-----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, BtBRsVxAiW5iyJw1qGyU3l/IokPyhnsD255VMkQsCINB/lCAYjAMOVw7JKHX1jDN 3fQKKwX6ywAR0xLfqplNEg== 0000930413-06-002939.txt : 20060417 0000930413-06-002939.hdr.sgml : 20060417 20060417171246 ACCESSION NUMBER: 0000930413-06-002939 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060417 DATE AS OF CHANGE: 20060417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACL SEMICONDUCTOR INC CENTRAL INDEX KEY: 0000934445 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 161642709 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-50140 FILM NUMBER: 06763017 BUSINESS ADDRESS: STREET 1: 28 GLANA DR CITY: HAWTHORNE STATE: NJ ZIP: 02506 BUSINESS PHONE: 2012380056 FORMER COMPANY: FORMER CONFORMED NAME: PRINT DATA CORP DATE OF NAME CHANGE: 20011025 FORMER COMPANY: FORMER CONFORMED NAME: UNIVERSAL MARKETING & ENTERTAINMENT INC DATE OF NAME CHANGE: 19941219 10-K 1 c41890_10k.txt UNITED STATES 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 - December 31, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO______ Commission File Number: 000-50140 ACL SEMICONDUCTORS INC. (Exact name of registrant as specified in its charter) DELAWARE 16-1642709 --------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation) Identification No.) B24-B27,1/F., Block B, Proficient Industrial Centre, 6 Wang Kwun Road, Kowloon, Hong Kong - -------------------------------------------------------------------------------- (Address of principal executive offices) (852) 2799-1996 --------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock - $.001 par value The Common Stock is listed on the Over-the-Counter Bulletin Board Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X] 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 registrant was required to file such reports) and (2) has been subject to such filing requirements for at least the past 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. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated file and larger accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the voting common equity held by non-affiliates of the registrant as of March 31, 2006 was approximately $1,035,488 based upon the closing price of $0.19 of the registrant's common stock on the OTC Bulletin Board, as of the last business day of the most recently completed first fiscal quarter (March 31, 2006). (For purposes of determining this amount, only directors, executive officers, and 10% or greater stockholders have been deemed affiliates). Registrant had 27,829,936 shares of common stock, par value $0.001 per share, outstanding as of April 12, 2006. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980). N/A FORWARD LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED HEREIN CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS ANNUAL REPORT, STATEMENTS THAT ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS "PLAN", "INTEND", "MAY," "WILL," "EXPECT," "BELIEVE", "COULD," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR SIMILAR EXPRESSIONS OR OTHER VARIATIONS OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. EXCEPT AS REQUIRED BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. ANY REFERENCE TO "ACL", THE "COMPANY"," WE", "US", "OUR" OR THE "REGISTRANT" MEANS ACL SEMICONDUCTORS INC. AND ITS SUBSIDIARIES. TABLE OF CONTENTS Form 10-K Index PART I
PAGE Item 1. Business.......................................................................................2 Item 1A. Risk Factors...................................................................................7 Item 1B. Unresolved Staff Comments.....................................................................10 Item 2. Properties....................................................................................10 Item 3. Legal Proceedings.............................................................................11 Item 4. Submission of Matters to a Vote of Security Holders...........................................11 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities..............................................................12 Item 6. Selected Financial Data.......................................................................13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................23 Item 8. Financial Statements and Supplementary Data...................................................23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........23 Item 9A. Controls and Procedures.......................................................................23 Item 9B. Other Information.............................................................................25 PART III Item 10. Directors and Executive Officers of the Company...............................................25 Item 11. Executive Compensation........................................................................26 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.....................................................................................27 Item 13. Certain Relationships and Related Transactions................................................28 Item 14. Principal Accounting Fees and Services........................................................33 PART IV Item 15. Exhibits, Financial Statement Schedules.......................................................34 Signatures ............................................................................................37
1 PART I ITEM 1. BUSINESS GENERAL ACL Semiconductors Inc. was incorporated under the laws of the State of Delaware on September 17, 2002. Our predecessor, Print Data Corp. ("Historic Print Data") was incorporated under the laws of the State of Delaware on August 15, 1984 as a business forms distributor and supplier of office and computer environment supply needs. On September 8, 2003, the Company entered into a Share Exchange and Reorganization Agreement (the "Exchange Agreement") with Atlantic Components Limited, a Hong Kong corporation ("Atlantic"), and Mr. Chung-Lun Yang, the sole beneficial stockholder of Atlantic ("Mr. Yang"), which set forth the terms and conditions of the exchange by Mr. Yang of his common shares of Atlantic, representing all of the issued and outstanding capital stock of Atlantic, in exchange for the issuance by Company to Mr. Yang and certain financial advisors of an aggregate twenty five million (25,000,000) shares of common stock, par value $0.001 per share (the "Common Stock"), of Company (the "Transaction"). Pursuant to the Exchange Agreement, the Company and Atlantic agreed, INTER ALIA, to elect Mr. Yang and Mr. Ben Wong to the board of directors ("Board of Directors") of the Company upon the closing of the Transaction (the "Closing"), effective as of that date (the "Closing Date"), at which time, all of the Company's existing directors resigned. On September 9, 2003, in contemplation of the Closing and the resultant change in control of the Board of Directors, the Company filed an Information Statement on Schedule 14f-1 with the Securities and Exchange Commission (the "SEC"). The Closing occurred on September 30, 2003, upon the satisfaction or waiver of the conditions to the Closing set forth in the Exchange Agreement, as a result of which (i) Atlantic became a wholly-owned subsidiary of the Company, (ii) Mr. Yang received an aggregate of 22,380,000 shares of Common Stock, (iii) the Company's existing directors resigned and Mr. Yang and Mr. Wong were appointed to fill their vacancies and become the sole members of the Board of Directors, and (iv) certain financial advisors to Atlantic became entitled to receive an aggregate of 2,620,000 shares of Common Stock. Giving effect to the Closing (including required issuances to financial advisors), Mr. Yang held approximately 80.4% of the outstanding Common Stock immediately following the Closing. On December 16, 2003, the Company filed a Certificate of Amendment with the Secretary of State of the State of Delaware changing its name from Print Data Corp. to ACL Semiconductors Inc. The address of the Company's principal executive offices and its telephone and facsimile numbers at that address are: ACL Semiconductors Inc., B24-B27, 1st Floor, Block B, Proficient Industrial Centre, 6 Wang Kwun Road, Kowloon, Hong Kong; Phone Number: (852) 2799-1996. 2 BUSINESS The Company is one of authorized distributors in the Hong Kong and Southern China markets of memory products of Samsung Electronics Co., Ltd. ("Samsung"), the world's largest producer of memory chips and a global producer of memory products pursuant to a distribution agreement with Samsung (the "Distribution Agreement") since 1993. Atlantic Components Ltd. ("Atlantic") was established as a Hong Kong corporation in May 1991 by Mr. Yang as a regional distributor of memory products of various manufacturers. In 1993, Samsung appointed Atlantic as its authorized distributor and marketer of Samsung's memory products in Hong Kong and overseas markets. In 2001, Atlantic established a representative office in Shenzhen, China and began concentrating its distribution and marketing efforts in the southern region of the People's Republic of China. Since 1993, Atlantic has diversified its product portfolio to include all Samsung's memory products marketed under the "Samsung" brandname which comprise Dynamic Random Access Memory ("DRAM"), Static Random Access Memory ("SRAM"), Double Data Rate RAM ("DDR"), Graphic Random Access Memory ("Graphic RAM"), NAND FLASH, NOR FLASH, MASK Read Only Memory ("MASK ROM") and Multi-Chip Packing ("MCP"). Atlantic believes it is the largest and most successful distributor of Samsung memory products in Hong Kong and Southern China. The Company's business objective is to build the best platform for memory solutions for electronics manufacturers globally. It also aims to offer updated market intelligence to Samsung in connection with the Hong Kong and Southern China markets' demand in memory products and secure high-quality Samsung products in order to meet the market demands of individual and corporate users in Hong Kong and Southern China. The Company works closely with Samsung to present updated market information collected from retail channels and corporate users to assist Samsung to plan their production and allocation schedule for the coming six months. The Company's business strategy is to assist Samsung in implementing their production planning using market intelligence to balance the supply and demand of memory products in the Hong Kong and Southern China markets. Accordingly, the Company maintains and develops a sales and market research team to answer marketing questions from Samsung on a regular basis. In addition, the Company has established distribution channels covering retail outlets and major corporate users in the region allows those retail or ultimate customers a secure stable supply of Samsung's memory products with competitive prices. The Company is a non-exclusive distributor of Samsung, and enjoys a minimum guaranteed gross profit margin of approximately 2.5% of products sold in form of sales rebate payable by Samsung. Approximately 80% of the Company's revenues are derived from sales of Samsung memory products. As of December 31, 2005, pricing for the Samsung memory products ranged from approximately $0.17 to $750 per product depending on the product specifications. The Distribution Agreement has a one-year term and contains certain sales quotas to be met by the Company. The Distribution Agreement has been renewed more than ten times, most recently on March 1, 2005. The Company has never failed to meet the sales quotas set forth in the Distribution Agreement. As of April 1, 2006, Samsung has confirmed to the Company of the annual renewal of the Distribution Agreement for one year. PRODUCTS SDRAMs are high density, low-cost-per-bit, random access memory components that store digital information and provide high-speed storage and retrieval of data. SDRAMs are the most widely used semiconductor memory component in computer peripheral (HDD), DSC ( digital still camera), 3 Modems, ADSL Applications, DVD player, STB (settop box), Digital TV, High Definition TV, PMP (Portable Multimedia Player). SRAMs are semiconductor devices that perform memory functions similar to SDRAMs. SRAMs utilize a more complex memory cell and do not require the memory array to be periodically refreshed. This simplifies system design for memory applications utilizing SRAM and allows SRAM to operate faster than SDRAM, although SRAM has a higher cost-per-bit than SDRAM. DDRs (DDR1, DDR2) are random access memory components that transfer data on both 0-1 and 1-0 clock transitions, theoretically yielding twice the data transfer rate of normal RAM or SDRAM. Starting in 2006, the main stream will be DDR2 and it will gradually replace DDR1 and Samsung's products should continue to dominate the DDR market share. Graphic RAM is a special purpose DDR (DDR1, DDR2, DDR3) as graphic products request high-speed 3-Dimensional calculation performance and large memory size as data storage buffer for VCD/DVD display. The current market consumption on graphic products is mainly for DDR 128Mb IC and DDR 256Mb IC with clockspeed up to 500MHz. Flash memory is a specialized type of memory component used to store user data and program code; it retains this information even when the power is off. Although flash memory is currently used predominantly in mobile phones and PDAs, it is commonly used in multi-media digital storage applications for products such as MP3 players, Digital Still Cameras, Digital Voice Recorders, PDAs, USB Disks, Flash Cards, etc. Samsung is a major supplier in the world of FLASH products. In 2005, Samsung NAND Flash revenue up to US$ 6.580 million and occupied all Flash (NAND + Nor) market's share 35%. MASK ROM is a kind of ROM in which the memory contents are determined by one of the masks used to manufacture the integrated circuit. MROM can give high storage density (bits per millimeter squared) making it a cheap solution for high volume applications. Due to the constant growth of consumer electronic products such as games, toys and PDAs, the worldwide demand for MASK ROM is expected to maintain in the coming year. INDUSTRY BACKGROUND Memory products are integral parts of a wide variety of consumer products and industry applications including personal computer systems, notebooks, workstations and servers, handheld computer devices, cellular phones, camcorders, MP3 music players, digital answering machines and game boxes, DVD player, STB (set-top box), HDTV and PMP, among others. Market trends, such as increased emphasis on high-through put applications, including networking, graphics, multimedia, computer, consumer, and telecommunications products, have created opportunities for high performance memory products. General speaking, NAND Flash, DDR2 and SDRAM are the major memory products for now and the future of Consumer Electronics, PC field and Home Appliance products, and Samsung is among the world's largest developers and manufacturers of those memory products, and a leader driving forward. CUSTOMERS As of December 31, 2005, the Company had over 120 active customers in Hong Kong and Southern China, the majority of whom are memory product traders and PC/Servers OEM manufacturers. Sales to Classic Electronic Ltd., a related party, accounted for 17%, 31% and 21% of the Company's net sales for the years ended December 31, 2005, 2004 and 2003 respectively. No other customers accounted for more 4 than 25% of the Company's net sales for 2005, 2004 and 2003, respectively. In order to control the Company's credit risks, the Company does not offer any credit terms to its customers other than a small number of clients who have long-established business relationships with the Company. SALES AND MARKETING As of December 31, 2005, the Company employed a total of 11 salespeople, each of whom has several years experience in the memory products industry. Nine of these salespeople are stationed in the Company's headquarters offices in Hong Kong; and two who work out of the Company's representative office in Shenzhen, China as customer liaisons. These sales personnel cooperate with key memory product retailers and PC/Servers OEM manufacturers to ensure that clients are supplied promptly with Samsung memory products. The Company intends to expand its sales force if levels of business materially increase in the next twelve months. MARKET RESEARCH The Company invests significant resources in market research for its own account to provide prompt and accurate market intelligence and feedback on a weekly or on demand basis to Samsung in order to assist Samsung's production planning and products allocation functions and maintains the close business relationship accordingly. SUPPLIERS As of December 31, 2005, a majority of the distributed products are Samsung memory products. Since 1993, our procurement operations have been supported by Samsung Electronics H.K. Co., Ltd. ("SAMSUNG HK"), a wholly-owned subsidiary of Samsung, to ensure there are enough supplies of memory products according to our monthly sales quota although there is no written long-term distribution agreement in place with Samsung HK. Samsung HK is allocated quantities of Samsung memory products each year based on anticipated demand for such products by the customers of the various distributors of Samsung memory products in Hong Kong and in the People's Republic of China. The distributors that are supported by Samsung HK provide Samsung HK with their own annual estimates of product demand. In case of unexpected strong demand in the market exceeding our monthly sales quota, there is no assurance that Samsung HK will be able to supply sufficient memory products to us and other non-exclusive distributors to meet such demand in excess of Samsung's global allocation policy to Samsung HK. In the event of a supply shortage, the market prices of such memory products will rise and any loss of income attributable to our inability to fulfill all of our orders would be offset by the increase in income as a result of any increase in the market prices of such memory products. Atlantic relies heavily on Samsung to supply it memory products for distribution to its clients. Atlantic's relationship with Samsung is primarily maintained through Mr. Yang, the founder of the Company. COMPETITION The memory products industry in the Hong Kong and Southern China markets is very competitive. However, as one of the world's largest memory products manufacturers, Samsung's memory products are competitively priced and have an established reputation for product quality and brandname recognition in the retail and PC/Server OEM & Consumer segments. The Company, as one of the largest distributors of Samsung's memory products for the Hong Kong and Southern China markets, believes it is in a strong competitive position against other US, European, Japanese and Taiwanese memory products manufacturers and distributors. 5 Samsung's principal competitors in the Hong Kong and Southern China markets include Hynix and other Taiwanese manufacturers such as Nanya, PSC, Promos, ISSI and ESMT. The Company's principal competitors also include the five other non-exclusive distributors of Samsung memory products in the Hong Kong and Southern China markets. Samsung may at its sole discretion increase the number of distributors of its products in Hong Kong and Southern China which would result in increased competition for the Company. REGULATION As of December 31, 2005, the Company's business operations were not subject to the regulations of any jurisdiction other than China. Although the Company is not formally authorized to do business in the People's Republic of China, it has been permitted by the Chinese authorities to establish a representative office in Shenzhen, China to carry out liaison works for its customers in Southern China. The Company executes its sales contracts and delivers its products in Hong Kong for its Chinese customers and there have been no restrictions imposed on the Company by the mainland Chinese authorities with respect to the Company's pursuit of business growth and opportunities in China. EMPLOYEES As of December 31, 2005, the Company had 40 employees. Of the 40 employees, 13 employees are in sales and marketing, 13 employees are in administration, 8 employees are in engineering, 6 employees are in customer service and liaison. None of the Company's employees are represented by labor unions. The Company's primary hiring sources for its employees include referrals from existing employees, print and Internet advertising and direct recruiting. All of the Company's employees are highly skilled and educated and subject to rigorous recruiting standards appropriate for a company involved in the distribution of brandname memory products. The Company attracts talent from numerous sources, including higher learning institutions, colleges and industry. Competition for these employees is intense. EMPLOYEE COMPENSATION For the year ended December 31, 2005, Mr. Yang, the Company's chief executive officer and director, had annual compensation of $319,230. No long-term compensation was awarded or paid to him in 2005. As of December 31, 2005, the Company did not have any employment agreements with its directors, executives or staff and the Company had not issued any stock options or stock appreciation rights to any executive officers (or any other persons). The Company may grant stock options or stock appreciation rights to these or other executive officers or other persons in the future at the discretion of its Board of Directors. 