UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Under Section 12(b) or (g) of The Securities Exchange Act of 1934
GOUNG HEI INVESTMENT CO., LTD.
(Name of issuer in its charter)
Delaware 75-2254391
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
236 Zen Lin Road, Zen Wu County, Kaohsiung, Taiwan, R.O.C.
(Address of principal executive offices) (Zip code)
Issuer's telephone number: 8867-372-6088
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
none none
------------------------- -----------------------------
------------------------- -----------------------------
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.00015 par value
<PAGE>
ITEM 1.
DESCRIPTION OF BUSINESS
BACKGROUND
Goung Hei Investment Co., Ltd. ("the Company") was incorporated as
Potentialistics, Inc. as a wholly owned subsidiary of Texas American Group, Inc.
("TAG"), a publicly-owned corporation, in Delaware on October 12, 1988 as a
"blind pool.". In April of 1989, TAG distributed 1,585,733 shares of its issued
and outstanding common stock of the Company to its shareholders pursuant to an
effective registration statement on Form S-18. The Company has had no
substantial operations or substantial assets since inception. Its business
purpose was primarily to seek and acquire or merge with all types of business
ventures. At the time of its organization, the authorized capital stock was
50,000,000 shares of common stock (the "Common Stock"), par value $.00001 per
share and 10,000,000 shares of preferred stock (the "Preferred Stock"), par
value $.00001 per share.
Since inception, the Company has not engaged in any business activities
and the business purpose of the Company is to seek out and obtain an acquisition
or merger transaction whereby its stockholders would benefit by owning an
interest in a viable enterprise. Since the Company has no operations or
significant assets, its principal potential for profits comes solely from
operations it would receive in any acquisition or merger transaction. A merger
or acquisition transaction with the Company would allow a privately held company
to become a publicly held corporation with a broad shareholder base without
experiencing the substantial time and filing requirements and financial
expenditures imposed by federal and state securities laws.
The Company sought to effect a merger, exchange of capital stock, asset
acquisition or other similar business combination with an operating business.
The business objective of the Company was to effect a business combination with
a business which the Company believes has significant growth potential. The
Company intended to utilize equity in affecting a business combination.
Prior to the transaction with Goung Hei Investment Co., Ltd., a West
Samoa corporation ("Goung Hei") described below, the Company did not engage in
any business activities and the business purpose of the Company was primarily to
seek out and obtain an acquisition or merger transaction whereby its
stockholders would benefit by owning an interest in a viable business
enterprise. Since the Company had no operations or significant assets, its
principal potential for profits came solely from operations it would receive in
an acquisition or merger transaction. A merger or acquisition transaction with
the Company would allow a privately held company to become a publicly held
corporation with a broad shareholder base without experiencing the substantial
time and filing requirements and financial expenditures imposed by federal and
state securities laws.
In connection with the transaction with Goung Hei described below, the
Company amended its Articles of Incorporation to (1) effect a reverse split of
the Company's issued and outstanding Common Stock on the basis that each 15
shares then outstanding were converted into one share of Common Stock; (2)
adjust the par value of the Common Stock to $.00015 per share to reflect the
reverse stock split; and (3) change the name of the Company to Goung Hei
Investment Co., Ltd.
TRANSACTION WITH GOUNG HEI INVESTMENT CO., LTD.
In June of 1996, Goung Hei obtained a controlling interest in the
Company by acquiring 1,416,667 shares, or approximately 84%, of the then issued
and outstanding Common Stock of the Company from Halter Capital Corporation.
As discussed above, the reason for entering into the transaction with
Goung Hei was that the Company sought to obtain an acquisition or merger
transaction whereby its shareholders would benefit by owning an interest in a
viable business enterprise. Specifically, the Company desired to enter into a
transaction with a company that either qualified, or would qualify, for listing
on the Nasdaq National or SmallCap Market. Upon analysis of Goung Hei's business
plans for the Company (See "--Description of the Business"), it was determined
that the Company had specific plans to meet the assets and net worth criteria to
be listed on the Nasdaq National or SmallCap Market. For these reasons, the
Company believed it could best enhance shareholders' values by consummating the
transaction with Goung Hei.
<PAGE>
Goung Hei caused the Company to acquire Qualyserve Construction Co.,
Ltd. ("Qualyserve"), a privately held company that was incorporated in Taiwan.
The Company entered into a share exchange agreement by and among the Company,
Qualyserve and certain shareholders of Qualyserve whereby the Company acquired
99.7% of the issued and outstanding common stock of Qualyserve in exchange for
an aggregate of 19,846,000 shares of Common Stock. After the consummation of the
transaction, the former Qualyserve shareholders owned 96.25% of the Company's
common stock and the balance is owned by the remaining shareholders.
RESTRICTIONS ON SHARES HELD BY FORMER SHAREHOLDERS OF QUALYSERVE
All of the shares of the Company's common stock owned by the former
shareholders of Qualyserve are "restricted securities" and under certain
circumstances may in the future be sold only in compliance with Rule 144 adopted
under the Securities Act of 1933, as amended. Rule 144 provides, among other
things, that persons holding restricted securities for a period of two years may
each sell in brokerage transactions every three months an amount equal to 1% of
the Company' outstanding shares or the weekly reported volume of trading during
the four calendar weeks preceding the filing of a notice of proposed sale,
whichever is greater. All of the shares held by former Qualyserve shareholders
are not eligible for resale pursuant to Rule 144 until June of 1998. No
prediction can be made as to the effect, if any, that sales of such shares or
the availability of such shares for sale will have on the Company's market
prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of common stock may be sold in the public market may
adversely affect prevailing market prices for the Company's shares and could
also impair the Company's ability to raise capital through the sale of its
equity securities.
DESCRIPTION OF THE COMPANY'S CURRENT BUSINESS
General - Manufacturing and Industry of Taiwan.
- -----------------------------------------------
More than any other sector, industry (including manufacturing, mining,
construction and utilities) has driven the growth of Taiwan's economy. During
the nineties, manufacturing and industry has accounted for approximately 50% of
it gross domestic product, produced virtually all of its exports and employs
approximately 40% of its workforce. Manufacturing alone contributed
approximately 38% of the gross domestic product, the largest single contributor
in the entire economy and employs approximately 32% of its workforce.
Manufacturing is expected to remain Taiwan's primary focus in the near
future. While early on, Taiwan had problems with heavy industry as a result of
environmental difficulties, stumbling privatization efforts and a lessening of
international competitiveness due to increasing costs, such industries as steel
have the opportunity for tremendous growth due to the growth in the construction
industry (from a 1.3% share of gross domestic product in 1983 to approximately
5% in 1995). This growth is fueled by public sector infrastructure projects.
The Company
- -----------
The following description will refer to the Company's business after
its acquisition of Qualyserve. Except where otherwise indicated, all references
to share amounts of Common Stock reflect the one for 15 reverse split effected
pursuant to the Stock Purchase Agreement.
General
In recent decades, tremendous economic growth has in large means
ignited an immense flocking of people into urban areas. Since the urban land is
limited, it is a necessity to construct tall buildings to allow for the limited
area in which the people must occupy. However, Taiwan Island sits on the seismic
zone and the steel structure, for its high strength and rigidity, is now
commonly applied to the construction of the high-rise buildings. The steel
structure, usually in the form of being prefabricated, renders tremendous saving
in construction time and speeds up an early realization of capital return. Due
to the scarcity of labor, the steel structure, designed and manufactured by
automatic processing, presents a powerful competitive edge in the market.
Therefore, because of the short supply of domestic land and the broad awareness
of environment protection, the steel structure becomes the unique resolution for
the building industry.
3
<PAGE>
Qualyserve Construction Co., Ltd., founded seven years ago, has commanded a
high reputation for solid performance. To closely cope with the dramatic changes
in the marketing environment, Qualyserve has a well developed prospective
operation plan aimed at a variety of expansion projects. Such projects include
the TPC's expansion program for TPC to add four new power generation units to
the power station, the new erection of a nuclear power plant, and the
enlargement of power production capacity in another nuclear power plant. In
addition, there are many construction projects for public utilities sponsored by
the government, such as the construction of Scientific Park in Tainan City; the
APROC Center, RTA, the Second Free Highway, the expansion plans for CKS
International Airport and Hsiaokong International Airport, and the building of
additional power plants and refuse resource plants.
Similarly, big strides in the economic development of southeastern Asian
countries have witnessed the increasing demand for electricity in which the
steel structure is an essence for the construction of power plants. However, in
countries like Hongkong, Indonesia, Philippines, Thailand, Malaysia and Vietnam,
the steel industry is small in scale, unable to cope with the pace of fast
economic development and its production technique is not sufficient enough to
undertake the gigantic construction projects. Furthermore, the cost of imported
steel is not affordable. The best solution is to cooperate with the constructors
or equipment suppliers to create a joint venture in undertaking the foreseeable
steel structure business. For Taiwan alone, the productivity available is
700,000 mt of steel structure in 1996; and the demand of steel structure for the
refuse resource plants EPA programs for the five years to come is 500,000 mt,
plus 400,000 mt for the power plant construction.
Products. The Company's principal business is to develop and acquire
leading steel technologies, including steel construction equipment and strip
roil & sheet. The future objective of the Company will be to provide materials
for aero-space and computer parts. Goung Hei, through its subsidiary, Qualyserve
Construction Co., Ltd., a corporation organized under the laws of Taiwan,
Republic of China, is in the business of manufacturing, reprocessing, designing,
and marketing steel products and related equipment.
Customers. The following three customers accounted for the following
percentages of the Company's sales in fiscal year 1995: Goung Lee Engineer Co.,
Ltd. (64.1%); Jou-Da Construction Co., Ltd. (13.75%); and Shung Ding Engineer
Co., Ltd. (5.27%). The following three customers accounted for the following
percentages of the Company's sales in fiscal year 1994: Chung Yuan Construction
Co., Ltd. (36.83%); Goung Lee Engineer Co., Ltd. (32.68%); and G-Yuan
Construction Co., Ltd. (7.01%). The loss of any of these customers could have a
material adverse effect on the Company.
Raw Materials and Manufacturing. The materials used in the Company's
operations include steel plates, steel materials, rolled sections and built-up
sections. The Company is dependent upon outside suppliers for all of its raw
material needs and, therefore, is subject to fluctuations in prices of raw
materials. In particular, the Company's results of operations are affected
significantly by increases in the market prices of steel plate. The Company
purchases its raw materials at market-based prices from numerous independent
suppliers. Prices of steel plate can be adversely affected by, among other
things, the price of iron mine and certain business trends. The Company
purchases these materials from various suppliers at market prices and believes
that the loss of any one of its suppliers would not have a material adverse
effect on the Company's business, financial condition and results of operations.
Properties. The Company conducts its operations from its main office
located at No. 366 Bor-Ay Rd., 8th Floor, Kaohsiung, Taiwan, Republic of China
under a three year lease with 14,400 square feet of office space. The production
facility is located in Kangshan, Kaohsiung, Taiwan and contains 360,000 square
feet.
Competition. The industry in which the Company operates is highly
competitive and includes a large number of both domestic and foreign
manufacturers. Certain of the Company's competitors have greater sales volumes
and greater financial resources than the Company.
The Company believes the following factors have enabled the Company to
compete effectively: (i) its low cost products that are attractively styled and
high quality; (ii) its ability to anticipate new markets and distribution
channels for its products; (iii) its continuing effort to improve its products;
(iv) its low cost production capabilities and stable, experienced work force;
(v) its strong commitment to customer service; and (vi) its experienced
management team.
4
<PAGE>
Environmental Laws. The Company believes that there are currently no
material costs of compliance with environmental laws.
