) (14,384) Capital leases (16,966) (25,992) (3,337) Property, machinery and --------- --------- -------- equipment and capital leases, net 184,227 227,137 29,158 ========= ========= ======== As of March 31, 1999 and 2000, all of the Group's leasehold land and building was situated in Hong Kong and were held under a long-term lease. F-12 8. PROPERTY, MACHINERY AND EQUIPMENT AND CAPITAL LEASES (Cont'd) ---------------------------------------------------- As of March 31, 1999 and 2000, leasehold land and building with a net book value of approximately HK$1,973,000 and HK$1,973,000, respectively, were mortgaged and machinery and equipment with a net book value of approximately HK$1,395,000 and HK$1,116,000, respectively, were pledged as collateral of certain of the Group's banking facilities. 9. SHORT-TERM BANK BORROWINGS -------------------------- Short-term bank borrowings comprised: 1 9 9 9 2 0 0 0 --------- ------------------------------- HK $'000 HK $'000 US $'000 Bank overdrafts 4,524 2,571 330 Short-term bank loans 2,000 12,000 1,540 Trust receipts bank loans 121,542 207,327 26,615 --------- --------- --------- 128,066 221,898 28,485 ========= ========= ========= Short-term bank borrowings were denominated in Hong Kong dollars, and bore interest at the Hong Kong prime lending rate to Hong Kong prime lending rate plus 3.5%, which ranged from 8.75% to 12.25% per annum as of March 31, 1999 and 8.25% to 12.25% per annum as of March 31, 2000. Refer to Note 17 for details of the Group's banking facilities. Supplemental information with respect to short-term bank borrowings for the years ended March 31, 1999 and 2000 is as follows: Maximum Average Weighted Weighted amount amount average interest average interest outstanding outstanding rate at rate during the year during the year the end of the year during the year --------------- --------------- ------------------- ---------------- HK $'000 HK $'000 Year ended March 31, 1999 Bank overdrafts 9,800 8,713 10.93% 11.73% ======== ======== ======== ======== Short-term bank loans 2,000 667 8.75% 8.81% ======== ======== ======== ======== Trust receipts bank loans 123,500 80,914 9.33% 10.12% ======== ======== ======== ======== Year ended March 31, 2000 Bank overdrafts 9,951 7,388 10.77% 11.84% ======== ======== ======== ======== Short-term bank loans 12,000 7,000 9.13% 9.23% ======== ======== ======== ======== Trust receipts bank loans 213,004 166,946 8.95% 9.10% ======== ======== ======== ========
F-13 10. LONG-TERM BANK LOANS Long-term bank loans were denominated in Hong Kong dollars, and bore interest at the Hong Kong prime lending rate plus 0.25% to 3.25%, which ranged from 9% to 11.75% per annum as of March 31, 1999 and 8.5% to 11.5% per annum as of March 31, 2000. Refer to Note 17 for details of the Group's banking facilities. Aggregate maturities of long-term bank loans are as follows: 1 9 9 9 2 0 0 0 ---------------------------------------- HK $'000 HK $'000 US $'000 ---------- ---------- ---------- Payable during the following periods - Within one year 2,812 2,123 273 - Over one year but not 2,137 1,033 133 exceeding two years - Over two years but not 1,043 1,149 147 exceeding three years - Over three years but not 1,153 1,278 164 exceeding four years - Over four years but not 1,274 1,421 182 exceeding five years - Over five years 2,783 1,391 179 -------- -------- -------- Total bank loans 11,202 8,395 1,078 Less: Current portion (2,812) (2,123) (273) -------- -------- -------- Non-current portion 8,390 6,272 805 ======== ======== ======== 11. CAPITAL LEASE OBLIGATIONS Future minimum lease payments under the capital leases, together with the present value of the minimum lease payments, were: 1 9 9 9 2 0 0 0 -------- ----------------------- HK $'000 HK $'000 US $'000 Payable during the following periods - Within one year 10,780 14,253 1,830 - Over one year but not 7,477 5,271 676 exceeding two years - Over two years but not 693 2,267 291 exceeding three years Total minimum lease payments 18,950 21,791 2,797 Less: Amount representing (1,736) (2,051) (263) future interest -------- --------- --------- Present value of minimum 17,214 19,740 2,534 lease Less: Current portion (9,487) (12,747) (1,636) -------- --------- --------- Non-current portion 7,727 6,993 898 ======== ========= ========= F-14 12. ACCRUED LIABILITIES ------------------- Accrued liabilities comprised: 1 9 9 9 2 0 0 0 ----------- ------------------------- HK $'000 HK $'000 US $'000 Accruals for operating expenses - Professional fees 680 833 107 - Workers' wages & bonus 2,716 3,473 446 - Management bonus 3,100 3,950 507 - Rental expenses 150 324 41 - Others 26 184 24 Accrued interest expense - 893 115 ------- -------- ------- 6,672 9,657 1,240 ======= ======== ======= 13. PROVISION FOR INCOME TAXES --------------------------- Provision for income taxes consisted of the following: 1 9 9 8 1 9 9 9 2 0 0 0 ------- ------- ---------------------- HK$'000 HK$'000 HK$'000 US$'000 Current tax - Hong Kong profits tax (2,212) (13,000) (5,217) (670) - PRC business tax and enterprise income tax (a) (6,477) (4,253) - - Over - provision in prior years - Hong Kong profits tax (b) - - 21,098 2,709 - PRC business tax and enterprise income tax (a) 6,477 2,506 - - Deferred tax (7,751) - (3,449) (443) ---------- -------- --------- ------- (9,963) (14,747) 12,432 1,596 ========== ======== ========= ======= Notes - a: Prior to April 1, 1999, the Group received contract processing fees based on the utilization of equipment and technology provided by the Group to its PRC contracting partners. Provision for PRC taxes in relation to these fees had been made for periods prior to April 1, 1999. F-15 13. PROVISION FOR INCOME TAXES (Cont'd) -------------------------- b: A substantial portion of the Group's business activities were conducted in the PRC. Accordingly, the Group was entitled to a 50 : 50 offshore claim in reporting its Hong Kong profits tax, under which the profit attributable to the Group's PRC activities is exempted from Hong Kong profits tax. Prior to April 1, 1999, the Group's 50 : 50 offshore claim was under review by the Hong Kong Inland Revenue Department ("the IRD") and a provision for Hong Kong profits tax in respect of the Group's offshore profit was recorded. During the year ended March 31, 2000, the Group's 50 : 50 offshore claim was agreed by the IRD and Hong Kong profits tax in respect of the Group's offshore profit was exempted. In addition, excess provision for Hong Kong profits tax recorded prior to April 1, 1999 amounting to approximately HK$21,098,000 was written back in the year March 31, 2000. The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. Subsidiaries with business operations in Hong Kong are subject to Hong Kong profits tax at a rate of 16.5% for the year ended March 31, 1998 and 16% for the years ended March 31, 1999 and 2000. The British Virgin Islands subsidiaries are incorporated under the International Business Companies Act of the British Virgin Islands and, accordingly, are exempted from payment of the British Virgin Islands income taxes. The Bermuda subsidiary is incorporated under the Companies Act 1981 of Bermuda (as amended) as an exempted company and, accordingly, is exempted from payment of Bermuda income taxes until 2016. Hang Fung Jewellery (Shenzhen) Co., Ltd., a company established and operated in the PRC, is subject to enterprise income tax at the rate of 33% (30% state income tax and 3% local income tax). However, it is exempted from PRC state income tax and local income tax for two years starting from the first year of profitable operations, followed by a 50% reduction for the following three years. No PRC enterprise income tax was provided as Hang Fung Jewellery (Shenzhen) Co., Ltd. was in a loss position. The reconciliation of the Hong Kong statutory tax rate to the effective income tax rate based on the income before income taxes as stated in the consolidated statements of operations is as follows: 1 9 9 8 1 9 9 9 2 0 0 0 --------- --------- --------- Hong Kong statutory income tax rate 16.5% 16.0% 16.0% Non-taxable income arising from activities which qualified as offshore - - (8.0%) General provision on tax charged in foreign jurisdiction 11.4% 6.8% - Over-provision of taxation in prior years (11.0%) (3.3%) (24.2%) Deferred tax assets for which no benefits have been recognized due to the establishment of valuation allowance - - 2.8% Other deductible activities - - (0.9%) --------- ---------- ------------ 16.9% 19.5% (14.3%) ========= ========== ============ F-16 13. PROVISION FOR INCOME TAXES (Cont'd) -------------------------- Components of deferred tax balances as of March 31, 1999 and 2000 are as follows: 1 9 9 9 2 0 0 0 ------- --------------------- HK$'000 HK$'000 US$'000 Tax effect of accumulated difference between taxation allowance and deprecation expenses 9,945 13,394 1,719 Loss of a subsidiary to be utilized for offsetting future taxable income - (2,470) (317) -------- --------- -------- 9,945 10,924 1,402 Valuation allowance - 2,470 317 -------- --------- -------- 9,945 13,394 1,719 ======== ========= ======== The retained earnings of the foreign subsidiaries would be subject to additional taxation if distributed. In the opinion of the Directors these retained earnings are, at the present time, required to finance the continuing operation of the subsidiaries and, accordingly, no provision for additional taxation has been made. 14. LOSS ON REDUCTION IN EQUITY INTEREST IN A SUBSIDIARY ---------------------------------------------------- On February 27, 1999, Hang Fung Jewellery Company Limited, a subsidiary of the Company, redeemed its redeemable preferred stocks and Phenomenal Limited, the redeemable preferred stock holder applied the redeemed proceeds, US$10,000,000 to subscribe for 582,800 shares of common stock of HFGTL, a then wholly owned subsidiary of the Company, at US$17.16 each. On March 9, 1999, HFGTL sold 78,750,000 common stock at HK$0.9 in a public offering, receiving a net cash proceeds of HK$58,671,000, after deducting the common stock issuance expenditure. Immediately after the public offering, HFGTL capitalized share premium of approximately HK$23,425,000 for the issuance of 234,250,000 shares on a pro rata basis to the shareholders of HFGTL before the public offering. Thus, after the share subscription and the capitalization, Phenomenal Limited holds 68,843,250 shares of HFGTL. These equity transactions resulting in a dilution of the Company's effective percentage of shareholding of HFGTL from 100% to 53.145%. The loss resulting from reduction of the Company's equity interest in HFGTL of approximately HK$2,100,000 was charged to the consolidated statements of operations for the year ended March 31,1999. F-17 15. COMMITMENTS AND CONTINGENT LIABILITIES -------------------------------------- a. Capital commitments As of March 31, 1999 and 2000, the Group had capital commitments for acquisition of machinery and equipment amounting to approximately HK$1,535,000 and HK$1,675,000, respectively. b. Operating lease commitments The Group has various operating lease agreements for staff quarters, factory premises, warehouses and motor vehicles under non-cancellable operating leases which extend to September 2006. Rental expenses for the years ended March 31, 1998, 1999 and 2000 were approximately HK$4,745,000, HK$4,523,000 and HK$3,836,000 respectively. As of March 31, 1999 and 2000, future rental payments under agreements classified as operating leases with non-cancellable terms are as follows: 1 9 9 9 2 0 0 0 --------- -------------------------- HK$'000 HK$'000 US$'000 Payable during the following periods: - Within one year 2,951 2,364 303 - Over one year but not 2,229 504 65 exceeding two years - Over two years but not 504 495 64 exceeding three years - Over three years but not 495 448 57 exceeding four years - Over four years but not 448 460 59 exceeding five years - More than five years 1,163 701 90 ------- ------- ------ 7,790 4,972 638 ======= ======= ====== c. Contingent liabilities Contingent liabilities not provided in the financial statements were: 1 9 9 9 2 0 0 0 --------- ------------------------ HK$'000 HK$'000 US$'000 Discounted bills with recourse 2,605 1,798 231 ======= ======= ====== F-18 16. RETIREMENT PLAN The Group's employees in the PRC are all employed on a contract basis and consequently the Group has no obligation for pension liabilities of these employees. The employees of the Group's operation in Hong Kong after completing twelve month's service may join the Group's defined contribution pension fund managed by an independent trustee. Both the Group and the employees make monthly contributions to the scheme of 5% of the employees' basic salaries. The employees are entitled to receive their entire contribution together with accrued interest thereon at any time upon leaving the Group, and 100% of the Group's employer contribution and the accrued interest thereon upon retirement or leaving the Group after completing ten years of service or at a reduced scale of between 30% to 90% after completing three to nine years of service. Any forfeited contributions made by the Group and the accrued interest thereon are used to reduce future employer's contributions. The aggregate amount of the Group's employer contributions (net of forfeited contributions) for the years ended March 31, 1998, 1999 and 2000 was approximately HK$145,000, HK$93,000 and HK$184,000, respectively. As of March 31, 1999 and 2000, certain employees of the Group have completed the required number of years of service under the Hong Kong Employment Ordinance ("the Ordinance") to be eligible for long service payments on termination of their employment. The Group is only liable to make such payments when the termination meets the circumstances specified in the Ordinance. If the termination of employment of all these employees meets the circumstances specified by the Ordinance, the Group's liability as of March 31, 1999 and 2000 would be as follows: 1 9 9 9 2 0 0 0 --------- -------------------------- HK$'000 HK$'000 US$'000 Amount not provided in the financial statements 231 123 16 ===== ===== ===== 17. BANKING FACILITIES ------------------ As of March 31, 1999 and 2000, the Group had aggregate banking facilities of approximately HK$184,807,000 and HK$279,315,000, respectively, from several banks for bank overdrafts, loans and trade financing. Unused facilities as of the same date amounted to approximately HK$27,926,000 and HK$37,736,000, respectively. These facilities were secured by: a. pledge of machinery and equipment with an aggregate net book value of approximately HK$1,395,000 and HK$1,116,000 as of March 31, 1999 and 2000, respectively; b. mortgage over the Group's leasehold land and building with a net book value of approximately HK$1,973,000 and HK$1,973,000 as of March 31, 1999 and 2000, respectively; c. the Group's inventories held under trust receipts bank loans; F-19 17. BANKING FACILITIES (Cont'd) ------------------- d. pledges of the Group's bank deposits of HK$60,150,000 and HK$117,575,000 as of March 31, 1999 and 2000, respectively; e. guarantee from the Government of the Hong Kong Special Administrative Region under the Special Finance Scheme for Small and Medium Enterprises amounting to Nil and HK$2,000,000 as of March 31, 1999 and 2000, respectively; f. mortgages over certain leasehold land and buildings owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane, directors of the Company; g. personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane; h. assignment of the benefits in respect of the keyman insurance for Mr. Lam Sai Wing, a director of the Company, amounting to Nil and HK$20,000,000 as of March 31, 1999 and 2000, respectively; and i. corporate guarantee provided by the Company. In addition, the Group has undertaken to comply with restrictive covenants imposed by a bank. 18. RELATED PARTY TRANSACTIONS -------------------------- a. The Group entered into the following transactions with related parties: 1 9 9 8 1 9 9 9 2 0 0 0 --------- --------- -------------------- HK$'000 HK$'000 HK$'000 US$'000 Rental paid to Ms. Chan Yam 1,350 - - - Fai, Jane Rental paid to Mr. Lam Sai - 162 324 42 Wing ======= ======= ====== ====== b. The Group had the following outstanding balances with a director: 1 9 9 9 2 0 0 0 --------- --------------------- HK$'000 HK$'000 US$'000 Due to a director - Mr. Lam Sai Wing 3,101 4,426 568 ======= ======= ====== The balances due to a director were unsecured, non-interest bearing and without pre-determined repayment terms. c. The Group's banking facilities were secured by, among others, mortgages over leasehold land and buildings owned by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane and personal guarantees provided by Mr. Lam Sai Wing and Ms. Chan Yam Fai, Jane. F-20 19. SEGMENT INFORMATION ------------------- a. Revenue 1 9 9 8 1 9 9 9 2 0 0 0 --------- --------- ----------------------- HK$'000 HK$'000 HK$'000 US$'000 Hong Kong operation - Sales of jewellery products to customers in - Hong Kong 80,058 54,929 147,592 18,946 - The PRC 77,527 122,659 254,418 32,659 - Middle East 72,161 108,086 85,073 10,921 - South East Asia 94,739 128,352 134,517 17,268 - Europe 45,614 136,880 188,065 24,142 - United States of America 79,137 107,884 149,405 19,179 --------- --------- --------- --------- 449,236 658,790 959,070 123,115 ========= ========= ========= ========= The PRC operation - Contract processing fees 33,360 17,012 - - ========= ========= ========= =========