6 ITEM 1A. RISK FACTORS In addition to the other information contained in this report, the following risk factors should be considered carefully in evaluating an investment in the Company and in analyzing the Company's forward-looking statements. IF OUR RELATIONSHIP WITH SAMSUNG IS TERMINATED, WE MAY NOT BE ABLE TO CONTINUE OPERATIONS. We rely ultimately on Samsung to provide us with memory products for distribution to our clients even though we, with the consent from Samsung HK, can purchase the required memory products from other Samsung distributors under the same mode in calculation of commission income receivable from Samsung. Our relationship with Samsung is primarily maintained through our Chief Executive Officer Mr. Yang, who is verbally contracted to remain with us. If our relationship with Samsung is terminated or if Mr. Yang terminates his employment with us, we may be unable to replace Samsung as distributor of memory products on favorable terms if at all. Although we are not an exclusive distributor of Samsung's memory products, we believe we are the largest Samsung memory products distributor for the Hong Kong and Southern China markets. Although the Distribution Agreement is subject to annual renewal at Samsung's option, we do not foresee, based upon the long-term business relationship with Samsung established by Mr. Yang and our sales history with respect to the distribution of Samsung's memory products, any significant obstacles to obtaining renewals of the Distribution Agreement in the foreseeable future. However, no assurances can be given that Samsung will definitely renew the Distribution Agreement or, if renewed, on terms satisfactory to us. In addition, Samsung has the right to increase the number of distributors of its memory products in Hong Kong and the Southern China markets without consulting us. If Samsung significantly increases the number of authorized distributors of its memory products, competition among Samsung distributors, would increase and we may not be able to meet its annual sales quota, which could increase the likelihood that Samsung would not renew the Distribution Agreement, or if renewed, that we could operate profitably. IF THE GROWTH RATE OF EITHER MEMORY PRODUCTS SOLD OR THE AMOUNT OF MEMORY USED IN EACH PRODUCT DECREASES, SALES OF OUR PRODUCTS COULD DECREASE. We are dependent on the computer market as many of the memory products that we distribute are used in PCs or peripheral products. DRAMs are the most widely used semiconductor components in PCs. In recent years, the growth rate of PCs sold has slowed or declined. If there is a sustained reduction in the growth rate of either PCs sold or the average amount of semiconductor memory included in each PC, sales of our memory products built for those markets could decrease, and our results of operations, cash flows and financial condition could be adversely affected. IF SAMSUNG IS UNABLE TO RESPOND TO CUSTOMER DEMAND FOR DIVERSIFIED SEMICONDUCTOR MEMORY PRODUCTS OR IS UNABLE TO DO SO IN A COST-EFFECTIVE MANNER, WE MAY LOSE MARKET SHARE AND OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED. In recent periods, the semiconductor memory market has become relatively segmented, with diverse memory needs being driven by the different requirements of desktop and notebook PCs, servers, workstations, handheld devices, and communications, industrial and other applications that demand specific memory solutions. Samsung currently offers customers a variety of memory products including DDR, RAM, FLASH, SRAM and MASK ROM. 7 Samsung needs to dedicate significant resources to product design and development to respond to customer demand for the continued diversification of memory products. If Samsung is unable or unwilling to invest sufficient resources to meet the diverse memory needs of customers, we, as a Samsung memory products' major distributor may lose market share. In addition, as we diversify our product lines, we may encounter difficulties penetrating certain markets, particularly markets where we do not have existing customers. If we are unable to respond to customer demand for market diversification in a cost-effective manner, our results of operations may be adversely affected. If Samsung's global allocation process results in Samsung HK not having sufficient supplies of memory product to meet all of our customer orders, this would have a negative impact on our sales and could result in our loss of customers. Although such shortages are infrequent, there was such a shortage during the three months ended March 31, 2004 and no assurance can be given that such shortages will not occur in the future. Currently, due to increased demand in FLASH memory, ACL also experiences insufficient supplies of such products from Samsung and loss of sales. IF SAMSUNG'S MANUFACTURING PROCESS IS DISRUPTED, OUR RESULTS OF OPERATIONS, CASH FLOWS AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED. Samsung manufactures products using highly complex processes that require technologically advanced equipment and continuous modification to improve yields and performance. Difficulties in the manufacturing process can reduce yields or disrupt production. From time to time, we have experienced minor disruptions in product deliveries from Samsung and we may be unable to meet our customers' requirements and they may purchase products from other suppliers. This could result in loss of revenues or damage to customer relationships. WE ARE HEAVILY DEPENDENT UPON THE ELECTRONICS INDUSTRY, AND EXCESS CAPACITY OR DECREASED DEMAND FOR PRODUCTS PRODUCED BY THIS INDUSTRY COULD RESULT IN INCREASED PRICE COMPETITION AS WELL AS A DECREASE IN OUR GROSS MARGINS AND UNIT VOLUME SALES. Our business is heavily dependent on the electronics industry. A majority of our revenues are generated from the networking, high-end computing and computer peripherals segments of the electronics industry, which is characterized by intense competition, relatively short product life-cycles and significant fluctuations in product demand. Furthermore, these segments are subject to economic cycles and have experienced in the past, and are likely to experience in the future. A recession or any other event leading to excess capacity or a downturn in these segments of the electronics industry could result in intensified price competition, a decrease in our gross margins and unit volume sales and materially affect its business, prospects, financial condition and results of operations. THE MEMORY PRODUCT INDUSTRY IS HIGHLY COMPETITIVE. We face intense competition from a number of companies, some of which are large corporations or conglomerates that may have greater resources to withstand downturns in the semiconductor memory market, invest in technology and capitalize on growth opportunities. To the extent Samsung memory products become less competitive, our ability to effectively compete against distributors of other memory products will diminish. CURRENT ECONOMIC AND POLITICAL CONDITIONS MAY HARM OUR BUSINESS. Global economic conditions and the effects of military or terrorist actions may cause significant disruptions to worldwide commerce. If these disruptions result in delays or cancellations of customer orders, a decrease in corporate spending on information technology or our inability to effectively market, manufacture or ship our products, our results of operations, cash flows and financial condition could be adversely affected. In addition, our ability to raise capital for working capital purposes and ongoing 8 operations is dependent upon ready access to capital markets. During times of adverse global economic and political conditions, accessibility to capital markets could decrease. If we are unable to access the capital markets over an extended period of time, we may be unable to fund operations, which could materially adversely affect our results of operations, cash flows and financial condition. WE BELIEVE THAT WE WILL REQUIRE ADDITIONAL EQUITY FINANCING TO REDUCE OUR LONG-TERM DEBTS AND IMPLEMENT OUR BUSINESS PLAN. We anticipate that we will require additional equity financing in order to reduce our long-term debts and implement our business plan of increasing sales into the Southern China markets. There can be no assurance that we will be able to obtain the necessary additional capital on a timely basis or on acceptable terms, if at all. As a result of such financing, the holders of our common stock may experience substantial dilution. OUR MAJOR STOCKHOLDER CONTROLS OUR BUSINESS, AND COULD DELAY, DETER OR PREVENT A CHANGE OF CONTROL OR OTHER BUSINESS COMBINATION. One shareholder, Mr. Yang, our Chief Executive Officer and Chairman of the Board of Directors, holds approximately 80% of our outstanding common stock. By virtue of his stock ownership, Mr. Yang will control all matters submitted to our board and our stockholders, including the election of directors, and will be able to exercise control over our business, policies and affairs. Through his concentration of voting power, he could cause us to take actions that we would not consider absent his influence, or could delay, deter or prevent a change of control of us or other business combination that might otherwise be beneficial to our stockholders. OUR STOCK PRICE HAS BEEN VOLATILE AND MAY FLUCTUATE IN THE FUTURE. There has been significant volatility in the market prices for publicly traded shares of computer related companies, including ours. From September 30, 2003, the effective date of the recapitalization with Atlantic Components Ltd., to March 31, 2006, the closing price of our common stock fluctuated from a per share high of $2.95 to a low of $0.06 per share. The per share price of our common stock may not remain at or exceed current levels. The market price for our common stock, and for the stock of electronic companies generally, has been highly volatile. The market price of our common stock may be affected by: (1) incidental level of demand and supply of the stock; (2) daily trading volume of the stock; (3) number of public stockholders in our stock; (4) fundamental results announced by ACL; and any other unpredictable and uncontrollable factors. IF ADDITIONAL AUTHORIZED SHARES OF OUR COMMON STOCK AVAILABLE FOR ISSUANCE OR SHARES ELIGIBLE FOR FUTURE SALE WERE INTRODUCED INTO THE MARKET, IT COULD HURT OUR STOCK PRICE. We are authorized to issue 50,000,000 shares of common stock. As of December 31, 2005, there were 27,829,936 shares of our common stock issued and outstanding. Currently, outstanding shares of common stock are eligible for resale. We are unable to estimate the amount, timing or nature of future sales of outstanding common stock. Sales of substantial amounts of the common stock in the public market by these holders or perceptions that such sales may take place may lower the common stock's market price. IF PENNY STOCK REGULATIONS IMPOSE RESTRICTIONS ON THE MARKETABILITY OF OUR COMMON STOCK, THE ABILITY OF OUR STOCKHOLDERS TO SELL SHARES OF OUR STOCK COULD BE IMPAIRED. The SEC has adopted regulations that generally define a "penny stock" to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share subject to certain exceptions. Exceptions include equity securities issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for more than three 9 years, or (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average revenue of at least $6,000,000 for the preceding three years. Unless an exception is available, the regulations require that prior to any transaction involving a penny stock, a risk of disclosure schedule must be delivered to the buyer explaining the penny stock market and its risks. Our common stock is currently trading at under $5.00 per share. Although we currently fall under one of the exceptions, if at a later time we fail to meet one of the exceptions, our common stock will be considered a penny stock. As such the market liquidity for the common stock will be limited to the ability of broker-dealers to sell it in compliance with the above-mentioned disclosure requirements. You should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include: o Control of the market for the security by one or a few broker-dealers; o "Boiler room" practices involving high-pressure sales tactics; o Manipulation of prices through prearranged matching of purchases and sales; o The release of misleading information; o Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and o Dumping of securities by broker-dealers after prices have been manipulated to a desired level, which hurts the price of the stock and causes investors to suffer loss. We are aware of the abuses that have occurred in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, we will strive within the confines of practical limitations to prevent such abuses with respect to our common stock. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW MAY DETER A THIRD PARTY FROM ACQUIRING US. Section 203 of the Delaware General Corporation Law prohibits a merger with a 15% shareholder within three years of the date such shareholder acquired 15%, unless the merger meets one of several exceptions. The exceptions include, for example, approval by two-thirds of the shareholders (not counting the 15% shareholder), or approval by the Board prior to the 15% shareholder acquiring its 15% ownership. This provision makes it difficult for a potential acquirer to force a merger with or takeover of the Company, and could thus limit the price that certain investors might be willing to pay in the future for shares of our common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS. Not applicable. ITEM 2. PROPERTIES. Our principal offices occupy approximately 4,989 square feet gross floor area located at B24-B27, 1/F., Block B, Proficient Industrial Centre, 6 Wang Kwun Road, Kowloon Bay, Kowloon, Hong Kong, which is leased from Classic Electronic Ltd. ("Classic"), a related party, covering a lease period from December 1, 2005 to November 30, 2006 at monthly rental of HK$17,137 (approximately US$2,197). Mr. Ben Wong, one of our directors, is also a director of Classic. We lease a warehouse unit of approximately 1,846 square feet gross floor area located at B14-15, 1/F., Block B, Proficient Industrial Centre, 6 Wang Kwun Road, Kowloon Bay, Kowloon, Hong Kong pursuant to a one-year lease with Lin Chin Hsiung which covers a period from May 23, 2005 to May 22, 2006 with monthly lease payments of HK$15,000 (approximately US$1,923). 10 We lease approximately 3,000 square feet gross floor area for its directors' resident located at No. 78, 5th Street, Hong Lok Yuen, Tai Po, New Territories, Hong Kong for Mr. Yang which is covered by a lease with Classic which expires on March 31, 2008, with monthly rentals of HK$35,000 (approximately US$4,487). We lease approximately 3,000 square feet gross floor area for its directors' resident located at No. 76, 5th Street, Hong Lok Yuen, Tai Po, New Territories, Hong Kong for Mr. Yang which is covered by a lease with Systematic Information Limited which expires on March 31, 2008, with monthly rentals of HK$25,000 (approximately US$3,205). Mr. Ben Wong, one of our directors, is also a director of Systematic Information Limited. We lease an office unit of approximately 1,273.8 square feet gross floor area located at Room 2307, 23/F., Building A, United Plaza, No.5022 Binhe Road, Futian Centre, Shenzhen, China pursuant to an original lease dated June 1, 2002 and an extended lease dated May 27, 2004 with Shenzhen Jing Tian Wei Investment Development Co. Ltd. which expires on May 31, 2006 with monthly lease payments of RMB7,643 (approximately US$920). In the event that such facilities should become unavailable, we believe that alternative facilities could be obtained on a competitive basis. ITEM 3. LEGAL PROCEEDINGS. In the ordinary course of business the Company may be subject to litigation from time to time. There is no past, pending or, to the Company's knowledge, threatened litigation or administrative action (including litigation or action involving the Company's officers, directors or other key personnel) which in the Company's opinion has, had, or is expected to have, a material adverse effect upon its business, prospects financial condition or operations. Professional Traders Fund, LLC ("PTF") had filed a complaint, dated February 8, 2005, against the Company in the Southern District of New York alleging breach of contract for the nonpayment of a 12% subordinated convertible note from the Company to PTF in the principal amount of $250,000. PTF was seeking $239,850 plus default interest, costs and attorneys fees. On August 16, 2005, the Company and PTF entered into a settlement agreement whereby the Company agreed to pay PTF pursuant to a payment schedule a total of $255,291.50, which amount includes all post judgment legal expenses and payment by PTF of $1,400 to the stock transfer agent. The outstanding payable amount related to this settlement was $76,088 as of December 31, 2005. The final installment was fully paid in February 2006. On March 6, 2006, PTF filed a satisfaction of judgment. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the three months ended December 31, 2005. 11 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. QUARTERS ENDED HIGH LOW QUARTER ENDED MARCH 31, 2006 Quarter ended March 31, 2006...........................$0.23 $0.12 FISCAL YEAR ENDED DECEMBER 31, 2005: Quarter ended December 31, 2005........................$0.13 $0.06 Quarter ended September 30, 2005.......................$0.27 $0.12 Quarter ended June 30, 2005............................$0.36 $0.13 Quarter ended March 30, 2005........................ ..$0.45 $0.25 FISCAL YEAR ENDED DECEMBER 31, 2004 Quarter ended December 31, 2004........................$0.88 $0.23 Quarter ended September 30, 2004.......................$1.13 $0.65 Quarter ended June 30, 2004............................$1.70 $0.70 Quarter ended March 31, 2004...........................$3.00 $1.50 Stock price information has been derived from Yahoo Finance. Such quotations reflect inter-dealer bids, without retail mark-up, mark-down or commissions, and may not reflect actual transactions. As of April 13, 2006, the last reported sale price of our common stock, as reported by the OTC Bulletin Board, was $0.22 per share. As of April 14, 2006, there were approximately 373 holders of record of our common stock. DIVIDEND POLICY Since our recapitalization with Atlantic Components Ltd., effective September 30, 2003, we have never paid cash dividends on our common stock. We currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS As of December 31, 2005, we did not have any compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance to employees or non-employees (such as directors and consultants). On March 31, 2006, the Board of Directors adopted the 2006 Equity Incentive Stock Plan (the "Plan") and the majority stockholder approved the Plan by written consent. The purpose of the Plan is to provide additional incentive to employees, directors and consultants and to promote the success of the Company's business. As of March 31, 2006, 5,000,000 shares of Common Stock are reserved for issuance under the Plan and no options have been granted. We intend to file a Schedule 14(c) Information Statement with respect to the Plan. 12 ITEM 6. SELECTED FINANCIAL DATA. The following consolidated selected financial data, at the end of and for the last three fiscal years, should be read in conjunction with our Consolidated Financial Statements and related Notes thereto appearing elsewhere in this Annual Report on Form 10-K. The consolidated selected financial data are derived from our consolidated financial statements that have been audited by Stonefield Josephson, Inc., our independent registered public accounting firm, as indicated in their report included herein. The selected financial data provided below is not necessarily indicative of our future results of operations or financial performance.
2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- Net Sales $110,207,743 $133,243,690 $72,672,797 $85,343,249 $61,663,209 Net income (loss) $259,515 $(454,006) $(1,437,670) $986,876 $238,292 Earnings (loss) per common share $0.01 $(0.02) $(0.06) $0.04 $0.01 Total Assets $8,832,457 $10,265,983 $9,570,808 $7,215,169 $7,429,388 Long-term Debt $ - $65,522 $194,703 $1,071,503 $1,780,303 Weighted average number of shares outstanding - basic and diluted 27,829,936 27,829,936 23,753,682 22,380,000 22,380,000
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND OTHER PORTIONS OF THIS REPORT CONTAIN FORWARD-LOOKING INFORMATION THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING INFORMATION. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, AVAILABILITY AND COST OF FINANCIAL RESOURCES, PRODUCT DEMAND, MARKET ACCEPTANCE AND OTHER FACTORS DISCUSSED IN THIS REPORT UNDER THE HEADING "RISK FACTORS." THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT. OVERVIEW CORPORATE BACKGROUND We are engaged primarily in the business of distribution of memory products under "Samsung" brandname which comprise DRAM and Graphic RAM, FLASH, SRAM and MASK ROM for the Hong Kong and Southern China markets. As of December 31, 2005, we had over 120 active customers in Hong Kong and Southern China. Pricing for the Samsung memory products ranges from approximately $0.17 to $750 depending on the product specifications. We also sell our products in Hong Kong and Southern China and do not anticipate selling its products outside of these regions in the foreseeable future. For the years ended December 31, 2005, 2004, and 2003, the largest 5 customers accounted for 43%, 48% and 31% of our net sales, respectively. As of December 31, 2005, we had a working capital deficit of $227,545 and accumulated deficit of $2,524,673. We generated net sales of $110,207,743 for the year ended December 31, 2005 and recorded a net income of $259,515. In addition, during the year ended December 31, 2005, net cash provided by operating activities amounted to $2,732,805. We are in the mature stage of operations and, as a result, the relationships between revenue, cost of revenue, and operating expenses reflected in the financial information included in this document to a large extent represent future expected financial relationships. Much of the cost of sales and operating expenses reflected in our consolidated financial statements are recurring costs in nature. PLAN OF OPERATIONS Our business objectives are to offer updated market intelligence to Samsung in connection with the Hong Kong and Southern China markets' demand in memory products and secure high-quality Samsung products in order to meet the market demands of individual and corporate users in Hong Kong and Southern China. Each quarter, we work closely with Samsung to present updated market information collected from retail channels and corporate users to assist Samsung to plan their production and allocation schedule for the coming six months. Our business strategy is to assist Samsung in implementing their production planning using market intelligence to balance the supply and demand of memory products in the Hong Kong and Southern China markets. Accordingly, we maintain and develop a sales and market research team to answer marketing questions from Samsung on a regular basis. In addition, our established distribution channels covering retail outlets and major corporate users in the region allows those retail or ultimate customers a secure stable supply of Samsung's memory products with competitive prices. We are a non-exclusive distributor of Samsung, and enjoy a minimum 14 guaranteed gross profit margin of approximately 2.5% of products sold in form of sales rebate payable by Samsung. ACCOUNTING PRINCIPLES; ANTICIPATED EFFECT OF GROWTH Below is a brief description of basic accounting principles which we adopt in determining our recognition of revenues and expenses, as well as a brief description of the effects that management believes its anticipated growth will have on revenues and expenses in the next 12 months. NET SALES Net Sales are recognized upon the transfer of legal title of the electronic components to the customers. At December 31, 2005 we had over 120 active customers. The quantities of memory products the Company sells fluctuate with changes in demand from its customers. The prices set by Samsung that the Company must charge its customers are expected to fluctuate as a result of prevailing economic conditions and their impact on the market. During the six months ended December 31, 2005, large OEMS like DELL, IBM and many other personal computer manufacturers placed large orders for new memory standard DDR2 for personal computers. However, Intel could not meet the demand for their i945 Motherboard chip set full series. Consequently, the output for personal computers dropped substantially, which lead to a high level of memory module inventory at the personal computer manufacturers. These excess inventories were flooded into the market and the prices for DDR2 memory module dropped significantly. This reduction in prices caused our revenue to be lower than expected. During 2005, we experienced shortage of supplies of Samsung products and decrease in customers' demand. The essential element of our growth in the future, will be to obtain adequate financial resources as additional working capital to cope with the strong market needs from the China PCs' personal and business users. COST OF SALES Cost of revenues consists of costs of goods purchased from our principal supplier, Samsung and purchases from other Samsung authorized distributors. Many factors affect our gross margin, including, but not limited to, the volume of production orders placed on behalf of our customers, the competitiveness of the memory products industry and the availability of cheaper Samsung memory products from overseas Samsung distributors due to regional demand and supply situation. Nevertheless, our procurement operations are supported by Samsung HK, a wholly-owned subsidiary of Samsung, although there is no written long-term supply agreement in place between us and Samsung HK. Our cost of goods, as a percentage of total revenues, amounted to approximately 97.1% for the year ended December 31, 2005 and approximately 97.7% the year ended December 31, 2004. OPERATING EXPENSES Our operating expenses for the years ended December 31, 2005 and 2004 were comprised of sales and marketing, general and administrative expenses. 15 Selling and marketing expenses consisted primarily of commissions paid to outside sales agent and salary expenses to customer service personnel and costs associated with advertising and marketing activities. General and administrative expenses include all corporate and administrative functions that serve to support our current and future operations and provide an infrastructure to support future growth. Major items in this category include management and staff salaries, rent/leases, professional services, and travel and entertainment. We expect these expenses to remain at approximately the same level in 2006. Sales and marketing costs are expected to fluctuate as a percentage of revenue due to the addition of sales personnel and various marketing activities planned throughout the year. Interest expense, including finance charges, relates primarily to our short-term and long-term bank borrowings, which we intend to reduce and the amortization of discount related to the convertible note payable. RESULTS OF OPERATIONS The following table sets forth audited consolidated statements of operations data for the years ended years ended December 31, 2005, 2004, and 2003 and should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and our financial statements and the related notes appearing elsewhere in this document.