Purchasing and Principal Suppliers Although the principal supplier of the
Company is China Steel Corp., Kaohsiung, Taiwan, Republic of China, the Company
maintains relationships with several principal suppliers due to quality
considerations and in order to benefit from the volume purchasing discount of
the material casts. Alternative suppliers with acceptable technology and quality
have been identified for all critical components.
Research and Development. The Company's research and development objective
and its implementation have ben guided by the Company's growth strategies. The
Company is committed to engaging the best available manufacturing technology of
the steel industry and also research and development in precious metal. This
research is expected to produce additional product offerings, reduce the capital
cost of maintenance of equipment and improve efficiency of the production.
Research and development is conducted primarily through routine meetings held to
solve the problems concerning the quality of the product and the scheduling of
projects.
Employees. The Company currently has 24 employees in its administrative
department and 12 employees in its production department on a full time basis.
These employees are primarily management and professional staff and are not
subject to any collective bargaining units. The relationship between management
and employees is considered excellent. The Company firmly believes in
labor-management interdependence for prosperity and in harmonious labor
relations. The Company continues to adopt the following measures: (i)
establishment of multi-channel labor communications, (ii) constantly improving
management-labor communications and harmonization, (iii) improvement of the work
place environment and (iv) ensure the effectiveness of the grievance and
counseling systems.
The Company's principal offices are located at 236 Zen Lin Road, Zen Wu
County, Kaohsiung, Taiwan, R.O.C.
5
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Overview
- --------
Goung Hei Investment Co., Ltd. (the "Company") was originally incorporated
as a West Samoa Corporation on April 2, 1996. The Company will set up its Taiwan
branch at the end of September, 1996.
The Company's principal business is to develop and acquire leading steel
technologies, including steel construction equipment and strip roil & sheet. The
future objective will be capable of providing materials for aero-space and
computer parts. The Company currently owns and operates Qualyserve Construction
Co., Ltd., Kaohsiung, Taiwan, Republic of China, which forms the initial base
for the growth of the Company. Qualyserve Construction Co., Ltd. was
incorporated on August 2,1989. It engages in manufacturing, reprocessing,
designing and marketing of structure steel products and related equipment.
The Company's net sales include revenues from construction projects (less
return and discount), commission revenue and sales of materials. Construction
revenues represent 77% and 75% of the Company's net sales for the years ended
December 31, 1995 and 1994, respectively. As the Company enters into
construction contracts or agreements, revenues from such contracts or agreements
are accounted for on a percentage of completion method, based upon a ratio of
costs incurred to the total estimated costs. Losses are recorded when they are
incurred.
The Company's cost of goods sales include all direct manufacturing costs,
consignment process costs, warehousing and freight. Direct manufacturing costs
has accounted for a majority of the cost of sales. The Company has expensed a
substantial portion of its construction activities, capitalizing only those
expenditures that are incurred. Other operating expenses consist of sales and
marketing and general and administrative expenses.
Due to the adoption of percentage of completion method, the Company's
operating results do not fluctuate on a quarterly basis. The Company's operating
results have been affected mainly by construction depression.
RESULT OF OPERATIONS
The following table sets forth, as a percentage of net sales, statement of
operations data for the periods indicated:
Fiscal Year Ended Six Months Ended June 30
December 31
1994 1995 1995 1996
Sales Revenue 100 100 100 100
Cost of Goods Sold 89.78 90.35 90.35 87.63
Gross profit 10.22 9.65 9.65 12.37
Operation expenses 4.50 3.06 3.06 2.27
Income from operations 5.72 6.60 6.60 10.10
Non-Operating Income 0.13 1.01 1.01 1.65
Non-Operating expenses (0.87) (3.17) (3.17) (7.08)
Income before income tax 4.98 4.44 4.44 4.66
6
<PAGE>
Provision for income tax (1.35) (1.68) (1.68) 1.17
Net income after tax 3.63 2.75 2.75 3.50
SIX MONTHS ENDED JUNE 30,1995 AND 1996
Net Sales
- ---------
Net sales decreased 10%, primarily due to construction depression. In
addition, most construction companies settle revenues by the percentage of
completion method at the end of year. So estimated Pro forma revenue for six
months of 1995 was not reasonable.
Cost of Sales
- -------------
The Company's gross profit as a percentage of net sales increased to
12.37% in the six months ended June 30, 1996 from 9.65% in June 30,1995. The
significant change is a result of good control in material and factory overhead
costs.
Operating Expense
- -----------------
In comparison to the prior period, general and administrative expenses
decreased $102,140. The decreases were primarily due to reduction in the
workforce.
FISCAL YEARS ENDED DECEMBER 31, 1994 AND 1995
Net Sales
- ---------
In comparison to the prior year, the Company's net sales increased 44%.
In general, revenues have increased with the increase in the number of contracts
and expanding market of potential customers. The increase in net sales in fiscal
1995 was primary due to recognition of revenues from constrution, which included
Thermo-power plant in Taichon, Steel Construction-N.R.S, Parking lots of Marco
and Kaohsiung Finance and Tax Building.
Cost of Sales
- -------------
The Company's gross profit, as a percentage of net sales, decreased
9.7% in fiscal 1995 from 10.2% in fiscal 1994. The decrease was primarily due to
the increase in consignment processing cost and an increase in material cost
such as alternate sources of packaging. These costs increases resulted in lower
gross profit.
Operating Expenses
- ------------------
In comparison to the prior year, general and administrative expenses
increased by $105,000 in fiscal 1995 and increased as a percentage of net sales.
This increase was primarily due to the Company's growth.
LIQUIDITY AND CAPITAL RESOURCES
Since its formation in 1996, the Company has financed its operations
primarily through its working capital, proceeds received from the issuance of
debt and the sale of stock. The Company's operating activities used cash for
operations of $2,925,000 in fiscal 1995 and $3,431,000 in the six month period
ended June 30, 1996.
Accounts receivable increased $859,000 from December 31,1995 to June
30,1996 and inventories decreased $1,470,000 from December 31,1995 to June
30,1996. Accounts receivable have increased due to longer payment terms
7
<PAGE>
which have been granted to distributors. The Company believes that these new
terms reflect normal practices in the industry. Inventories have decreased due
to completion of construction and transferring construction in process out from
the inventory account.
The decrease in trade payables from December 31 ,1995 to June 30,1996
was due to the repayment of certain payables with the proceeds from debt
discussed below. Accrued liabilities have increased as a result of increased
interest payable.
In July 1995, the Company completed a $10,980,536 financing with bank
of Taiwan, the proceeds of which were used to purchase a land for building a new
plant in Pington. Interest and principal are payable quarterly for 32 periods
based upon an established formula. This subordinated note bears interest at
8.5%. This term will end on June 21, 2005.
The Company believes that existing sources of liquidity will satisfy
its projected working capital and capital expenditure for at least the next 12
months.
8
<PAGE>
ITEM 3.
PROPERTIES
Set forth below is certain information with respect to the Company's
principal properties. The Company believes that all of these properties are
adequately insured, in good condition and suitable for the uses described below.
<TABLE>
<CAPTION>
Approximate Size Lease Expiration
Location Primary Use (Square Feet) Owned/Leased Date
- -------- ----------- ------------- ------------ ----
<S> <C> <C> <C> <C>
Office located at
Kaohsiung, Taiwan, Corporate Office 14,400 Lease December 2000
Republic of China
Plant located at
Kaohsiung, Taiwan, Manufacturing Plant 360,000 Lease December 2010
Republic of China
ITEM 4.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information table sets forth certain information
regarding the Common Stock owned on July 31, 1996 by (1) any person (including
any "group") who is known by the Company to own beneficially more than 5% of its
outstanding Common Stock, (2) each director and executive officer, and (3) all
executive officers and directors as a group.
Name and Address Shares Owned Percentage
- ---------------- ------------ ----------
Grand Internation 6,720,000 56%
Development Corporation
Great Kang Investment 960,000 8%
Chi-Kang Lu 720,000 6%
Yen-Jung Chang 720,000 6%
Executive Officers and Directors as 1,109,200 9.24%
a group (8 persons)
9
<PAGE>
ITEM 5.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Certain information about the directors and executive officers of the
Company is contained in the following table:
Name Age Position
- ---- --- --------
Chun Shin, Wu 46 Chairman and Director
Chi-Kang, Lu 40 President, Chief
Executive Officer and Director
Yen-Jung, Chang 37 Director
Bor-Yang, Hwang 37 Director
Chung-Ching, Yen 38 Director
Hsien-Pao, Lin 61 Director
Jung-Tung, Hsiao 40 Director
Tsung-chun, Chiu 39 Chief Financial Officer
Hsiung, Lu 73 Director
Juo-lan, Shen 51 Director
Yi-shih, Lin 38 Director
All directors hold office until the next annual meeting of the shareholders
of the Company or until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors. Additional
information regarding the directors and officers is set forth below.
Chun-Shin Wu, Chairman of Qualyserve Construction, has over fifteen years
experience in marketing and purchasing. Prior to joining Qualyserve Construction
Co., Ltd, he was the director of Ya-Hsin, Heng-Yao, Yao-Shen and Li-Yuan
Industrial Corp. Mr. Wu brings extensive experience to Qualyserve Construction
in marketing and purchasing. Graduated from Taiwan Provincial Gang-Shan
Agricultural Engineering Vocational School.
Chi-Kang Lu, has extensive experience in planning, operation, control and
management of steel structure plant. Prior to joining the Board of Directors of
Goung Hei Investment Corp., he continuously worked in Goung Lee Engineering Co.,
Ltd since 1982. He began work as an engineer, promoted to manager of Engineering
Department, Vice President, then to President. When he was Vice President, he
assisted Mr. Lu Hsiung to build two steel structure plants in Gang Shan and Zen
Wu. He also brings a variety of experience to Goung Hei Investment Corp., in
purchasing and sales of products. Graduated from National Kaohsiung Institute of
Marine Technology-Department of Naval Architecture. 1982, Engineer of Goung Lee
Engineering Co., Ltd--in charge of constructing the drilling plate. 1985,
manager of the Engineering Department--in charge of steel structure in land.
1988, Vice Chairman of Goung Lee Engineering Co.,Ltd--assisted in establishing
Gang-Shan plant. 1993, President of Goung Lee Engineer Co.,Ltd--establish the
Zen-Wu plant.
Yen-Jeng Chang, brings almost fifteen years experience in financial management
and plan. Prior to joining Board of Directors of Goung Hei Investment Corp., she
was Vice Chairman and Controller of Goung Lee Engineering Co., Ltd since 1982.
Though her experience, she brings expertise to the Company in area of financial
management. Graduated from Senior Commercial School. From Graduation to 1982,
worked in Financial Department of Ganh-Shan Metal Co.,
10
<PAGE>
Ltd. From 1982 to the present, she works for Goung Lee Engineer Co., Ltd as Vice
Chairman-Financial Planning and Control.
Bor-Yan Hwang, has extensive years experience in the field of cold rolling.
Prior to joining Board of Directors of Goung Hei Investment Corp., he worked for
China Steel Corporation for more than seven years. He also acted as consultant
for Cold Rolling Mill Indonesia for three years. Mr. Hwang was also the Vice
President of the Production and Engineering Department in Ornasteel Corporation
between 1989 to 1994. He had been leading a team of highly experienced and
competent engineers and was directly involved in the formation of Ornasteel
Corporation, Malaysia. At present, Mr. Hwang Bor Yang is leading the management
team in Techsu Steel Corporation Sdn. Bhd. June, 1982, obtained Bachelor Degree
of Mechanical Engineering from National University of Jiao Tung, Taiwan. 1983 to
1985, China Steel --Engineer of operation and production department. 1983 to
1988, China Steel --Engineer in Indonesia. 1988 to 1989, China Steel --Engineer
of new expansion project in China Steel corporation. 1989 to 1994, Ornatube &
Ornasteel--Vice President in production and Ornasteel engineering department.