b. Operating profit * ------------------ 1 9 9 8 1 9 9 9 2 0 0 0 --------- --------- -------------------- HK$'000 HK$'000 HK$'000 US$'000 Hong Kong operation 27,103 69,943 103,702 13,312 The PRC operation 36,704 17,960 - - -------- -------- --------- ------- Total 63,807 87,903 103,702 13,312 ======== ======== ========= ======= * Operating profit represents gross profit less selling, general and administrative expenses. c. Identifiable assets ------------------- 1 9 9 9 2 0 0 0 --------- ------------------------ HK$'000 HK$'000 US$'000 Hong Kong 417,179 636,947 81,765 The PRC 153,977 104,389 13,400 --------- --------- -------- Total 571,156 741,336 95,165 ========= ========= ======== F-21 19. SEGMENT INFORMATION (Cont'd) ------------------- d. Major customers Details of individual customers accounting for more than 5% of the Group's sales are as follows: 1 9 9 8 1 9 9 9 2 0 0 0 --------- --------- --------- Chow Tai Fook Jewellery Company Limited 5.9% 2.0% 2.9% Sam Ming Tong Jewellery Company Limited 5.5% 4.9% 3.8% ====== ====== ====== e. Major suppliers Details of individual suppliers accounting for more than 5% of the Group's purchases are as follows: 1 9 9 8 1 9 9 9 2 0 0 0 --------- --------- ---------- Heraeus Limited - supplied gold bullion 44.3% 62.9% 67.4% AGR Hong Kong Limited 7.5% 3.6% 2.3% Degussa China Limited 6.9% 4.6% 3.2% Chinese Wall Technology Company Limited - - 7.8% Johnson Matthey Hong Kong Limited 3.3% 2.0% 5.8% ====== ====== ====== 20. OPERATING RISKS --------------- a. Country risk ------------ The Group's operations are conducted in Hong Kong and the PRC. Accordingly, the Group's business, financial position 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. Effective from July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to the PRC, and Hong Kong became a Special Administrative Region of the PRC. As provided in the Basic Law of the Hong Kong, Hong Kong 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 had an adverse impact on the Group's financial and operating environment. 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 in North America and Western Europe. 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, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. F-22 20. OPERATING RISKS (Cont'd) b. Concentration of credit risk ---------------------------- Concentration of accounts receivable as of March 31, 1999 and 2000 is as follows: 1 9 9 9 2 0 0 0 --------- ---------- Five largest accounts receivable 18.5% 21.6% ======= ======= The Group performs ongoing credit evaluation of each customer's financial condition. It maintains reserves for potential credit losses and such losses in the aggregate have not exceeded management's projections. c. Dependence on a limited number of suppliers ------------------------------------------- The Group purchases raw materials from a limited number of suppliers. Concentration on the Group's suppliers for the years ended March 31, 1998, 1999 and 2000 is as follows: 1 9 9 8 1 9 9 9 2 0 0 0 --------- --------- -------- Purchases from five largest suppliers 66.2% 77.0% 89.0% ======= ======= ======= 21. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION ------------------------------------------------ a. Cash paid for interest and income taxes are as follows: 1 9 9 8 1 9 9 9 2 0 0 0 ------- ------- --------------------- HK$'000 HK$'000 HK$'000 US$'000 Interest paid 5,513 11,588 18,599 2,387 ======= ======== ======== ======= Income taxes 3,664 147 2,397 308 ======= ======== ======== =======
b. Cash received for interest income are as follows: 1 9 9 8 1 9 9 9 2 0 0 0 ------- ------- ------------------ HK$'000 HK$'000 HK$'000 US$'000 Interest received 1,065 3,234 6,216 798 ======= ======= ======= =====
c. Non-cash investing activities During the years ended March 31, 1998, 1999 and 2000, capital lease obligations of approximately HK$29,644,000, HK$2,234,000 and HK$15,070,000, respectively, were incurred to finance the Group's additions of new machinery and equipment. F-23 22. OTHER SUPPLEMENTAL INFORMATION 1 9 9 8 1 9 9 9 2 0 0 0 --------- --------- ---------------------- HK$'000 HK$'000 HK$'000 US$'000 Depreciation of property, machinery and equipment - owned assets 15,634 31,970 44,215 5,676 - assets held under capital leases 7,513 7,635 11,365 1,459 Loss on disposal of property, machinery and equipment - 49 - - Allowance for bad and doubtful accounts - 2,500 5,000 642 Allowance for obsolete and slow-moving inventories - 2,000 - - Derivative trading loss * - - 497 64 Interest expenses for - bank overdrafts and loans 4,475 9,585 17,636 2,264 - capital lease obligations 1,038 2,003 1,856 238 Operating lease rentals for - premises 4,745 4,443 3,754 482 - machinery & equipment - 80 82 11 Advertising and promotion expenses 1,331 1,154 804 103 Repairs and maintenance expenses 667 721 774 99 Rental income 55 101 48 6 Net foreign exchange (loss) gain (12) 149 127 16 Interest income from bank deposits 1,065 3,234 6,216 798 ======= ======= ======= ======
* During the year ended March 31, 2000, the Group entered into forward contracts for trading of gold, resulting in a loss of approximately HK$497,000. There was no outstanding forward contract as of March 31, 1999 and 2000. 23. SUBSEQUENT EVENTS ----------------- The following significant events took place subsequent to March 31, 2000: a. The Group is under negotiation to enter into a joint venture agreement with a company related to Phenomenal Limited, a minority shareholder of the HFGTL, and an independent third party to establish an internet portal for trading in gold, other precious metal and jewellery products. According to the negotiation, each of the Group and the two venture partners would own a 33.33% interest in the joint venture. In addition, the Group has agreed to provide the joint venture a loan of HK$7,000,000 for the development of its internet business. The loan is unsecured, non-interest bearing and subordinated to other third party liabilities of the joint venture. b. In June, 2000, the Group entered into an agreement with New Epoch Holdings International Limited ("NEHIL"), an independent third party, whereby HFGTL agreed to acquire a 49.9% interest in New Epoch Information (BVI) Limited ("NEIBVI"), a company engaged in the development of internet portal for online trading ("the Acquisition"). The purchase price for the 49.9% interest in NEIBVI amounted to approximately HK$186,000,000, which would be satisfied by the issue of 1,632,000,000 new shares of HFGTL at HK$0.114 each. Upon completion of the Acquisition, NEHIL will own approximately 34.1% of the issued voting shares of HFGTL and the Group's interest in HFGTL will be reduced to approximately 35%. In addition, HFGTL has agreed to provide NEIBVI a loan facility upon completion of the Acquisition. The amount of the loan facility is the higher of (i) HK$50,000,000 and (ii) two-thirds of the amount of the net proceeds of equity or debt issue of HFGTL from time to time subsequent to the Acquisition. The loan facility bears interest at Hong Kong prime lending rate plus 2.5% and will be used for developing the internet business of NEIBVI. F-24 EX-10.16 2 0002.txt NEW EPOCH FACILITY AGREEMENT THIS AGREEMENT is dated , 2000 and made BETWEEN:- (1) NEW EPOCH INFORMATION (BVI) LIMITED, a company incorporated under the laws of British Virgin Islands and whose registered office is situated at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands (the "Borrower"); and (2) HANG FUNG GOLD TECHNOLOGY LIMITED, a company incorporated in Bermuda and whose registered office is at Clarendon House, 2 Church Street, Hamilton HM12, Bermuda and whose principal place of business in Hong Kong is situated at Unit 25-32, 2nd Floor, Block B, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong (the "Lender"). BACKGROUND:- The Lender has agreed, upon the terms and subject to the conditions of this Agreement, to make available to the Borrower a loan facility in the maximum aggregate amount of HK$50 million. IT IS AGREED as follows:- 1. DEFINITIONS AND CONSTRUCTION 1.1 Terms defined In this Agreement, unless the context otherwise requires:- "Advance" means an advance made or to be made by the Lender under this Agreement or, as the case may be, the outstanding principal amount of any such advance. "Affiliate" means a Subsidiary or a Holding Company of the Lender or any other Subsidiary of that Holding Company. "Auditors" means the auditors of the Borrower from time to time. "Available Commitment" means, the Commitment at any time less the Outstandings. "Banking Day" means a day (other than a Saturday) on which dealings in deposits in Dollars are carried on in Hong Kong and (if payment is required to be made on such day) on which banks are open for business in Hong Kong and the relevant place of payment hereunder. 1 "Breakage Costs" means the amount determined by the Lender to be the cost (if any) of liquidating deposits or re-employing funds taken or borrowed to make or to maintain the Loan or any part thereof. "Commitment" means the Loan as reduced from time to time by any cancellation, or termination under the provisions of this Agreement. "Default" means any Event of Default . "Default Rate" means the annual rate determined by the Lender to be the aggregate of (i) the Margin, (ii) Prime or, if the provisions of Clause 9.1 apply, the cost to the Lender referred to in Clause 9.3(b) and (iii) 3% per annum. "Dollars" and "HK$" means the lawful currency for the time being of Hong Kong. "Drawdown Date" means in respect of any Advance, the date which is specified as the Drawdown Date therefor in the relevant Drawdown Notice or (as the context may require) the date on which that Advance is made to the Borrower. "Drawdown Notice" means a notice substantially in the form of Schedule 1. "Drawdown Period" means the period commencing on the date of this Agreement and ending on the earlier of (i) the date falling 36 months after the date of this Agreement and (ii) the first Banking Day on which the Available Commitment is zero. "Event of Default" means any of the events or circumstances described in Clause 17.1. "Facility" means the loan facility in the maximum aggregate amount of the greater of: (a) HK$50 million; and (b) two-thirds of the proceeds of issues of debt or equity securities by the Lender (net of expenses attributable to such issues) from time to time, to be made available on the terms set out in this Agreement. "Final Repayment Date" means the third anniversary of the first Drawdown Date. "Financial Indebtedness" means any Indebtedness in respect of:- (a) moneys borrowed and debit balances at banks; or 2 (b) any debenture, bond, note, loan stock or other security; or (c) any acceptance credit; or (d) receivables sold or discounted (otherwise than on a non-recourse basis); or (e) the acquisition cost of any asset to the extent payable before or after the time of acquisition or possession by the party liable where the advance or deferred payment is arranged primarily as a method of raising finance or financing the acquisition of that asset; or (f) leases entered into primarily as a method of raising finance or financing the acquisition of the asset leased; or (g) currency swap or interest swap, cap or collar arrangements; or (h) amounts raised under any other transaction having the commercial effect of a borrowing or raising of money; or (i) any guarantee, indemnity or similar assurance against financial loss of any person, but no particular indebtedness shall be taken into account more than once. "GAAP" means accounting principles generally accepted in Hong Kong. "Group" means the Borrower, any Subsidiary of the Borrower and any other company which is a Subsidiary of such company and references to a "member of the Group" shall be construed to mean any person or entity which is comprised within the Group. "Holding Company" means in relation to any person, an entity of which that person is a Subsidiary. "Hong Kong SAR" means the Hong Kong Special Administrative Region of the People's Republic of China. "Indebtedness" means any obligation for the payment or repayment of money, whether as principal or as surety and whether present or future, actual or contingent, primary or collateral, several or joint, secured or unsecured, subordinated or unsubordinated. "Interest Payment Date" means the last day of an Interest Period. "Interest Period" means each period for the calculation of interest in respect of the Loan ascertained in accordance with Clauses 8.2 or 8.4. 3 "Loan" means the aggregate principal amount borrowed by the Borrower on the Drawdown Dates or (as the context may require) the aggregate principal amount owing to the Lender under this Agreement at any relevant time. "London Banking Day" means a day on which Dollar deposits may be dealt with in the London interbank market. "Margin" means 2.5% per annum. "Outstandings" means at any relevant time the principal amount of the Advances owing to the Lender. "Prime" means the prime lending rate as quoted by the Hongkong and Shanghai Banking Corporation Limited on the first Banking Day in the period in respect of which interest is to be calculated; "Security Documents" means this Agreement, the charge over 50.1% of the issue share capital of the Borrower by New Epoch Holdings Limited and any other document executed from time to time by whatever person as a further security for the Borrower's obligations hereunder and "Security Document" means any of them; "Security Interest" means any mortgage, charge (whether fixed or floating), pledge, lien, hypothecation, assignment, security interest or other encumbrance of any kind securing or conferring any priority of payment in respect of any obligation of any person and includes any right granted by a transaction which, in legal terms, is not the granting of security but which has an economic or financial effect similar to the granting of security in each case under any applicable law. "Security Party" means each party to any Security Document (other than the Lender) and "Security Parties" shall be construed accordingly. "Subsidiary" of a person means any company or entity directly or indirectly controlled by such person, for which purpose "control" means either ownership of more than fifty per cent. (50%) of the voting share capital (or equivalent right of ownership) of such company or entity or power to direct its policies and management whether by contract or otherwise. "Taxes" includes all present and future taxes, levies, imposts, duties, fees or charges of whatever nature together with interest thereon and penalties in respect thereof and "Taxation" shall be construed accordingly. 1.2 Clause headings Clause headings and the table of contents are inserted for convenience of reference only and shall be ignored in the interpretation of this Agreement. 