Year Ended December 31 ------------------------------------------------------- (US$) 2005 2004 2003 ---- ---- ---- Net sales 110,207,743 133,243,690 72,672,797 Cost of sales 107,004,491 130,130,674 68,214,587 Gross profit 3,203,253 3,113,016 4,458,210 Operating expenses: Sales and marketing 745,755 453,862 149,364 General and administrative 2,059,150 2,618,810 2,571,147 Merger cost - - 2,753,620 Total operating expenses 2,804,905 3,072,672 5,474,131 Income (loss) from operations 398,347 40,344 (1,015,921) Interest expense 203,192 402,412 166,509 Net income (loss) 259,515 (454,006) (1,437,670)
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004 NET SALES Sales decreased by $23,035,947 or 17.3% from $133,243,690 for year ended December 31, 2004 to $110,207,743 for the year ended December 31, 2005. The decrease was mainly due to the drop in demand and shortage of supplies of Samsung products. We expect the sales will increase as new products are launched in the market and accumulated demand boom in the next year. 16 COST OF SALES Cost of sales decreased $23,126,183 or 17.8%, from $130,130,674 for the year ended December 31, 2004 to $107,004,491 for the year ended December 31, 2005. The cost of sales decreased in proportion to the decrease of net sales. We expect the cost of sales for the year ended December 31, 2006 to increase in proportion of sales for the same year. GROSS PROFIT Gross profit increased by $90,237, or 2.9% from $3,113,016 for the year ended December 31, 2004 to $3,203,253 for the year ended December 31, 2005. The gross profit percentage increased to 2.9% of revenue for the year ended December 31, 2005 compared to 2.3% of revenue for the year ended December 31, 2004 mainly as a result of shortage of supplies of Samsung products. We expect the gross profit for the year ended December 31, 2006 will remain at approximately the same level as the year ended December 31, 2005. OPERATING EXPENSES Sales and marketing expenses increased by $291,893, or 64.3%, from $453,862 for the year ended December 31, 2004 to $745,755 for the year ended December 31, 2005. The increase was primarily attributable to the sales commission expenses incurred and paid to an external sales agent which brought in certain sales orders to the Company. No such sales were subject to commission in 2004. We expect the sales and marketing expenses for the year ended December 31, 2006 will remain at approximately the same level as the year ended December 31, 2005. General and administrative expenses decreased $559,660 or 21.4% from $2,618,810 for the year ended December 31, 2004 to $2,059,150 for the year ended December 31, 2005. In August 2004, we suffered a loss of $475,591 as a result of the theft of certain of its inventory which were no covered by its insurance policy. Excluding this incident, our general and administrative expenses would have increased by $101,115 which was primary related to increase of payroll expenses. We will use our best efforts to keep general and administrative expenses for the year ended December 31, 2006 at approximately the same level as the year ended December 31, 2005. Income from operations was $398,347 for the year ended December 31, 2005 compared to $40,344 for the year ended December 31, 2004, an increase of income of $358,003. The increase was mainly due to increase in gross profit of our products caused by the shortage of memory products in the market during the year. We expect the income from operations for the year ended December 31, 3006 will remain at about of the same level of the current year. OTHER INCOME (EXPENSES) Interest expense decreased $199,220, or 49.5% from interest expense of $402,412 in the year ended December 31, 2004, to $203,192 in the year ended December 31, 2005. The decrease was due to a $250,000 amortization of discount related to the convertible debt in 2004. Excluding this amortization, our interest expense increased by $50,780 for the year ended December 31, 2005 mainly due to increase in interest rates during the year. We expect the interest expense for the year ended December 31, 2006 will increase significantly because of increase in interest rate. Our net income increased by $713,521 from the loss of $454,006 for the year ended December 31, 2004 compared to the income of $259,515 for the year ended December 31, 2005. This increase was due to increase in gross profit and decrease in general and administrative expenses. We expect the net income will be adversely affected by the increase of interest rate. 17 YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003 NET SALES Sales increased by $60,570,893 or 83% from $72,672,797 for year ended December 31, 2003 to $133,243,690 for the year ended December 31, 2004. This increase resulted primarily from the unexpected world-wide pricing pressure on memory products during May 2004 to July 2004 among major memory products manufacturers which stimulated the strong demand of memory products in the Hong Kong and Southern China markets. COST OF SALES Cost of sales increased $61,916,087 or 90.8%, from $68,214,587 for the year ended December 31, 2003 to $130,130,674 for the year ended December 31, 2004. The increase in cost of sales resulted from the increase in sales of Samsung's memory products and strong demand of Samsung memory products. As a percentage of net sales, cost of sales increased slightly from 93.8% of net sales in the year ended December 31, 2003 to 97.7% of net sales in the year ended December 31, 2004. GROSS PROFIT Gross profit decreased by $1,345,194, or 30.2% from $4,458,210 for the year ended December 31, 2003 to $3,113,016 for the year ended December 31, 2004. The gross profit percentage decreased to 2.3% of revenue for the year ended December 31, 2004 compared to 6.2% of revenue for the year ended December 31, 2003 as a result of aggressive pricing strategy imposed by Samsung with our assistance for newly launched 1 Gigabyte memory products during August 2004 to September 2004 to prevent the entrance of other major memory products manufacturers in the Hong Kong and Southern China markets which in turn stimulated a strong demand of such newly launched memory products. However, such pricing strategry reduces the gross margin significantly compared to the historical margin on selling the Samsung products. OPERATING EXPENSES Sales and marketing expenses increased by $304,498, or 204%, from $149,364 for the year ended December 31, 2003 to $453,862 for the year ended December 31, 2004 due to increase of sales commission to ACL Technology Pte Ltd. as a result of more than 70 new and active customers with more than $42 million revenues introduced by this sales agent. General and administrative expenses increased $47,663 or 1.9% from $2,571,147 for the year ended December 31, 2003 to $2,618,810 for the year ended December 31, 2004. Merger cost of $2,753,620 in 2003 represents the fair value of common stock issued to consultants and advisors related to the acquisition of Atlantic by us, which took place on September 30, 2003. No such cost was incurred during the year ended December 31, 2004. Income from our operations was $40,344 for the year ended December 31, 2004 compared to the loss of $1,015,921 for the year ended December 31, 2003, an increase of income of $1,056,264. The decrease of loss was primarily due to merger cost of $2,753,620 incurred in September 2003 related to the acquisition of Atlantic. Excluding the merger cost, income from operations decreased by 98% for the year ended December 31, 2004, compared to $1,737,699 for the year ended December 31, 2003. This decrease was the result of decreasing gross profits during the year 2004, together with increased sales and marketing expenses. 18 OTHER INCOME (EXPENSES) Interest expense increased $235,903, or 142% from interest expense of $166,509 in the year ended December 31, 2003, to $402,412 in the year ended December 31, 2004. Excluding $250,000 non-cash interest expense incurred in the year ended December 31, 2004 relating to amortization of discount on convertible note payable, interest expense was $152,412 in the year ended December 31, 2004. Excluding the above-mentioned amortization of discount on convertible note payable, our interest expense decreased to 0.1% of sales for the year ended December 31, 2004 from 0.2% for the year ended December 31, 2003 due to a reduction by us of our long-term bank borrowings during the year 2004. Gain on disposal of property and equipment decreased by $7,100, to $128 in the year ended December 31, 2004 from $7,228 in the year ended December 31, 2003, due to certain automobile being disposed during 2003, which was replaced with new purchases of automobile. Our net loss decreased by $983,664 from $1,437,670 for the year ended December 31, 2003 compared to the loss of $454,006 for the year ended December 31, 2004. This decrease was the result of merger cost incurred during the year ended December 31, 2003. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity have been cash provided by operations, bank lines of credit and credit terms from suppliers. Our principal uses of cash have been for operations and working capital. We anticipate these uses will continue to be our principal uses of cash in the future. We may require additional financing in order to finance our growing business and implement our business plan. In order to meet anticipated demand for Samsung's memory products in the Southern China market over the next 12 months, we anticipate an additional need of working capital of at least $2.0 million through short-term borrowings from the banks to finance the cash flow required to finance the purchase of Samsung memory products from Samsung HK one day in advance of the release of goods from Samsung HK's warehouse before receiving payments from customers upon physical delivery of such goods in Hong Kong which, in most instances, takes approximately two days from such delivery. In certain limited instances, our customers are permitted up to thirty (30) days to make payment for purchased memory products. As the anticipated cash generated by our operations are insufficient to fund our growth requirements, we will need to obtain additional equity funds. There can be no assurance that we will be able to obtain the necessary additional capital on a timely basis or on acceptable terms, if at all. In any of such events, our business growth and prospects would be materially and adversely affected. As a result of any such financing, if it is an equity financing, the holders of our common stock may experience substantial dilution. In addition, as our results may be negatively impacted and thus delayed as a result of political and economic factors beyond the management's control, our capital requirements may increase. The following factors, among others, could cause actual results to differ from those indicated in the above forward-looking statements: pricing pressures in the industry; a continued downturn in the economy in general or in the memory products sector; an unexpected decrease in demand for Samsung's memory products; our ability to attract new customers; an increase in competition in the memory products market; and the ability of some of our customers to obtain financing. These factors or additional risks and uncertainties not known to us or that we currently deems immaterial may impair business operations and may cause our actual results to differ materially from any forward-looking statement. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no 19 duty to update any of the forward-looking statements after the date of this report to conform them to actual results or to make changes in its expectations. In the year ended December 31, 2005, net cash provided by operating activities amounted to $2,992,320 while in the year ended December 31, 2004, net cash used in operating activities amounted to $416,876, an increase of $2,575,444. This increase was caused, in part, by increase amount of trade receivable due from related parties at the end of 2005. In the year ended December 31, 2004, net cash provided by operating activities amounted to $416,876 while in the year ended December 31, 2003, net cash used in operating activities amounted to $216,151, an increase of $633,027. This increase was caused, in part, by a strengthened control in inventory level during year 2004. In the year ended December 31, 2005, net cash provided by investing activities amounted to $85,744 while in the year ended December 31, 2004, we used net cash of $954,770 in investing activities, an increase of cash provided for investing activities of $1,040,514. The increase was mainly due to repayments from related parties. We do not expect a significant amount of cash flows in respect of investing activities incurred in year 2006 as there is no significant plan of acquisition or disposal of property, equipment and improvements at this moment. Net cash used for investing activities increased by $1,745,411. In the year ended December 31, 2003, we received cash repayments from a stockholder for advances to this stockholder in the amount of $807,724. In the year ended December 31, 2004, we loaned $930,429 to a related party which was repaid in 2005. In the year ended December 31, 2005, net cash used for financing activities amounted to $1,052,813, while in the year ended December 31, 2004, we have net cash of $583,368 provided by financing activities, an decrease of cash provided by financing activities of $1,636,181. This decrease was caused by decrease on lines-of-credit and repaid the balance of long-term debt in the year 2005. We do not expect significant cash be used for financing activities in year 2006. In the year ended December 31, 2004, net cash provided by financing activities amounted to $583,368 while in the year ended December 31, 2003, we used net cash of $286,353 in financing activities, an increase of cash provided by financing activities of $869,721. This increase was caused by additional proceeds on lines-of-credit of $1.3 million in the year 2004. An essential element of our growth in the future, will be to obtain adequate additional working capital to meet anticipated market demand from PC users (business and personal) in the southern part of China. RELATED PARTY TRANSACTIONS We conduct business with several affiliated companies. All the related party transactions taking place during the reporting periods were conducted during the normal course of business. The prices of products sold to or purchased from these related entities are in the same price ranges as those offered to other non related customers or purchased from other vendors. DEPENDENCE OF SAMSUNG We are highly dependent on the product supplies from Samsung HK. If the relationship with Samsung HK is terminated, we may not be able to continue our business. We have been taking necessary 20 steps to reduce our dependence on Samsung HK through potential acquisition of Classic which is a reseller of various memory products. An essential element of our growth in the future will be to obtain adequate additional working capital to meet anticipated market demand from PC users (business and personal) in the southern part of China. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk for changes in interest rates as our bank borrowings accrue interest at floating rates of 0.5% to 1.0% over the Best Lending Rate (currently at the range of 7.75% to 8.0% per annum) prevailing in Hong Kong. For the three years ended December 31, 2005, 2004, and 2003, we did not generate any material interest incomes. Accordingly, we believe that changes in interest rates may have a material effect on our liquidity, financial condition or results of operations. IMPACT OF INFLATION We believe that our results of operations are not dependent upon moderate changes in inflation rates as we expect we will be able to pass along component price increases to our customers. SEASONALITY We have not experienced any material seasonality in sales fluctuations over the past 2 years in the memory products markets. NEW ACCOUNTING PRONOUNCEMENTS In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff's views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on the financial statements. In May 2005, the FASB issued FASB Statement No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS. This new standard replaces APB Opinion No. 20, ACCOUNTING CHANGES, and FASB Statement No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and represents another step in the FASB's goal to converge its standards with those issued by the IASB. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. Management believes that changes resulting from adoption of the FASB will not have a material effect on the financial statements taken as a whole. In June 2005, the EITF reached a consensus on Issue 05-6, "Determining the Amortization Period for Leasehold Improvements," which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the 21 useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after June 29, 2005. Earlier application is permitted in periods for which financial statements have not been issued. The adoption of this Issue did not have an impact on the Company's financial statements. In February 2006, the Financial Accounting Standards Board issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments -- an amendment of FASB Statements No. 133 and 140." SFAS No. 155 simplifies the accounting for certain hybrid financial instruments, eliminates the FASB's interim guidance which provides that beneficial interests in securitized financial assets are not subject to the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and eliminates the restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006, however, early adoption is permitted for instruments acquired or issued after the beginning of an entity's fiscal year in 2006. The Company is evaluating the impact of this new pronouncement to its financial position and results of operations or cash flows. CONTRACTUAL OBLIGATIONS The following table presents our contractual obligations as of December 31, 2005 over the next five years and thereafter: Payments by Period
- ------------------------------------------------------------------------------------------------------------------ LESS THAN 1-3 4-5 AFTER 5 AMOUNT 1 YEAR YEARS YEARS YEARS ------ ------ ----- ----- ----- Operating Leases 263,994 139,552 124,442 --- --- Payable related to debt settlement 76,088 76,088 --- --- --- Line of credit and notes payable - short-term 2,842,285 2,842,285 --- --- --- ------------------------------------------------------------------------ Total Contractual Obligations $3,182,367 $3,057,925 $124,442 $ --- $ --- ========================================================================
CRITICAL ACCOUNTING POLICIES The U.S. Securities and Exchange Commission ("SEC") recently issued Financial Reporting Release No. 60, "CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL ACCOUNTING POLICIES" ("FRR 60"), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include: inventory valuation, which affects cost of sales and gross margin; policies for revenue recognition, and allowance for doubtful accounts. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on our results we report in our consolidated financial statements. INVENTORY VALUATION. Our policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires us to make estimates regarding the market value of our inventories, including an assessment of excess or obsolete inventories. We determine excess and obsolete inventories 22 based on an estimate of the future demand for our products within a specified time horizon, generally 12 months. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our demand forecast is greater than our actual demand we may be required to take additional excess inventory charges, which will decrease gross margin and net operating results in the future. In addition, as a result of the downturn in demand for our products, we have excess capacity in our manufacturing facilities. Currently, we are not capitalizing any inventory costs related to this excess capacity as the recoverability of such costs is not certain. The application of this policy adversely affects our gross margin. ALLOWANCE FOR DOUBTFUL ACCOUNTS. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry. If a major customer's credit worthiness deteriorates, or our customers' actual defaults exceed our historical experience, our estimates could change and impact our reported results. REVENUE RECOGNITION. We derive revenues from resale of computer memory products. Revenue for resale of computer memory products is recognized based on guidance provided in Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements," as amended (SAB 104). Computer memory resale revenue is recognized when products have been shipped and collection is probable. An allowance for returns is recorded based on the management's estimate of sales returns. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not invest in or own any market risk sensitive instruments entered into for trading purposes or for purposes other than trading purposes. All loans to us have been made at fixed interest rates and; accordingly, the market risk to us prior to maturity is minimal. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto and filed as a part of this Annual Report on Form 10-K are our Consolidated Financial Statements, beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer, in consultation with our other members of management and advisors as appropriate, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report pursuant to Rule 15d-15(b) promulgated under the Exchange Act. 23 Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are not effective in alerting them in a timely fashion to all material information required to be included in our periodic filings with the SEC as a result of the significant deficiency described below in that subsection captioned "SIGNIFICANT DEFICIENCIES IN DISCLOSURE CONTROLS AND PROCEDURES OR INTERNAL CONTROLS". CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING The term INTERNAL CONTROL OVER FINANCIAL REPORTING is defined as a process designed by, or under the supervision of, our Chief Executive Officer and Principal Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Except as noted below in that subsection captioned "SIGNIFICANT DEFICIENCIES IN DISCLOSURE CONTROLS AND PROCEDURES OR INTERNAL CONTROLS", there were no changes in our internal control over financial reporting identified in connection with our evaluation of these controls as of the end of the period covered by this annual report that could have significantly affected those controls subsequent to the date of the evaluation referred to in the previous paragraph, including any correction action with regard to significant deficiencies and material weakness. SIGNIFICANT DEFICIENCIES IN DISCLOSURE CONTROLS AND PROCEDURES OR INTERNAL CONTROLS Our independent auditors identified that our accounting on certain significant transactions were incorrectly calculated or incorrectly recorded in the 2004 financial statements. In addition, certain related parties were not disclosed to our independent auditors and transactions with these related parties were not disclosed in the financial statements for the year ended December 31, 2004. During the course of the 2004 audit field work, our independent auditors discovered these errors and these related parties and the transactions with these related parties. Our independent auditors discussed these matters with our Chief Financial Officer, and we subsequently reevaluated the transactions and recorded the necessary adjustments. The auditors believe that these adjustments reflected significant deficiencies in our internal controls over accounting and financial reporting. Our independent auditors did not discover similar adjustments and errors during the 2005 audit. OTHER OBSERVATIONS In connection with the audit of our consolidated financial statements for the year ended December 31, 2004, our independent auditors also made several other observations relating to our disclosure controls and procedures or internal controls. First, our independent auditors observed that ACL did not have adequate segregation of duties due to the size of the company, and that management had the ability to override any existing controls. Management acknowledges the existence of this problem, and is developing procedures to address them to the extent possible given the acknowledged limitations. Secondly, our independent auditors observed that we did not have a comprehensive accounting procedures manual including information as to customized internal control structure, documentation and transaction flow. We are now developing a system to address these issues but a detailed plan has not yet been implemented. Finally, our independent auditors observed that none of the members of the board of directors demonstrated an in-depth understanding of generally accepted accounting principles. We acknowledge that while we believe our board of director members are proficient in reading and understanding financial statements, they may not have an in-depth understanding of generally accepted accounting principles, and we are currently seeking a person with an individual with U.S. accounting and finance background to join the board. As of March 31, 2006, we have not yet recruited such person due to the lack of qualified accountants and financial expert with U.S. background in Hong Kong. Nevertheless, we have increased the number of our accounting staff in 2005 to handle increasing volume of the accounting and finance related matters. 24 ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. DIRECTORS AND EXECUTIVE OFFICERS Our directors and executive officers, as of December 31, 2005, and their biographical information are set forth below: NAME AGE POSITION Chung-Lun Yang 44 Chairman of the Board of Directors and Chief Executive Officer Ben Wong 42 Director Kenneth Lap-Yin Chan 43 Chief Financial Officer CHUNG-LUN YANG, Chairman of the Board and Chief Executive Officer. Mr. Yang became a Director on September 30, 2003. Mr. Yang is the founder of Atlantic and has been a director of Atlantic since 1991. Mr. Yang was graduated from The Hong Kong Polytechnic in 1982 with a degree in electronic engineering. From October 1982 until April 1985, he was the sales engineer of Karin Electronics Supplies Ltd. From June 1986 until September 1991, he was Director of Sales (Samsung Components Distribution) of Evertech Holdings Limited, a Hong Kong based company. Mr. Yang has over 15 years' extensive experience in the electronics distribution business. Mr. Yang is also a member of The Institution of Electrical Engineers, United Kingdom. BEN WONG, Director. Mr. Wong became a Director on September 30, 2003. Since 1992, Mr. Wong has been the vice-president of Atlantic and is responsible for the purchasing, sales and marketing of Atlantic's products. Mr. Wong was graduated from the Chinese Culture University of Taiwan in 1986 with a Bachelor's Degree of Science in Mechanical Engineering. KENNETH LAP-YIN CHAN, Chief Financial Officer. Mr. Chan was appointed our Chief Financial Officer effective September 30, 2003. Mr. Chan has been with Atlantic since 2001 serving as Financial Controller. From 1998 to 2001, Mr. Chan worked for Standard Chartered Bank. Prior to September 2001, Mr. Chan worked for a number of other banks in Hong Kong, including Dao Heng Bank and Asia Commercial Bank. He has more than 12 years of experience in corporate and commercial finance. Mr. Chan graduated from the University of Toronto in 1986 with a Bachelor's Degree in Commerce. Each director holds office (subject to our By-Laws) until the next annual meeting of shareholders and until such director's successor has been elected and qualified. All of our executive officers are serving until the next annual meeting of directors and until their successors have been duly elected and qualified. There are no family relationships between any of our directors and executive officers. Our Board of Directors does not have a separate Compensation Committee, Audit Committee nor Nominating Committee. All of the members of our Board of Directors are acting as our audit committee. None of the members of our Board of Directors is deemed an audit committee financial expert. We are in the process of searching for the appropriate candidate to be our audit committee financial expert. Our Board of Directors plans to expand the number of members on the board and create an independent Compensation Committee, Audit Committee and a Nominating Committee. 25 There have been no events under any bankruptcy act, no criminal proceedings and no judgments, orders or decrees material to the evaluation of the ability and integrity of any director or executive officer of the Company during the past five years. CODE OF BUSINESS CONDUCT AND ETHICS We have adopted a written code of business conduct and ethics, known as our Code of Business Conduct and Ethics which applies to all of our directors, officers, and employees, including our principal executive officer and our principal financial and accounting officer. A copy of the Code of Business Conduct and Ethics is attached hereto as Exhibit 14 to the Annual Report on Form 10-K for the period ended December 31, 2003. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who own more than ten percent of a registered class of our equity securities (collectively, "Reporting Persons") to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and our other equity securities. Reporting Persons are required by SEC regulation to furnish us with copies of all Section 16(a) forms that they file. To our knowledge, based solely on a review of the copies of such reports furnished to us, we believe that during fiscal year ended December 31, 2005 all Reporting Persons complied with all applicable filing requirements. ITEM 11. EXECUTIVE COMPENSATION. EXECUTIVE OFFICER COMPENSATION The following table sets forth the annual and long-term compensation for services in all capacities to the Company for the last three fiscal years ended December 31, 2005.