1994, Techsu Steel-managing director for the company.
Chung-Ching Yen, has fifteen years experience in producing steel structure and
processing mechanics. Prior to joining Qualyserve Construction Co., Ltd, he was
in charge of production department of Chun-Yuan Steel Industrial Co., Ltd from
1981 to 1990. He has worked as Vice President of Qualyserve Construction Co.,
Ltd since 1990. He brings broad knowledge in variety of industries as well as
expertise. Graduated from Kuang-Wu Industrial College. From 1981 to 1990 he was
employed by Chun-Yuan Steel Industrial Co.-- in charge of production department.
Hsien-Pao Lin, worked as People Representative for over thirty years. Prior to
Board of Director of Goung Hei Investment Corp., he was Kaohsiung District
Councilman and Taiwan Provincial Councilman. He was also Chief Recorder of Party
Office of Taiwan Provincial Council and Chief Commissioner in Central Committee
of Chinese National Party. He has also been awarded the Second Prize from
Ministry of Interior. His experience provides the Company with valuable
experience in dealing with governmental agencies. Graduated from Taiwan
Provincial Tai-Nan High School and Shin-Chien Home Economics College. Chairman
of Rural Councilman Association. General whip of Agriculture & Fishery
Association. District Councilman of Kaohsiung hsien. Provincial councilman.
Chief recorder of party office of Taiwan Provincial Council. Chief Commissioner
in Central Committee.
Jung-Tung Hsiao, has 21 years experience in engineering construction and
production of steel structure. Prior to joining the Board of Directors of Goung
Hei Investment Corp , he was Vice President of Goung Lee Engineering Co., Ltd
from 1993 to the present. He had held a senior position for 12 years when he
worked for Evergreen and Chiang-Kang Industrial Corp. He bring his experience to
the Company in Engineering. Graduated from the Water & Soil Maintenance Engineer
Department of Tamkang College of Arts & Science . 1975 to 1982, Chinese Engineer
Consulting Co. 1982 to 1986, Chiang An Steel Engineer Co. 1986 to 1993,
Evergreen Heveen Metal Co. 1993 to 1996, Goung Lee Engineer Co.
Tsung-Chun Chiu, has extensive international experience in project development,
venture, and finance. He was special assistant to chairman of Qualyserve
Construction and vice president of Administrative Department in Goung Lee
Engineering Co., Ltd. between 1995-1996. He worked as financial manager of
Sam-Hsia Enterprise Corporation in 1995. He currently is the Vice President and
Chief Financial Officer for the Company. Mr. Chiu studied his Phd degree from
UCLA and he majored in business administration. Through his background he brings
to the Company expertise in areas of international finance, planning, control
and management. Master Degree of Management Science Engineer from National
University of Jiao Tung, Taiwan. From 1988 to 1994 he was the President of a
computer company . During 1995 Sam-Hsia Enterprise Corp--financial manager. 1995
to 1996, Goung Lee Engineer Co., Ltd.- Vice President. August 1996, Goung Hei
Investment Corp.--Vice President & Chief Financial Office.
Hsiung Lu, has twenty years experience in engineering, material purchasing,
project planning and plant management. Prior to joining the Board of Directors
of Goung Hei Investment Corp., he was President of Goung Lee Engineering Co.,
Ltd from 1978 to 1988. During that period, he established Goung Lee Engineering
Co., Ltd and set up steel structure plant in Gang Shan. In 1993, he was elected
as chairman of Goung Lee. As the chairman of Goung Lee, he built a new steel
structure plant in Zen Wu. He has significant management experience in plant and
project planning.
11
<PAGE>
Administrator of China Engineering Co.,Ltd--in charge of construction
engineering. Established Goung Lee Co., Ltd. to engage in shipbuilding.
Juo-Lan Shen, has twenty-five years experience in teaching. Prior to joining the
Board of Director of Goung Hei Investment Corp., she was elementary school
teacher. She also was Director of Womens League and assistant to Taiwan
Provincial Councilman. Graduated from Kaohsiung Girl's School. Director of
Fang-Shan Women's League Teacher of Ta-Tung Elementary School.
Yi-Shih Lin, graduated from Taipei Medical College, majoring in Dentistry. Prior
to joining the Board of Director of Goung Hei Investment Corp., he was a
dentist. He was also special assistant to Mr. Lin Hsien-Pao, Provincial
Councilman's office.
12
<PAGE>
ITEM 6.
EXECUTIVE COMPENSATION
The Company did not pay any compensation to its executive officers or
directors during the fiscal year ended December 31, 1995.
Furthermore, there are no plans to pay any officers in excess of $100,000 for
the fiscal year 1996.
ITEM 7.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 21, 1995, Mr. Chun-Shin Wu, a member of the Board of Directors
of Qualyserve, loaned the Company the principal amount of $97,304.50 to be used
as working capital. The loan is without interest and is payable to Qualyserve.
The current balance of the loan as of June 30, 1996 is $93,161.
On January 17, 1995, Mr. Jung-sheng Mah, a member of the Board of
Directors of Qualyserve, loaned the Company the principal amount of $186,727 to
be used as working capital. The loan was without interest and is payable
Qualyserve. The loan had ben repaid in full by June 30, 1996.
On March 20, 1995, Mr. Chan-Ching Yen, a member of the Company's Board
of Directors of Qualyserve, loaned the Company the principal amount of $12,447
to be used as working capital. The loan is without interest and is payable to
Qualyserve. The loan had ben repaid in full by June 30, 1996.
On July 31, 1995, Mr. Chin-Houg Tsai, a member of the Company's Board
of Directors of Qualyserve, loaned the Company the principal amount of
$4,363,636 to be used as working capital. The loan is without interest and is
payable to Qualyserve. The current balance of the loan as of June 30, 1996 is
$101,115.
ITEM 8.
LEGAL PROCEEDINGS
The Company may from time to time defend various claims and legal
actions in the ordinary course of its operations. Management believes that there
are currently no such claims or actions that will have a material effect on the
Company's financial position or results of operations.
ITEM 9.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock was publicly traded in the over-the-counter market and was
listed in the "pink sheets" maintained by members of the National Association of
Securities Dealers, Inc. from April 1989 through 1990. There were no bids on the
Common Stock from that time until June of 1996.
The Common Stock began trading again on the over-the-counter market
maintained by members of the National Association of Securities Dealers, Inc. in
June of 1996. Since that date, J. Alexander Securities, the only market maker,
reports that it is quoting the stock at $.50 bid,$1.00 offered and no trades
have occurred since June of 1996.
ITEM 10.
RECENT SALES OF UNREGISTERED SECURITIES
In June of 1996, the Company acquired 100% of the issued and
outstanding shares of common stock of Qualyserve in exchange for an aggregate of
19,846,000 shares of Common Stock issued to the former shareholders of
Qualyserve pursuant to a share exchange agreement by and among the Company,
Qualyserve and the shareholders of Qualyserve.
The Company relied on Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act") in that such transactions did not involve a
public offering and were thus exempt from the registration requirements of the
Securities
13
<PAGE>
Act. Each investor was able to fend for himself in the transaction, and each
investor was furnished with information concerning the proposed operations of
the Company and had the opportunity to verify the information supplied.
ITEM 11.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of common stock,
par value $.00015 per share (the "Common Stock"). Each share of Common Stock is
entitled to one vote at all meetings of shareholders. The By-Laws of the Company
prohibit cumulative voting in the election of directors. All shares of Common
Stock are equal to each other with respect to liquidation rights and dividend
rights. In the event of liquidation, dissolution or winding up of the Company,
holders of the Common Stock will be entitled to receive, on a pro rata basis,
all assets of the Company remaining after satisfaction of all liabilities. There
are no preemptive rights to purchase additional shares of Common Stock.
Holders of Common Stock are entitled to receive dividends if and when
declared by the Board of Directors out of funds legally available therefore.
PREFERRED STOCK
The Company's Certificate of Incorporation authorize 10,000,000 shares
of preferred stock, par value $.00001 per share (the "Preferred Stock"). The
Certificate of Incorporation also provides that Preferred Stock may be issued in
one or more series as may be determined from time to time by the Board of
Directors. All shares of any one series of Preferred Stock will be identical
except as to the date of issue and dates from which dividends on shares of the
series issued on different dates will cumulate, if cumulative. The Certificate
of Incorporation also grants the Board of Directors the power to authorize the
issuance of one or more series of Preferred Stock, and to fix by resolution or
resolutions providing for the issue of each such series the voting powers,
designations, preferences, and relative, participating, optional, redemption,
conversion, exchange or other special rights, qualifications, limitations or
restrictions of such series, and the number of shares in each series, to the
full extent now or hereafter permitted by law.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Section 203 of the
Delaware General Corporation Law (the "DGCL") contain certain provisions that
may make the acquisition of control of the Company by means of a tender offer,
open market purchase, proxy fight or otherwise more difficult.
Business Combinations. The Company is a Delaware corporation and is
subject to Section 203 of the DGCL. In general, subject to certain exceptions,
Section 203 of the DGCL prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless upon consummation of such transaction,
the interested stockholder owned 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding for purposes of
determining the number of shares outstanding those shares owned by (x) persons
who are directors and also officers and (y) employee stock plans in which
employee participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer)
or unless the business combination is, or the transaction in which such person
became an interested stockholder was, approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or,
in the case of affiliates and associates of the issuer, did own within the last
three years) 15% or more of the corporation's voting stock other than a person
who owned such shares on December 23, 1987.
Indemnification. The Certificate of Incorporation provides that the
Company shall advance expenses to and indemnify each director and officer of the
Company to the fullest extent permitted by law and will limit the liability of
directors to corporations and their stockholders for monetary damages in certain
circumstances.
14
<PAGE>
ITEM 12.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
The Certificate of Incorporation of the Company provides for the
indemnification of officers, directors, agents and employees of the Company to
the fullest extent permitted by the General Corporation Law of the State of
Delaware ("Delaware Code"). Pursuant to Section 145 of the Delaware Code, the
Company generally has the power to indemnify its present and former directors,
officers, employees and agents against expenses incurred by them in connection
with any suit to which they are, or are threatened to be made, a party by reason
of their serving in such positions so long as they acted in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best interests
of the Company, and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Company has the power to
purchase and maintain insurance for such persons. The statute also expressly
provides that the power to indemnify authorized thereby is not exclusive of any
rights granted under any bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise.