4 1.3 Construction In this Agreement, unless the context otherwise requires:- (a) references to Clauses and Schedules are to be construed as references to the clauses of, and schedules to, this Agreement and references to this Agreement include its Schedules; (b) reference in a Clause to a sub-clause shall be a reference to a sub-clause of that Clause; (c) references to (or to any specified provision of) this Agreement or any other document shall be construed as references to this Agreement, that provision or that document as in force for the time being and as amended in accordance with the terms thereof, or, as the case may be, with the agreement of the relevant parties and (where such consent is, by the terms of this Agreement or the relevant document, required to be obtained as a condition to such amendment being permitted) the prior written consent of the Lender; (d) words importing the plural shall include the singular and vice versa; (e) references to a person shall be construed as including references to an individual, firm, company, corporation, unincorporated body of persons or any state or any agency thereof; (f) references to a document or agreement being "in the agreed form" means any such document or agreement in the form approved and initialled by the Lender; and (g) any reference to the "Lender" shall, where the context permits, be construed so as to include its and any subsequent successors and permitted assigns in accordance with their respective interests. 2. THE FACILITY Subject to the terms of this Agreement, the Lender hereby agrees to make available to the Borrower a loan facility in the maximum aggregate amount of HK$50 million. 5 3. PURPOSE The purpose of the Facility is to assist the Borrower in financing the development of the internet and e-commerce business of the Group and associated companies of a member of the Group and accordingly, the Loan shall be applied for that purpose but the Lender shall not be obliged to concern itself with the application by the Borrower of the Loan. 4. THE LOAN 4.1 Drawdown Subject to the terms and conditions of this Agreement, an Advance will be made by the Lender to the Borrower, at any time and from time to time if the following conditions are fulfilled:- (a) not later than 10:00a.m. (Hong Kong time) on the last Banking Day before the proposed Drawdown Date of the relevant Advance, the Lender has received from the Borrower a Drawdown Notice (receipt of which shall oblige the Borrower to borrow the amount therein requested on the Drawdown Date upon the terms and conditions of this Agreement); (b) the proposed Drawdown Date of each Advance, is a Banking Day falling within the Drawdown Period; (c) the proposed amount of the relevant Advance is equal to or less than the Available Commitment; and (d) no Event of Default has occurred and is continuing or will occur as a result of the relevant Advance. 4.3 Payment of Proceeds All amounts to be made available by the Lenders to the Borrower shall be made available on the due date in Dollars in immediately available freely transferable cleared funds to the account of the Borrower. 4.4 Cancellation after Drawdown Period Any part of the Facility which shall not have been drawn down or cancelled by the end of the Drawdown Period shall at that time be automatically cancelled and the Available Commitments shall at that time be reduced to zero. 6 5. CONDITIONS PRECEDENT 5.1 Documentary Conditions Precedent The obligation of the Lender under this Agreement shall be subject to the condition that the Lender, or its duly authorised representative, shall have received before the each Drawdown Notice is given, the documents and evidence specified in Schedule 2, each in form and substance satisfactory to the Lender. 5.2 Further conditions The obligation of the Lender to make available the Loan is subject to the further conditions that at the time of the making of the Loan:- (a) the Lender has completed the acquisition of 49.9% of the issued share capital of the Borrower pursuant to the Sale and Purchase Agreement dated 24th June, 2000 entered into between, inter alia, the Lender and New Epoch Holdings International Limited for not less than 28 calendar days or if earlier, after the Lender has placed new shares in the Lender for an aggregate consideration of not less than HK$50 million; (b) no event mentioned in Clause 9.1 occurs or has occurred; (c) the representations and warranties set out in Clause 15.1 are true and correct on and as of each such time as if each was made with respect to the facts and circumstances existing at such time; and (d) no Default shall have occurred and be continuing or would result from the making of the Loan. 6. REPAYMENT 6.1 The Borrower shall repay the Loan in full in one amount on the Final Repayment Date together with all interest accrued thereon and all other amounts payable hereunder. 6.2 No part of the Loan repaid shall be available for reborrowing. 7. PREPAYMENTS AND CANCELLATION 7.1 Voluntary prepayments The Borrower may prepay, without premium or penalty, all or any part of the Loan on any Interest Payment Date or on any other Banking Day provided that:- 7 (a) the Borrower shall have given to the Lender not less than 14 days prior written notice specifying the amount and proposed date of prepayment; and (b) the amount of any partial prepayment shall be not less than HK$1,000,000 or an integral multiple thereof. 7.2 Additional Amounts on prepayments Prepayments under this Agreement shall be made together with accrued interest thereon and all other sums then due and payable under this Agreement. 7.3 Cancellation of the Loan The Borrower may, by giving to the Lender not less than 30 days' prior written notice specifying the amount to be cancelled, cancel without premium or penalty all or any part (but, if in part, being an amount of not less than HK$1,000,000 or integral multiples thereof) of the Facility. Any cancellation in part shall reduce the commitment of the Lender under the Facility rateably. 7.4 Irrevocability Any notice of prepayment or cancellation given by the Borrower under this Agreement shall be irrevocable, shall specify the date upon which such prepayment or cancellation is to be made and the amount of such prepayment or cancellation and shall oblige the Borrower to make such prepayment or cancellation on such date. 7.5 Limitation on prepayments The Borrower may not voluntarily prepay or repay all or any part of the Loan or cancel any part of the Loan under the Facility except at the times and in the manner expressly provided for in this Agreement. The Borrower shall not be entitled to reborrow any amount prepaid pursuant to this Agreement. 7.6 Application of prepayments The Lender shall apply any partial prepayment made in accordance with Clause 7.1 pro tanto against the Borrower's repayment obligations under Clause 6. Any prepayment made in accordance with Clause 9.4, Clause 10.1 or Clause 11 shall reduce rateably the remaining obligations of the Borrower under Clause 6. 8. INTEREST 8 8.1 Interest Rate The Borrower shall pay interest in arrears on the Loan in respect of each Interest Period on the last day of such Interest Period at the rate per annum determined by the Lender to be the aggregate of (i) the Margin and (ii) Prime for that Interest Period. 8.2 Interest Periods The Interest Periods applicable to the Loan shall be of 12 months duration provided that:- (a) the first Interest Period in relation to the Loan shall commence on the first Drawdown Date; (b) each Interest Period (other than the first) shall commence on the last day of the preceding Interest Period; (c) if any Interest Period would otherwise end on a non-Banking Day interest payable in respect of that period shall instead be payable on the next following Banking Day in which case no adjustment is to be made to the amount of interest payable; (d) if any Interest Period commences on the last Banking Day of a calendar month or on a day for which there is no numerically corresponding day in the calendar month 12 months thereafter as the case may be, that Interest Period shall, subject to paragraph (e) end on the last Banking Day of such later calendar month; (e) any Interest Period which would otherwise extend beyond the Final Repayment Date shall instead end on that date. 8.3 Day Count Fraction Interest shall accrue from day to day, shall be calculated on the basis of the actual number of days elapsed and a 360 day year, including the first day of the period during which it accrues but excluding the last. 8.4 Default interest If the Borrower fails to pay any sum on its due date for payment under this Agreement, the Borrower shall on demand by the Lender pay interest on such sum from the due date up to the date of actual payment (as well after as before judgment) at the Default Rate. Such interest shall be compounded monthly, or following such longer period as the Lender shall deem appropriate. 9. SUBSTITUTE BASIS 9.1 Market disruption 9 If, in relation to any Interest Period:- (a) the Lender determines (which determination shall be conclusive and binding) that by reason of circumstances affecting the Hong Kong interbank market generally, adequate and fair means do not or will not exist for ascertaining Prime for that Interest Period; or (b) the Lender determines that deposits in Dollars in the required amount for the relevant Interest Period are not available to it in the London interbank market or that Prime does not adequately reflect the cost to the Lender of obtaining funds for that Interest Period, the Lender shall promptly notify the Borrower accordingly. 9.2 Consultation and Agreement Immediately following the notification referred to in Clause 9.1, the Borrower and the Lender shall negotiate in good faith with a view to agreeing upon a substitute basis for determining the applicable interest rate. If a substitute basis is agreed within a period of 30 days after such notification or such longer period for discussion as the Borrower and the Lender may agree, that substitute basis shall take effect in respect of such Interest Period in accordance with its terms. 9.3 No agreement If a substitute basis is not so agreed and the Loan has been made, the Borrower shall pay interest on the Loan to the Lender for the relevant Interest Period at the rate per annum equal to the aggregate of:- (a) the Margin; and (b) the cost (expressed as an annual interest rate) to the Lender of funding the Loan during the relevant Interest Period (as conclusively determined by the Lender). 9.4 Prepayment If a substitute basis is not so agreed pursuant to Clause 9.2, if the Loan has been made, the Lender or the Borrower may request the prepayment of the Loan, by giving written notice to the other specifying a prepayment date which is not less than 30 days after such notice is given. On the date specified in the notice the Facility shall be cancelled and the Borrower shall prepay the Loan in full together with interest thereon to the date of prepayment and all other sums payable hereunder. For this purpose, the interest rate from time to time applicable to the Loan shall be the rate as ascertained in accordance with Clause 9.3 in relation to the relevant period. 10 10. INCREASED COSTS 10.1 If the result of any change in, or the introduction of, any law, regulation or regulatory requirement or any change in the interpretation or application thereof or compliance by the Lender or any of its Affiliates with any direction, request or requirement (whether or not having the force of law) of any central bank, monetary, regulatory or other authority (including, in each case without limitation, those relating to Taxation, capital adequacy, liquidity, reserve assets and special deposits) is to:- (a) subject the Lender or any of its Affiliates to Taxes or change the basis of Taxation of the Lender or any of its Affiliates with respect to any payment under this Agreement (other than Taxes or Taxation on the overall net income or profits of the Lender or any of its Affiliates imposed in the jurisdiction in which it is incorporated or in which its lending office under this Agreement is located); and/or (b) increase the cost of, or impose an additional cost on, the Lender or any of its Affiliates in relation to the making, maintaining or funding the Loan; and/or (c) reduce the amount payable or the effective return to the Lender or any of its Affiliates under this Agreement; and/or (d) reduce the Lender's or any of its Affiliates' rate of return on its overall capital by reason to a change in the manner in which it is required to allocate capital resources to its obligations under this Agreement; and/or (e) require the Lender or any of its Affiliates to make a payment or forgo a return on or calculated by reference to any amount received or receivable by it under or by reason of this Agreement, then and in each such case:- (i) the Lender shall notify the Borrower in writing of such event promptly upon its becoming aware of the same; and (ii) the Borrower shall on demand pay to the Lender the amount which the Lender certifies as the amount required to compensate the Lender or its Affiliates for such increased cost, reduction, payment or forgone return; and (iii)the Borrower and the Lender shall discuss in good faith whether any alternative arrangement may be made to avoid such increased cost, reduction, payment or foregone return. If no such alternative arrangement is agreed, the Borrower may prepay the Loan together with accrued interest thereon to the date of actual payment, on giving not less than 30 days' prior written notice to the Lender, provided that such notice is given within 60 days of the notification under paragraph (i) above. The Facility shall be cancelled on the giving of such notice.. 11 10.2 Allocation The Lender may in good faith allocate or spread costs and/or losses among its assets and liabilities (or any class thereof) or such basis as it reasonably considers appropriate. A demand may be made by the Lender under this Clause at any time whether or not the Loan has been repaid. 11. ILLEGALITY If it shall become unlawful any change or introduction of any law, regulation, treaty, or official directive or any change in the interpretation or application thereof, shall make it unlawful or contrary to such regulation, treaty or official directive, as the case may be, in any jurisdiction applicable to the Lender for the Lender to make available or fund or maintain the Loan or to give effect to its obligations as contemplated hereby, the Lender shall promptly upon becoming aware of the same, by written notice to the Borrower, declare that the Lender's obligations shall be terminated forthwith whereupon the Borrower will if so required pursuant to such law, regulation, treaty or official directive prepay forthwith (or, if permitted by the relevant law, regulation, treaty or official directive, at the end of the then current Interest Period) the Loan. The Facility shall be cancelled on the giving of such notice. 12. INDEMNITIES 12.1 General Indemnity The Borrower shall, on demand by the Lender, indemnify the Lender against all costs, losses, expenses and liabilities, including (without limitation) Breakage Costs and loss of margin, which the Lender may sustain or incur as a consequence of all or any of:- (a) any default in payment on the due date by the Borrower of any sum due or expressed to be due under this Agreement; (b) the occurrence or continuation of any Event of Default or Default; (c) any accelerated repayment under Clause 17 (Events of Default); (d) any failure to borrow in accordance with the Drawdown Notice, including any failure by it to satisfy any of the conditions in Clause 5; 12 (e) any repayment or prepayment of the Loan or any part thereof (other than in accordance with the provisions of Clause 7); or (f) any payment of principal or an overdue amount being received from any source otherwise than on the last day of an Interest Period subject to Clauses 8.2 and 13.5. 12.2 Currency Indemnity If an amount due to the Lender from the Borrower in one currency (the "first currency") is received by the Lender in another currency (the "second currency"), the Borrower's obligations to the Lender in respect of such amount shall only be discharged to the extent that the Lender may purchase the first currency with the second currency in accordance with its normal banking practice. If the amount of the first currency which may be so purchased (after deducting any costs of exchange and any other related costs) is less than the amount so due, the Borrower shall indemnify the Lender against the shortfall. 13. PAYMENTS 13.1 Place All payments by the Borrower under this Agreement shall be made to the Lender to its account at such office or bank as it may notify to the Borrower for this purpose. 13.2 Funds Payments under this Agreement shall be made for value on the due date at such times and in such funds as the Lender may specify as being customary at the time for the settlement of Dollars. 13.3 Set-off and counterclaim All payments made by the Borrower under this Agreement shall be made without set-off or counterclaim. 