SUMMARY COMPENSATION TABLE - ------------------------------------------------------------------------- ------------------------------------------------------ ANNUAL COMPENSATION LONG TERM COMPENSATION - ------------------------------------------------------------------------- ------------------------------------------------------ (a) (b) (c) (d) (e) (f) (g) (h) (i) NAME AND FISCAL SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER PRINCIPAL POSITION YEAR ANNUAL STOCK UNDERLYING PAYOUTS COMPENSATION COMPEN- AWARDS OPTIONS SATION - ------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ -------------- Jeffrey I. Green, 2005 N/A N/A N/A N/A N/A N/A N/A Former Director and 2004 N/A N/A N/A N/A N/A N/A N/A President (1) 2003 $195,000 0 0 0 0 0 0 - ------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ -------------- - ------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ -------------- Phyllis Green, Former 2005 N/A N/A N/A N/A N/A N/A N/A Director and Executive 2004 N/A N/A N/A N/A N/A N/A N/A Administrator(2) 2003 $160,367 0 0 0 0 0 0 - ------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ -------------- - ------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ -------------- Chung-Lun Yang, 2005 $226,922 $0 $92,308 $0 $0 $0 $0 Chief Executive 2004 $233,590 $0 $95,000 $0 $0 $0 $0 Officer and Chairman 2003 $23,077 $624,462 $16,539 $0 $0 $0 $0 of the Board (3) - ------------------------ --------- ------------ ------------- ----------- ----------- -------------- ------------ --------------
26 (1) Mr. Green resigned effective September 9, 2003 upon the closing of the Share Exchange and Reorganization. Compensation includes the amount up to September 30, 2003. (2) Ms. Green resigned effective September 9, 2003 upon the closing of the Share Exchange and Reorganization. Compensation includes the amount up to September 30, 2003. (3) Mr. Yang was elected to be the Chief Executive Office of the Company upon the resignation of Mr. Jeffrey I. Green after the reverse-acquisition of Atlantic Components Ltd. Compensation information indicated above covers the salaries of $23,077 to Mr. Yang for the period from October 1 to December 31, 2003. Salaries for the full year totaled $92,308 for the year ended December 31, 2003. The Company accrued bonus of $624,462 and payable to Mr. Yang on September 30, 2003, effective date of Share Exchange and Reorganization. Other annual compensation includes rent and housing allowance in the amount of $92,308 for the year ended December 31, 2005, $95,000 for the year ended December 31, 2004 and $16,539 for the period from October 1 to December 31, 2003. OPTION GRANTS TO EXECUTIVE OFFICERS IN LAST FISCAL YEAR No options were granted to our executive officers during the fiscal year ended December 31, 2005. On March 31, 2006, the Board of Directors adopted the 2006 Equity Incentive Stock Plan and the majority stockholder approved the Plan by written consent. The purpose of the Plan is to provide additional incentive to employees, directors and consultants and to promote the success of the Company's business. COMPENSATION OF DIRECTORS None of our directors who served during the year ended December 31, 2005 received compensation for serving as such, other than reimbursement for out of pocket expenses incurred in attending director meetings. No options were granted to directors during the fiscal year ended December 31, 2005. EMPLOYMENT AGREEMENTS We have not entered into any employment agreements with any of our executive officers. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding beneficial ownership of our common stock as of December 31, 2005 (i) each person known by us to own beneficially more than 5% of the outstanding shares of our common stock (ii) each director, named executive officer and (iii) all executive officers and directors as a group. On such date, we had 27,829,936 shares of common stock outstanding. Shares not outstanding but deemed beneficially owned by virtue of the right of any individual to acquire shares within 60 days are treated as outstanding only when determining the amount and percentage of common stock owned by such individual. Each person has sole voting and investment power with respect to the shares shown, except as noted. 27
NAME AND ADDRESS OF SHARES OF COMMON STOCK PERCENTAGE OF CLASS BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1) - ---------------------------------------------------------------------------------------------- Chung-Lun Yang 22,380,000 78.9% No. 78, 5th Street, Hong Lok Yuen, Tai Po, New Territories, Hong Kong Ben Wong 0 0.0% 19B, Tower 8, Bellagio, 33 Castle Peak Road, Sham Tseng, New Territories, Hong Kong Kenneth Lap-Yin Chan 0 0.0% Flat B, 8/F., Block 19, South Horizons, Aplei Chau, Hong Kong All Directors and Officers 22,380,000 78.9% as a Group (3)
- ----------------- (1) Applicable percentage of ownership is based on 27,829,936 shares of common stock outstanding as of December 31, 2005, together with securities exercisable or convertible into shares of common stock within 60 days of December 31, 2005, for each stockholder. Beneficial ownership is determined in accordance with the rules of the United States Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of December 31, 2005, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The common stock is the only outstanding class of equity securities of the Company. Except as otherwise set forth, information on the stock ownership of these persons was provided to us by the persons. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. TRANSACTIONS WITH MR. YANG As of December 31, 2005 and 2004, we had an outstanding receivable from Mr. Yang, the President and Chairman of our Board of Directors, totaling $102,936, and $102,936, respectively. These advances bear no interest and are payable on demand. For the years ended December 31, 2005, 2004, and 2003, we recorded compensation to Mr. Yang of $226,922, $233,590, and $716,770, respectively, and paid $226,922, $233,590, and $92,308, respectively, to Mr. Yang as compensation to him. The respective unpaid amounts are included in the amount due from stockholder/director as of December 31, 2005 and 2004. During each of the years ended December 31, 2005, 2004, and 2003, we paid rent of $92,308, $82,692, and $53,846, respectively, for Mr. Yang's personal residency as fringe benefits to him, and paid housing allowance to him in the amount of $12,308, $12,308, and $12,308, respectively. All such payments have been recorded as compensation expense in the accompanying financial statements. TRANSACTIONS WITH CLASSIC ELECTRONIC LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $18,780,971, $40,885,565, and $15,224,745, respectively, to Classic Electronic Ltd. ("Classic"). We have not experienced any bad debt from this customer in the past. Pursuant to a written personal guarantee agreement, Mr. Yang personally guarantees to our lenders up to $10 million of the outstanding accounts receivable from Classic. During the years ended December 31, 2005, 2004, and 2003, we purchased inventory of $6,007,185, $5,867,150, and $4,159,300, respectively, from Classic, which offset the outstanding accounts receivable 28 from Classic. As of December 31, 2005 and 2004, we had net outstanding accounts receivable from Classic totaling $2,175,736 and $4,714,057, respectively. We leased one of our facilities and Mr. Yang's personal residency from Classic. Lease agreements for the one facility expire on November 30, 2006 while the lease agreement for Mr. Yang's personal residency expires on March 31, 2008 Monthly lease payments for these 2 leases totaled $6,684. We incurred and paid rent expense of $83,250, $88,462, and $56,731 to Classic for the years ended December 31, 2005, 2004, and 2003, respectively. During the years ended December 31, 2004 and 2003, certain Classic's employees performed work on behalf of Atlantic and their salaries were allocated to Atlantic's operations and charged to expenses in the accompanying consolidated financial statements. Such expenses approximated $57,820 for 2005, $0 for 2004, and $248,000 for 2003. In December 2003, we relieved our account receivable from Classic by transferring $1,048,604 of outstanding amounts we owed to its stockholder/director. Mr. Ben Wong, one of our directors, is a 99.9% shareholder of Classic. The remaining 0.1% of Classic is owned by a non-related party. TRANSACTIONS WITH ACL TECHNOLOGY PTE LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $0, $0, $901,430, respectively, to ACL Technology Pte Ltd. ("ACLT"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. We have not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, we purchased inventories of $0, $2,049,474, and $700,126, respectively, from ACLT. As of December 31, 2005 and 2004, there were no outstanding accounts payable to ACLT. In December 2003, we relieved our account receivable from ACLT by transferring $374,988 of outstanding amounts it owed to its stockholder/director. In 2004, we paid a commission of $392,434 to ACLT related to sales brought in by this entity. In 2004, we loaned $318,983 to ACLT, which is classified as loans receivable from related parties in the accompanying consolidated balance sheet. The loan is unsecured, bears no interest and fully repaid in 2005. Mr. Ben Wong, one of our directors, is a 99% shareholder of ACLT. The remaining 1% of ACLT is owned by a non-related party. TRANSACTIONS WITH KADATCO COMPANY LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $5,072,858, $166,152, and $0, respectively, to Kadatco Company Ltd. ("Kadatco"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004. We have not experienced any bad debt from this customer in the past. Mr. Yang is the sole beneficial owner of the equity interest of Kadatco. 29 TRANSACTIONS WITH RAMBO TECHNOLOGIES LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $165,225, $7,682,072, and $5,134,160, respectively, to Rambo Technologies Ltd. ("Rambo"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004. We have not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, we purchased $874,553, $339,605, and $229,781, respectively, from Rambo. Outstanding accounts payable due to Rambo totaled $0 and $61,360 as of December 31, 2005 and 2004. Mr. Ben Wong, one of our directors, is a 60% shareholder of Rambo. The remaining 40% of Rambo is owned by a non-related party. Mr. Yang is a director of Rambo. TRANSACTIONS WITH ARISTO COMPONENTS LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $71,402, $90, and $62,268, respectively, to Aristo Components Ltd. ("Aristo"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004. We have not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, we purchased $0, $500, and $28,053, respectively, from Aristo. There are no outstanding accounts payable due to Aristo as of December 31, 2004 and 2003. Mr. Ben Wong, one of our directors, is a 90% shareholder of Aristo. The remaining 10% of Aristo is owned by a non-related party. Mr. Yang is a director of Aristo. TRANSACTIONS WITH ATLANTIC NETCOM LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $1,652, $14,985, and $0, respectively, to Atlantic Netcom Ltd. ("Atlantic Netcom"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. We have not experienced any bad debt from this customer in the past. Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a director, is a 60% shareholder and director of Atlantic Netcom. The remaining 40% of Atlantic Netcom is owned by a non-related party. TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $55,122, $513,698, and $523,809, respectively, to Solution Semiconductor (China) Ltd. ("Solution"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004. We have not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, we purchased $22,019, $8,387, and $0, respectively, from Solution. There are no outstanding accounts payable due to Solution as of December 31, 2005 and 2004. Mr. Ben Wong, one of our directors, is a 99% shareholder of Solution. The remaining 1% of Solution is owned by a non-related party. 30 TRANSACTIONS WITH SYSTEMATIC INFORMATION LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $61,910, $1,941,298, and $137,482, respectively, to Systematic Information Ltd. ("Systematic Information"). There are no outstanding accounts receivable due from Systematic Information as of December 31, 2005 and 2004. We have not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, we purchased $0, $154,460, and $0, respectively, from Systematic Information. There are no outstanding accounts payable due to Systematic Information as of December 31, 2005 and 2004. On April 1, 2005, we entered into a lease agreement with Systematic Information pursuant to which we lease one residential property for Mr. Yang's personal use for a monthly lease payment of $3,205 per month. The lease agreement for this residency expires on September 30, 2008. Monthly lease payment for this lease totaled $3,205. We incurred and paid an aggregate rent expense of $38,462 and $28,846 to Systematic Information during the year ended December 31, 2005 and 2004. Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a director, is a director and shareholder of Systematic with a total of 100% interest. TRANSACTIONS WITH ARISTO TECHNOLOGIES LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $2,544,995, $0, and $0, respectively, to Aristo Technologies Ltd. ("Aristo"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. We have not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, we purchased inventories of $100,822, $0, and $0, respectively, from Aristo. As of December 31, 2005 and 2004, there were no outstanding accounts payable to Aristo. Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a director, is a director and the sole beneficial owner of Aristo. TRANSACTIONS WITH GLOBAL MEGA DEVELOPMENT LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $19,074, $427,004, and $0, respectively, to Global Mega Development Ltd. ("Global"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. We have not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, we received management fee $2,564, $0, and $0, respectively, from Global. As of December 31, 2005 and 2004, there were no outstanding accounts receivable from Global. Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a director, is the sole beneficial owner of the equity interest of Global. TRANSACTIONS WITH TFT TECHNOLOGIES LTD. During the years ended December 31, 2005, 2004, and 2003, we sold $1,460, $0, and $0, respectively, to TFT Technologies Ltd. ("TFT"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. We have not experienced any bad debt from this customer in the past. 31 Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a director, is a director and 51% shareholder of TFT. The remaining 49% of TFT is owned by a non-related party. TRANSACTIONS WITH INTELLIGENT NETWORK TECHNOLOGY LTD. During the years ended December 31, 2005, 2004, and 2003, we received management fee $2,564, $0, and $0, respectively, from Intelligent Network Technology Ltd. ("Intelligent"). As of December 31, 2005 and 2004, there were no outstanding accounts receivable from Intelligent. Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a director, is a director and 80% shareholder of Intelligent. The remaining 20% of Intelligent is owned by a non-related party. TRANSACTIONS WITH SYSTEMATIC SEMICONDUCTOR LTD. During the years ended December 31, 2005, 2004, and 2003, we received management fee $2,564, $0, and $0, respectively, from Systematic Semiconductor Ltd. ("Systematic"). As of December 31, 2005 and 2004, there were no outstanding accounts receivable from Systematic. Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a director, is the sole beneficial owner of the equity interest of Systematic. TRANSACTIONS WITH FIRST WORLD LOGISTICS LTD. During the years ended December 31, 2005, 2004, and 2003, we purchased inventories $306,432, $0, and $0, respectively, from First World Logistic Ltd. ("First"). As of December 31, 2005 and 2004, there were no outstanding accounts receivable from First. Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a director, is the sole beneficial owner of the equity interest of First. TRANSACTIONS WITH CITY ROYAL LTD. In August 2004, we were in negotiation with The Dah Sing Bank Limited (the "Dah Sing Bank") for an additional amount of its available line of credit. As a condition to the extension of additional credit to us, Dah Sing Bank requested additional collateral to secure the increased amount on the line. In order to meet the increased security requirement, we loaned $611,446 to City Royal Limited to pay off the mortgage loan on a residential property owned by City Royal Limited and pledged to Dah Sing Bank as collateral to secure our borrowings from Dah Sing Bank. In consideration thereof, Dah Sing Bank made available additional borrowings of HK$10 million (approximately US$1,282,000). The loan is unsecured and bears no interest. In February 2005, City Royal Limited sold the residential property and has repaid the loan through transferring the entire proceeds from the sale of HK$8,000,000 (approximately $1,025,641) to Dah Sing Bank as collateral for the Company's line. The loan to City Royal Limited is non-interest bearing, in consideration of which City Royal Limited did not charge an arrangement fee to us in respect of the security pledge in favor of Dah Sing Bank. The primary purpose of the loan, from our perspective, was to advance our business by enabling us to secure additional lines of financing in excess of the loan amount from Dah Sing Bank. We settled this loan in February 2005 and received payment in the full amount of $611,446. City Royal loaned $414,195 to the Company during the three months ended March 31, 2005 and the Company repaid $86,276 and $327,919 to City Royal during the three months ended June 30 and December 2005. There are no outstanding loan balance due to City Royal as of December 31, 2005. The Company believe that the above-referenced loan to City Royal in 2004 does not violate the general prohibition against loans made by publicly-traded 32 companies to its directors and executive officers set forth in Section 402 of the Sarbanes-Oxley Act of 2002 ("Section 402") as its primary purpose was to advance our business. However, no assurance can be given that the Securities and Exchange Commission or U.S. federal government will agree with our position and, in the event such loan is determined to be a violation of Section 402, the criminal penalties of the Securities Exchange Act of 1934, as amended, could apply. Mr. Yang's wife and Mr. Yang's mother-in-law are shareholders of City Royal Limited, owning 100% of the capital stock thereof. All the related party transactions taking place during the reporting periods were conducted during the normal course of business. The prices of products sold to or purchased from these related entities are in the same price ranges as those offered to other non related customers or purchased from other vendors. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The following table presents fees, including reimbursements for expenses, for professional audit services rendered by Stonefield Josephson, Inc. for the audits of our annual financial statements and interim reviews of our quarterly financial statements for the years ended December 31, 2005 and December 31, 2004 and fees billed for other services rendered by Stonefield Josephson, Inc. during those periods. FISCAL 2005 FISCAL 2004 Audit Fees (1) $ 162,650 $ 221,047 Audit Related Fees (2) $ -- $ -- Tax Fees (3) $ -- $ -- All Other Fees (4) $ -- $ -- Total $ -- $ -- - --------------- (1) Audit Fees consist of fees billed for professional services rendered for the audit of the Company's consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Stonefield Josephson, Inc. in connection with statutory and regulatory filings or engagements. (2) Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company's consolidated financial statements and are not reported under "Audit Fees." There were no such fees in fiscal year 2005 or 2004. (3) Tax Fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning. There were no such fees in fiscal year 2005 or 2004. (4) All Other Fees consist of fees for products and services other than the services reported above. There were no such fees in fiscal year 2005 or 2004. 33 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES. (a) Documents filed as part of this Report (1) The financial statements listed in the Index to Consolidated Financial Statements are filed as part of this report (2) The financial statements listed in the Index are filed a part of this report. Schedule II - Valuation and Qualifying Accounts and Reserves. Schedule II on page S-1 is filed as part of this report. (3) List of Exhibits See Index to Exhibits in paragraph (b) below. The Exhibits are filed with or incorporated by reference in this report. (c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K. Exhibit No. Description 3.1 Certificate of incorporation of the Company, together with all amendments thereto, as filed with the Secretary of State of the State of Delaware, incorporated by reference to Exhibit 3.1 to the Form 8-K filed with the Securities and Exchange Commission on December 19, 2003. 3.2 By-Laws of the Company, as amended, incorporated by reference to Exhibit 3.2 to the Company's Registration Statement. 4.1(a) Form of specimen certificate for common stock of the Company. 10.1 Share Exchange and Reorganization Agreement, dated as of September 8, 2003, among Print Data Corp., Atlantic Components Limited and Mr. Chung-Lun Yang, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on October 16, 2003. 10.2 Conveyance Agreement, dated as of September 30, 2003, between Print Data Corp. and New Print Data Corp., incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the Securities and Exchange Commission on October 16, 2003. 10.3 Securities Purchase Agreement, dated October 1, 2003, among Print Data Corp, Jeffery Green, Phyllis Green and Joel Green, incorporated by reference to Exhibit 10.3 to the Form 8-K filed with the Securities and Exchange Commission on October 16, 2003. 10.4 Sales Restriction Agreement, dated September 30, 2003, between Print Data Corp. and Phyllis Green, incorporated by reference to Exhibit 10.4 to the Form 8-K filed with the Securities and Exchange Commission on October 16, 2003. 10.5 Sales Restriction Agreement, dated September 30, 2003, between Print Data Corp. and Jeffery Green, incorporated by reference to Exhibit 10.5 to the Form 8-K filed with the Securities and Exchange Commission on October 16, 2003. 