The above discussion of the Company's Certificate of Incorporation and
of Section 145 of the Delaware Code is not intended to be exhaustive and is
qualified in its entirety by such Bylaws and the Delaware Code.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
15
<PAGE>
ITEM 13.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Interim Financial Statements of Goung Hei Investment Co., Inc. (Unaudited)
F-1 Independent Accountant's Report
F-2 Consolidated Balance Sheets as of June 30, 1996
F-4 Consolidated Statements of Income for the Six Months Ended June 30,
1996
F-5 Statements of Changes in Stockholders' Equity (Deficit) for the Six
Months Ended June 30, 1996
F-6 Consolidated Statement of Cash Flows for the Six Months Ended June 30,
1996
F-8 Notes to Financial Statements
Financial Statements of Qualyserve Construction Co., Ltd.(Audited)
F-16 Independent Auditors' Report
F-17 Balance Sheets as of December 31, 1995 and 1994
F-19 Statements of Income for the Years Ended December 31, 1995 and 1994
F-20 Statements of Changes in Stockholders' Equity (Deficit) for the Years
Ended December 31, 1995 and 1994
F-21 Statements of Cash Flows for the Years Ended December 31, 1995 and
1994
F-23 Notes to Financial Statements
F-37 Independent Auditors' Report
F-38 Balance Sheets as of December 31, 1994 and 1993
F-39 Statements of Income for the Years Ended December 31, 1994 and 1993
F-40 Statements of Changes in Stockholders' Equity (Deficit) for the Years
Ended December 31, 1994 and 1993
F-41 Statements of Cash Flows for the Years Ended December 31, 1994 and
1993
F-43 Notes to Financial Statements
Financial Statements of Potentialistics, Inc. (Audited)
F-50 Independent Auditors' Report
F-51 Balance Sheets as of March 31, 1996 and December 31, 1995 and 1994
F-52 Statements of Operations for the Three Months Ended March 31, 1996 and
for the Years Ended December 31, 1995 and 1994 and for the period
October 12, 1988 (date of inception) through March 31, 1996
F-53 Statements of Changes in Shareholders' Equity (Deficit) for the Three
Months Ended March 31, 1996 and for the Years Ended December 31, 1995
and 1994 and for the period October 12, 1988 (date of inception)
through March 31, 1996
F-55 Statements of Cash Flows for the Three Months Ended March 31, 1996 and
for the Years Ended December 31, 1995 and 1994 and for the period
October 12, 1988 (date of inception) through March 31, 1996
F-56 Notes to Financial Statements
16
<PAGE>
Independent Accountant's Report
To the Stockholders of
GOUNG HEI INVESTMENT CO.,LTD.
We have reviewed the accompanying balance sheet of Goung Hei Investment CO.,
Ltd. and consolidated subsidiary Qualyserve Construction CO., Ltd. as of June
30.1996 and the related statements of income, and cash flows for the year then
ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
company'smaangement. A review consists principally of inquiries of company
personnel and analytical procedures applied to financial data. It is
substantially less in scope than an audit in accordance with generally accepted
auditing standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion on financial statements.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
- ----------------------------------
HORWATH & COMPANY
Certified Public Accountants
A member of Horwath International
Kaohsiung, Taiwan, R.O.C.
April 15, 1996
<PAGE>
GOUNG HEI INVESTMENT CO., LTD.AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(AMOUNTS EXPRESSED IN US DOLLARS)
See Accountant's Review Report)
A S S E T S Amount %
------------------------------------- -------------- -------
CURRENT ASSETS
82,899.85
CASH & CASH EQUIVALENTS (NOTE4) 1,231,522.00 4,446,855.00
NOTES & ACCOUNTS 8,014,592.00 503,811.00
RECEIVABLE-NET(NOTE5) 104,583.00
OTHER RECEIVABLES 1,455,708.00 1,202,560.00
INVENTORIES(NOTE6) 3,031,512.00 2,026,821.00
PREPAYMENTS 84,410.00 339,773.00
PLEDGED TIME DEPOSIT(NOTE3) 536,989.00 0.92
-------------- --------------
TOTAL CURRENT ASSETS 14,354,733.00 16,914,388.00
-------------- --------------
PROPERTY,PLANT &
EQUIPMENT COST(NOTE7) 44,696,498.00 11,042,045.00
LESS: ACCUMULATED (557,102.00) (0.95)
DEPRECIATION(NOTE7) 11042045
-------------- --------------
NET PROPERTIES(NOTE7) 44,139,396.00 75.42
-------------- 1,079,636.00
OTHER ASSETS 194,277.00
REFUNDABLE DEPOSITS 28,257.00 0.05
-------------- 1,273,913.00
TOTAL OTHER ASSETS 28,257.00 0.04
---------------
29,230,346.00
28,978,290.00
313,750.00
29,292,040.00
TOTAL ASSETS 58,522,386.00 58,522,386.00
=============== =============
LIABILITIES i Amount %
STOCKHOLDERS EQUIYT
------------------------------------- -------------- -------
CURRENT LIABILITIES
SHORT-TERM LOANS(NOTE8) 8,289,985.00 14.17
NOTES & ACCOUNTS PAYABLE 4,446,855.00 7.60
ACCRUED EXPENSES 503,811.00 0.86
INCOME TAX-PAYABLE 104,583.00 0.18
OTHER PAYABLES 1,202,560.00 2.05
ADVANCE FROM CUSTOMERS(NOTE10) 2,026,821.00 3.46
LOUNS DUE IN 1996(LONG-TERM LOANS) 339,773.00 0.58
OPTTON(NOTE9)
-------------- -------
TOTAL CURRENT LIABILITIES 16,914,388.00 28.90
-------------- -------
LONG-TERM LIABILITIES
LONG-TERM(NOTE9) 11,042,045.00 18.87
<PAGE>
--------------- -------
TOTAL LONG-TERM LIABILITIES 11,042,045.00 18.87
--------------- -------
OTHER LIABILITIES
GUARANTEE DEPOSIT RECEIVED 1,079,636.00 1.84
PAYABLE TO STOCKHOLDERS 194,277.00 0.33
--------------- -------
TOTAL OTHER LIABILITIES 1,273,913.00 2.18
--------------- -------
TOTAL LIABILITIES 29,230,346.00 49.95
--------------- -------
STOCKHOLDERS EQUITY
CAPITAL STOCK(NOTE11) 28,978,290.00 49.52
UNAPPROPRIATED EARNINGS(NOTE12) 313,750.00 0.54
--------------- -------
TOTAL STOCKHOLDERS EQUITY 29,292,040.00 50.05
--------------- -------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY 58,522,386.00 100
<PAGE>
GOUNG HEI INVESTMENT CO., LTD.AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30,1996
(EXPRESSED IN US DOLLARS)
(See Accountant's Review Report)
Amount %
SALES 8,973,123 100.06
LESS: SALES RETURN AND ALLOWANCE 5,115 0.06
NET SALES 8,968,008 100.00
COST OF GOODS SOLD 7,858,543 87.63
GROSS PROFIT 1,109,465 12.37
OPERATION EXPENSES 203,382 2.27
INCOME FROM OPERATIONS 906,083 10.10
NON-OPERATING INCOME 147,534 1.65
NON-OPERATING EXPENSES (635,284) (7.08)
INCOME BEFORE INCOME TAX 418,333 4.66
PROVISION FOR INCOME TAX(NOTE15) 104,583 1.17
NET INCOME AFTER INCOME TAX 313,750 3.50
Earnings Per share of common stock: 0.03
Earnings per share(NOTE16)
<PAGE>
GOUNG HEI INVESTMENT CO., Ltd.
STATEMENTS OF CHANGES IN STOCK HOLDERS' EQUITY
For the years ended June 30, 1996
(Expressed In US Dollars)
</TABLE>
<TABLE>
<CAPTION>
RETAINED EARNINGS
---------------------------------------
Unappropriated Total Stockholders'
Legal Surplus Earnings Total Equity
------------- ------------ ------------- -----------------
<S> <C> <C> <C> <C>
Balance at APRIL 2,1996 $ - $ - $ - $ -
Combines subsidiazies 124,503.00 783,450.00 907,953.00 13,489,772.00
cash stock - 313,750.00 313,750.00 313,750.00
Net income for 1996 - - - 15,488,518.00
------------ ------------- ------------- ---------------
Balance at June 30, 1996 124,503.00 1,097,200.00 1,221,703.00 29,292,040.00
============ ============= ============= ===============
CAPITAL STOCK ISSUED CAPITAL SURPLUS RETAINED
EARNINGS
------------------------ --------------------------------------- -----------------------
Revaluation Increment
Amount on Properties Other Total Legal Surplus
-------------- ------------- ------------- -------------- -------------
Balance at APRIL 2,1996 $ - $ - $ - $ - $ -
Combines subsidiazies 7,236,364.00 - 5,345,455.00 5,345,455.00 124,503.00
cash stock 15,488,518.00 - - - -
Net income for 1996 - - - - -
-------------- -------------- -------------- ------------- --------------
Balance at June 30, 1996 22,724,882.00 $ - 5,345,455.00 5,345,455.00 124,503.00
============== ============== ============== ============== ==============
</TABLE>
(The accompanying notes are an review of the financial statements
with review dated August 6,1996)
<PAGE>
GOUNG HEI INVESTMENT CO., LTD.AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended June 30, 1996
(Expressed In us Dollars)
(See Accountant's Review Report)
Items 1996
----- ----
1. Cash flows from operating activities
Net income 313,750.00
adjusted to
Bad debts 105,429.00
Depreciation 557,102.00
Increase in notes and accounts (8,120,021.00)
receivable
Increase in other receivable (1,455,708.00)
Increase in inventories (3,031,512.00)
Increase in prepayments (84,410.00)
Increase in notes and accounts 4,446,855.00
payable
Decrease in accrued expenses 503,811.00
Increase in income tax payable 104,583.00
Increase in other payables 1,202,560.00
Increase in advance from customers 2,026,821.00
Cash used for operating (3,430,740.00)
activities
2. Cash flows from investing activities (44,696,498.00)
Acquisitions of properties (28,257.00)
Increase in refundable deposits (536,989.00)
Increase in pledged time deposit
Cash used for investing (45,261,744.00)
activities
<PAGE>
Items 1996
3. Cash flows from financing activities
Borrowing short-term loans 8,289,985.00
Borrowing long-term loans 11,381,818.00
Increase in payable to stockholders 194,277.00
current
Increase in guarantee deposit 1,079,636.00
received
Issuance of cash stock 15,488,815.00
Consolidated subsidiaries 13,489,475.00
Cash provided by financing 49,924,006.00
activities
4. Net increase in cash and cash 1,231,522.00
equivalents
5. Cash and Cash equivalents at -
beginning of year
6. Cash and Cash equivalents at end 1,231,522.00
of year
==============
7. Supplementary information of cash flows:
(1) Interest paid (excluding 620,482.00
==============
capitalized interest)
==============
(2) Income tax paid $ -
==============
(3) Non-affecting cash flows of
investing and financing
activities:
Long-term Loans due in 1996 339,773.00
==============
(The accompanying notes are an integral part of the finacial
statements wth review report dated August 6, 1996)
<PAGE>
Notes to Financial Statements
JUNE 30, 1996
(Amounts Expressed In Us Dollars)
1. Introduction
Our corporation was originally incorporated under the West Somoa
Corporation on April 2, 1996 as Goung Hei Investment Co., Ltd.We have set up its
Taiwan branch in August,1996. Our corporation's principal business is to develop
and acquire leading steel technologics, including steel construction equipment
and strip roil & sheet, The future objective will be capable of providing
materials for aero-space and computer parts. We currently owns and operates
Qualyserve Construction Co.Ltd., Kanhsiung, Taiwan, Republic of China, Which
forms the initial base for the growth of the company. The Qualyserve
construction co.,Ltd. was incorporated on August 2,1989. It engages in
manufacturing, reprocessing, designing and marketing of structure steel products
and related equipment.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company, which conform to
accounting principles generally accepted in the USA, are summarized as follows:
(a) CLASSIFICATIONS OF CURRENT AND UNCURRENT ITEMS
The time period for classifying items as current or long-term is
operating cycle (usually about 1-2 years). The threshold for classifying current
or long-term items is operation cycle, ranging from one year to two years.
(b) CASH AND CASH EQUIVALENTS
For the purposes of the statement of cash flows, all highly liquid debt
instruments purchased with a maturity of three months or less are treated as
cash equivalents.
(c) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts are provided according to the
judgement of the management, which is sufficient to cover all possible bad debt
losses.
(d) INVENTORIES
Inventories are costing by each of the construction projects and stated
at weighted average cost. At end of the years, the inventories are evaluated at
lower of cost or market price (LCM). Construction in process represents net
realized value.
(e) DEFERRED CHARGES
<PAGE>
Deferred charges are amortized by the straight-line method over five
years.
(f) PROPERTIES
Fixed assets are stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line method using the guideline service
lives prescribed by the government which approximately estimated useful lives.