13.4 Refunds Where any sum is to be paid under this Agreement to the Lender for the account of another person, the Lender may assume that the payment will be made when due and may (but shall not be obliged to) make such sum available to the person so entitled. If it proves to be the case that such payment was not made to the Lender, then the person to whom such sum was so made available shall on request refund such sum to the Lender together with interest thereon sufficient to compensate the Lender for the cost of making available such sum up to the date of such repayment and the person by whom such sum was payable shall indemnify the Lender for any and all loss or expense which the Lender may sustain or reasonably incur as a consequence of such sum not having been paid on its due date. 13 13.5 Business Day Convention When any payment under this Agreement would otherwise be due on a day which is not a Banking Day, the due date for payment shall be the immediately following Banking Day and (subject to clause 8.2) the amount payable shall be adjusted accordingly. 13.6 Certificates Any certificate or determination of the Lender as to any rate of interest or any other amount pursuant to and for the purposes of this Agreement or any Security Document shall, in the absence of manifest error, be conclusive and binding on the Borrower. Any such certificate shall set out the basis of computation in reasonable detail. 14. TAXES 14.1 Taxes If at any time the Borrower is required to make any deduction or withholding in respect of Taxes or otherwise from any payment due under this Agreement for the account of the Lender, the sum due from the Borrower in respect of such payment shall be increased to the extent necessary to ensure that, after the making of such deduction or withholding, the Lender receives on the due date for such payment (and retains, free from any liability in respect of such deduction or withholding) a net sum equal to the sum which it would have received had no such deduction or withholding been required to be made and the Borrower shall indemnify the Lender against any losses or costs incurred by the Lender by reason of any failure of the Borrower to make any such deduction or withholding or by reason of any increased payment not being made on the due date for such payment. The Borrower shall promptly deliver to the Lender any receipts, certificates or other proof evidencing the amounts (if any) paid or payable in respect of any deduction or withholding as aforesaid. 14.2 Tax Credits If the Borrower pays any increased amount under Clause 14.1 and the Lender effectively obtains a refund of tax or credit against tax by reason of that payment, and if the Lender is able (in its sole opinion, which shall not be capable of being challenged) to identify that refund or credit as being attributable to that payment having regard to its other activities, then the Lender shall reimburse to the Borrower such amount as it shall determine (any such determination being conclusive) to be the proportion of that refund or credit as will leave the Lender after that reimbursement in no better or worse position than it would have been in if that payment had not been required. The Lender shall not be obliged to arrange its tax affairs in any particular manner or to disclose any information regarding its tax affairs or commutations to the Borrower. 14 15. REPRESENTATIONS AND WARRANTIES 15.1 Representations and Warranties The Borrower represents and warrants to the Lender that:- (a) Status: the Borrower is a company duly incorporated and validly existing under the laws of the British Virgin Islands and has full power, authority and legal right to own its property and assets and to carry on its business as such business is now being conducted; (b) Power and Authority: the Borrower has all legal power and authority to enter into this Agreement and each of the Security Documents to which it is a party and perform its obligations under this Agreement and each of the Security Documents to which it is a party and all action (including any corporate action) required to authorise the execution and delivery of this Agreement and each of the Security Documents to which it is a party and the performance of its obligations under this Agreement and each of the Security Documents to which it is a party has been duly taken (or, in the case of any board meetings required in respect of the same, will be duly taken prior to any Drawdown Date); (c) Legal Validity: this Agreement and the Security Documents to which the Borrower is a party constitutes or, when so executed and delivered, will constitute legal, valid and binding obligations of the Borrower and, subject to the usual qualifications as to matters of law, enforceable in accordance with their terms; (d) Non-conflict with laws: the entry into and performance of this Agreement and each of the Security Documents to which the Borrower is a party and the transactions contemplated by this Agreement and each of the Security Documents to which the Borrower is a party do not and will not conflict with or result in a breach of (i) any law, judgment or regulation or any official or judicial order, or (ii) the constitutional documents of the Borrower, or (iii) any agreement or document to which the Borrower is a party or which is binding upon it or any of its assets or revenues, nor cause any limitation placed on it or the powers of its directors to be exceeded or result in the creation or imposition of any Security Interest on any of its assets or revenues pursuant to the provisions of any such agreement or document; 15 (e) No consents: no consent of, giving of notice to, or registration with, or taking of any other action in respect of, any governmental authority or agency in Hong Kong or any other relevant jurisdiction or any shareholders or creditors of the Borrower is required for or in connection with the execution, validity, delivery, enforceability and admissibility in evidence in proceeding of this Agreement and the Security Documents to which the Borrower is a party (other than registrations thereof at the Companies Registry in Hong Kong), or the carrying out by, the Borrower of any of the transactions contemplated hereby or thereby; (f) Litigation: no litigation, arbitration or administrative proceeding is currently taking place or pending or, to the knowledge of the Borrower, threatened against the Borrower or its assets which would adversely affect its financial condition or its ability to perform its obligations under this Agreement or the Security Documents to which it is a party; (g) Taxes on payments: all payments to be made by the Borrower under this Agreement and each of the Security Documents to which the Borrower is a party may be made by the Borrower free and clear of, and without deduction for, Taxes and no deductions or withholdings are required to be made therefrom; (h) Pari passu ranking: the obligations of the Borrower hereunder rank at least pari passu with all its other present and future unsecured and unsubordinated obligations save for any obligations mandatorily preferred by law and not by contract; (i) Ownership of assets: each member of the Group has good title to or valid leases of all its assets which are reflected in the financial statements as at the date hereof subject to no Security Interest except as disclosed in such financial statements or as created by the Security Documents or otherwise permitted under Clause 16.8; (j) Tax Liabilities: the Borrower have complied with all Taxation laws in all jurisdictions in which they are subject to Taxation and have paid all Taxes due and payable by each of them; no material claims are being asserted against them with respect to Taxes; (k) No Default: no Default has occurred and is continuing; (l) No Immunity: the Borrower is generally subject to civil and commercial law and to legal proceedings and neither the Borrower nor any of its assets or revenues is entitled to any immunity or privilege (sovereign or otherwise) from any set-off, judgment, execution, attachment or other legal process; (m) Other Information: all financial and other information (other than any plans or projections) supplied to the Lender by or on behalf of the Borrower or any other Security Party in connection with the Facility or the matters envisaged therein is to the best of the Company's knowledge (based on information available at the time) true and accurate in all material respects; 16 (n) Security Interests over Assets: save as may be permitted by Clause 16.8 or as created by the Security Documents, no Security Interest exists over all or any of the present or future revenues or assets of any member of the Group; (o) Choice of Law: in any proceedings taken in the Hong Kong SAR in relation to this Agreement, the choice of the law of the Hong Kong SAR as the governing law of this Agreement and any judgment obtained in the Hong Kong SAR would be recognised and enforced. 15.2 Repetition The representations and warranties in Clause 15.1 shall be deemed to be repeated by the Borrower throughout the continuance of this Agreement as if made, with reference to the facts and circumstances existing from time to time. 16. UNDERTAKINGS 16.1 Duration The undertakings in this Clause shall remain in force from and after the date hereof and so long as any sum remains payable under this Agreement. 16.2 Information The Borrower will furnish to the Lender:- (a) as soon as they are available, but in any event within 90 days after the end of each of its financial years, copies of the audited financial statements (including a profit and loss account and balance sheet and in the case of the Borrower, prepared on a consolidated basis) of the Borrower and each of its Subsidiaries in respect of such financial year; (b) as soon as they are available, but in any event within 60 days after the end of each half of each of its financial years, copies of the unaudited financial statements (including a profit and loss account and balance sheet prepared on a basis consistent with the audited financial statements of the relevant company and in the case of the Borrower, prepared on a consolidated basis) of the Borrower and each of its Subsidiaries in respect of such 6 months period; 17 (c) promptly on request, all notices or other documents despatched by the Borrower to the Borrower's shareholders or creditors (or any class thereof); (d) promptly on request, such further information in the possession or control of the Borrower or of any of its Subsidiaries with respect to the financial condition and operations of the Borrower or any other member of the Group as the Lender may from time to time reasonably request; (e) promptly, details of any actual, pending or threatened litigation, arbitration or administrative proceedings against the Borrower or any other member of the Group or any of their respective assets which might materially and adversely affect the Borrower's financial condition or its ability to perform its obligations under this Agreement. All audited financial statements required hereunder shall be prepared in accordance with applicable laws and regulations of the British Virgin Islands and Hong Kong and generally accepted accounting principles and policies consistently applied and show a true and fair view of the financial position of the Borrower and each member of the Group or the Group, as the case may be, as at the end of, and the results of their respective operations for, the financial period to which they relate, and as at the end of such period. 16.3 Records The Borrower shall keep proper records and books of account in respect of its business and that of its Subsidiaries and permit the Lender and/or any professional consultants appointed by the Lender at all reasonable times upon prior notice to inspect and examine the records and books of account of the Borrower and its Subsidiaries. 16.4 Notification of Defaults The Borrower will notify the Lender in writing of any Default forthwith upon the occurrence thereof. 16.5 Compliance certificates The Borrower will within 90 days of the end of each of its financial years and also promptly at the request of the Lender from time to time furnish the Lender with a certificate signed by the Auditors certifying that no Default has occurred and is continuing or, if the same has occurred, specifying the Default or event and the steps being taken to remedy the same. 16.6 Consents 18 The Borrower will obtain and promptly renew from time to time and thereafter maintain in full force and effect, and will comply with and promptly furnish certified copies to the Lender of, all such authorisations, approvals, consents, licences and exemptions as may be required under any applicable law or regulation to enable it to perform its obligations under this Agreement or the Security Documents to which it is a party or required for the validity or enforceability of this Agreement or the Security Documents to which it is a party. 16.7 Pari passu ranking The Borrower undertakes that its obligations hereunder do and will at all times rank at least pari passu with all other present and future unsecured obligations of the Borrower save for any obligations preferred by law. 16.8 Mergers The Borrower will not without the prior written consent of the Lender take any step with a view to dissolution, liquidation or winding-up. 16.9 Maintenance of status and franchises (a) The Borrower will do all such things as are necessary to maintain its corporate existence in good standing and to conduct its business in a proper and efficient manner and in compliance with all laws, regulations, authorisations, agreements and obligations applicable to it and pay all Taxes imposed on it when due. (b) The Borrower will and will procure that each other member of the Group will, ensure that it has the right and is duly qualified to conduct its business as it is or is intended as at the date hereof to be conducted in all applicable jurisdictions and will obtain and maintain all franchises and rights necessary for the conduct of its business. 16.10 Indebtedness Save with the consent of the Lender, no member of the Group will borrow or obtain credit or execute any guarantees or indemnities in favour of any person other than another member of the Group (other than any such guarantees which arise in the ordinary course of business) or incur any other Financial Indebtedness (in any such case if the total amount of such Financial Indebtedness would at any time exceed the Financial Indebtedness as at the date of this Agreement) to the extent that it will materially and adversely affect the value of the assets secured by the Security Documents. 16.11 Lending 19 The Borrower will not and will procure that no other member of the Group will make or grant any loan or advance to the extent that it will materially and adversely affect the value of the assets secured by the Security Documents. 