10.6 Distribution Agreement, dated May 1, 1993, by and between Samsung Electronics Co., Ltd. and Atlantic Components Limited, incorporated by reference to Exhibit 10.6 to the Form 8-K 34 filed with the Securities and Exchange Commission on October 16, 2003. 10.7 Renewal of Distributorship Agreement, dated March 1, 2002, by and between Samsung Electronics Co., Ltd. and Atlantic Components Limited, incorporated by reference to Exhibit 10.7 to the Form 8-K filed with the Securities and Exchange Commission on October 16, 2003. 10.8 Form of Note Subscription, dated as of December 31, 2003, by and between the Company and Professional Traders Fund LLC, a New York limited liability company ("PTF"), incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on March 24, 2004. 10.9 Form of 12% Senior Subordinated Convertible Note due December 31, 2004 in the aggregate principal amount of $250,000 issued by the Company to PTF, incorporated by reference to Exhibit 10.2 to the Form 8-K filed with the Securities and Exchange Commission on March 24, 2004. 10.10 Form of Limited Guaranty and Security Agreement, dated as of December 31, 2003, by and among, the Company, PTF, Orient Financial Services Limited, Mr. Li Wing-Kei and Emerging Growth Partners, Inc., incorporated by reference to Exhibit 10.3 to the Form 8-K filed with the Securities and Exchange Commission on March 24, 2004. 10.11 Form of Stock Purchase and Escrow Agreement, dated as of December 31, 2003, by and among, PTF, Orient Financial Services Limited, Mr. Li Wing-Kei and Emerging Growth Partners, Inc., and the law firm of Sullivan & Worcester LLP, as escrow agent, incorporated by reference to Exhibit 10.4 to the Form 8-K filed with the Securities and Exchange Commission on March 24, 2004. 10.12 Form of Letter Agreement, dated as of December 31, 2003, by and between the Company and PTF, incorporated by reference to Exhibit 10.5 to the Form 8-K filed with the Securities and Exchange Commission on March 24, 2004. 10.13 Letter of Intent, dated December 29, 2003, between the Company and Classic Electronics, Ltd., incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on March 25, 2004. 10.14 Note Subscription, dated as of December 31, 2003, by and between the Company and Professional Traders Fund LLC, a New York limited liability company ("PTF"), incorporated by reference to Exhibit 10.6 to the Form 8-K/A filed with the Securities and Exchange Commission on April 13, 2004. 10.15 12% Senior Subordinated Convertible Note due December 31, 2004 in the aggregate principal amount of $250,000 issued by the Company to PTF, incorporated by reference to Exhibit 10.7 to the Form 8-K/A filed with the Securities and Exchange Commission on April 13, 2004. 10.16 Limited Guaranty and Security Agreement, dated as of December 31, 2003, by and among, the Company, PTF, Orient Financial Services Limited, Mr. Li Wing-Kei and Emerging Growth Partners, Inc., incorporated by reference to Exhibit 10.8 to the Form 8-K/A filed with the Securities and Exchange Commission on April 13, 2004. 35 10.17 Stock Purchase and Escrow Agreement, dated as of December 31, 2003, by and among, PTF, Orient Financial Services Limited, Mr. Li Wing-Kei and Emerging Growth Partners, Inc., and the law firm of Sullivan & Worcester LLP, as escrow agent, incorporated by reference to Exhibit 10.9 to the Form 8-K/A filed with the Securities and Exchange Commission on April 13, 2004. 10.18 Letter Agreement, dated as of December 31, 2003, by and between the Company and PTF, incorporated by reference to Exhibit 10.10 to the Form 8-K/A filed with the Securities and Exchange Commission on April 13, 2004. 10.19 Stock Purchase Agreement, dated as of December 30, 2005, by and among the Company, Classic Electronics, Ltd. ("Classic") and the shareholders of Classic, incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange Commission on January 6, 2006. 10.20 2006 Incentive Equity Stock Plan* 14 Code of Business Conduct and Ethics of the Company incorporated by reference to Exhibit 14 to the Form 10-K for the period ended December 31, 2003. 21 Subsidiaries of the Company Atlantic Components Limited, a Hong Kong corporation Alpha Perform Technologies Limited, a British Virgin Islands corporation 31.1 Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certification of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* * Filed herewith (c) Financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b). 36 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. ACL SEMICONDUCTORS INC. By: /s/ CHUNG LUN YANG -------------------------- Chung-Lun Yang Chief Executive Officer Dated: April 17, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ CHUNG LUN YANG Chief Executive April 17, 2006 - ---------------------------- Officer and Chairman of the Chung-Lun Yang Board of Directors (Principal Executive Officer) /s/ KENNETH LAP-YIN CHAN Chief Financial Officer, April 17, 2006 - --------------------------- (Principal Financial and Accounting Kenneth Lap-Yin Chan Officer) /s/ BEN WONG Director April 17, 2006 - ---------------------------- Ben Wong
37 EX-10.2 2 c41890_ex10-2.txt ACL SEMICONDUCTORS, INC. 2006 INCENTIVE EQUITY STOCK PLAN 1. PURPOSES OF THE PLAN. The purposes of this Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights, Stock Awards and Stock Bonuses may also be granted under the Plan. 2. DEFINITIONS. As used herein, the following definitions shall apply: a. "AWARD" means any award under this Plan, including any Option, Stock Award or Stock Bonus. b. "ADMINISTRATOR" means the Board or any of its Committees as shall be administering the Plan in accordance with Section 4 hereof. c. "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any other country or jurisdiction where Options or Stock Purchase Rights are granted under the Plan. d. "BOARD" means the Board of Directors of the Company. e. "CODE" means the Internal Revenue Code of 1986, as amended. f. "COMMITTEE" means a committee of Directors appointed by the Board in accordance with Section 4 hereof. g. "COMMON STOCK" means the Common Stock, par value $0.001 per share, of the Company. h. "COMPANY" means ACL Semiconductors, Inc., a Delaware corporation. i. "CONSULTANT" means any person who is engaged by the Company or any Parent or Subsidiary to render consulting services to such entity. j. "DIRECTOR" means a member of the Board of Directors of the Company. k. "DISABILITY" means total and permanent disability as defined in Section 22(e)(3) of the Code. l. "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A person shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. m. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. n. "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: i. If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq National Market or The Nasdaq Small Cap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in THE WALL STREET JOURNAL or such other source as the Administrator deems reliable; ii. If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination; or iii. In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. o. "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. p. "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. q. "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. r. "OPTION" means a stock option granted pursuant to the Plan. s. "OPTION AGREEMENT" means a written or electronic agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. 2 t. "OPTION EXCHANGE PROGRAM" means a program whereby outstanding Options are exchanged for Options with a lower exercise price. u. "OPTIONED STOCK" means the Common Stock subject to an Option or a Stock Purchase Right. v. "OPTIONEE" means the holder of an outstanding Option or Stock Purchase Right granted under the Plan. w. "PARENT" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. x. "PARTICIPANT" means a person who receives an Award under this Plan. y. "PERFORMANCE STOCK BONUS AGREEMENT" means an award agreement pursuant to which Stock Bonuses are granted for achieving certain performance goals. z. "PLAN" means this 2006 Incentive Equity Stock Plan. aa. "PURCHASE PRICE" means the price at which the Participant of a Stock Award may purchase the Shares. bb. "RESTRICTED STOCK" means shares of Common Stock acquired pursuant to a grant of a Stock Purchase Right under Section 12 below. cc. "SERVICE PROVIDER" means an Employee, Consultant or other service provider. dd. "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 18 below. ee. "STOCK AWARD" means an award of Shares pursuant to Section 10. ff. "STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant to Section 11. gg. "STOCK AWARD AGREEMENT" means the award agreement pursuant to which Stock Awards are granted. hh. "STOCK BONUS AGREEMENT" means the award agreement pursuant to which Stock Bonuses are granted. ii. "STOCK PURCHASE RIGHT" means a right to purchase Common Stock pursuant to Section 12 below. jj. "SUBSIDIARY" means a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code. 3 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 18 of the Plan, the maximum aggregate number of Shares that may be subject to option or otherwise available for grant and issuance under the Plan is 5,000,000 Shares. The Shares may be authorized but unissued, or reacquired Common Stock. If an Award or Stock Purchase Right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan, upon exercise of either an Award or Stock Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. a. ADMINISTRATOR. The Plan shall be administered by the Board or a Committee appointed by the Board, which Committee shall be constituted to comply with Applicable Laws. b. POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, and subject to the approval of any relevant authorities, the Administrator shall have the authority in its discretion: i. to determine Fair Market Value; ii. to select the Service Providers to whom Awards and Stock Purchase Rights may from time to time be granted hereunder; iii. to determine the number of Shares to be covered by each such award granted hereunder; iv. to approve forms of agreement for use under the Plan; v. to determine the terms and conditions, of any Award or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards or Stock Purchase Rights may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or Stock Purchase Right or the Common Stock relating thereto, based in each case on such factors as the Administrator, in its sole discretion, shall determine; vi. to determine whether and under what circumstances an Award may be settled in cash under subsection 8(e) instead of Common Stock; 4 vii. to reduce the exercise price of any Award to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Award has declined since the date the Award was granted; viii. to initiate an Option Exchange Program; ix. to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; x. to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Award or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by Participants to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable; and xi. to construe and interpret the terms of the Plan and awards granted pursuant to the Plan. c. EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Participants. 5. ELIGIBILITY. a. Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to Employees. b. Each Award shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Awards shall be treated as Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be determined as of the time the Award with respect to such Shares is granted. c. Neither the Plan nor any Award or Stock Purchase Right shall confer upon any Optionee or Participant any right with respect to continuing the Participant's relationship as a Service Provider with the Company, nor shall it interfere in any way with his or her right or the Company's right to terminate such relationship at any time, with or without cause. 6. TERM OF PLAN. The Plan shall become effective upon its adoption by the Board. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 20 of the Plan. 5 7. OPTION EXERCISE PRICE AND CONSIDERATION. a. The per share exercise price for the Shares to be issued upon exercise of an Option shall be such price as is determined by the Administrator, but shall be subject to the following: i. In the case of an Incentive Stock Option A. granted to an Employee who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. B. granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. ii. In the case of a Nonstatutory Stock Option A. granted to a Service Provider who, at the time of grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. B. granted to any other Service Provider, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. iii. Notwithstanding the foregoing, Options may be granted with a per Share exercise price other than as required above pursuant to a merger or other corporate transaction. b. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). Such consideration may consist of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised, (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan, or (6) any combination of the foregoing methods of payment. In making its determination as to the type of consideration to accept, the Administrator shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 6 8. EXERCISE OF OPTION. a. PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option granted hereunder shall be exercisable according to the terms hereof at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Except in the case of Options granted to Officers, Directors and Consultants or as otherwise provided in the Option Agreement, Options shall become exercisable at a rate of no less than 20% per year over five (5) years from the date the Options are granted. Unless the Administrator provides otherwise, vesting of Options granted hereunder to Officers and Directors shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Shares, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 18 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. b. TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an Optionee ceases to be a Service Provider (other than by reason of Disability or Death), such Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least thirty (30) days) to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of the Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified by the Administrator, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. c. DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service Provider as a result of the Optionee's Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall revert to the Plan. 7 If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. d. DEATH OF OPTIONEE. If an Optionee dies while a Service Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (of at least six (6) months) to the extent that the Option is vested on the date of death (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement) by the Optionee's estate or by a person who acquires the right to exercise the Option by bequest or inheritance. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for twelve (12) months following the Optionee's termination. If, at the time of death, the Optionee is not vested as to the entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. e. BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. 9. TERM OF OPTION. The term of each Option shall be stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof. In the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant or such shorter term as may be provided in the Option Agreement. 10. STOCK AWARD. a. NATURE OF STOCK AWARD. A Stock Award is an offer by the Company to sell to an eligible person Shares that may or may not be subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price"), the restrictions to which the Shares will be subject, if any, and all other terms and conditions of the Stock Award, subject to the following: b. FORM OF STOCK AWARD. All purchases under a Stock Award made pursuant to this Plan will be evidenced by an Award Agreement (the "Stock Award Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of a Stock Award will be accepted by the Participant's execution and delivery of the Stock Award Agreement (or similar agreement) and payment for the Shares to the Company in accordance with the Stock Award Agreement. c. PURCHASE PRICE. The Purchase Price of Shares sold pursuant to a Stock Award will be determined by the Committee on the date the Stock Award is granted and may not be less than 100% of the Fair Market Value of the Shares on the grant date, except in the case of 8 a sale to a Ten Percent Stockholder, in which case the Purchase Price will be 110% of the Fair Market Value. d. TERMS OF STOCK AWARDS. Stock Awards may be subject to such restrictions as the Committee may impose. These restrictions may be based upon completion of a specified number of years of service with the Company or upon completion of the performance goals as set out in advance in the Participant's individual Stock Award Agreement. Stock Awards may vary from Participant to Participant and between groups of Participants. Prior to the grant of a Stock Award subject to restrictions, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the Participant. Prior to the transfer of any Stock Award, the Committee shall determine the extent to which such Stock Award has been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Awards that are subject to different Performance Periods and have different performance goals and other criteria. e. TERMINATION DURING PERFORMANCE PERIOD. If a Participant is terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Award only to the extent earned as of the date of Termination in accordance with the Stock Award Agreement, unless the Committee determines otherwise. 11. STOCK BONUSES. a. AWARDS OF STOCK BONUSES. A Stock Bonus is an award of Shares for extraordinary services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus will be awarded pursuant to an Award Agreement (the "Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "Performance Stock Bonus Agreement") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine. b. TERMS OF STOCK BONUSES. The Committee will determine the number of Shares to be awarded to the Participant. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will: (a) determine the nature, length and starting date of any Performance Period for each Stock Bonus; (b) select from among the Performance Factors to be used to measure the performance, if any; and (c) determine the number of Shares that may be awarded to the Participant. Prior to the payment of any Stock Bonus, the Committee shall determine the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may 9 vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. c. FORM OF PAYMENT. The earned portion of a Stock Bonus may be paid to the Participant by the Company either currently or on a deferred basis, with such interest or dividend equivalent, if any, as the Committee may determine. Payment of an interest or dividend equivalent (if any) may be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine. 12. STOCK PURCHASE RIGHTS. a. RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically of the terms, conditions and restrictions related to the offer, including the number of Shares that such person shall be entitled to purchase, the price to be paid, and the time within which such person must accept such offer. The offer shall be accepted by execution of a Restricted Stock purchase agreement in the form determined by the Administrator. b. REPURCHASE OPTION. Unless the Administrator determines otherwise, the Restricted Stock purchase agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's service with the Company for any reason (including death or disability). The purchase price for Shares repurchased pursuant to the Restricted Stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine. Except with respect to Shares purchased by Officers, Directors and Consultants, the repurchase option shall in no case lapse at a rate of less than 20% per year over five (5) years from the date of purchase. c. OTHER PROVISIONS. The Restricted Stock purchase agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. d. RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is exercised, the purchaser shall have rights equivalent to those of a shareholder and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 18 of the Plan. 13. PAYMENT FOR SHARE PURCHASES. Payment for Shares purchased pursuant to this Plan may be made in case (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: 10 a. by cancellation of indebtedness of the Company to the Participant; b. by surrender of shares that either: (A) have been owned by the Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144; or (B) were obtained by the Participant in the public market; c. by waiver of compensation due or accrued to the participant for services rendered; d. with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (A) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (B) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly the Company; or e. by any combination of the foregoing. 14. WITHHOLDING TAXES. a. WITHHOLDING GENERALLY. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. b. STOCK WITHHOLDING. When, under applicably tax laws, a participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee and will be in writing in a form acceptable to the Committee. 15. PRIVILEGES OF STOCK OWNERSHIP. a. VOTING AND DIVIDENDS. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares 11 are issued to the Participant, the Participant will be a stockholder and will have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are issued pursuant to a Stock Award with restrictions, than any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Stock Award; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's Purchase Price or Exercise Price pursuant to Section 17. b. FINANCIAL STATEMENTS. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 16. NON-TRANSFERABILITY OF AWARDS AND STOCK PURCHASE RIGHTS. The Awards and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 17. REPURCHASE RIGHTS. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement, a right to repurchase a portion of or all of the unvested Shares held by a Participant following such Participant's Termination Date. Such repurchase by the Company shall be for cash and/or cancellation of purchase mony indebytedness and the price per share shall be the Participant's Exercise Price or Purchase Price, as applicable. 