Interests incurred in the period of construction or purchase of fixed assets are
capitalized and carried as a cost of fixed assets. Major renewals and
betterments are capitalized, while maintenance and repairs are expensed
currently. Upon sale or disposal of properties, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or
charged to income. Then the net gain less applicable income tax is transferred
from unappropriated earnings to capital surplus in the current year of sale or
disposal.
(g) LEGAL SURPLUS AND CAPTIAL SURPLUS
The Articles of Incorporation of the Company provide that 10% of its
annual net income should be set aside as legal surplus until the accumulated
surplus have equalled the company's paid-in capital. This legal surplus may be
used to offset a deficit. Capital surplus shall not be appropriated for uses
other than for offsetting of deficit or transferring to contributed capital.
(h) RECOGNIZED METHOD ON SALE
The Company recognizes the sales revenue by applying the Completed-
Contract Method while the contract will be completed within one year; The other
applys the Percentage of Completion Method. Revenues and gains are recognized as
most of profit-making processes have been achieved realized or can be realized.
(i) INCOME TAX
Income tax is provided based on estimated income tax currently payable.
Adjustments of tax liabilities of prior years are added to or deducted from in
the current year's tax provision. The Company adopted SFAS 96, "Accounting for
Income Tax," which requires the Company to recognize deferred tax liabilities
for influences result from taxable temporary differences, to recognize deferred
tax assets for influences result from deductably temporary difference, loss
deduction and tax deduction, and to estimate allowance by evaluating the
possibility of realization of deferred tax assets.
(j) FOREIGN-CURRENCY TRANSACTIONS
Foreign-currency transactions are recorded in New Taiwan Dollars at the
rate of exchange in effect when the transactions occur. Gains or losses caused
by different foreign exchange rates applied when cash in foreign currency is
actually converted into New Taiwan dollars, or when the foreign-currency
receivables or payables are settled, are charged or credited to non-operating
income or expense in the year of actual conversion or settlement. If the rates
of exchange fluctuated, the unrealized exchange gain or loss at the date of
balance sheets is, also charged to non-operating income or expense.
<PAGE>
(k) PENSION PLAN
The company adopted SFAS 87 "Accounting for Pensions" which requires the
company to recognize accured pension costs. The date of December 31, 1995 is
used as the measured date for actuarial purpose. The company disclosed the
minimum pension liabilities on balance sheets in December 31, 1995. The company
did not set up any pension plan until the year of 1995.
3. ASSETS MORTGAGED OR PLEDGED
The following assets have been mortgaged or pledged as collateral's for
long-term and short-term loans.
Accounts 6/30/96
- ------------------- --------------
Pledged time deposit 536,989.00
Land 32,525,407.00
Buildings 3,551,437.00
Notes Receivable 1,348,515.00
--------------
Total 37,962,348.00
==============
4. CASH AND CASH EQUIVALENTS
Accounts 6/30/96
------------------------- --------------
Cash on hand 6,590.00
Bank Deposit 1,224,932.00
--------------
Total 1,231,522.00
==============
5. NOTES AND ACCOUNTS RECEIVABLE-NET
Accounts 6/30/96
------------------------- --------------
Notes receivable 4,128,037.00
Accounts receivable 3,991,984.00
--------------
Subtotal 8,120,021.00
Less:Allowance for doubtful
accounts (105,429.00)
--------------
Net Amount 8,014,592.00
6. INVENTORIES
Accounts 6.00
------------------------- --------------
Materials 1,203,176.00
Construction in process 10,385,499.00
--------------
Subtotal 11,588,675.00
Less: Advance from
customers (8,557,163.00)
--------------
Net of inventories 3,031,512.00
==============
<PAGE>
Summary of Construction in process:
<TABLE>
<CAPTION>
6/30/96
-------------------------------------------------
Construction in Advance from
Items Process Customers Net
------------------------------- ---------------- ------------- ---------------
<S> <C> <C> <C>
Thermo-power plant in Taichon 7,628,663.00 6,191,867.00 1,436,796.00
Bureau of Commodity Inspection 912,972.00 798,992.00 113,980.00
& Quarantine in Chizi
Kaohsiung Finance and Tax 35,815.00 10,976.00 24,839.00
Building
Steel Construction-N.R.S-m.s.s 1,107,401.00 895,418.00 211,983.00
Project for CHUNGHWA PICTURE 658,182.00 651,939.00 6,243.00
TUBES, LTD.
TAL-SH IN TAINUN 31,391.00 - 31,391.00
SUN MOVIE CITY 11,075.00 7,971.00 3,104.00
---------------- ------------- ---------------
Total 10,385,499.00 8,557,163.00 1,828,336.00
================ ============= ===============
</TABLE>
<PAGE>
7. PROPERTY, PLANT AND EQUIPMENT
Cost 6/30/96
------------------------ --------------
Land 32,525,407
Building 4,246,156
Machinery and equipment 620,889
Transportation equipment 172,665
Miscellaneous equipment 262,405
Advance payments on equipment 5,818
purchases
Advance payments on land & 4,967,758
buildings purchases
Leased property 1,895,400
--------------
sub-total 44,696,498
--------------
Accumlated depreciation
------------------------
Building 65,486
Machinery and equipment 200,475
Transportation equipment 70,985
Miscellaneous equipment 126,871
Leased property 93,285
--------------
Sub-total 557,102
--------------
Net 44,139,396
==============
8. SHORT TERM LOANS
6/30/1996
----------------------------------
Items Amount Interest rate
------------------------- ---------------- ---------------
Credit loans 2,254,545 8.65%-9.85%
Mortgaged loans 3,199,634 9%-12.5%
Usance loans 2,835,806 8.50%-10.01%
---------------- ---------------
Total 8,289,985
================
9. LONG-TERM LOANS AND Loan-Term Liabilty Due Within One year
6/30/96
-------------
Land and Building Mortgage from Bank of Taiwan-
Koahsiung Branch
Principal: US$10872727
Period: June 21,1995 to June 21,2005
Interest Rate: 8.5% per year,floating
Payment Agreement: Interest paid monthly;
principal paid every three months beginning
at October 21,1997 and ending at June 21,2005
by thirty two payments.
Long-term Loans 11,381,818
Less: due within one year (339,773)
--------------
Net long-term of loans 11,042,045
==============
10. ADVANCES FROM CUSTOMERS
6/30/96
-------------------------------------
Advances from Construction in
Items Customers Process Net
------------------------------- ------------- --------- ---------
Construction in Chunshi 133,843 53,181 80,662
Hospital
Flight stop Construction in 2,252,353 609,185 1,643,168
CKS airport, Taoyuan Taiwan
Projects of NRS MSS in 347,211 320,371 26,840
Malaysia
Remodeing of Taipei Bridge 1,007,173 943,527 63,646
Remodeing of Taipei Bridge 40,168 19,959 20,209
Building Taichung Taiwan
Parking lot Markro 2,969,758 2,777,462 192,296
Supermarket in Nehu, Taipei
Taiwan
------------- ----------- ------------
Total 6,750,506 4,723,685 2,026,821
============= =========== ============
<PAGE>
11. CAPITAL STOCK
(1) As of December 31,1995, the amount borrowed from shareholders is
US$15,488,815.Qualyserve Construction Co., Ltd.,Kaohsiung hae not paid off this
loans.On April 30,1996, the shareholders and Mr.Lu Cui-Kang, the representative
of Goung Hei Investment Co.,Ltd.reached the contract that the advances from
shareholders was going to be converted to hold the stocks of equivalent value.
(2) The shareholders of Qualyserve Construction Co., Ltd., Kaohsiung,
Taiwan (QCC) has transferred their stockholders equity to Goung Hei Investment
Corporation. The amount is US$ 13,489,475.
12. RETAINED EARNINGS
(1) The Articles of Incorporation of the Company provide that 10% of its
annual net income to be set aside as legal surplus until the accumulated reserve
equals to the Company's capital stock. This legal surplus may be used to offset
the deficit.
The net income, after setting aside the legal surplus, shall be appropriated
according to the results of stockholders meeting.
13. MISCELLANEOUS GAIN
Items 6/30/96
------------------------------ ----------------
Withhold from payable 30,896
Other 25,574
----------------
Total 56,470
================
14. INTEREST EXPENSES
Items 6/30/96
------------------------------ ----------------
Interest expenses 620,482
Less: Interest capitalized -
----------------
Net 620,482
================
15. INCOME TAX
Items 6/30/96
------------------------------ ----------------
Provision for income tax 104,583
----------------
INCOME TAX 104,583
================
16. EARNING PER SHARE(EPS)
Items 6/30/96
------------------------------ ----------------
Net income 313,750
Weighted average
number of shares
outstanding 12,000,000
----------------
EARNINGS PER SHARE 0.03
================
17. RELATED PARTY TRANSACTIONS
(A) Titles and relationship of related parties
Title Relationship with the Company
------------------------------ ----------------------------------
Chun-Shin Wu President of Board of Directors
of Qualyserve Construction
Chin-Hong Tsai Member of the Board of Directors
of Qualyserve Construction
Jung-Sheng Mah Member of the Board of Directors
of Qualyserve Construction
Chung-Ching Yen Member of the Board of Directors
of Qualyserve Construction
(B) Transaction with Related
Parties
Accounts Payable to stockholders current: advance from stockholders, with
no interest.
Maximum amount Ending Balance as
Related Parties during the June of June 30, 1996
----------------- ---------------- ----------------
Chun-Shin Wu 1,517,045 93,161
Jung-Sheng Tsai 1,722,996 -
Chung-Ching Yen 395,130 -
Chin-Houg Tsai 1,265,038 101,115
<PAGE>
Independent Auditor's Report
To the Stockholders
QUALYSERVE CONSTRUCTION CO., LTD.
We have audited the accompanying balance sheets of QUALYSERVE CONSTRUCTION CO.,
LTD. as of December 31, 1995 and 1994, and the related statements of income,
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our resposibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with USA's generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the fianacial statements are free of material
misstatements . An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of QUALYSERVE CONSTRUCTION CO.,
LTD. as of December 31, 1995 and 1995 and 1994 and the results of its operations
and its cash flows for the years then ended, in conformity with USA's generally
accepted accounting principles.
- ----------------------------------
HORWATH & COMPANY
Certified Public Accountants
A member of Horwath
International Kaohsiung, Taiwan, R.O.C.