17. EVENTS OF DEFAULT 17.1 There shall be an Event of Default if, for any reason and whether or not for a reason outside the control of the Borrower:- (a) Non-payment: the Borrower fails to pay any sum due from it under this Agreement or any Security Document to which it is a party within 10 days of the due date, in the currency and in the manner stipulated herein or therein Provided that such non-payment shall not constitute an Event of Default if it is solely due to administrative or technical reasons affecting the transfer of funds despite timely payment instructions having been given by the Borrower; or (b) Other Breach: the Borrower or any other Security Party fails duly to comply with any of its respective obligations (other than those referred to in Clause 17.1(a)) under this Agreement or any of the Security Documents within 10 days of the due date therefor and in respect only of a failure which in the opinion of the Lender is capable of remedy, does not remedy such failure to the Lender's satisfaction within 7 days after receipt of written notice from the Lender requiring it to do so; or (c) Breach of Representation: any representation or warranty made or deemed to be made or repeated by or in respect of the Borrower or any other Security Party in or pursuant to this Agreement or any of the Security Documents is or proves to have been incorrect or misleading in any respect considered by the Lender to be material; or (d) Consents: any consent, authorisation, licence or approval of, or registration with or declaration to, governmental or public bodies or authorities or courts required by the Borrower or any other Security Party to authorise, or required by the Borrower or any other Security Party in connection with, the execution, delivery, performance, validity, enforceability or admissibility in evidence of this Agreement or any of the Security Documents is modified in a manner unacceptable to the Lender or is not granted or is revoked or terminated or expires and is not renewed or otherwise ceases to be in full force and effect and, in any such case, such event is materially prejudicial to the Borrower's ability to perform its obligations hereunder; or (e) Creditors: a creditor attaches or takes possession of, or a distress, execution sequestration or other process is levied or enforced upon or sued out against, any of the material undertakings, assets, rights or revenues of any member of the Group and is not discharged within 20 days or any step is taken to enforce any present or future Security Interest on or over all or any substantial part of the assets or revenues of the Borrower and is not released or revoked within 20 days; or 20 (f) Suspension of Debts: any member of the Group stops or suspends or threatens to stop or suspend payment of all or any material part of its debts or is unable or admits inability to pay its debts as they fall due or commences negotiations with one or more of its creditors or takes any proceedings or other step with a view to the general readjustment or rescheduling or a moratorium of all or part of its Financial Indebtedness or proposes a general assignment or enters into any composition or other arrangement for the benefit of its creditors generally or any class of creditors or proceedings are commenced in relation to any member of the Group under any law, regulation or procedure relating to reconstruction or readjustment of debts; or (g) Winding-up: any person takes any action, or any proceedings are started or other steps taken by any person, for (i) any member of the Group to be adjudicated or found bankrupt or insolvent, (ii) the winding-up, re-organisation, reconstruction or dissolution of the Borrower or (iii) the appointment of a liquidator, administrator, trustee, receiver or similar officer of any member of the Group of the whole or a material part of their respective undertakings, assets, rights or revenues and such action, proceedings or steps are not discontinued, withdrawn or dismissed within 14 days; or (h) Other Jurisdictions: any event occurs or proceeding is taken with respect to any member of the Group in any jurisdiction to which it is subject which has an effect equivalent or similar to any of the events mentioned in sub-clauses(e), (f) or (g); or (i) Suspension of Business or Expropriation: any member of the Group suspends or ceases or threatens to suspend or cease to carry on its business or any substantial part thereof or changes or threatens to change the nature or scope of its business or any governmental or other authority expropriates, seizes, or compulsorily acquires or threatens to expropriate, seize or compulsorily acquire all or any substantial part of its business or assets; or (j) Illegality: it becomes or will become unlawful at any time for the Borrower or any other Security Party to perform all or any of its respective obligations under this Agreement or any of the Security Documents or any of the respective obligations of the Borrower or any other Security Party under this Agreement or any of the Security Documents are not or cease to be or is claimed by it not to be legal, valid and binding and in full force and effect; or 21 (k) Repudiation: the Borrower or any other Security Party repudiates this Agreement or any of the Security Documents or does or causes to be done any act or thing evidencing an intention to repudiate this Agreement or any of the Security Documents or any action or proceedings are commenced (and not withdrawn or dismissed within a period of 14 days after its commencement) to enjoin or restrain the performance of or compliance with any respective obligation of the Borrower or any other Security Party under this Agreement or any of the Security Documents or otherwise dispute the ability of the Borrower or any other Security Party to enter into, exercise its respective rights or perform or comply with any of its respective obligations under this Agreement or any of the Security Documents; or (l) Material adverse change: any other event occurs or circumstance arises which, in the reasonable opinion of the Lender (after consultation with the Borrower), is likely, materially and adversely to affect the ability of the Borrower to perform all or any of its respective obligations under or otherwise to comply with the terms of this Agreement or any of the Security Documents; or (m) Lenders shareholding: the Lender's percentage shareholding in the Borrower is reduced below 49.9% of the issued share capital of the Borrower by reason of any new Issue of Shares by the Borrower without the Lender's consent; or (n) Control of Borrower and its investment: New Epoch Holdings International Limited shall cease to hold at least 50.1% of the issued share capital of the Borrower or Mr. Fok Chun Yue shall cease to hold at least 50.1% of New Epoch Holdings International Limited. 17.2 Acceleration The Lender may, without prejudice to any other rights of the Lender, at any time after the happening of an Event of Default and so long as the same is continuing by notice to the Borrower:- (a) declare that the obligation of the Lender to make the Loan available shall be terminated, whereupon the Facility shall be reduced to zero forthwith; and/or (b) declare that the Loan, all interest and all other sums payable under this Agreement have become due and payable, whereupon the same shall, immediately or in accordance with the terms of such notice, become due and payable without further demand or other legal formality of any kind; and/or (c) take any action, exercise any other right or pursue any other remedy conferred upon the Lender by this Agreement or any of the other Security Documents or by any applicable law or regulation or otherwise as a consequence of such Event of Default. 22 18. ASSIGNMENT AND TRANSFER 18.1 Benefit of Agreement This Agreement shall be binding upon, and enure for the benefit of the Lender and the Borrower and their respective successors. 18.2 Assignments by Borrower The Borrower may not assign or transfer any of its rights or obligations under this Agreement. 18.3 Assignments by the Lender The Lender may assign or otherwise transfer or grant participations in all or any part of its rights under this Agreement and the Security Documents to any of its affiliates (an "Assignee") without the consent of the Borrower. 18.4 References If the Lender assigns or transfers all or any part of its rights, benefits and/or obligations in accordance with this Clause all relevant references in this Agreement and each Security Document to the Lender shall thereafter be construed as a reference to the Lender and/or its Assignee to the extent of their respective interests. 18.5 Disclosure The Lender may disclose on a confidential basis to a prospective assignee or transferee or to any other person who may propose entering into, or who has entered into, contractual relations with the Lender in relation to this Agreement such information about the Borrower and/or any other Security Party as the Lender shall consider necessary in connection with such assignment on transfer. 18.6 Transfer or Assignment In the event of any transfer or assignment pursuant to this Clause 18, the Borrower or any other Security Party shall not, by reason of such transfer or assignment or by reason of the place of incorporation or location of such transferee, participant, assignee or lending office, be obliged to pay any greater amount under this Agreement or any of the Security Documents than it would have been obliged to pay had no such transfer or assignment (as the case may be) taken place but so that this shall be without prejudice to any liability of the Borrower or any other Security Party to pay such Assignee or the Lender (as the case may be) any increased cost which arises subsequent to the date of such transfer or assignment. 23 19. EXPENSES 19.1 Expenses The Borrower shall pay to the Lender on demand and in the currency specified by the Lender:- (a) all reasonable expenses (including legal, printing and out-of-pocket expenses) incurred by the Lender in connection with the negotiation, preparation, registration (where relevant) and execution of this Agreement and the Security Documents and any amendment of extension of or the granting of any waiver or consent under this Agreement or any of the Security Documents; and (b) all expenses (including legal and out-of-pocket expenses) incurred by the Lender in connection with, the enforcement of, or preservation of any rights under this Agreement or any of the Security Documents, or otherwise in respect of the moneys owing under this Agreement or any of the Security Documents together with interest at the Default Rate from the date on which such expenses were incurred to the date of payment (as well after as before judgment). 19.2 Stamp Duty The Borrower shall pay all stamp, documentary, registration or other like duties or taxes (including any duties or taxes payable by the Lender) imposed on or in connection with this Agreement , any Security Document, the Facility or the Loan and shall indemnify the Lender against any liability arising by reason of any delay or omission by the Borrower to pay such duties or taxes. 20. SET-OFF Without prejudice to any right of set-off, combination of accounts, lien or other rights which the Lender is at any time entitled whether by operation of law or contract or otherwise, the Lender may (but shall not be obliged to) set off against any obligation of the Borrower due and payable by it hereunder without prior notice any moneys held by the Lender for the account of the Borrower at any office of the Lender anywhere and in any currency. The Lender may effect such currency exchanges as are appropriate to implement such set-off. 24 21. NOTICES 21.1 Notices Any notice or communication under or in connection with this Agreement shall be in writing and shall be delivered personally or by first-class prepaid letter (airmail if available), telex or facsimile transmission to the addresses set out below or at such other address as the recipient may have notified to the other parties in writing. Proof of posting or despatch of any notice or communication to any party hereto shall be deemed to be proof of receipt:- (a) in the case of a letter, on the 5th Banking Day after posting; (b) in the case of a telex or facsimile transmission, on the Banking Day immediately following the date of despatch; 21.2 Addresses Notices or communications shall be sent to the following addresses:- To the Borrower:- Name New Epoch Information (BVI) Limited Address Room 3606 Shun Tak Center West Tower 200 Connaught Road Central Hong Kong Fax (852) 2964-0221 Attention Mr Benjamin Fok To the Lender:- Name Hang Fung Gold Technology Limited Address Unit 25-32, 2/F, Block B Focal Industrial Centre 21 Man Lok Street Hunghom Kowloon Hong Kong Fax (852) 2362-3034 Attention Mr Patrick Wong 25 21.3 Language Each notice or document referred to herein or to be delivered hereunder shall be in the English language. 22. WAIVERS, REMEDIES, SEVERABILITY AND COUNTERPARTS 22.1 Waivers No failure or delay on the part of the Lender to exercise any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise by the Lender of any power, right or remedy preclude any other or further exercise thereof or the exercise of any other power, right or remedy. 22.2 Remedies The remedies provided in this Agreement are cumulative and are not exclusive of any remedies provided by law. 22.3 Severability If any provision of this Agreement is prohibited or unenforceable in any jurisdiction such prohibition or unenforceability shall not invalidate the remaining provisions hereof or affect the validity or enforceability of such provision in any other jurisdiction. 22.4 Counterparts This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Agreement by signing any such counterpart. 23. GOVERNING LAW AND JURISDICTION 23.1 Governing Law This Agreement is governed by the law of the Hong Kong SAR. 23.2 Submission of Jurisdiction For the benefit of the Lender, the Borrower irrevocably agrees that the courts of the Hong Kong SAR are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and that, accordingly, any legal action or proceedings arising out of or in connection with this Agreement ("Proceedings") may be brought in those courts and the Borrower irrevocably submits to the jurisdiction of those courts. 26 23.3 Other jurisdictions Nothing in this Clause shall limit the right of the Lender to take proceedings against the Borrower in any other court of competent jurisdiction nor shall the taking of Proceedings in one or more jurisdictions preclude the Lender from taking Proceedings in any other jurisdiction, whether concurrently or not. 23.4 Waiver of inconvenient forum The Borrower irrevocably waives any objection which it may at any time have to the laying of the venue of any Proceedings in any court referred to in this Clause and any claim that any such Proceedings have been brought in an inconvenient forum. 23.5 Process Agent The Borrower hereby irrevocably authorises and appoints Mr Fok Chun Yue, Benjamin of Room 3606 Shun Tak Center West Tower, 200 Connaught Road Central, Hong Kong (or such other person being resident of or incorporated in Hong Kong as it may by notice to the other Party substitute) to accept service of all legal process arising out of or in connection with this Agreement and service on Mr Fok Chun Yue, Benjamin (or such substitute) shall be deemed to be service on the Borrower. 23.6 Service The Borrower irrevocably consents to any process in any Proceeding anywhere being served by mailing a copy by post in accordance with Clause 21 and such service shall become effective 7 days after mailing. Nothing shall affect the right to serve any process in any other manner permitted by law. 23.7 Waiver of Immunities To the extent that the Borrower has or hereafter may acquire any immunity (sovereign or otherwise) from any legal action, suit or proceeding, from the jurisdiction of any court or from set-off or any legal process (whether service or notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise) with respect to itself or any of its property, the Borrower hereby irrevocably waives and agrees not to plead or claim such immunity in respect of its obligations under this Agreement. IN WITNESS whereof the parties to this Agreement have caused this Agreement to be duly executed on the date first above written. 27 SCHEDULE 1 Form of Drawdown Notice ........................., 2000 To: [Name and address of Lender] HK$[ ] loan Facility Agreement dated ........................., 2000 We refer to the above Facility Agreement and hereby give you notice that we wish to draw down in accordance under the Loan namely HK$...................., on ........................., 2000. The funds should be credited to [name and number of account] with [insert bank details]. We confirm that:- (a) no event or circumstance has occurred and is continuing which constitutes a Default; (b) the representations and warranties contained in the Facility Agreement are true and correct at the date hereof as if made with respect to the facts and circumstances existing at such date; (c) the borrowing to be effected by the drawdown of the Loan will be within our powers, has been validly authorised by appropriate action and will not cause any limit on our borrowings (whether imposed by statute, regulation, agreement or otherwise) to be exceeded. Words and expressions defined in the Facility Agreement shall have the same meanings where used herein. For and on behalf of New Epoch Information (BVI) Limited .................................... 