18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE. a. CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Award or Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Award or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Award or Stock Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company. The conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Award or Stock Purchase Right. 12 b. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each Participant as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Participant to have the right to exercise his or her Award or Stock Purchase Right until fifteen (15) days prior to such transaction as to all of the Awarded Stock covered thereby, including Shares as to which the Award or Stock Purchase Right would not otherwise be exercisable. In addition, the Administrator may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Award or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in the manner contemplated. To the extent it has not been previously exercised, an Award or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. c. MERGER OR ASSET SALE. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Award and Stock Purchase Right shall be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Award or Stock Purchase Right, the Participant shall fully vest in and have the right to exercise the Award or Stock Purchase Right as to all of the Awarded Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Award or Stock Purchase Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Participant in writing or electronically that the Award or Stock Purchase Right shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the Award or Stock Purchase Right shall terminate upon the expiration of such period. For the purposes of this paragraph, the Award or Stock Purchase Right shall be considered assumed if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Awarded Stock subject to the Award or Stock Purchase Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Award or Stock Purchase Right, for each Share of Awarded Stock subject to the Award or Stock Purchase Right, to be solely common stock of the successor corporation or its Parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 19. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of grant of an Award or Stock Purchase Right shall, for all purposes, be the date on which the Administrator makes the determination granting such Award or Stock Purchase Right, or such other date as is determined by the Administrator. Notice of the determination shall be given to each Service Provider to whom an Award or Stock Purchase Right is so granted within a reasonable time after the date of such grant. 13 20. AMENDMENT AND TERMINATION OF THE PLAN. a. AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or terminate the Plan. b. SHAREHOLDER APPROVAL. The Board shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. c. EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan shall not affect the Administrator's ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination. 21. CONDITIONS UPON ISSUANCE OF SHARES. a. LEGAL COMPLIANCE. Shares shall not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. b. INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Award, the Administrator may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 22. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 23. RESERVATION OF SHARES. The Company, during the term of this Plan, shall at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. 24. SHAREHOLDER APPROVAL. Issuances of Incentive Stock Options under this Plan shall be subject to approval of the Plan by the shareholders of the Company within twelve (12) months after the date the Plan is adopted by the Board. Such shareholder approval shall be obtained in the degree and manner required under Applicable Laws. EX-31.1 3 c41890_ex31-1.txt EXHIBIT 31.1 CERTIFICATION I, Chung-Lun Yang, certify that: 1. I have reviewed this annual report on Form 10-K of ACL Semiconductors Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a015(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 17, 2006 /s/ CHUNG LUN YANG --------------------------- Chung-Lun Yang Chief Executive Officer EX-31.2 4 c41890_ex31-2.txt EXHIBIT 31.2 CERTIFICATION I, Kenneth Lap-Yin Chan, certify that: 1. I have reviewed this annual report on Form 10-K of ACL Semiconductors Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a015(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 17, 2006 /s/ KENNETH LAP-YIN CHAN ------------------------ Kenneth Lap-Yin Chan Chief Financial Officer and Treasurer EX-32.1 5 c41890_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of ACL Semiconductors Inc. (the "Company") on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission (the "Report"), I, Chung-Lun Yang, Chief Executive Officer of the Company, certify, pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented. Date: April 17, 2006 /s/ CHUNG LUN YANG -------------------------- Chung-Lun Yang Chief Executive Officer of ACL Semiconductors Inc. This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to ACL Semiconductors, Inc. and will be retained by ACL Semiconductors Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 c41890_ex32-2.txt EXHIBIT 32.2 6 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of ACL Semiconductors Inc. (the "Company") on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission (the "Report"), I, Kenneth Lap-Chan, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented. Date: April 17, 2006 /s/ Kenneth Lap-Yin Chan ------------------------ Kenneth Lap-Yin Chan Chief Financial Officer of ACL Semiconductors Inc. This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to ACL Semiconductors, Inc. and will be retained by ACL Semiconductors Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -41- SCHEDULE II ACL SEMICONDUCTORS INC. AND SUBSDIARIES Valuation and Qualifying Accounts and Reserves Years Ended December 31, 2005, 2004 and 2003
Balance Charged Balance at the Beginning to Costs at the End of the Year and Expenses Deductions of the Year ---------------- ------------ ---------- ----------- Allowance for Doubtful Accounts: Year ended December 31, 2003 $ - $ 128,598 $ 128,598 $ - Year ended December 31, 2004 $ - $ - $ - $ - Year ended December 31, 2005 $ - $ 6,200 $ 6,200 $ - Inventory Obsolescence Reserve: Year ended December 31, 2003 $ 100,000 $ 50,590 $ - $ 150,590 Year ended December 31, 2004 $ 150,590 $ 3,256 $ - $ 153,846 Year ended December 31, 2005 $ 153,846 $ - $ - $ 141,026 Valuation Allowance for Deferred Tax Assets: Year ended December 31, 2003 $ - $ 513,544 $ - $ 513,544 Year ended December 31, 2004 $ 513,544 $ 291,909 $ - $ 805,453 Year ended December 31, 2005 $ 805,453 $ 109,293 $ - $ 914,746
S-1 ACL Semiconductors Inc. and Subsidiaries CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2005 and December 31, 2004 and the Years Ended December 31, 2005, 2004 and 2003 WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -43- CONTENTS Page ---- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1 FINANCIAL STATEMENTS: Consolidated Balance Sheets F-2 - F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity (Deficit) F-5 - F-6 Consolidated Statements of Cash Flows F-7 - F-9 Notes to Consolidated Financial Statements F-9 - F-33 -44- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors ACL Semiconductors Inc. Kowloon, Hong Kong We have audited the accompanying consolidated balance sheets of ACL Semiconductors Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity (deficit), cash flows and financial statement schedule for each of the three years in the period ended December 31, 2005, as listed in the index appearing under Item 15(a)(1) and (2) of this Annual Report on Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 10 to the consolidated financial statements, the Company has had numerous significant transactions with businesses and affiliates controlled by, and with persons who are related to, the officers and directors of the Company. As discussed in Note 7 to the consolidated financial statements, the Company is dependent on one single vendor to supply its inventories and this single vendor provided the majority of the Company's inventory purchases during the years ended December 31, 2005, 2004, and 2003. The Company's non-exclusive distributorship agreement with this supplier expired on March 1, 2006. The Company is still in negotiation with the supplier regarding the renewal terms of the agreement, and such an agreement has not yet been renewed. Termination of such distributorship agreement by the supplier would have a material adverse effect on the operations of the Company. /s/ STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS Central, Hong Kong April 12, 2006, except for Note 13, for which the date is April 13, 2006 F-1 ACL SEMICONDUCTORS AND SUBSDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 2005 2004 ------------------- ------------------ CURRENT ASSETS: Cash and cash equivalents $ 2,537,799 $ 512,548 Restricted cash 769,231 - Accounts receivable, net of allowance for doubtful accounts of $0 for 2005 and 2004 515,557 1,088,751 Accounts receivable, related parties 2,175,737 4,727,517 Loans receivable, related parties - 930,429 Inventories, net 1,087,752 1,520,117 Refundable deposits 1,000,000 - Other current assets 263,300 80,802 ------------------- ------------------ Total current assets 8,349,376 8,860,164 PROPERTY, EQUIPMENT AND IMPROVEMENTS, net of accumulated depreciation and amortization 102,037 55,819 ACQUISITION DEPOSITS - 1,000,000 OTHER DEPOSITS 381,044 350,000 ------------------- ------------------ $ 8,832,457 $ 10,265,983 =================== ==================
F-2 ACL SEMICONDUCTORS AND SUBSDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 2005 2004 ------------------- ------------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,495,819 $ 5,065,965 Accrued expenses 272,782 456,676 Lines of credit and loan facilities 2,842,285 3,469,632 Current portion of long-term debt - 286,032 Convertible note payable - 150,000 Payable related to debt settlement 76,088 - Income tax payable 217,453 145,050 Due to shareholders for converted pledged collateral 112,385 112,385 Other current liabilities 55,019 13,610 ------------------- ------------------ Total current liabilities 8,071,831 9,699,350 Long-term debt, less current portion - 65,522 ------------------- ------------------ Total liabilities 8,071,831 9,764,872 ------------------- ------------------ COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY (DEFICIT): Common stock - $0.001 par value, 50,000,000 shares authorized, 27,829,936 issued and outstanding 27,830 27,830 Additional paid-in capital 3,360,405 3,360,405 Amount due from stockholder/director (102,936) (102,936) Accumulated deficit (2,524,673) (2,784,188) ------------------- ------------------ Total stockholders' equity 760,626 501,111 ------------------- ------------------ $ 8,832,457 $ 10,265,983 =================== ==================
The accompanying notes form an integral part of these consolidated financial statements F-3 ACL SEMICONDUCTORS AND SUBSDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
December 31, 2005 2004 2003 -------------------- ------------------- ------------------- NET SALES: Related parties $ 26,772,046 $ 51,203,860 $ 21,983,894 Other 83,538,221 82,158,559 50,840,352 Less discounts to customers (102,524) (118,729) (151,449) -------------------- ------------------- ------------------- 110,207,743 133,243,690 72,672,797 COST OF SALES 107,004,491 130,130,674 68,214,587 -------------------- ------------------- ------------------- GROSS PROFIT 3,203,252 3,113,016 4,458,210 OPERATING EXPENSES: Selling 745,755 453,862 149,364 General and administrative 2,059,150 2,618,810 2,571,147 Merger cost - - 2,753,620 -------------------- ------------------- ------------------- INCOME (LOSS) FROM OPERATIONS 398,347 40,344 (1,015,921) OTHER INCOME (EXPENSES): Rental income 3,502 - - Interest expense (203,192) (402,412) (166,509) Gain on disposal of property and equipment - 128 7,228 Miscellaneous 184,093 (6,252) 3,398 -------------------- ------------------- ------------------- INCOME (LOSS) BEFORE INCOME TAXES 382,750 (368,192) (1,171,804) INCOME TAXES 123,235 85,814 265,866 -------------------- ------------------- ------------------- NET INCOME (LOSS) $ 259,515 $ (454,006) $ (1,437,670) ==================== =================== =================== EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED $ 0.01 $ (0.02) $ (0.06) ==================== =================== =================== WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED 27,829,936 27,829,936 23,753,682 ==================== =================== ===================
The accompanying notes form an integral part of these consolidated financial statements F-4 ACL SEMICONDUCTORS AND SUBSDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Total Common stock Additional Due from stockholders' ---------------------------- paid-in stockholder/ Accumulated Equity Shares Amount capital director deficit (deficit) ------------- ------------ ------------ ------------ -------------- ------------- Balance at December 31, 2002 22,380,000 $ 22,380 $ 362,235 $(624,351) $ (379,691) $ (619,427) Reverse acquisition between ACL Semiconductors Inc. (formerly Print Data Corp.) and Atlantic Components Ltd. 2,829,936 2,830 (2,830) - - - Issuance of common stock to consultants related to reverse-acquisition 2,620,000 2,620 2,751,000 - - 2,753,620 Dividend declared - - - - (512,821) (512,821) Intrinsic value for beneficial conversion feature on convertible note payable - - 250,000 - - 250,000 Net decrease in due from stockholder/director - - - 521,415 - 521,415 Net loss - - - - (1,437,670) (1,437,670) ------------- ------------ ------------ ------------ -------------- ------------- Balance at December 31, 2003 27,829,936 $ 27,830 $3,360,405 $ (102,936) $ (2,330,182) $955,117 Net loss - - - - (454,006) (454,006) ------------- ------------ ------------ ------------ -------------- -------------
F-5 ACL SEMICONDUCTORS AND SUBSDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Total Common stock Additional Due from stockholders' ---------------------------- paid-in stockholder/ Accumulated Equity Shares Amount capital director deficit (deficit) ------------- ------------ ------------ ------------ -------------- ------------- Balance at December 31, 2004 27,829,936 $ 27,830 $ 3,360,405 $(102,936) $ (2,784,188) $ 501,111 Net income - - - - 259,515 259,515 ------------- ------------ ------------ ------------ -------------- ------------- Balance at December 31, 2005 27,829,936 27,830 $ 3,360,405 $(102,936) $ (2,524,673) $ 760,626 ============= ============ ============ ============ ============== =============
The accompanying notes form an integral part of these consolidated financial statements F-6 ACL SEMICONDUCTORS AND SUBSDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31, ------------------------------------------------------------ 2005 2004 2003 ----------------- ------------------ ---------------- CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Net income (loss) $ 259,515 $ (454,006) $(1,437,670) ----------------- ------------------ ---------------- ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Depreciation and amortization 29,236 23,032 15,230 Bad debt 6,200 - 128,598 Change in inventory reserve (12,821) 3,256 50,590 Gain on disposal of property and equipment - (128) (7,228) Merger cost - - 2,753,620 Amortization of convertible note payable discount - 250,000 - Reduction of receivable due from stockholder/ Director as additional compensation - - 624,462 CHANGES IN ASSETS AND LIABILITIES: (INCREASE) DECREASE IN ASSETS Accounts receivable - other 566,994 (208,390) 75,157 Accounts receivable - related parties 2,551,780 753,675 (2,661,158) Inventories 445,186 (196,253) (1,075,621) Other current assets (182,498) (70,123) 421 Other asssets (31,044) - - INCREASE (DECREASE) IN LIABILITIES Accounts payable (570,146) 28,661 1,221,659 Accrued expenses (183,894) 328,692 (18,780) Income tax payable 72,403 (32,595) 118,707 Other current liabilities 41,409 (8,945) (4,138) ----------------- ------------------ ---------------- Total adjustments 2,732,805 870,882 1,221,519 ----------------- ------------------ ---------------- Net cash provided by (used for) operating activities 2,992,320 416,876 (216,151) ----------------- ------------------ ----------------
F-7 ACL SEMICONDUCTORS AND SUBSDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31, ------------------------------------------------------------ 2005 2004 2003 ----------------- ------------------ ---------------- CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES: (Loans) to/repayments from stockholders - - 807,724 Increase in restricted cash (769,231) - - Loan to related party - (930,429) - Repayments from related party 930,429 - - Proceeds received from sale of fixed assets - 128 25,641 Purchases of property, equipment and improvements (75,454) (24,469) (42,724) ----------------- ------------------ ---------------- Net cash provided by (used for) investing activities 85,744 (954,770) 790,641 ----------------- ------------------ ---------------- CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES: Proceeds (repayments) on lines of credit and notes payable (627,347) 1,310,648 166,410 Cash proceeds from issuance of convertible note payable - - 250,000 Payments related to debt settement (73,912) - - Principal payments on long-term debt (351,554) (727,280) (702,763) ----------------- ------------------ ---------------- Net cash provided by (used for) financing activities (1,052,813) 583,368 (286,353) ----------------- ------------------ ---------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,025,251 45,474 288,137 CASH AND CASH EQUIVALENTS, beginning of year 512,548 467,074 178,937 ----------------- ------------------ ---------------- CASH AND CASH EQUIVALENTS, end of year $ 2,537,799 $ 512,548 $ 467,074 ================= ================== ================
F-8 ACL SEMICONDUCTORS AND SUBSDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years ended December 31, ------------------------------------------------------------ 2005 2004 2003 ----------------- ------------------ ---------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 203,192 $ 152,412 $ 166,509 ================= ================== ================ Income tax paid $ 50,832 $ 118,409 $ 147,159 ================= ================== ================ NON-CASH ACTIVITIES: Reduction of accounts receivable from related party as acquisition deposits $ - $ - $ 1,000,000 ================= ================== ================ Reduction of accounts receivable from related parties for assumed liability due stockholder/director $ - $ - $ 1,423,592 ================= ================== ================ Dividend to stockholder of Atlantic Components Ltd. prior to reverse-acquisition to increase payable to stockholder/director $ - $ - $ 512,821 ================= ================== ================ Conversion of convertible debenture to due to shareholders for shares pledged as collateral $ - $ 100,000 $ - ================= ================== ================ Reclassification of convertible debenture to payable related to debt settlement $ 150,000 $ - $ - ================= ================== ================
The accompanying notes form an integral part of these consolidated financial statements F-9 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION: On September 8, 2003, ACL Semiconductors Inc. (formerly Print Data Corp.) ("ACL") entered into a Share Exchange and Reorganization Agreement with Atlantic Components Ltd. ("Atlantic"), a Hong Kong based company, and Mr. Chung-Lun Yang ("Mr. Yang"), the then sole beneficial stockholder of Atlantic. Under the terms of the agreement, ACL issued 22,380,000 of its shares to Mr. Chung-Lun Yang and 2,620,000 of its shares to certain financial advisors in exchange for 100% of the issued and outstanding shares of Atlantic's capital stock. The Company recorded an expense of $2,753,620 related to the issuance of 2,620,000 shares of its common stock to these advisors, which was computed based on the quoted market price of $1.05 on September 30, 2003, the effective date of the merger and was classified as merger cost in the accompanying consolidated statements of operations for the year ended December 31, 2003. The share exchange agreement closed and became effective on September 30, 2003. Upon the completion of this transaction, Atlantic became the wholly owned subsidiary of ACL, and Mr. Yang became the owner of approximately 80% of ACL's issued and outstanding shares of common stock. In addition, ACL's directors and officers resigned and were replaced by directors and officers of Atlantic. For accounting purposes, the acquisition was accounted for as a recapitalization whereby Atlantic was deemed to have acquired ACL. Because the acquisition was accounted for as a purchase of ACL, the historical financial statements of Atlantic became the historical financial statements of ACL after this transaction. The accompanying consolidated statements of operations for the year ended December 31, 2003 include the operating results of Atlantic up to September 30, 2003, the closing date of the acquisition, and the operating results of ACL from October 1, 2003 to December 31, 2003. In accounting for this transaction: o Atlantic is deemed to be the purchaser and surviving company for accounting purposes. Accordingly, due to the acquisition, its net assets have been included in the consolidated balance sheets at their historical book values and the results of operations of Atlantic have been presented for the comparative prior years ended December 31, 2002. o Control of the net assets and operations of ACL was acquired effective September 30, 2003. The Company accounted for this transaction as a purchase of the assets and liabilities of ACL. The historical cost of the net assets assumed was $0. F-10 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED: In connection with this transaction, ACL entered into a Conveyance Agreement on September 30, 2003 with New Print Data Corp. ("NewCo"). Under the terms of this agreement, effective September 30, 2003, ACL conveyed its historic operations of providing supplies used in a computer or office environment to NewCo, by assigning all of the assets and liabilities related to such operations to NewCo which accepted the assignment and assumed all such liabilities in exchange for 1,000,000 shares of common stock of NewCo. On October 1, 2003, Print Data Corp. entered into a Securities Purchase Agreement with the holders of Print Data Corp.'s Series A Preferred Stock. Under the terms of this agreement, Print Data Corp. sold its 1,000,000 shares of NewCo common stock in exchange for the cancellation