April 15, 1996
<PAGE>
QUALYSERVE CONSTRUCTION Co., Ltd.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(Expressed In United State Dollars)
<TABLE>
<CAPTION>
1995 1994
-------------- ------- -------------- -------
A S S E T S Amount % Amount %
------------------------------------- -------------- ------- -------------- -------
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents (Notes 2 and 4) 235,764 0.42 437,091.89 6.80
NOtes and accounts receivable-Net 8,403,454 14.91 4,221,168.83 65.70
(Notes 2 and 5)
Other receivable 210,208 0.37 28,623.29 0.45
Inventories (Notes 2 and 6) 4,501,302 7.98 157,426.04 2.45
Prepayments 130,518 0.23 20,611.78 0.32
Pledged bank deposit(Notes 3) 171,246 0.30 - -
-------------- ------- -------------- -------
Total Current Assets 13,652,491 24.22 4,864,921.83 75.72
-------------- ------- -------------- -------
PROPERTY, PLANT AND EQUIPMENT
Cost 43,115,781 76.45 1,815,533.35 28.26
Less:Accumulated depreciation (412,933) (0.73) (288,763.90) (4.49)
-------------- ------- -------------- -------
Net Properties (Notes 2 and 7) 42,702,848 75.72 1,526,769.45 23.76
-------------- ------- -------------- -------
INTANGIBLE ASSETS
Deferred pension cost 10,746 0.02 $ - $ -
-------------- ------- -------------- -------
Total Intangible Assets 10,746 0.02 $ - $ -
-------------- ------- -------------- -------
OTHER ASSETS
Refundable deposits 31,766 0.06 33,009.56 0.51
Deferred charges - - 120.65 0.01
--------------- ------- --------------- -------
Total Other Assets 31,766 0.06 33,130.21 0.52
--------------- ------- --------------- -------
TOTAL ASSETS 56,397,851 100.00 6,424,821.49 100.00
=============== ======= =============== =======
</TABLE>
<TABLE>
<CAPTION>
1995 1994
-------------- ------- -------------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY Amount % Amount %
------------------------------------- -------------- ------- -------------- -------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Short-term loans(Note 8) 6,628,544.95 11.75 921,904.76 14.35
Notes and accounts payable 5,667,790.41 10.05 1,768,916.11 27.53
Accrued expenses 176,198.49 0.31 189,177.30 2.94
Income tax payable 252,552.11 0.45 150,005.87 2.33
Other payables 274,473.74 0.48 - -
Advance from customers (Note 10) 2,051,043.45 3.64 999,142.59 15.55
Long-term loans-current
portion (Note 9) 343,141.76 0.61 - -
--------------- ------- -------------- -------
Total Current Liabilities 15,393,744.91 27.28 4,029,146.63 62.71
--------------- ------- -------------- -------
LONGioTERM LIABILITIES
Longioterm loans (Note 9) 10,637,394.42 18.86 $i@i@io -
--------------- ------- -------------- -------
Total Longterm Liabilities 10,637,394.42 18.86 $i@i@io -
--------------- ------- -------------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
OTHER LIABILITIES
Guarantee deposit received 1,090,341.54 1.93 $i@i@io -
Payable to stockholders current
(Note 18) 15,642,095.04 27.75 - -
Pension liability (Note 2.11) 10,745.50 0.03 - -
--------------- ------- -------------- -------
Total Other Liabilities 16,743,182.08 29.71 $i@i@io -
--------------- ------- -------------- -------
Total Liabilities 42,774,321.41 75.84 4,029,146.63 62.71
--------------- ------- -------------- -------
STOCKHOLDERS' EQUITY
Capital stock;$10 par value (Note 12) 7,329,321.99 13.00 1,940,758.94 30.21
Capital surplus(Note 2) 5,388,563.05 9.55 - 0.00
Legal Surplus(Note 2) 38,819.74 0.07 242.76 0.00
Unappropriated earnings(Note 13) 897,855.57 1.59 385,769.75 6.00
Equity adjustment on translation (Note 2) (31,030.93) 68,903.41
--------------- ------- --------------- -------
Total Stockholders' Equity 13,623,529.42 24.21 2,395,674.86 36.22
--------------- ------- --------------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 56,397,850.83 100.06 6,424,898.93 98.93
</TABLE>
<PAGE>
QUALYSERVE CONSTRUCTION Co., Ltd.
STATEMENTS OF INCOME
For the years ended December 31, 1995 and 1994
(Expressed In United State Dollars)
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
Amount % Amount %
-------------- -------- -------------- --------
<S> <C> <C> <C> <C>
Sales Revenue (Note 2) $19,986,136.09 100.00 $11,246,701.12 100.00
Cost of Goods Sold 18,056,859.50 90.35 10,097,015.13 89.78
-------------- -------- -------------- --------
Gross profit 1,929,276.59 9.65 1,149,685.99 10.22
Operation expenses 611,042.63 3.06 506,113.79 4.50
-------------- -------- -------------- --------
Income from operations 1,318,233.96 6.60 643,572.20 5.72
Non-operating income 202,299.48 1.01 14,440.70 0.13
Non-operating expenses (633,296.22) (3.17) (98,248.61) (0.87)
-------------- -------- -------------- --------
Income before income tax 887,237.22 4.44 559,764.29 4.98
Provision for income tax (336,574.42) (1.68) (151,802.69) (1.35)
(Note 12)
-------------- -------- -------------- --------
Net income after tax $550,662.80 2.75 $407,961.60 3.63
============== ======== ============== ========
Earnings per share of common stock:
Earnings per share (Notes 17) $0.09 $0.08
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
(with auditor's report dated April 15, 1996)
<PAGE>
QUALYSERVE CONSTRUCTION Co., Ltd.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31,1995 and 1994
(Expressed In United State Dollars)
<TABLE>
<CAPTION>
CAPITAL STOCK ISSUED CAPITAL SURPLUS
------------------------- ---------------------------
Revaluation Increment
Shares Amount on Properties Other Total
----------- ----------- ------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,1993 5,200,000.00 1,940,758.94 $ - $ - $ -
Net income for 1994
Effect of Foreign Currency
Translation Changes
----------- ----------- ------- ------------- -----------
Balance at December 31,1994 5,200,000.00 1,940,758.94 $ - $ - $ -
Cash stock 14,700,000.00 5,388,563.05 - 5,388,563.05 5,388,563.05
Legal surplus divided - - - - -
Net income for 1995 - - - - -
Effect of Foreign Currency
Translation Changes
------------- ----------- ------- ------------- -----------
Balance at December 31,1995 19,900,000.00 7,329,322.00 $ - 5,388,563.00 5,388,563.00
============= =========== ======= ============= ===========
</TABLE>
<TABLE>
<CAPTION>
RETAINED EARNINGS
----------------------------------------
Unappropriated Equity Adjustment Total Stockholder's
Legal Surplus Earnings Total on Translation Equity
-------------- -------------- ---------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,1993 $242.76 ($22,191.85) ($21,949.09) $39,733.12 $1,958,542.97
Net income for 1994 407,961.60 407,961.60 - 407,961.60
Effect of Foreign Currency 29,170.29 29,170.29
Translation Changes
-------------- -------------- ---------- ----------------- -------------------
Balance at December 31,1994 $242.76 $385,769.75 $386,012.51 $68,903.41 $2,395,674.86
Cash stock - - - - 10,777,126.10
Legal surplus divided 38,576.98 (38,576.98) - - -
Net income for 1995 - 550,662.80 550,662.80 - -
Effect of Foreign Currency (99,934.34) (99,934.34)
Translation Changes
-------------- -------------- ---------- ----------------- -------------------
Balance at December 31,1995 $38,819.74 $897,855.57 $936,675.31 ($31,030.93) $13,623,529.42
</TABLE>
The accompanying notes are an integral part of the financial statements
(with auditor's report dated April 15,1996)
<PAGE>
QUALYSERVE CONSTRUCTION Co., Ltd.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995 and 1994
(Expressed In United State Dollars)
Items 1995 1994
- ---------------------------------------- -------------- --------------
1. Cash flows from operating activities
Net income $550,662.80 $407,961.60
Adjustments to Reconcil Net Income to
Net Cash used in Operating Activities:
Bad debts 69,822.14 39,048.38
Depreciation 138,496.30 81,349.73
Amortization 117.99 3,184.98
(Gain) or loss on disposal of fixed assets 609.99 -
Increase in Notes and Accounts receivable (4,249,284.90) (3,273,852.03)
Increase in other receivable (181,584.68) (22,704.81)
Decrease(Increase) in inventories (4,343,875.58) 5,789,944.62
Decrease(Increase) in Prepayments (109,905.81) 113,008.77
Increase in notes and accounts payable 3,898,874.30 64,875.43
Decrease in accrued expenses (12,978.81) 44,777.82
Increase in income tax payable 102,546.24 145,936.67
Increase in other payables 274,473.74 -
Increase in advance from customers 1,051,990.86 (3,355,929.87)
Foreign exchange gain (loss) (114,313.70) 34,104.64
-------------- --------------
Cash outflows from operating activities ($2,924,349.12) $71,705.93
-------------- --------------
2. Cash flows from investing activities
Acquisitions of fixed assets ($41,301,228.82) ($1,083,985.94)
Increase in refundable deposits (1,243.12) (620.38)
Increase in pledged bank deposit (171,245.80) -
-------------- --------------
Cash provided (Used) by investing ($41,473,717.74) ($1,084,606.32)
activities
-------------- --------------
<PAGE>
1995 1994
-------------- -------------
3. Cash flows from financing activities
- ----------------------------------------
Borrowing short-term loans $5,706,640.19 $360,527.52
Borrowing long-term loans 10,980,536.18 -
Increase in payable to stockholders 15,642,095.04 -
current
Increase in guarantee deposit 1,090,341.54 -
received
Issuance of cash stock 10,777,126.10 -
-------------- --------------
Cash provided (Used) by financing $44,196,739.05 $360,527.52
activities
-------------- --------------
4. Net increase (Decrease) in cash ($201,327.81) ($652,372.87)
and cash equivalents
5. Cash and Cash equivalents at 437,091.89 1,089,464.76
beginning of year
-------------- --------------
6. Cash and Cash equivalents at end of year $235,764.08 $437,091.89
============== ==============
7. Supplementary information of cash flows:
(1) Interest paid (excluding $484,385.19 $102,524.00
capitalized interest)
============== ==============
(2) Income tax paid $226,651.46 $6,959.67
============== ==============
(3) Non-affecting cash flows of
investing and financing
activities:
Current protion of long-term
loans. 341,886.21 $ -
============== ==============
The accompanying notes are an integral part of the finacial statements
(with auditor's report dated April 15, 1996)
<PAGE>
QIALYSERVE CONSTRUCTION Co., Ltd.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(Amounts Expressed In United State Dollars,
Except Where Otherwise Stated)
1. GENERAL & ORGANIZATION
Qualyserve Construction Co., Ltd. (the Company) was incorporated on August
2, 1989. The Company is engaged in manufacture, reporocess, design and Sale of
all Kinds of industrial construction and equipments.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company, which conform to
accounting principles generally accepted in the Republic of China, are
summarized as follows:
(a) CLASSIFICATIONS OF CURRENT AND UNCURRENT ITEMS
The time period for classifying items as current or long-term is operating
cycle (usually about 1-2 years).
(b) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
(c) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts are provided according to the judgement
of the management, which is sufficient to cover all possible bad debt losses.
<PAGE>
(d) INVENTORIES
Inventories are costing by each of the construction projects and stated at
weighted average cost.
At end of the years, the inventories are evaluated at lower of cost or
market price (LCM).
Construction in process represents net value.
advance from customers.
(e) DEFERRED CHARGES
Deferred charges are amortized by the straight-line method over five years.
(f) PROPERTIES
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is provided on the straight line method using the guideline service lives
prescribed by the government which approximatcly estimated useful lives.
Interests incurred in the period of construction or purchase of fixed
assets are capitalized and carried as a cost of fixed assets.
Major renewals and betterments are capitalized, while maintenance and
repairs are expensed currently.
Upon sale or disposal of properties, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or
charged to income. Then the net gain less applicable income tax is transferred
from unappropriated earnings to capital surplus in the current year of sale of
disposal.
(g) LEGAL SURPLUS AND CAPTIAL SURPLUS
The Articles of Incorporation of the Company provide that 10% of its annual
net income should be set aside as legal surplus until the accumulated surplus
have equalled the company's paid-in capital. This legal surplus may be used to
offset a deficit. Capital surplus shall not be appropriated for uses other than
for offsetting of deficit or transferring to contributed capital.
<PAGE>
(h) RECOGNITION METHOD OF SALE
The Company recognizes the sales revenue by applying the Completed-Contract
Method while the contract will be completed within one year; The other by
applying the Percentage of Completion Method.
Revenues and gains are recognized as most of profit-making processes have
been achieved realized or can be realized.
2. SIGNIFICANT ACCOUNTING POLICIES
(i) INCOME TAX
The Company adopted SFAS 96, "Accounting for Income Tax," which requires
the Company to recognize deferred tax liabilities for influences result from
taxably temporary differences, to recognize deferred tax assets for influences
result from dieductably temporary difference, loss deduction and tax deduction,
and to estimate allowance by evaluating the realizability of deferred tax
assets.