28 SCHEDULE 2 Documents and evidence required as conditions precedent 1. Fully executed original counterparts of each of:- (a) this Agreement; (b) a legal charge in a form to the satisfaction of the Lender duly executed by New Epoch Holdings Limited over such number of shares (rounded up to the nearest integral number) of the Borrower to be calculated as follows (subject to a maximum of 50.1% of the then issued share capital of the Borrower):- A x C B A = the aggregate of the amount of Advance then subject to the Drawdown Notice and the principal amount of the Loan then outstanding B = HK$374 million C = total number of shares of the Borrower then in issue (c) a certified copy of the board minutes of the chargor authorising the creation and execution of the charge; (d) all notices, consents, acknowledgements and other documents required to be received, given or exchanged pursuant to this Agreement and the other Security Documents prior to drawdown of the Loan; (e) a certificate in the form set out in Schedule 3 together with all the documents referred to therein. 2. Evidence that all governmental and other licences, approvals, consents, registrations and filings necessary for any matter or thing contemplated by this Agreement and the other Security Documents and for the legality, validity, priority, enforceability, admissibility in evidence and effectiveness thereof have been obtained or effected on an unconditional basis and remain in full force and effect (or, in the case of effecting of any registrations and filings, that arrangements satisfactory to the Lender have been made for the effecting of the same within any applicable time limit). 3. Arrangements satisfactory to the Lender have been made for all expenses (referred to in Clause 19.2), including without limitation all legal fees, incurred on or prior to the proposed Drawdown Date, to be paid. 29 4. Such other documents and evidence as the Lender may reasonably require. 30 SCHEDULE 3 Certificate of the Borrower [ ], 2000 To: [Name and address of the Lender] I refer to a loan facility agreement (the "Facility Agreement") dated [ ], 2000 between (1) [ ] as borrower (the "Borrower") and (2) [_____________________________] as lender (the "Lender") in relation to a loan facility in the maximum aggregate of HK$50 million to be made available on the terms and conditions set out therein. I am a Director of the Borrower and hereby certify as follows:- 1. I am duly authorised to give this Certificate. 2. Powers: Delivered with this Certificate and signed or initialled by me for the purpose of identification is a true, complete and up-to-date copy of the Memorandum of Association and Bye-laws of the Borrower as in effect when it signed the Facility Agreement and on the date of this Certificate. The Borrower is carrying on a business authorised under its Memorandum of Association. Neither the entry into the Facility Agreement by the Borrower, nor the exercise of its rights and/or performance of or compliance with its obligations under the Facility Agreement does or will violate, or exceed any borrowing or other power or restriction granted or imposed by, its Memorandum of Association and Bye-laws. 3. Due Authorisation: Delivered with this Certificate and signed or initialled by me for the purpose of identification is a true and complete copy of the Minutes of a duly convened meeting of the Board of Directors of the Borrower duly held on [ ], 2000 at which a duly constituted quorum of Directors was present throughout and at which the Resolutions set out in the Minutes were duly passed. Each of those Resolutions remains in full force and effect without modification. Those Resolutions constitute all action necessary on the part of the Borrower to approve the Facility Agreement and to authorise the signing of the Facility Agreement and the giving of any communications and/or taking of any other action required under or in connection with the Facility Agreement on behalf of the Borrower. 31 4. Due Execution: The Facility Agreement has been unconditionally signed and delivered by the Borrower. The persons who signed the Facility Agreement on behalf of the Borrower were duly authorised signatories of the Borrower when the Facility Agreement was entered into. 5. Consents: No Consents are or will be required by or in relation to the Borrower for any of the purposes stated in Clause 15.1(e) of the Facility Agreement. ............................................... Director of New Epoch Information (BVI) Limited 32 SIGNATURE PAGE The Borrower SIGNED by ) for and on behalf of ) NEW EPOCH INFORMATION (BVI) LIMITED ) The Lender SIGNED by ) ) for and on behalf of ) HANG FUNG GOLD TECHNOLOGY LIMITED ) 33 Private and Confidential Dated , 2000 NEW EPOCH INFORMATION (BVI) LIMITED (as Borrower) and HANG FUNG GOLD TECHNOLOGY LIMITED (the Lender) FACILITY AGREEMENT RICHARDS BUTLER HONG KONG 34 TABLE OF CONTENTS CLAUSE NO. CLAUSE HEADING PAGE NO. 1. DEFINITIONS AND CONSTRUCTION 2. THE FACILITY 3. PURPOSE 4. THE LOAN 5. CONDITIONS PRECEDENT 6. REPAYMENT 7. PREPAYMENTS AND CANCELLATION 8. INTEREST 9. SUBSTITUTE BASIS 10. INCREASED COSTS 11. ILLEGALITY 12. INDEMNITIES 13. PAYMENTS 14. TAXES 15. REPRESENTATIONS AND WARRANTIES 16. UNDERTAKINGS 17. EVENTS OF DEFAULT 18. ASSIGNMENT AND TRANSFER 19. EXPENSES 20. SET-OFF 21. NOTICES 22. WAIVERS, REMEDIES, SEVERABILITY AND COUNTERPARTS 23. GOVERNING LAW AND JURISDICTION SCHEDULE 1 - FORM OF DRAWDOWN NOTICE SCHEDULE 2 - DOCUMENTS AND EVIDENCE REQUIRED AS CONDITIONS PRECEDENT SCHEDULE 3 - CERTIFICATE OF THE BORROWER 35 EX-10.15 3 0003.txt NEW EPOCH PURCHASE AND SALE AGREEMENT DATED: 24 June 2000 - --------------------------------------------------- Sale and Purchase Agreement - --------------------------------------------------- between Hang Fung Gold Technology Limited Quality Prince Limited and New Epoch Holdings International Limited relating to the sale and purchase of 49.9% of the issued share capital of New Epoch Information (BVI) Limited SIMMONS & SIMMONS 35th Floor Cheung Kong Center, 2 Queen's Road Central Hong Kong Tel: (852) 2868 1131 Fax: (852) 2810 5040 DX 009121 Central 1 13 April 1999 CONTENTS 1. INTERPRETATION 2. TRANSACTION 3. CONDITIONS 4. COMPLETION 5. WARRANTIES AND UNDERTAKINGS OF THE PURCHASER 6. DUE DILIGENCE 7. WARRANTIES AND UNDERTAKINGS OF THE SELLER 8. PRE-COMPLETION OBLIGATIONS OF THE PURCHASER 9. PRE-COMPLETION OBLIGATIONS OF THE SELLER 10. RIGHT OF FIRST REFUSAL 11. MISCELLANEOUS 2 12. NOTICES 13. CONFIDENTIALITY 4 14. COSTS AND EXPENSES 15. GOVERNING LAW AND SERVICE AGENTS SCHEDULE 1 : THE SHAREHOLDING STRUCTURE OF N GROUP 7 THIS AGREEMENT is dated 24 June 2000 and made BETWEEN: (1) Hang Fung Gold Technology Limited (the "Purchaser" or "HFG"), a company incorporated in Bermuda and having its registered office at Clarendon House, 2 Church Street, Hamilton HM11, Bermuda; (2) New Epoch Holdings International Limited (the "Seller"), a company incorporated in the British Virgin Islands and having its registered office at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands; and (3) Quality Prince Limited, a company incorporated in the British Virgin Islands and having its registered office c/o TrusNet (British Virgin Islands) Limited, TrustNet Chambers, P.O. Box 3344, Road Town, Tortola, British Virgin Islands ("QPL"). Background: (A) The Seller is the legal and beneficial owner of the Purchased Shares (as defined below). (B) The Purchaser has at the date of this Agreement an authorised share capital of HK$80,000,000, consisting of 8,000,000,000 shares of HK$0.01 each (the "Shares"), of which 3,150,000,000 Shares have been issued and are fully paid and are listed on the Stock Exchange (as defined below). (C) The Seller has agreed to sell and the Purchaser has agreed to purchase the Purchased Shares (the "Purchase"). (D) As consideration for the Purchase, the Purchaser has agreed to allot and issue to the Seller the Consideration Shares (as defined below) on and subject to the terms and conditions set out in this Agreement. (E) Application will be made to the Stock Exchange on behalf of the Purchaser for the listing of, and permission to deal in, the Consideration Shares. IT IS HEREBY AGREED:- 1. INTERPRETATION In this Agreement, including the Recitals and the Schedules, the following expressions shall have the following meanings, unless the context otherwise requires:- "Business Day" means any day (excluding a Saturday) on which banks in Hong Kong are generally open for banking business; "CCASS" means the Central Clearing and Settlement System operated by Hong Kong Securities Clearing Company Limited; "Completion" means completion of the Transaction under this Agreement whereupon the obligations set out in Clause 4 shall be performed by the Purchaser and the Seller; "Completion Date" means on a date no later than seven Business Days after the date upon which the conditions set out in Clause 3.1 have been fulfilled or waived, or such other date as the Purchaser and the Seller may (subject to the fulfilment or waiver of the conditions set out in Clause 3.1) agree; "Consents" includes any licence, consent, approval, authorisation, permission, waiver, order or exemption; "Consideration" means the total consideration payable by the Purchaser for the Purchase, being HK$186,626,000; "Consideration Shares" means 1,632,000,000 new Shares to be allotted and issued by the Purchaser to the Seller pursuant to this Agreement; "Executive" means the executive director of the Corporate Finance Division of the SFC from time to time and any delegate of the executive director; "HFG Group" means the Purchaser and its Subsidiaries; "HK Dollars" or "HK$" means Hong Kong dollars, the lawful currency of Hong Kong; "Hong Kong" means the Hong Kong Special Administrative Region of the People's Republic of China; "Listing Rules" means the Rules Governing the Listing of Securities on the Stock Exchange, as amended from time to time; "Loan" means the HK$50 million loan facility to be advanced by HFG to N Ltd pursuant to the Loan Agreement; "Loan Agreement" means the agreement of even date between HFG (as lender) and N Ltd (as borrower) in relation to the Loan; "Management Accounts" means unaudited consolidated management accounts for the period up to the end of the second calendar month immediately preceding the month in which Completion takes place; "N Group" means N Ltd, N Information and China International Electronic Commerce (HK) Limited, in which N Information has a 49 per cent. equity interest; "N Information" means New Epoch Information Company Limited, a wholly-owned subsidiary of N Ltd; "N Ltd" means New Epoch Information (BVI) Limited, a wholly-owned subsidiary of the Seller; "Parties" means the parties to this Agreement and their respective successors and permitted assigns; "Purchase" has the meaning ascribed thereto in Recital (C); "Purchased Shares" means 499 shares of US$1.00 each, representing 49.9% of the issued share capital of N Ltd and "Remaining Shares" means 501 shares of US$1.00 each representing the remaining 50.1% of the issued share capital of N Ltd; "Purchaser Warranties" means the warranties given by the Purchaser as set out in Clause 5.1; "Right of First Refusal" means the right to purchase the Remaining Shares which is exercisable by the Purchaser in the circumstances set out in clause 10; "SFC" means the Securities and Futures Commission of Hong Kong; "Seller Warranties" means the warranties given by the Seller as set out in Clause 7.1; "Shares" has the meaning ascribed thereto in Recital (B); "Stock Exchange" means The Stock Exchange of Hong Kong Limited; "Subsidiary" has the meaning ascribed thereto under Section 2 of the Companies Ordinance (Cap. 32 of the Laws of Hong Kong); "Takeover Code" means the Hong Kong Code on Takeovers and Mergers; "Transaction" means the Purchase and the allotment and issue of the Consideration Shares; "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction; and "US$" means US dollars, the lawful currency of the United States of America. References to Recitals, Clauses and Sub-clauses or Schedules are to recitals, clauses and sub-clauses of or schedules to this Agreement and the Recitals and the Schedules shall form part of this Agreement and shall have the same force and effect as if expressly set out in the body of this Agreement. The headings are for convenience only and do not affect interpretation of this Agreement. Unless the context otherwise requires:- words in the singular include the plural, and vice versa; words importing any gender include all genders; a reference to a "person" shall be construed so as to include any individual, firm, business, company, body corporate or unincorporated or other juridical person, government, federation, state or agency thereof or any joint venture, association, partnership or trust (whether or not having separate legal personality); a reference to a "company" shall be construed so as to include any company, corporation or other body corporate, wherever and however incorporated or established; and a reference to a statute or statutory provision shall be construed as a reference:- to that statute or provision as from time to time amended, modified or re-enacted; to any repealed statute or statutory provision which it re-enacts (with or without modification); to any orders, regulations, instruments or other subordinate legislation made under the relevant statute or statutory provision. References to writing shall include any modes of reproducing words in a legible and non- transitory form. Reference to a time of the day is to Hong Kong time. 2. TRANSACTION Subject to and upon the terms and conditions set out in this Agreement, the Seller agrees to sell and the Purchaser agrees to purchase the Purchased Shares, and the Purchaser agrees to allot and issue the Consideration Shares (subject to the Memorandum of Association and Bye-laws of the Purchaser) upon Completion. 3. CONDITIONS Completion is conditional upon the following conditions having been fulfilled in accordance with Clause 3.3:- the shareholders of the Purchaser having approved in general meeting the Loan, the Purchase and the allotment and issue of the Consideration Shares in accordance with the terms of this Agreement, with such shareholders abstaining from voting as may be so required by law, the Listing Rules, the Takeover Code or by the Stock Exchange and/or the SFC; the Stock Exchange having approved the listing of, and permission to deal in, the Consideration Shares; the Bermuda Monetary Authority having given its consent (if required) to the allotment and issue of the Consideration Shares; all other Consents (if any) which are required or appropriate for the entering into or the performance of obligations under this Agreement by the Parties having been obtained, including, without limitation, the Consents (if required) of the shareholders of the Seller, the Stock Exchange and the SFC and all filings with any relevant governmental or regulatory authorities and other relevant third parties (including without limitation courts and banks) in Hong Kong, Bermuda, the United States or elsewhere which are required or appropriate for the entering into and the implementation of this Agreement having been made and such Consents (if any) remaining in full force and effect and there being no statement, notification or intimation of an intention to revoke or not to renew the same having been received; the Purchaser having completed its due diligence review of the N Group and being satisfied as to the financial, contractual, taxation and trading positions of the members of the N Group and their respective business(es); and the Seller having completed its due diligence review of the HFG Group and being satisfied as to the financial, contractual, taxation and trading positions of the members of the HFG Group and their respective business(es). Each of the Parties shall use its reasonable endeavours to procure the fulfilment of the conditions set out in Clause 3.1 by no later than 30 September 2000. In particular, the Seller shall furnish such information and documents, give such undertakings, execute all such applications and documents and do all such acts and things as may be reasonably required by the Stock Exchange and/or the SFC for the purpose of fulfilling such conditions. The Purchaser shall send a notice in writing to the Seller together with evidence in support thereof as soon as practicable after the conditions set out in Clause 3.1 have been fulfilled, notifying such fulfilment. If the conditions set out in Clause 3.1 shall not have been fulfilled (or waived pursuant to Clause 3.5) on or prior to 5.00 p.m. on 30 September 2000 (or such later time and/or date as the Parties may agree in writing), this Agreement shall forthwith lapse automatically and be of no further effect (save and except Clauses 11 to 15) and no Party shall have any claim against the other Party for costs, damages, compensation or otherwise under this Agreement (save in respect of any breach of Clause 3.2 or any antecedent breach). The Seller may waive the condition set out in Sub-clause 3.1(F), at any time by notice in writing to the Purchaser. The Purchaser may waive the condition set out in Sub-clause 3.1(E) at any time by notice in writing to the Purchaser. The Purchaser undertakes to do all that is necessary to maintain the public float of the Company upon Completion or as soon as practicable thereafter as required by the Listing Rules including to effect a placing of Shares. 