of the issued and outstanding 500,400 shares of ACL's Series A Preferred Stock (representing 100% of Print Data Corp.'s issued and outstanding preferred stock previously held by three preferred stockholders). This transaction was reflected in the accompanying consolidated balance sheet as if the transaction took place on September 30, 2003. On December 16, 2003, Print Data Corp. filed a Certificate of Amendment with the Secretary of State of the State of Delaware changing its name from Print Data Corp. to ACL Semiconductors Inc. On December 31, 2004, ACL entered into a Stock Purchase Agreement with Classic Electronics Ltd., a Hong Kong corporation ("Classic") and the stockholders of Classic, pursuant to which ACL would purchase all of the outstanding shares of capital stock of Classic from its two selling stockholders (the "Selling Stockholders") for an aggregate purchase price of 12,000,000 shares of common stock, par value $0.001 per share, of the Company, to be issued to the Selling Stockholders pro rata based on their ownership percentages of Classic, the cancellation of $4.0 million of indebtedness owed by the Selling Stockholders to Classic, which consideration is in addition to the $1.0 million paid to Classic by ACL in December 2003 as an irrevocable deposit towards the acquisition through the cancellation of accounts receivable then owing by Classic to ACL. Mr. Ben Wong, a director of ACL, is a 99.9% shareholder of Classic. The remaining 0.1% of Classic is owned by a non-related party. As of April 8, 2005, the due diligence procedures were not yet been completed by both entities and the closing date of the acquisition was postponed to a date when such due diligence procedures are completed and the related results are satisfactory for both parties. Accordingly, the accompanying consolidated financial statements do not include the financial statements of Classic as the transaction has not been effectively consummated because the considerations have not yet been exchanged between the two entities and effective control of Classic has not transferred to the Company. F-11 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: BUSINESS ACTIVITY: On December 30, 2005, the Company entered into a Stock Purchase Agreement with the stockholders of Classic ("Sellers") to acquire 100% of Classic through the cancellation of an aggregate of approximately $4.0 million of indebtedness owed by the Sellers, plus $1.0 million previously paid by Purchaser to Classic on December 29, 2003 as a non-refundable deposit towards the consummation of the sale of Classic to the Purchaser through cancellation of accounts receivable then payable by Classic to Purchaser. Classic was unable to provide certain information requested by the Company on a timely manner. On April 13, 2006, both parties entered into a Rescission Agreement to rescind the original Stock Purchase Agreement entered on December 30, 2005. The seller agreed to fully refund the acquisition deposits of $1.0 million during 2006. See Note 13. Accordingly, the accompanying consolidated financial statements did not include the accounts of Classic due to this rescission. ACL Semiconductors Inc. ("Company" or "ACL") was incorporated under the State of Delaware on September 17, 2002. Through a reverse-acquisition of Atlantic Components Ltd., a Hong Kong based company, effective September 30, 2003, the Company's principal activities are distribution of electronic components under the "Samsung" brandname which comprise DRAM and graphic RAM, FLASH, SRAM and MASK ROM for the Hong Kong and Southern China markets. Atlantic Components Ltd., its wholly owned subsidiary, was incorporated in Hong Kong on May 30, 1991 with limited liability. On October 2, 2003, the Company set up a wholly-owned subsidiary, Alpha Perform Technology Limited ("Alpha"), a British Virgin Islands company, to provide services on behalf of the Company in jurisdictions outside of Hong Kong. Effective January 1, 2004, the Company has ceased the operations of Alpha and all the related activities are consolidated with those of Atlantic. CURRENCY REPORTING: Amounts reported in the accompanying consolidated financial statements and disclosures are stated in U.S. Dollars, unless stated otherwise. The functional currency of the Company, which accounted for most of the Company's operations, is reported in Hong Kong dollars ("HKD"). Foreign currency transactions (outside Hong Kong) during the years ended December 31, 2005, 2004, and 2003 are translated into HKD according to the prevailing exchange rate at the transaction dates. Assets and liabilities denominated in foreign currencies at the balance sheet dates are translated into HKD at year-end exchange rates. F-12 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: For the purpose of preparing these consolidated financial statements, the financial statements of Atlantic reported in HKD have been translated into United States Dollars at US$1.00=HKD7.8, a fixed exchange rate maintained between the two countries. CONSOLIDATION POLICY: The consolidated financial statements include the financial statements of ACL Semiconductors Inc. and its wholly owned subsidiaries, Atlantic Components Ltd., and Alpha Perform Technology Limited. All significant intercompany accounts and transactions have been eliminated in preparation of the consolidated financial statements. REVENUE RECOGNITION: Product sales are recognized when products are shipped to customers, title passes and collection is reasonably assured. Provisions for discounts to customers, estimated returns and allowances and other price adjustments are provided for in the same periods the related revenue is recorded which are deducted from the gross sales. USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue recognition, allowance for doubtful accounts, long lived assets impairment, inventories, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations. The Company had no cash equivalents at December 31, 2005 or 2004. SEGMENT REPORTING: The Company's sales are generated from Hong Kong and the rest of China and substantially all of its assets are located in Hong Kong. F-13 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: ACCOUNTS RECEIVABLE: The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change in the near future. The Company did not provide an allowance for doubtful accounts as of December 31, 2005 and 2004. INVENTORIES: Inventories are stated at the lower of cost or market and are comprised of purchased computer technology resale products. Cost is determined using the first-in, first-out method. The reserve for obsolescence was decrease by $12,821 for 2005 and increased by $3,256 for 2004. Inventory obsolescence reserve totaled $141,025 and $153,846 as of December 31, 2005 and 2004, respectively. PROPERTY, EQUIPMENT AND IMPROVEMENTS: Property and equipment are valued at cost. Depreciation and amortization are provided over the estimated useful lives of three to five years using the straight-line method. Leasehold improvements are amortized on a straight-line basis over the shorter of the economic lives or the lease terms. The estimated service lives of property, equipment and improvements are as follows: Automobile 3 1/3 years Office equipment 5 years Leasehold improvements 5 years Computers 5 years F-14 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: LONG-LIVED ASSETS: In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS No. 144 relates to assets that can be amortized and the life can be determinable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less the cost to sell. The Company determined that there was no impairment of long-lived assets as of December 31, 2005 and 2004. ADVERTISING: The Company expenses advertising costs when incurred. Advertising expense totaled $2,164, $8,851, and $3,567 for the years ended December 31, 2005, 2004, and 2003, respectively. INCOME TAXES: Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Realization of the deferred tax asset is dependent on generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. F-15 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount of the Company's cash and cash equivalents, accounts receivable, lines of credit, convertible debt, accounts payable, accrued expenses, and long-term debt approximates their estimated fair values due to the short-term maturities of those financial instruments. COMPREHENSIVE INCOME: SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in the financial statements. For the years ended December 31, 2005, 2004, and 2003, the Company has no items that represent other comprehensive income and, therefore, has not included a schedule of comprehensive income in the consolidated financial statements. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: In accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss) per common share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per common share is computed similarly to basic earnings (loss) per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. For the years ended December 31, 2005 and 2004, the Company has 0 and 517,241 shares of common stock equivalents upon conversion of the convertible note payable based on the quoted market price at the end of each reporting years. These common stock equivalents were excluded from the computation of diluted loss per share as their effect is antidilutive for 2004 and 2003. RECLASSIFICATIONS Certain reclassifications have been made to the 2004 consolidated financial statements to conform to the 2005 presentation. F-16 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: NEW ACCOUNTING PRONOUNCEMENTS: In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff's views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on the financial statements. In May 2005, the FASB issued FASB Statement No. 154, ACCOUNTING CHANGES AND ERROR CORRECTIONS. This new standard replaces APB Opinion No. 20, ACCOUNTING CHANGES, and FASB Statement No. 3, REPORTING ACCOUNTING CHANGES IN INTERIM FINANCIAL STATEMENTS, and represents another step in the FASB's goal to converge its standards with those issued by the IASB. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. Management believes that changes resulting from adoption of the FASB will not have a material effect on the financial statements taken as a whole. In June 2005, the EITF reached a consensus on Issue 05-6, "Determining the Amortization Period for Leasehold Improvements," which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after June 29, 2005. Earlier application is permitted in periods for which financial statements have not been issued. The adoption of this Issue did not have an impact on the Company's financial statements. F-17 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: NEW ACCOUNTING PRONOUNCEMENTS, CONTINUED: In February 2006, the Financial Accounting Standards Board issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments -- an amendment of FASB Statements No. 133 and 140." SFAS No. 155 simplifies the accounting for certain hybrid financial instruments, eliminates the FASB's interim guidance which provides that beneficial interests in securitized financial assets are not subject to the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and eliminates the restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006, however, early adoption is permitted for instruments acquired or issued after the beginning of an entity's fiscal year in 2006. The Company is evaluating the impact of this new pronouncement to its financial position and results of operations or cash flows. (2) PROPERTY, EQUIPMENT AND IMPROVEMENTS: A summary is as follows: 2005 2004 ---- ---- Office equipment $ 95,399 $ 68,376 Leasehold improvements 46,015 4,346 Furniture and fixtures 10,606 3,843 Automobile 33,333 33,333 -------------- -------------- 185,353 109,898 Less accumulated depreciation and amortization 83,316 54,079 -------------- -------------- $ 102,037 $ 55,819 ============== ============== Depreciation and amortization expense for property, equipment, and improvements amounted to $29,236, $23,032, and $15,230, for the years ended December 31, 2005, 2004, and 2003, respectively. F-18 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (3) REVOLVING LINES OF CREDIT AND LOAN FACILITIES: The Company has available to it a $1,641,025 revolving line of credit with Dah Sing Bank with an outstanding balance of $1,641,025 at December 31, 2005 and $2,050,000 at December 31, 2004. For borrowings in Hong Kong dollars, the line of credit bears interest at the greater of (1) Hong Kong dollar prime rate or (2) 1% over the Hong Kong Interbank Offer Rate ("HIBOR".), or 5% as of December 31, 2005 and 2004, respectively. Weighted average interest rate approximated 6% for 2005 and 5% for 2004. For borrowings in foreign currency, the line of credit carries interest of 0.5% over the Base Rate. The line matures on September 30, 2006. The Company has available to it a line for overdraft with Dah Sing Bank with an outstanding balance of $0 at December 31, 2005 and $137,632 at December 31, 2004. The line of credit bears interest at the greater of (1) 0.5% over Hong Kong dollar prime rate or (2) 1% over HIBOR, or 5.5% as of December 31, 2004. Weighted average interest rate approximated 5.5% for 2004. The Company has available to it a $1,282,051 revolving line of credit with DBS Bank with an outstanding balance of $1,201,260 at December 31, 2005 and $0 at December 31, 2004. The line of credit bears interest at a rate of Hong Kong prime rate less 0.5% as of December 31, 2005. Weighted average interest rate approximated 5.5% for 2005. The Company has available to it import loan facilities totaling $1,282,051 with HSBC with an outstanding balance of $0 at December 31, 2005 and $1,282,000 at December 31, 2004. For borrowings in Hong Kong dollars, the import loan facilities bear interest at 0.5% per annum over the bank's best lending rate and are payable monthly, or 5.5% as of December 31, 2005 and 2004, respectively. Weighted average interest rate approximated 6.0% for 2005 and 5.5% for 2004. This loan is due on demand. See Note 5 for the details for the security, collateral and guarantees under the debenture deed dated April 20, 2001. (4) CONVERTIBLE NOTE PAYABLE: On December 31, 2003, the Company issued a 12% subordinated convertible note in the amount of $250,000 to Professional Traders Fund, Inc. ("PTF"). The borrowing amount is due and payable on December 31, 2004. The interest is payable in arrears on March 31, June 30, September 30, and December 31, 2004. The Company is in default at December 31, 2004 and accordingly, interest is accrued at a rate of 15% on and after the date of the default, and the Company is obligated to pay a default penalty equal to 30% of the unpaid principal and interest. At the option of the debt holder, such unpaid principal, interest and default penalty can be paid with shares of the Company's common stock at conversion price, which is defined in the following paragraph. F-19 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (4) CONVERTIBLE NOTE PAYABLE, CONTINUED: The holder of this note, at its option, can convert the outstanding balance of the debt into shares of common stock at the conversion price, which is defined as 40% of the average closing price of the stock three trading days immediately prior to the Notice of Conversion date or the interest payment date or the debt maturity date. The conversion price shall not in any case exceed $1 per share. In addition, since this debt is convertible into equity at the option of the note holder at beneficial conversion rates, an embedded beneficial conversion feature was recorded as a debt discount and amortized using the effective interest method over the life of the debt in accordance with Emerging Issues Task Force No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments." Since the intrinsic value of the beneficial conversion feature exceeds the proceeds of the convertible debt, the amount of the discount assigned to the beneficial conversion feature is limited to the amount of the proceeds of the convertible debt. Therefore, the Company recorded a discount of $250,000, the face value of the debt in 2003. The Company fully amortized the discount of $250,000 during the year ended December 31, 2004. Pursuant to the terms of a Limited Guarantee and Security Agreement, the debt is guaranteed by 1.2 million shares of the Company's common stock beneficially owned by three shareholders of which 700,000 are restricted shares and 500,000 are freely traded shares. The Company has agreed to file a registration statement for the conversion shares within 60 days of the funding of the note and agreed to use reasonable efforts to cause such registration statement to be declared effective within 150 days of the funding of the note. If the Company fails to meet either of such timelines, a 1% penalty per month on the funded amount of the note will be levied against the Company. Accordingly, the Company is incurring a 1% penalty per month on the funded amount of the note. During the year ended December 31, 2004, PTF converted principal note balance of $100,000 into 222,980 shares of common stock and outstanding accrued interest of $12,385 into 29,579 shares of common stock through the shares pledged by three shareholders. Accordingly, the Company's shareholders issued directly to PTF a total of 252,559 common shares. The value of the converted principal and accrued interest, totaling $112,385 at December, has been recorded as a liability to the shareholders in the accompanying consolidated balance sheet. As of December 31, 2004 and 2003, the gross outstanding balance of this note totaled $150,000 and $250,000, respectively. On May 25, 2005, a Default Judgment was issued by United States District Court, Southern District of New York that the Company is demanded to pay PTF totally US$255,292 which comprises of principal amounting to US$150,000; interest amounting to US$10,541; penalties amounting to US$85,350; attorney fees amounting to US$4,781; and costs and disbursements of taking action against the Company amounting to US$4,620. The Company accrued the entire claimed amount as of September 30, 2005. F-20 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (4) CONVERTIBLE NOTE PAYABLE, CONTINUED: On August 16, 2005, the Company entered into a settlement agreement with PTF. The settlement amount of $255,292 covers the outstanding loan balance, unpaid interest and penalties and will be repaid in seven installments through February 28, 2006.Up to December 31, 2005, the Company had been paid $179,204 to PTF and the balance of $76,088 was reclassified in payable related to debt settlement. The final installment was fully paid on February, 2006. (5) LONG-TERM DEBT: A summary is as follows as of December 31:
2005 2004 ---- ---- Installment loan carrying an interest of 0.75% over Hong Kong dollar Prime Rate (5.75% at December 31, 2004 and 2003) to Dah Sing Bank payable in monthly installments of $4,535 including interest through April 2005 $ - $ 114,602 Term loan carrying an interest of 0.75% over the bank's best lending rate (5.75% at December 31, 2004 and 2003) to HSBC payable in monthly installments of $35,897 including interest through June 2005 - 38,322 Accrued interest on previous term loan which was converted to a term loan carrying 0% to HSBC, unpaid amount due June 2005 - 156,825 Term loan carrying an interest of 0.75% over Hong Kong dollar Prime Rate (5.75% at December 31, 2004 and 2003) to DBS Bank payable in monthly installments including interest at the following schedule: $16,410 from May 2002 to April 2003, $19,103 from May 2003 to April 2004, $21,923 from May 2004 to March 2005, and the remaining balance due April 2005 - 41,805 ------------- ------------- - 351,554 Less current maturities - 286,032 -------------- -------------- $ - $ 65,522 ============== ==============
F-21 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (5) LONG-TERM DEBT, CONTINUED: With respect to all of the above referenced debt and credit arrangements in Note 3, pursuant to a debenture deed dated April 20, 2001, the Company pledged its assets as collateral collectively to a bank group in Hong Kong comprised of Dah Sing Bank Limited, The Hong Kong and Shanghai Banking Corporation Limited, and DBS Bank (Hong Kong) Ltd. (formerly Overseas Trust Bank Limited) for all current and future borrowings from the bank group by the Company. In addition to the above pledged collateral, the debt is also secured by: 1. a personal guarantee given by Mr. Alan Chung-Lun Yang ("Mr. Yang") limited to approximately US$6,900,000 to The Hong Kong and Shanghai Banking Corporation Limited; 2. a fixed cash deposit of $769,231 (HK$6,000,000) as collateral for loans from Dah Sing Bank Limited; 3. a personal guarantee given by Mr. Yang for unlimited amount together with a key man life insurance policy on Mr. Yang for $500,000 and a personal guarantee to Dah Sing Bank Limited. During 2005, this debenture deed has been terminated with this banking group. (6) INCOME TAXES: Income tax expense amounted to $123,235 for 2005, $85,814 for 2004, and $265,866 for 2003 (an effective rate of 32% for 2005, 23% for 2004, and 23% for 2003). A reconciliation of the provision for income taxes with amounts determined by applying the statutory federal income tax rate of 34% to income before income taxes is as follows: F-22 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (6) INCOME TAXES, CONTINUED:
2005 2004 2003 ---- ---- ---- Computed tax at federal statutory rate $ 130,135 $ (125,185) $ (398,414) Non-deductible merger cost - - 422,687 Tax rate differential on foreign earnings of Atlantic Components Ltd. ("Atlantic"), a Hong Kong based company (116,193) (80,910) (89,247) Earnings on Alpha Perform Technology Limited ("Alpha"), a British Virgin Islands ("BVI") Company not subject to corporate income tax - - (353,914) Net operating loss carryforward 109,293 291,909 513,544 Provision for tax liabilities on procurement service fee income to Alpha - - 150,000 Other - - 21,210 -------------- -------------- -------------- $ 123,235 $ 85,814 $ 265,866 ============== ============== ============== The income tax provision consists of the following components: 2005 2004 2003 ---- ---- ---- Federal $ - $ - $ - Foreign 123,235 85,814 265,866 -------------- -------------- -------------- $ 123,235 $ 85,814 $ 265,866 ============== ============== ============== The Components of the deferred tax assets and liabilities are as follows: 2005 2004 2003 ---- ---- ---- Net operating losses $ 914,746 $ 805,453 $ 513,544 ---------------- ---------------- ---------------- Total deferred tax assets $ 914,746 $ 805,453 $ 513,544 Less valuation allowance (914,746) (805,453) (513,544) ---------------- ---------------- ---------------- $ - $ - $ - ================ ================ ================