(j) PENSION PLAN
The company adopted SFAS 87 "Accounting for Pensions" which requires the
Company to recognize accured pension costs. The date of December 31, 1995 is
used as the measured date for actuarial purpose. The Company disclosed the
minimum pension liabilities on balance sheet of December 31, 1995. The company
did not set up any pension plan until the year of 1995.
<PAGE>
(k) THE EQUITY ADJUSTMENT ON TRANSLATION OF FOREIGN SURRENC
Foreign currency financial report translation based on FASB Article No.52.
All the assets and debts are all followed the exchange rate on the date of
balance sheets. The equity of stockhialer's includes the initial retained
earnings according to the balance of the last final preiod and carry forward.
The rest woll be exchanged by the historical raate. The dividend will be
calculated by the rate of declare day. Futhermore, the item of profit and loss
will follow the rate of weighted average at that period. About the exchange
balance atter calculation, it will be losted in the equirt adjustment in
translation of foreign currency in order to be the adjustment item for the
stockhilder equity.
3. ASSETS MORTGAGED OR PLEDGED
The following assets have been mortgaged or pledged as collaterals for
long-term and short-term loans.
December 31,
----------------------------------
Accounts 1995 1994
------------------------- --------------- --------------
Pledged time deposit $ 171,245.80 $ -
Land 32,018,313.73 -
Buildings 3,586,651.49 -
Notes Receivable 1,607,986.71 439,878.28
-------------- -------------
Total $37,384,197.73 $ 439,878.28
============== =============
4. CASH AND CASH EQUIVALENTS
December 31
-------------------------------------
Accounts 1995 1994
------------------------- ------------- --------------
Cash on hand $7,712.08 $5,998.32
Bank Deposit 228,052.00 431,093.57
------------- --------------
Total $235,764.08 $ 437,091.89
============= ==============
<PAGE>
5. NOTES AND ACCOUNTS RECEIVABLE-NET
December 31,
---------------------------------------
Accounts 1995 1994
------------------------- ----------------- --------------
Notes receivable $3,102,668.45 $ 730,008.64
Accounts receivable 5,407,259.24 3,530,634.15
----------------- --------------
Subtotal $8,509,927.69 $4,260,642.79
Less:Allowance for doubtful
accounts (106,474.04) (39,473.96)
----------------- --------------
Net Amount $8,403,453.65 $4,221,168.83
================= ==============
6. INVENTORIES
December 31, 1996
--------------------------------
Accounts 1995 1994
------------------------- ------------- --------------
Materials $ 2,586,442.09 $ -
Construction in progress 13,540,785.02 402,462.37
-------------- --------------
Subtotal $16,127,227.11 $ 402,462.37
Less: Advance from customers (11,625,925.49) (245,036.33)
-------------- --------------
Net of inventories $ 4,501,301.62 $ 157,426.04
============== ==============
Summary of Constructions in progress:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------
Items Construction in Advance from Net
Progress Customers
<S> <C> <C> <C>
------------------------------- ---------------- -------------- ---------------
Thermo-power plant in Taichon $7,475,508.45 $6,253,262.43 $1,222,246.02
Bureau of Commodity Inspection
& Quarantine in Chizi 717,786.15 608,867.46 108,918.69
Remodeling of Taipei Bridge 929,223.58 925,932.72 3,290.86
Kaohsiung Finance and Tax 26,341.83 11,084.91 15,256.92
Building
Steel Construction-N.R.S-m.s.s 1,037,730.11 752,919.57 284,810.54
Parking lot-Wanklong Supermarket in Nehu 2,705,489.72 2,666,674.29 38,815.43
Project for CHUNGHWA PICTURE TUBES, LTD. 628,547.78 407,184.11 221,363.67
Remolding of stairs in kingsa Building 20,157.40 - 20,157.40
----------------- -------------- ---------------
Total $13,540,785.40 $11,625,925.49 $1,914,859.53
================= ============== =============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
------------------------------------------------------
Construction in Advance from
Items Progress Customers Net
<S> <C> <C> <C>
- -------------------------------- ---------------- ---------------- ---------------
Door-shapped lift-Valmet $357,789.06 $245,036.33 $112,752.73
pillar for Bureau of Commodity
inspection & Quarantine 44,673.31 - 44,673.31
---------------- ---------------- ---------------
Total $402,462.37 $245,036.33 $157,426.04
================ ================ ===============
</TABLE>
<PAGE>
7. RPOPERTY, PLANT AND EQUIPMENT
Cost 1995 1994
- ------------------------------ --------------- --------------
Land $32,018,313.73 $ -
Buildings 3,586,651.49 -
Machinery and equipment 993,048.44 461,715.45
Transportation equipment 206,888.54 102,240.73
Miscellaneous equipment 265,006.76 186,695.07
Advance payments on equipment 6,208.85 -
purchases
Advance Payments on Land and 6,039,663.64 1,064,882.10
Buildings Purchases
---------------- --------------
Sub-total $43,115,781.45 $ 1,815,533.35
---------------- --------------
Accumlated depreciation
- ------------------------
Buildings $ 32,023.69 $ -
Machinery and equipment 188,076.20 129,711.89
Transportation equipment 78,908.70 67,048.76
Miscellaneous equipment 113,924.68 92,003.25
---------------- --------------
Sub-total 412,933.27 288,763.90
---------------- --------------
Net $42,702,848.18 $ 1,526,769.45
================ ==============
8.SHORT-TERM LOANS
Items Amount Interest rate
----- ------ -------------
Credit loans $2,378,338.82 8.65%-9.85%
Mortgaged loans 1,417,334.50 4.25%-9.25%
Usance loans 2,832,871.63 8.50%-10.01%
Total $6,628,544.95
=============
<PAGE>
December 31, 1994
------------------------------------
Items Amount Interest rate
------------------------ --------------- --------------
Credit loans $571,428.57 8.75%
Mortgaged loans 350,476.19 9.00%
Total $921,904.76
===============
9.LONG-TERM LOANS AND CURRENT PORTIONS OF LONG-TERM LOANS
December 31,
-----------------------------------
1995 1994
--------------- ------------
Taiwan Bank Kangshan Branch,
Land and Building Mortgaged
Loan; Principal $ 299,000,000 ,
Loan Period Jun 21, 1995-
Jun 21,2005. Payments of
interest are to be made each month.
From Oct.21,1997 to Jun
21,2005, devide 32 periods
(3month per period), payments
of principal are to be made
each period.
The floating interest rate for
Dec 31,1995 is 8.5% $10,980,536.18 $ -
Less: Long-term loans-current
Portion (343,141.76) -
--------------- ------------
Long-term Loans: $10,637,394.42 $ -
=============== ============
<PAGE>
10. ADVANCES FROM CUSTOMERS
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------
Construction in Advances from
Items Progress Customers Net
<S> <C> <C> <C>
------------------------------- -------------- ----------- -------------
Construction in Chunshi Hospital 135,170.62 53,707.93 81,462.69
Flight stop Construction in CKS airport 2,274,686.42 332,212.27 1,942,474.15
Poject in malaysia 350.00,653.91 323,547.30 27,106.61
-------------- ----------- -------------
Total $2,760,510.95 $709,467.50 $2,051,043.45
============== =========== =============
December 31, 1994
-------------------------------------------
Construction in Advances from
Items Progress Customers Net
------------------------------- --------------- ----------- -------------
Thermo-power plantin Taichon $6,560,460.82 $5,508,559.96 $999,142.59
</TABLE>
11. PENSION
Based on SFAS 87, the following should be disclosed :
A. Retirement Plan
a.The retirement plan is applied to all eligible full-time employees.
b.Calculation of pension paid is summaried as follows:
* 2 points of pension are earned annually while 1 point of pension is
earned every year for employees with 15 years or more of qualified
service.
* The last service year, if it reaches 6 months or longer, is computed
as one year, otherwise as half year. The maximum pension points can be
earned are 45.
* Payment of pension is based on the years of qualified service and the
averaged amount of 6 month salaries right before retirement.
B. Bared on SFAS 87, as of year 1995, the company recognized accrued pension
costs by useing the date of Dec. 31 1995 as the measured date for actuarial
purpose. The recognized amount is $10,745.50 of deferred peusion costs and
pension obligation on balance sheet of Dec 31,1995.
<PAGE>
12. CAPITAL STOCK
Date Description Increase Capital Total Capital
----------- -------------- ---------------- ---------------
Aug 1989 Set up $ - $ 206,896.55
Nov 1990 Cash Stock 722,900.45 929,797.00
Jan 1991 Cash Stock 295,061.41 1,224,858.41
Aug 1991 Cash Stock 715,900.53 1,940,758.94
Dec 1995 Cash Stock 5,388,563.05 7,329,321.99
Par Value $10, authorized 19,900,000 shares, issued 19,900,000 shares in
Dec.31,1995 and 5,200,000 shares in Dec.31,1994.
RETAINED EARNINGS
(1) The Articles of Incorporation of the Company provide that 10% its annual net
income should be set aside as legal surplus until the accumulated reserve has
equalled the Company's capital stock. This legal surplus may be used to offset
deficit.
The annual net income after setting aside the legal surplus
14.MISCELLANEOUS GAIN
Items 1995 1994
------------------------- ----------- -----------
Sale of scrap $ 16,556.43 12,616.87
Withhold from payable 155,430.85 -
Other 2,100.67 2.46
----------- -----------
Total $174,087.95 $12,619.33
=========== ===========
15. INTEREST EXPENSES
Items 1995 1994
------------------------- --------------- --------------
Interest expenses $692,701.23 $9,824.89
Less: Interest capitalized (111,886.12) -
--------------- --------------
Net $580,815.11 $9,824.89
=============== ==============
<PAGE>
16. INCOME TAX
Items 1995 1994
------------------------- --------------- --------------
Provision for income tax $333,069.86 $151,802.69
plus: Demand payments of tax arrears 3,504.56 -
--------------- --------------
INCOME TAX $336,574.42 $151,802.69
=============== ==============
(1) Differences between Provision for tax on financial statements and tax
payable on income tax return:
Items 1995 1994
---------------------------- -------------- -------------
Tax based on Income before tax $221,435.34 $139,562.78
Permanent differences: 7,449.18 9,762.10
Over-declared bad debts 97,460.66 -
Decrease in interest expense 6,724.68 2,477.81
Other
-------------- -------------
Income tax for Current period $333,069.86 $151,802.69
============== =============
17.EARNINGS PER SHARE (EPS)
Items 1995 1994
--------------------- -------------- ------------
Net income $550,662.80 $407,961.60
Weighted average number of
shares outstanding 6,425,000 5,200,000
-------------- ------------
EARNINGS PER SHARE $0.09 $0.08
============== ============
Weighted average number of shares Outstanding in 1995:
$ 5,200,000+ 14,700,000 *1/12 = 6,425,000 (shares)
<PAGE>
18. RELATED PARTY TRANSACTIONS
(a) Title and relationship of related parties
Title Relationship with the Company
------------------------- ---------------------------------
Wu, Chun-Shin President of the Board of Directors
Tsai, Chih-Hong Member of the Board of Directors
Mah, Jung-Sheng Member of the Board of Directors
Yen, Chung-Ching Member of the Board of Directors
Chan, Chien-Hue Former President of the Board of Directors
(b) Transaction with Related Parties
(1) Payable to stockholders current: advance from stockholders, with no
interest.