4. COMPLETION Subject to the fulfilment or a waiver of the conditions set out in Clause 3.1, Completion shall take place on the Completion Date at the offices of Simmons & Simmons at 35th Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong when all (but not part only) of the following businesses shall be transacted:- the Seller shall:- deliver to the Purchaser a duly executed instrument of transfer and the share certificate(s) relating to the Purchased Shares; deliver to the Purchaser certified true copies of the minutes of a meeting of the board of directors of the Seller approving this Agreement and all matters contemplated hereunder and evidencing the authority of the person(s) executing this Agreement and of N Ltd approving the transfer of the Purchased Shares and appointing the new director as the Purchaser may nominate pursuant to Clause 4.1(A)(3); and cause one person as the Purchaser may nominate as director of N Ltd with effect from Completion. the Purchaser shall:- allot and issue to the Seller the Consideration Shares; deliver to the Seller definitive share certificate(s) in respect of the Consideration Shares in board lots issued in the name of the Seller, or HKSCC Nominees Limited if so designated by the Sellers; and deliver to the Seller a certified true copy of the minutes of a meeting of the board of directors of the Purchaser approving this Agreement and all matters contemplated hereunder and evidencing the authority of the person(s) executing this Agreement. The Purchaser shall: cause the three persons as the Seller may nominate and the one person as QPL may nominate in addition to the two existing executive directors of the Purchaser to be validly appointed as executive directors of the Purchaser with effect from the Completion Date; cause such existing non-executive directors of the Purchaser (save for Mr Ku Suen Fai) to resign with effect from Completion Date in each case, each delivering to the Seller under seal confirmations that he/she has no claim against the relevant member(s) of the HFG Group for compensation or otherwise, in a form reasonably acceptable to the Seller; cause two such persons as the Seller may nominate to be validly appointed as independent non-executive directors of the Purchaser (in addition to the three persons nominated by the Seller under Clause 4.2(A)) and cause such persons to be appointed to the audit committee of the Purchaser; cause Mr. Fok Chun Yue, Benjamin or such other person as he may nominate to be validly appointed as chief executive officer of the Purchaser and of N Information and the other Subsidiaries of the Company which are engaged in Internet-related businesses (other than Jubonet.com Inc.) respectively; cause such persons as the Seller may nominate to be validly appointed to a new management team of the Purchaser to manage the Internet-related businesses (other than Jubonet.com Inc.) of the Purchaser. If in any respect the provisions of Clause 4.1 are not complied with by the Seller or the Purchaser (as the case may be) on or before the Completion Date, or if at any time prior to Completion any of the Seller Warranties or the Purchaser Warranties is found to be untrue or incorrect in any material respect as at the date of its being made or if the Purchaser or the Seller has not complied in any material respect with its obligations under Clause 8.1 and Clause 9.1, without prejudice to any other remedies available to the Party not in default, the Party not in default may: defer Completion to a date not more than 14 days after the Completion Date (and so that the provisions of this Clause 4.3 shall apply to Completion as so deferred); or proceed to Completion so far as practicable (without prejudice to its rights under this Agreement); or rescind this Agreement. 5. WARRANTIES AND UNDERTAKINGS OF THE PURCHASER In consideration of the Seller entering into this Agreement, the Purchaser hereby warrants that each of the following statements is and will at Completion be true and correct, and not misleading in any material respect:- each member of the HFG Group is duly incorporated under the laws of its jurisdiction of incorporation and is validly existing and in good standing and has corporate power to own property and assets and will at Completion be of such financial standing to ensure that it can meet its obligations arising under or contemplated by the terms of this Agreement; the Purchaser has full power and authority under its constitutional documents to enter into this Agreement and this Agreement is duly authorised and constitutes valid and legally binding and enforceable obligations of the Purchaser; except as such enforceability may be limited under applicable bankruptcy, insolvency, fraudulent transfer, reorganisation, moratorium or similar laws of general applicability relating to or affecting creditor's rights and to general equitable principles; except for the Consents stated in Clause 3.1, no other Consent is or will be required in connection with the execution, delivery and performance of this Agreement by the Purchaser; and as at the date of this Agreement, the entire authorised share capital of the Purchaser is HK$80,000,000 divided into 8,000,000,000 Shares, of which 3,150,000,000 Shares are issued and fully paid. Immediately upon the Completion, and on the basis that all outstanding options granted by the Purchaser pursuant to its employee share option scheme are exercised in full, the Consideration Shares will constitute not less than 32 per cent. of the enlarged issued share capital of the Purchaser. Upon the registration of the Seller as a member of the Purchaser, the Seller will be the registered and legal owner of the Consideration Shares free and clear of all liens, charges, encumbrances or other third party rights of any kind other than those contained in the constitutional documents of the Purchaser or any agreement to which the Seller is a party. Subject to the provisions of this Clause 5, the Purchaser shall indemnify the Seller from and against any depletion or diminution in the value of any assets of the HFG Group as a result of any loss, damages, claims, liability, costs and expenses incurred or suffered by the Seller arising from or in connection with any breach of the Purchaser Warranties. Notwithstanding the provisions of Clause 5.2, the Purchaser shall not be liable for a claim for breach of any of the Warranties:- which arises as a result of legislation which comes into force after the date of this Agreement; or to the extent that such liability arises by reason of any act or omission effected by the Seller after the Completion Date. The Purchaser shall not be liable in respect of any representation, warranty, undertaking or indemnity under this Agreement after the date falling 18 months after the Completion Date. The aggregate liability of the Purchaser in respect of the representations, warranties, undertakings and indemnities contained in this Agreement shall not exceed the Consideration. 6. DUE DILIGENCE From the date of this Agreement, the Seller and any persons authorised by it, upon reasonable notice and subject to such confidentiality undertakings as the Purchaser may reasonably require shall be allowed access to the premises, books and records of the HFG Group, and the Purchaser shall supply or procure the supply of any information reasonably required by the Seller relating to the HFG Group. From the date of this Agreement, the Purchaser and any persons authorised by it, upon reasonable notice and subject to such confidentiality undertakings as the Seller may reasonably require shall be allowed access to the premises, books and records of the N Group, and the Seller shall supply or procure the supply of any information reasonably required by the Purchaser relating to the N Group. 7. WARRANTIES AND UNDERTAKINGS OF THE SELLER In consideration of the Purchaser entering into this Agreement and agreeing to perform its obligations hereunder, the Seller hereby warrants, represents and undertakes to and for the benefit of the Purchaser that: each member of the N Group is duly incorporated under the laws of its jurisdiction of incorporation and is validly existing and in good standing and has corporate power to own property and assets and will at Completion be of such financial standing to ensure that it can meet its obligations arising under or contemplated by the terms of this Agreement; the Seller has full power and authority under its constitutional documents to enter into this Agreement and this Agreement is duly authorised and constitutes valid and legally binding and enforceable obligations of the Seller; except as such enforceability may be limited under applicable bankruptcy, insolvency, fraudulent transfer, reorganisation, moratorium or similar laws of general applicability relating to or affecting creditor's rights and to general equitable principles; the Seller, its directors, substantial shareholders and principal beneficial owners are independent of and are not connected with the directors, chief executive or substantial shareholders of the Purchaser nor any of its Subsidiaries nor any of their respective associates (as defined in the Listing Rules); subject to and, at Completion, the Seller shall accept the Consideration Shares subject to the Memorandum of Association and Bye-laws of the Purchaser; neither the Seller nor any persons acting in concert with any of them (as such term is defined in the Takeover Code) has in the six months prior to the date of this Agreement acquired any voting rights in the Purchaser and shall not, between the date of this Agreement and the date of a meeting of shareholders in the Purchaser called to approve the transactions contemplated by this Agreement pursuant to a circular to such shareholders, acquire any such right; the diagram attached as Schedule 1 accurately reflects the corporate structure of the N Group as at the date hereof; and the Purchased Shares represents and will at Completion represent not less than 49.9 per cent of the issued share capital of N Ltd and upon the registration of the Purchaser as a member of the Company, the Purchaser will be the registered and legal owner of the Purchased Shares free and clear of all liens, charges, encumbrances or other third party rights of any kind other than those contained in the constitutional documents of the Company and shall rank pari passu in all respects with the Remaining Shares. 8. PRE-COMPLETION OBLIGATIONS OF THE PURCHASER The Purchaser hereby undertakes that the business of the HFG Group shall be operated until Completion in the ordinary course of day-to-day operations and in the same manner as it was operated before Completion and that the Purchaser shall procure that no member of the HFG Group shall prior to Completion, without the prior written consent of the Seller (which consent shall not be unreasonably withheld or delayed):- issue, or agree to issue, any share or loan capital, or grant or agree to grant, or redeem, any option or amend the terms of any existing option over or right to acquire or subscribe any of its share or loan capital, save pursuant to existing contractual obligations to issue shares; take any action which would result in the Seller acquiring on Completion an aggregate percentage interest in the Purchaser (on an enlarged basis) lower than 32 per cent; borrow or raise money other than on normal commercial terms in the ordinary course of its business for an aggregate amount which exceeds HK$10,000,000; terminate or vary any material agreement, arrangement or understanding; declare, pay or make any dividends or other distributions; create or permit to arise any mortgage, charge, lien, pledge, other form of security or encumbrance of equity of whatsoever nature, whether similar to the foregoing or not, on or in respect of any part of its undertaking, property or assets other than liens arising by operation of law in amounts which are not material or other than mortgages, charges, liens, pledges or other form of security given in relation to banking facilities made available to any member of the HFG Group or the obligations of any member of the HFG Group in the ordinary and usual course of trading; give any guarantee, indemnity, surety or security other than guarantees, indemnity, surety or security given in relation to banking facilities made available to any member of the HFG Group or the obligations of any member of the HFG Group in the ordinary and usual course of trading; other than in the ordinary and usual course of its business, compromise, settle, release, discharge or compound any material civil, criminal, arbitration or other proceedings or any material liability, claim, action, demand or dispute or waive any right in relation to any of the foregoing; otherwise than in the ordinary course of its business, release, compromise or write off any material amount recorded in the books of account of the relevant member of the Group as owing by any debtors of such member of the HFG Group; or let or agree to let or otherwise part with possession or ownership of the whole or any part of the properties owned or leased by the HFG Group nor purchase, take on lease or assume possession of any real property. As from the date of this Agreement, subject to Clause 8.4, the Purchaser shall use its reasonable endeavours to give to the Seller and any persons authorised by any of them all such information relating to each member of the HFG Group and such access to the premises and all books, title deeds, records, accounts and other documentation of each member of the HFG Group as the Seller may reasonably request and that the officers and employees of each member of the HFG Group shall be instructed to give promptly all such information and explanations to any such persons as aforesaid as may be reasonably requested by any of them. The Seller undertakes to the Purchaser that it shall treat, and shall procure that its shareholders, agents and professional advisers shall treat, any documents or information of a confidential nature obtained by it pursuant to Clause 8.3 or otherwise delivered or made available to it, its shareholders, agents or professional advisers prior to the date of this Agreement (the "Purchaser Confidential Information") as strictly confidential; use the Confidential Information solely to evaluate the transactions as contemplated under this Agreement and for no other purpose; use its reasonable endeavours to ensure that the Confidential Information is not disclosed to any person other than to its directors, employees, partners, investors, lenders, potential lenders, agents and professional advisors whose duties will require them to process any of such information, or as required by applicable law; and return the Purchaser Confidential Information on demand by the Purchaser if this Agreement is not consummated in accordance with the terms hereunder. The obligation of confidentiality under this Clause 8.4 shall be subject to the permitted disclosures referred to in Clause 13.2. The Purchaser shall deliver to the Seller a copy of the Management Accounts of the HFG Group as soon as they are available and shall use its best endeavours to procure such delivery not later than 14 days prior to Completion. 8.5 Each of the Purchaser and QPL hereby represents, warrants and undertakes that:- it has not entered into discussions or negotiations with, or provided any information concerning the Purchaser to; and it shall not at anytime prior to 30 September 2000 enter into discussions or negotiations with, or provide any information concerning the Purchaser to, any third party other than in the ordinary course of the business of the Purchaser or its Subsidiaries and:- (1) related parties in relation to a jewellery portal or other transactions or proposed transactions which have already been announced by the Purchaser; or (2) the Stock Exchange or the SFC in relation to any transaction which would or might result in the transactions contemplated herein (or any part thereof) or the implementation thereof or the Completion being frustrated. 