F-23 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (6) INCOME TAXES, CONTINUED: In 2003, the Company's Hong Kong subsidiary, Atlantic, paid a procurement fee to the Company's subsidiary, Alpha in BVI, and allocated certain expenses incurred outside Hong Kong. Procurement fee income net of such expenses totaled approximately $1,000,000, which is not subject to corporate tax in Hong Kong or BVI. However, such procurement service fee income or income net of related expenses may be subject to corporate income tax in the People's Republic of China. Based on the analysis of its tax counsel, the Company accrued approximately $150,000 for such potential tax liabilities as of December 31, 2003. The Company has not paid any of this tax in 2005 or 2004 and the amount remained to be included in the income tax payable as of December 31, 2005. Effective January 1, 2004, the Company has ceased the operations of Alpha and all the related activities are consolidated with those of Atlantic. (7) CONCENTRATIONS: The Company has a non-exclusive Distributorship Agreement with Samsung Electronics Hong Kong Co., Ltd. ("Samsung"), which was initially entered into in May 1993 and has been renewed annually. Under the terms of the agreement, Samsung appointed the Company on a non-exclusive basis as Samsung's distributor to distribute and market its products in the designated territory. The Company has the right to market and sell the products of other manufacturers and render service related to such activities, unless such activities result in the Company's inability to fulfill its obligations under the Agreement. However, the Company shall not purchase to sell any of the same product lines as Samsung produces and deals in from any other Korean manufacturer during the term of this Agreement. The most recent renewal of the Distributorship Agreement expired on March 1, 2006. As of April 1, 2006, Samsung has verbally confirmed the annual renewal of such agreement for one year. The Company's distribution operations are dependent on the availability of an adequate supply of electronic components under the "Samsung" brand name which have historically been principally supplied to the Company by the Hong Kong office of Samsung. The Company purchased 76%, 80%, and 84% of materials from Samsung for the years ended December 31, 2005, 2004, and 2003, respectively. However, there is no written supply contract between the Company and Samsung and, accordingly, there is no assurance that Samsung will continue to supply sufficient electronic components to the Company on terms and prices acceptable to the Company or in volumes sufficient to meet the Company's current and anticipated demand, nor can assurance be given that the Company would be able to secure sufficient products from other third party supplier(s) on acceptable terms. In addition, the Company's operations and business viability are to a large extent dependent on the provision of management services and financial support by Mr. Yang. See Note 5 for details for Mr. Yang's support of the Company's banking facilities. At December 31, 2005 and 2004, included in accounts payable were $3,253,239 and $2,921,612, respectively, to Samsung. Termination of such distributorship by Samsung will significantly impair and adversely affect the continuation of the Company's business. F-24 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (7) CONCENTRATIONS, CONTINUED: During the years ended December 31, 2005, 2004, and 2003, 17%, 31%, and 21%, respectively, of the Company's sales were generated from Classic Electronic Ltd. ("Classic"), a related party (see Note 10 for additional discussion of related party transactions). As of December 31, 2005 and 2004, accounts receivable, related parties included $2,175,737 and $4,714,057, respectively, due from Classic, which represented 81% and 81%, respectively, of the total accounts receivable due from related and unrelated parties. As of December 31, 2005 and 2004, Samsung has withheld a total of $350,000 commission due to the Company as deposits. Per a letter sent by Samsung on May 1, 2001, the deposits will be released upon further agreement between Samsung and the Company. Subsequent to this letter, no further discussion regarding this matter was made. The Company believes the amount is fully recoverable. (8) RETIREMENT PLAN: Under the Mandatory Provident Fund ("MPF") Scheme Ordinance in Hong Kong, the Company is required to set up or participate in an MPF scheme to which both the Company and employees must make continuous contributions throughout their employment based on 5% of the employees' earnings, subject to maximum and minimum level of income. For those earning less than the minimum level of income, they are not required to contribute but may elect to do so. However, regardless of the employees' election, their employers must contribute 5% of the employees' income. Contributions in excess of the maximum level of income are voluntary. All contributions to the MPF scheme are fully and immediately vested with the employees' accounts. The contributions must be invested and accumulated until the employees' retirement. The Company contributed and expensed $18,385 for 2005, $14,396 for 2004 and $16,129 for 2003. (9) COMMITMENTS: The Company leases its facilities. The following is a schedule by years of future minimum rental payments required under operating leases that have noncancellable lease terms in excess of one year as of December 31, 2005:
Related Party Other Total ------------- ------------- ------------- Year ending December 31, 2006 $ 116,475 $ 23,077 $ 139,552 2007 92,308 $ 9,057 $ 101,365 Thereafter 23,077 - 23,077 ------------- ------------- ------------- Total $ 231,860 $ 32,134 $ 263,994 ============= ============= =============
F-25 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (9) COMMITMENTS, CONTINUED: See Note 10 for related party leases. All leases expire prior to December 31, 2006. Real estate taxes, insurance, and maintenance expenses are obligations of the Company. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will likely be more than the amounts shown for 2005. Rent expense for the years ended December 31, 2005, 2004, and 2003 totaled $135,063, $111,214, and $106,612, respectively. (10) RELATED PARTY TRANSACTIONS: TRANSACTIONS WITH MR. YANG -------------------------- As of December 31, 2005 and 2004, the Company had an outstanding receivable from Mr. Yang, the President and Chairman of the Board of Directors of the Company, totaling $102,936 at the end of each of respective years. These advances bear no interest and are payable on demand. For the years ended December 31, 2005, 2004, and 2003, the Company recorded compensation to Mr. Yang of $226,922, $233,590, and $716,770, respectively, and paid $226,922, $233,590, and $92,308, respectively, to Mr. Yang as compensation to him. The respective unpaid amounts are included in the amount due from stockholder/director as of December 31, 2005 and 2004. During each of the years ended December 31, 2005, 2004, and 2003, the Company paid rent of $92,308, $82,692, and $53,846, respectively, for Mr. Yang's personal residency as fringe benefits to him, and paid housing allowance to him in the amount of $12,308, $12,308, and $12,308, respectively. All such payments have been recorded as compensation expense in the accompanying financial statements. TRANSACTIONS WITH CLASSIC ELECTRONIC LTD. ----------------------------------------- During the years ended December 31, 2005, 2004, and 2003, the Company sold $18,780,971, $40,885,565, and $15,224,745, respectively, to Classic Electronic Ltd. ("Classic"). The Company has not experienced any bad debt from this customer in the past. Pursuant to a written personal guarantee agreement, Mr. Yang personally guarantees to the Company's lenders up to $10 million of the outstanding accounts receivable from Classic. During the years ended December 31, 2005, 2004, and 2003, the Company purchased inventory of $6,007,185, $5,867,150, and $4,159,300, respectively, from Classic, which offset the outstanding accounts receivable from Classic. As of December 31, 2005 and 2004, the Company had net outstanding accounts receivable from Classic totaling $2,175,736 and $4,714,057, respectively. F-26 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (10) RELATED PARTY TRANSACTIONS, CONTINUED: The Company leased one of its facilities and Mr. Yang's personal residency from Classic. Lease agreements for the two facilities expire on November 30, 2006 while the lease agreement for Mr. Yang's personal residency expires on March 31, 2008. Monthly lease payments for these 2 leases totaled $6,684. The Company incurred and paid rent expense of $83,250, $88,462, and $56,731 to Classic for the years ended December 31, 2005, 2004, and 2003, respectively. During the years ended December 31, 2004 and 2003, certain Classic's employees performed work on behalf of Atlantic and their salaries were allocated to Atlantic's operations and charged to expenses in the accompanying consolidated financial statements. Such expenses approximated $57,820 for 2005, $0 for 2004, and $248,000 for 2003. In December 2003, the Company relieved its account receivable from Classic by transferring $1,048,604 of outstanding amounts to its stockholder/director as payment. Mr. Ben Wong, a director of the Company, is a 99.9% shareholder of Classic. The remaining 0.1% of Classic is owned by a non-related party. TRANSACTIONS WITH ACL TECHNOLOGY PTE LTD. ----------------------------------------- During the years ended December 31, 2005, 2004, and 2003, the Company sold $0, $0, $901,430, respectively, to ACL Technology Pte Ltd. ("ACLT"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. The Company has not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, the Company purchased inventories of $0, $2,049,474, and $700,126, respectively, from ACLT. As of December 31, 2005 and 2004, there were no outstanding accounts payable to ACLT. In December 2003, the Company relieved its account receivable from ACLT by transferring $374,988 of outstanding amounts it owed to its stockholder/director. In 2004, the Company paid a commission of $392,434 to ACLT related to sales brought in by this entity. In 2004, the Company loaned $318,983 to ACLT, which is classified as loans receivable from related parties in the accompanying consolidated balance sheet. The loan is unsecured, bears no interest and fully repaid in 2005. Mr. Ben Wong, a director of the Company, is a 99% shareholder of ACLT. The remaining 1% of ACLT is owned by a non-related party. F-27 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (10) RELATED PARTY TRANSACTIONS, CONTINUED: TRANSACTIONS WITH KADATCO COMPANY LTD. -------------------------------------- During the years ended December 31, 2005, 2004, and 2003, the Company sold $5,072,858, $166,152, and $0, respectively, to Kadatco Company Ltd. ("Kadatco"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004. The Company has not experienced any bad debt from this customer in the past. Mr. Yang is the sole beneficial owner of the equity interest of Kadatco. TRANSACTIONS WITH RAMBO TECHNOLOGIES LTD. ----------------------------------------- During the years ended December 31, 2005, 2004, and 2003, the Company sold $165,225, $7,682,072, and $5,134,160, respectively, to Rambo Technologies Ltd. ("Rambo"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004. The Company has not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, the Company purchased $874,553, $339,605, and $229,781, respectively, from Rambo. Outstanding accounts payable due to Rambo totaled $0 and $61,360 as of December 31, 2005 and 2004, respectively. Mr. Ben Wong, a director of the Company, is a 60% shareholder of Rambo. The remaining 40% of Rambo is owned by a non-related party. Mr. Yang is a director of Rambo. TRANSACTIONS WITH ARISTO COMPONENTS LTD. ---------------------------------------- During the years ended December 31, 2005, 2004, and 2003, the Company sold $71,402, $90, and $62,268, respectively, to Aristo Components Ltd. ("Aristo"). There was no outstanding accounts receivable as of December 31, 2005 and 2004. The Company has not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, the Company purchased $0, $500, and $28,053, respectively, from Aristo. There are no outstanding accounts payable due to Aristo as of December 31, 2005 and 2004, respectively. Mr. Ben Wong, a director of the Company, is a 90% shareholder of Aristo. The remaining 10% of Aristo is owned by a non-related party. Mr. Yang is a director of Aristo. F-28 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (10) RELATED PARTY TRANSACTIONS, CONTINUED: TRANSACTIONS WITH ATLANTIC NETCOM LTD. -------------------------------------- During the years ended December 31, 2005, 2004, and 2003, the Company sold $1,652, $14,985, and $0, respectively, to Atlantic Netcom Ltd. ("Atlantic Netcom"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. The Company has not experienced any bad debt from this customer in the past. Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a director, is a 60% shareholder and director of Atlantic Netcom. The remaining 40% of Atlantic Netcom is owned by a non-related party. TRANSACTIONS WITH SOLUTION SEMICONDUCTOR (CHINA) LTD. ----------------------------------------------------- During the years ended December 31, 2005, 2004, and 2003, the Company sold $55,122, $513,698, and $523,809, respectively, to Solution Semiconductor (China) Ltd. ("Solution"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004. The Company has not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, the Company purchased $22,019, $8,387, and $0, respectively, from Solution. There are no outstanding accounts payable due to Solution as of December 31, 2005 and 2004. Mr. Ben Wong, a director of the Company, is a 99% shareholder of Solution. The remaining 1% of Solution is owned by a non-related party. TRANSACTIONS WITH SYSTEMATIC INFORMATION LTD. --------------------------------------------- During the years ended December 31, 2005, 2004, and 2003, the Company sold $61,910, $1,941,298, and $137,482, respectively, to Systematic Information Ltd. ("Systematic Information"). There are no outstanding accounts receivable due from Systematic Information as of December 31, 2005 and 2004. The Company has not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, the Company purchased $0, $154,460, and $0, respectively, from Systematic. There are no outstanding accounts payable due to Systematic as of December 31, 2005 and 2004. F-29 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (10) RELATED PARTY TRANSACTIONS, CONTINUED: On April 1, 2005, the Company entered into a lease agreement with Systematic Information pursuant to which the Company leases one residential property for Mr. Yang's personal use for a monthly lease payment of $3,205 per month. The lease agreement for this residency expires on September 30, 2008. Monthly lease payment for this lease totaled $3,205. The Company incurred and paid an aggregate rent expense of $38,462 and $28,846 to Systematic Information during the years ended December 31, 2005 and 2004. Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a director, is a director and shareholder of Systematic with a total of 100% interest. TRANSACTIONS WITH ARISTO TECHNOLOGIES LTD. ------------------------------------------ During the years ended December 31, 2005, 2004, and 2003, we sold $2,544,995, $0, and $0, respectively, to Aristo Technologies Ltd. ("Aristo"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. We have not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, we purchased inventories of $100,822, $0, and $0, respectively, from Aristo. As of December 31, 2005 and 2004, there were no outstanding accounts payable to Aristo. Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a director, is a director and the sole beneficial owner of Aristo. TRANSACTIONS WITH GLOBAL MEGA DEVELOPMENT LTD. ---------------------------------------------- During the years ended December 31, 2005, 2004, and 2003, we sold $19,074, $427,004, and $0, respectively, to Global Mega Development Ltd. ("Global"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. We have not experienced any bad debt from this customer in the past. During the years ended December 31, 2005, 2004, and 2003, we received management fee $2,564, $0, and $0, respectively, from Global. As of December 31, 2005 and 2004, there were no outstanding accounts receivable from Global. Mr. Alan Yang, the Company's Chief Executive Officer, majority shareholder and a director, is the sole beneficial owner of the equity interest of Global. F-30 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (10) RELATED PARTY TRANSACTIONS, CONTINUED: TRANSACTIONS WITH TFT TECHNOLOGIES LTD. --------------------------------------- During the years ended December 31, 2005, 2004, and 2003, we sold $1,460, $0, and $0, respectively, to TFT Technologies Ltd. ("TFT"). Outstanding accounts receivable totaled $0 as of December 31, 2005 and 2004, respectively. We have not experienced any bad debt from this customer in the past. Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a director, is a director and 51% shareholder of TFT. The remaining 49% of TFT is owned by a non-related party. TRANSACTIONS WITH INTELLIGENT NETWORK TECHNOLOGY LTD. ----------------------------------------------------- During the years ended December 31, 2005, 2004, and 2003, we received management fee $2,564, $0, and $0, respectively, from Intelligent Network Technology Ltd. ("Intelligent"). As of December 31, 2005 and 2004, there were no outstanding accounts receivable from Intelligent. Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a director, is a director and 80% shareholder of Intelligent. The remaining 20% of Intelligent is owned by a non-related party. TRANSACTIONS WITH SYSTEMATIC SEMICONDUCTOR LTD. ----------------------------------------------- During the years ended December 31, 2005, 2004, and 2003, we received management fee $2,564, $0, and $0, respectively, from Systematic Semiconductor Ltd. ("Systematic"). As of December 31, 2005 and 2004, there were no outstanding accounts receivable from Systematic. Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a director, is the sole beneficial owner of the equity interest of Systematic. TRANSACTIONS WITH FIRST WORLD LOGISTICS LTD. -------------------------------------------- During the years ended December 31, 2005, 2004, and 2003, we purchased inventories $306,432, $0, and $0, respectively, from First World Logistic Ltd. ("First"). As of December 31, 2005 and 2004, there were no outstanding accounts receivable from First. Mr. Alan Yang the Company's Chief Executive Officer, majority shareholder and a director, is the sole beneficial owner of the equity interest of First. F-31 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (10) RELATED PARTY TRANSACTIONS, CONTINUED: TRANSACTIONS WITH CITY ROYAL LTD. --------------------------------- In August 2004, the Company was in negotiation with The Dah Sing Bank Limited (the "DahSing Bank") for an additional amount of its available line of credit. As a condition to the extension of additional credit to the Company, DahSing Bank requested additional collateral to secure the increased amount on the line. In order to meet the increased security requirement, the Company loaned $611,446 to City Royal Limited to pay off the mortgage loan on a residential property owned by City Royal Limited and pledged to DahSing Bank as collateral to secure the Company's borrowings from DahSing Bank. In consideration thereof, DahSing Bank made available additional borrowings of HK$10 million (approximately US$1,282,000). The loan is unsecured and bears no interest. In February 2005, City Royal Limited sold the residential property and has repaid the loan through transferring the entire proceeds from the sale of HK$8,000,000 (approximately $1,025,641) to DahSing Bank as collateral for the Company's line. The loan to City Royal Limited is non-interest bearing, in consideration of which City Royal Limited did not charge an arrangement fee to the Company in respect of the security pledge in favor of Dah Sing Bank. The primary purpose of the loan, from the Company's perspective, was to advance the business of the Company by enabling it to secure additional lines of financing in excess of the loan amount from DahSing Bank. The Company settled this loan in February 2005 and received payment in the full amount of $611,446. The Company believes that the above-referenced loan does not violate the general prohibition against loans made by publicly-traded companies to its directors and executive officers set forth in Section 402 of the Sarbanes-Oxley Act of 2002 ("Section 402") as its primary purpose was to advance the business of the Company. However, no assurance can be given that the Securities and Exchange Commission or U.S. federal government will agree with the Company's position and, in the event such loan is determined to be a violation of Section 402, the criminal penalties of the Securities Exchange Act of 1934, as amended, could apply. Mr. Yang's wife and Mr. Yang's mother-in-law are shareholders of City Royal Limited with a total of 100% interest. F-32 ACL SEMICONDUCTORS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 AND THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (12) QUARTERLY INFORMATION (UNAUDITED): The summarized quarterly financial data presented below reflects all adjustments, which in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.
(dollars in thousands except per share data) ------------------------------------------------------------------- TOTAL FOURTH THIRD SECOND FIRST 2005 ---- Total net sales $110,208 $26,251 $28,810 $26,501 $28,646 Gross profit $3,203 $1,184 $805 $251 $963 Net income (loss) $260 $257 $109 $(297) $191 Net income (loss) per share: basic and diluted $0.01 $0.01 $0.00 ($0.01) $0.01 2004 ---- Total net sales $133,244 $35,695 $34,715 $33,284 $29,550 Gross profit $3,113 $750 $595 $491 $1,277 Net income (loss) $(454) $(303) $(361) $(111) $321 Net income (loss) per share: basic and diluted $(0.02) $(0.01) $(0.01) $(0.00) $0.01
(13) SUBSEQUENT EVENT (UNAUDITED): On April 13, 2006, the Company entered into a Rescission Agreement with the seller of Classic Electronics Ltd. to rescind the original Stock Purchase Agreement entered on December 30, 2005. The seller agreed to fully refund the acquisition deposits of $1.0 million during 2006. F-33 -----END PRIVACY-ENHANCED MESSAGE-----