9. PRE-COMPLETION OBLIGATIONS OF THE SELLER The Seller hereby undertakes that the business of the N Group shall be operated until Completion in the ordinary course of day-to-day operations and in the same manner as it was operated before Completion and that the Seller shall procure that no member of the N Group (except China International Electronic Commerce (HK) Limited) shall prior to Completion, without the prior written consent of the Purchaser (which consent shall not be unreasonably withheld or delayed):- issue, or agree to issue, any share or loan capital, or grant or agree to grant, or redeem, any option or amend the terms of any existing option over or right to acquire or subscribe any of its share or loan capital; borrow or raise money other than on normal commercial terms in the ordinary course of its business for an aggregate amount which exceeds HK$10,000,000; terminate or vary any material agreement, arrangement or understanding; declare, pay or make any dividends or other distributions; create or permit to arise any mortgage, charge, lien, pledge, other form of security or encumbrance of equity of whatsoever nature, whether similar to the foregoing or not, on or in respect of any part of its undertaking, property or assets other than liens arising by operation of law in amounts which are not material or other than mortgages, charges, liens, pledges or other form of security given in relation to banking facilities made available to any member of the N Group or the obligations of any member of the N Group in the ordinary and usual course of trading; give any guarantee, indemnity, surety or security other than guarantees, indemnity, surety or security given in relation to banking facilities made available to any member of the N Group or the obligations of any member of the N Group in the ordinary and usual course of trading; other than in the ordinary and usual course of its business, compromise, settle, release, discharge or compound any material civil, criminal, arbitration or other proceedings or any material liability, claim, action, demand or dispute or waive any right in relation to any of the foregoing; otherwise than in the ordinary course of its business, release, compromise or write off any material amount recorded in the books of account of the relevant member of the N Group as owing by any debtors of such member of the N Group; or let or agree to let or otherwise part with possession or ownership of the whole or any part of the properties owned or leased by the N Group nor purchase, take on lease or assume possession of any real property. The Seller shall use its reasonable endeavours to assist the Purchaser in all its negotiations and exchanges of correspondence in relation to the transactions referred to herein with the SFC, the Stock Exchange and other relevant authorities in Hong Kong. As from the date of this Agreement, subject to Clause 9.4, the Seller shall use its reasonable endeavours to give to the Purchaser and any persons authorised by any of them all such information relating to each member of the N Group and such access to the premises and all books, title deeds, records, accounts and other documentation of each member of the N Group as the Purchaser may reasonably request and that the officers and employees of each member of the N Group shall be instructed to give promptly all such information and explanations to any such persons as aforesaid as may be reasonably requested by any of them. The Purchaser undertakes to the Seller that it shall treat, and shall procure that its shareholders, agents and professional advisers shall treat, any documents or information of a confidential nature obtained by it pursuant to Clause 9.3 or otherwise delivered or made available to it, its shareholders, agents or professional advisers prior to the date of this Agreement (the "Confidential Information") as strictly confidential; use the Confidential Information solely to evaluate the transactions as contemplated under this Agreement and for no other purpose; use its reasonable endeavours to ensure that the Confidential Information is not disclosed to any person other than to its directors, employees, partners, investors, lenders, potential lenders, agents and professional advisors whose duties will require them to process any of such information, or as required by applicable law; and return the Confidential Information on demand by the Seller if this Agreement is not consummated in accordance with the terms hereunder. The obligation of confidentiality under this Clause 9.4 shall be subject to the permitted disclosures referred to in Clause 13.2. The Seller shall deliver to the Purchaser a copy of the Management Accounts of the N Group as soon as they are available and shall use its best endeavours to procure such delivery not later than 14 days prior to Completion. 10. RIGHTS OVER THE SHARES 10.1 Notice of desire to sell The Seller agrees that if at any time during the period of 3 years from the Completion Date it intends to sell all (but not part) of the Remaining Shares, it shall give written notice ("Notice") to the Purchaser of its desire to sell or otherwise dispose of the Remaining Shares by making to the Purchaser an offer to sell the Remaining Shares and the Purchaser shall be at liberty within 7 days of the receipt of such Notice to exercise the First Right of Refusal on the terms and conditions of this clause. 10.2 Exercise of Right of First Refusal The Right of First Refusal shall be exercisable by notice in writing to the Seller at any time within 7 days from receipt of the Notice and if the same shall be exercised, the Seller and the Purchaser shall enter into a sale and purchase agreement on terms no less favourable to the Purchaser than those set out in this Agreement pursuant to which, inter alia, the Seller shall sell and the Purchaser shall buy (subject to and conditional upon the Seller and the Purchaser, as the case may be, complying with the then applicable requirements of the Listing Rules and the Takeover Code) the Remaining Shares at a consideration being equal to 50.1% of the then fair market value (to be determined by an independent valuer appointed jointly by the Seller and the Purchaser) of N Information and to be payable, at the election of the Purchaser, (i) in cash or (ii) by the issue of new Shares at HK$0.114 per Share if the Right of First Refusal is exercised within two years of the Completion Date and otherwise at 90% of the average closing price per Share for the period of 30 trading days prior to (but including) the date of the exercise of the Right of First Refusal. The Seller hereby undertakes to the Purchaser to comply with all the requirements of the Takeover Code then applicable to the Seller if the Purchaser elects to issue Shares in relation to its purchase of the Remaining Shares. 10.3 Failure to exercise the Right of First Refusal If the Purchaser shall for whatever reason fail to exercise the Right of First Refusal in accordance with this clause, the Seller shall be at liberty at any time to sell any Remaining Shares to any third party on terms (including the price) or otherwise deal with any Remaining Shares as the Seller may in its discretion determine within three months thereafter. If the Seller wishes to sell or otherwise dispose of the Remaining Shares after that period of 3 months, this Clause 10 shall apply. 10.4 Non disposal undertaking The Purchaser hereby undertakes not to dispose of its interest in N Ltd without the prior written consent of the Vendor. 11. MISCELLANEOUS Time shall be of the essence of this Agreement. Any provision of this Agreement which is capable of being performed after but which has not been performed at or before Completion shall remain in full force and effect notwithstanding Completion. (A) None of the Parties may assign all or any of its rights or obligations under this Agreement unless with the prior written consent of the other Parties. (B) Subject to Sub-clause 11.3(A), this Agreement shall be binding on and enure for the benefit of the successors and permitted assigns of each of the Parties. Unless otherwise provided in this Agreement, any remedy conferred on any Party for breach of this Agreement shall be in addition and without prejudice to all other rights and remedies available to it and the exercise of or failure to exercise any remedy shall not constitute a waiver by such Party of any of its rights or remedies. This Agreement shall supersede all and any previous agreements or arrangements between the Parties or any of them relating to the subject matter under this Agreement (including the Sale and Purchase Agreement entered into by the Parties on 19 June 2000) and all or any such previous agreements or arrangements (if any) shall cease and determine with effect from the date of this Agreement. This Agreement constitutes the whole agreement between the Parties relating to the subject matter hereof (no Party having relied on any representation, warranty or undertaking made by any other Party which is not a term of this Agreement) and no future variation shall be effective unless made in writing and signed by each of the Parties. Each of the Parties undertakes with the other that it shall do, or shall procure to be done, all such acts and things and shall execute, or shall procure to be executed, all such documents as may be necessary or appropriate to implement the provisions of this Agreement or otherwise to give full legal force and effect thereof. The Parties intended that the provisions of this Agreement shall be enforced to the maximum extent permissible under the laws applied in each jurisdiction in which enforcement of any provisions of this Agreement is sought. If any particular provision or part of this Agreement shall be held to be invalid or unenforceable, this Agreement shall be deemed to be amended by the deletion of the provision or part held to be invalid or unenforceable or, to the extent permissible by the applicable laws of the relevant jurisdiction in which such enforcement is sought, such provision or part shall be deemed to be varied in such a way as to achieve most closely the purpose of the original provision or part in a manner which is valid and enforceable, provided that for the avoidance of doubt, such amendments shall apply only with respect to the operation of this Agreement in the particular jurisdiction in which the decision as to invalidity or unenforceability is made. No delay or omission on the part of any Party in exercising any right, power or privilege shall operate to impair such right, power or privilege or be construed as a waiver by such Party of the same and no single or partial exercise or non-exercise or delay in exercising any right, power or privilege by any Party shall in any circumstances preclude any other or further exercise by such Party of such right, power or privilege or the exercise of any other right, power or privilege by such Party. All sums payable by any Party under this Agreement shall be made free of any set-off, counterclaim or other deduction of any nature whatsoever, except as may be required by law. This Agreement may be executed in various counterparts and by different Parties on separate counterparts, which when taken together shall be deemed to constitute one agreement. 12. NOTICES Any notice or other communication given or made under this Agreement shall be in writing and shall be addressed as provided in Clause 12.2 and, if so addressed, shall be deemed to have been duly given or made as follows:- if sent by personal delivery, upon delivery at the address of the relevant Party; if sent by registered post, two Business Days after the date of posting; and if sent by facsimile, upon despatch to the facsimile number of the recipient, with the production of a transmission report by the machine from which the facsimile was sent which indicates that the facsimile was sent in its entirety to the facsimile number of the recipient. The relevant address and facsimile number of each Party for the purposes of this Agreement, subject to Clause 12.3, are as follows:- Hang Fung Gold Technology Limited: Unit 25-32, 2/F, Block B, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong (Attention: Mr Patrick Wong, facsimile number (852) 2362-3034); New Epoch Holdings International: Room 3606 Shun Tak Center West Tower, 200 Connaught Road Central, Hong Kong (Attention: Mr Benjamin Fok, facsimile number (852) 2964-0221); and Quality Prince Limited: Unit 25-32, 2/F, Block B, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong (Attention: Mr Patrick Wong, facsimile number (852) 2362- 3034). A Party may notify the other Party of a change to its name, address or facsimile number for the purpose of Clause 12.2, provided that such notification shall only be effective on:- if paragraph (B) below does not apply, the date specified in the notification as the date on which the change is to take place; or if no date is specified or the date specified is less than two Business Days after the date on which the notice is given, the date falling two Business Days after notice of any such change has been given. 13. CONFIDENTIALITY The terms contained in, and the subject matter under, this Agreement shall be and remain confidential save for disclosure to professional advisers and (if required) regulatory authorities in Hong Kong or otherwise as required by law and/or regulations. Where any press or other announcement is required by law or regulations, the Stock Exchange, the SFC or other regulatory authorities, the Party proposing to make the announcement shall so far as practicable consult and obtain the consent from the other Party regarding the terms of such announcement prior to its release, which consent shall not be unreasonably withheld or delayed. A Party may disclose information which would otherwise be confidential if and to the extent:- the information has come into the public domain through no fault of that Party; or the other Party has given prior written approval to the disclosure. 14. COSTS AND EXPENSES Each Party shall bear its own costs and expenses in relation to the negotiations, preparation, execution and performance of this Agreement, any due diligence conducted by it and all matters contemplated under this Agreement. 15. GOVERNING LAW AND SERVICE AGENTS This Agreement shall be governed by and construed in accordance with the laws of Hong Kong and each Party hereby irrevocably submits to the non-exclusive jurisdiction of the courts of Hong Kong. The Seller hereby irrevocably authorises and appoints Mr Fok Chun Yue, Benjamin of Room 3606 Shun Tak Center West Tower, 200 Connaught Road Central, Hong Kong (or such other person being resident of or incorporated in Hong Kong as it may by notice to the other Party substitute) to accept service of all legal process arising out of or in connection with this Agreement and service on Mr Fok Chun Yue, Benjamin (or such substitute) shall be deemed to be service on the Seller. QPL hereby irrevocably authorises and appoints Mr Lam Sai Wing of Unit 25-32, 2/F, Block B, Focal Industrial Centre, 21 Man Lok Street, Hunghom, Kowloon, Hong Kong (or such other person being resident of or incorporated in Hong Kong as it may by notice to the other Party substitute) to accept service of all legal process arising out of or in connection with this Agreement and service on Mr Lam Sai Wing (or such substitute) shall be deemed to be service on Quality Prince Limited. IN WITNESS whereof this Agreement has been entered into on the day and year first above written. SIGNED by ) ) for and on behalf of ) HANG FUNG GOLD ) TECHNOLOGY LIMITED ) in the presence of:- ) SIGNED by ) ) for and on behalf of ) QUALITY PRINCE LIMITED ) in the presence of:- ) SIGNED by ) ) for and on behalf of ) NEW EPOCH HOLDING ) INTERNATIONAL LIMITED ) in the presence of:- ) : THE SHAREHOLDING STRUCTURE OF N GROUP [GRAPHIC OMITTED] [GRAPHIC OMITTED] EX-27.1 4 0004.txt FINANCIAL DATA SCHEDULE
5 12-mos MAR-31-2000 APR-01-1999 MAR-31-2000 19,562 0 20,413 (963) 26,604 66,007 46,879 17,721 95,165 41,047 805 0 0 13 26,798 95,165 123,115 123,115 95,119 95,119 14,684 0 2,502 11,182 (1,596) 12,778 0 0 0 6,781 (.53) (.53)
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