Related Partles Maximum amount during the Year Balance at Year end
- ------------------- ------------------------------ -----------------------
Wu, Chun-Shin $ 6,856,223.75 $ 6,307,376.33
Tsai, Chih-Houg 4,390,779.36 4,390,779.36
Mah, Jung-Sheng 9,730,352.36 3,690,703.62
Yen, Chung-Ching 3,600,943.76 1,253,235.73
Chan, Chien-Hue 1,110,049.76 -
<PAGE>
19. Contigent events
(1) As of December 31, 1995 and 1994, Letters of Credit were issued but not
used are summaried as follmws:
December 31
-------------------------------------
Items 1994 1994
- -------------------------- ----------------- ---------------
Letters of Credit-Overseas $549,946.00 -
Guarantee Deposit 54,995.00 -
Letters of Credit-local 15,288.99 -
<PAGE>
20. Contract
The Company has entered a contract of purchase of land and building in
order to meet the future needs for business. The Contract is summarized as
follows:
1.Location: Land-Chaocho section, Pingtung County(55,393oT) Building-#1148,
Chaocho section, Pingtung County (12,468.86oT)
2.Contractor: Kunli building Co.,Ltd.
3.Contract price: US$ 42,707.554.23(Tax included)
4.Title of properties: Except titles of land#33 and #40-27 have not
transfered, titles for all the residual have been transferred.
5.Evaluation: The fair market value for the land and building is evaluated
US$ 41,791,623.80
6.As of December 31,1995, US$ 41,267,763.65 has been paid.
21. Some accounts of financial statements, 1994 were reclassified in order to
compile the financial statements for 1995.
<PAGE>
Independent Auditor's Report
To the Stockholders
QUALYSERVE CONSTRUCTION CO., LTD.
We have audited the accompanying balance sheets of QUALYSERVE CONSTRUCTION CO.,
LTD. as of December 31, 1994 and 1993, and the related statements of income,
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our resposibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with USA's generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the fianacial statements are free of material
misstatements . An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of QUALYSERVE CONSTRUCTION CO.,
LTD. as of December 31, 1995 and 1995 and 1994 and the results of its operations
and its cash flows for the years then ended, in conformity with USA's generally
accepted accounting principles.
/s/ HORWATH & COMPANY
- ------------------------------------
HORWATH & COMPANY
Certified Public Accountants
A member of Horwath International
Kaohsiung, Taiwan, R.O.C.
April 15, 1996
<PAGE>
QUALYSERVE CONSTRUCTION CO., LTD.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(Expressed In United State Dollars)
<TABLE>
<CAPTION>
1994 1993
---------- -------------
A S S E T S Amount % Amount %
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents(Notes 2 and 4) 437,091.89 6.80 1,089,464.76 12.48
Notes and accounts receivable-Net 4,221,168.83 65.71 986,790.76 11.32
(Notes 2 and 5)
Other receivable 28,623.29 0.45 5,918.48 0.07
Inventories(Notes 2 and 6) 157,426.04 2.45 5,947,370.66 68.15
Prepayments 20,611.78 0.32 133,620.55 1.53
-------------- -------- -------------- --------
TOTAL CURRENT ASSETS 4,864,921.83 75.72 8,163,165.21 93.53
-------------- -------- -------------- --------
PROPERTY, PLANT AND EQUIPMENT
Cost 1,815,533.35 28.26 731,547.41 8.38
Less:Accumulated depreciation (288,763.90) (4.49) (202,881.14) (2.32)
-------------- -------- -------------- --------
Net Properties(Notes 2 and 7) 1,526,769.45 23.76 528,666.27 6.06
-------------- -------- -------------- --------
OTHER ASSETS
Refundable deposits 33,009.56 0.52 32,389.18 0.37
Deferred charger 120.65 0.00 3,281.37 0.05
-------------- -------- -------------- --------
Total Other Assets 33,130.21 0.52 35,670.55 0.41
-------------- -------- -------------- --------
TOTAL ASSETS 6,424,821.49 100.00 8,727,502.03 100.00
============== ======== ============== ========
</TABLE>
<TABLE>
<CAPTION>
1994 1993
----------------------------- ------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY Amount % Amount %
- ---------------------------------------- -------------- -------- --------------- --------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Short-term loans(Note 8) 921,904.76 14.35 561,377.24 6.43
Notes and accounts payable 1,768,916.11 27.53 1,704,040.68 19.52
Accrued expenses 189,177.30 2.94 144,399.48 1.65
Income tax payable 150,005.87 2.33 4,069.20 0.05
Advance from customers(Nete 9) 999,142.59 15.55 4,355,072.46 49.90
-------------- -------- --------------- --------
Total Long-term Liabilities 4,029,146.63 62.71 6,768,959.06 77.56
-------------- -------- --------------- --------
Total Liabilities 4,029,146.63 62.71 6,768,959.06 77.56
-------------- -------- --------------- --------
STOCKHOLDERS' EQUITY
Capital stock;$10 par value(Note10) 1,940,758.94 30.22 1,940,758.94 22.24
Legal Surplus(Note2) 242.76 - 242.76 -
Unappropriated earnings(Note11) 385,769.75 6.00 (22,191.85) (0.25)
Equity adjustment on translation(Note2) 68,903.41 1.07 39,733.12 0.45
Total Stockolders' Equity 2,395,674.86 37.29 1,958,542.97 22.44
-------------- -------- --------------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 6,424,821.49 100.00 8,727,502.03 100.00
============== ======== =============== ========
</TABLE>
<PAGE>
QUALYSERVE CONSTRUCTION Co., Ltd.
STATEMENTS OF INCOME
For the years ended December 31, 1994 and 1993
(Expressed In United State Dollars)
<TABLE>
<CAPTION>
1994 1993
------------------------ ------------------------
Amount % Amount %
<S> <C> <C> <C> <C>
Sales Revenue (Note 2) $11,246,701.12 100.00 $5,803,537.47 100.00
Cost of Goods Sold 10,097,015.13 89.78 5,252,811.41 90.51
------------- --------- ------------ -------
Gross profit 1,149,685.99 10.22 550,726.06 9.49
Operation expenses 506,113.79 4.50 505,646.01 8.71
------------- --------- ------------ -------
Income from operations 643,572.20 5.72 45,080.05 0.78
Non-operating income 14,440.70 0.13 21,638.45 0.37
Non-operating expenses (98,248.61) (0.87) (34,496.14) (0.59)
------------- --------- ------------ -------
Income before income tax 559,764.29 4.98 32,222.36 0.55
Provision for income tax (Note 12) (151,802.69) (1.35) (5,411.06) (0.09)
------------- --------- ------------ -------
Net income after tax 407,961.60 3.63 26,811.30 0.46
============= ========= ============ =======
Earnings per share of common stock:
Earnings per share (Notes 17) $0.08 $0.01
============= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
(with auditor's report dated April 15, 1996)
<PAGE>
QUALYSERVE CONSTRUCTION CO., Ltd.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1994 and 1993
(Expressed in United State Dollars)
<TABLE>
<CAPTION>
CAPITAL STOCK ISSUED CAPITAL SURPLUS
----------------------- ------------------------
Revaluation Increment
Shares Amount on Properties Other Total
------ ------ ------------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1,1993 $5,200,000 $1,940,758.94 $ - $ - $ -
Net income for 1993 - - - - -
Effect of Foreign Currency
Translation Changes
Balance at December 31,1993 $5,200,000 $1,940,758.94 $ - $ - $ -
Net income for 1994 - - - - -
Effect of Foreign Currency
Translation Changes
Balance at December 31,1994 $5,200,000 $1,940,758.94 $ - $ - $ -
=========== ========= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
RETAINED EARNINGS
-------------------------------------------
Unappropriated Equity Adjustment Total Stockholders'
Legal Surplus Earnings Total on Translation Equity
<S> <C> <C> <C> <C> <C>
Balance at January 1,1993 $ 242.76 (49,003.15) (48,760.39) 1,891,998.55
Net income for 1993 - 26,811.30 26,811.30 26,811.30
Effect of Foreign Currency $ 39,733.12 39,733.12
Translation Changes
Balance at December 31,1993 $ 242.76 (22,191.85) (21,949.09) 39,733.12 1,958,542.97
Net income for 1994 - 407,961.60 407,961.60 407,961.60
Effect of Foreign Currency 29,170.29 29,170.29
Translation Changes
Balance at December 31,1994 $ 242.76 385,769.75 386,012.51 68,903.41 2,395,674.86
======== =========== ========== ============= ==============
(The accompanying notes are an integral part of the financial statements
with the auditor's report dated April 15, 1996)
<PAGE>
QUALYSERVE CONSTRUCTION Co., Ltd.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994 and 1993
(Expressed In United State Dollars)
Items 1994 1993
-------------------------------------- ------------- ------------
1. Cash flows from operating activities
Net income $ 407,961.60 $26,811.30
Adjustments to reconcil net income to
net cash used in operating activities:
Bad debts 39,048.38 -
Depreciation 81,349.73 79,284.35
Amortization 3,184.98 3,316.88
Decrease(Increase) in notes and (3,273,852.03) 335,344.52
accounts receivable
Decrease(Increase) in other (22,704.81) 1,940.27
receivable
Decrease(Increase) in inventories 5,789,944.62 (5,207,468.14)
Decrease(Increase) in prepayments 113,008.77 (45,946.92)
Increase in notes and accounts 64,875.43 1,508,632.44
payable
Increase in accrued expenses 44,777.82 (8,890.53)
Increase in income tax payable 145,936.67 4,069.20
Increase in other payables - 56,252.28
Decrease in advance from customers (3,355,929.87) 3,004,697.12
Foreign exchange gain 34,104.64 16,852.26
Cash outflows from operating activities $ 71,705.93 ($225,104.97)
2. Cash flows from investing activities
Acquisitions of fixed assets ($1,083,985.94) ($89,175.77)
Increase in refundable deposits (620.38) (375.66)
Cash provided (used) by investing ($1,084,606.32) ($89,551.43)
activities
-------------- -------------
<PAGE>
3. Cash flows from financing activities 1994 1993
- ---------------------------------------- -------------- -------------
Borrowing short-term loans $360,527.52 $561,377.25
-------------- -------------
Cash provided (used) by financing $360,527.52 $561,377.25
activities
-------------- -------------
4. Net increase (Decrease) in cash ($652,372.87) $246,720.85
and cash equivalents
5. Cash and Cash equivalents at 1,089,464.76 842,743.91
beginning of year
-------------- -------------
6. Cash and Cash equivalents at end $437,091.89 $1,089,464.76
of year
============== =============
7. Supplementary information of cash flows:
(1) Interest paid (excluding $102,524.00 $ 30,155.02
capitalized interest)
============== =============
(2) Income tax paid $ 6,959.67 $ 1,234.80
============== =============
(The accompanying notes are an integral part of the finacial statements
with the auditor's report dated April 15, 1996)
<PAGE>
QIALYSERVE CONSTRUCTION Co., Ltd.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(Amounts Expressed In United State Dollars,
Except Where Otherwise Stated)
1. GENERAL & ORGANIZATION
Qualyserve Construction Co., Ltd. (the Company) was incorporated on August
2, 1989. The Company is engaged in manufacture, reporocess, design and Sale of
all kinds of industrial Constructions and equipments.
2. ACCOUNTING POLICIES
The accounting policies of the Company, which conform to accounting
principles generally accepted in the Republic of China, are summarized as
follows:
(a) CLASSIFICATIONS OF CURRENT AND NON-CURRENT ITEMS
The time period for classifying items as current or non-current is
operating cycle (usually about 1-2 years).
(b) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, all highly liquid debt
instruments purchased with a maturity of three months or less are to be cash
equivalents.
(c) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts, which should be sufficient to cover
all possible bad debt losses, is estimated based on the judgement of the
management.
<PAGE>
(d) INVENTORIES
Inventories are costed by each of the construction projects and stated at
weighted average cost. At end of the years, the inventories are evaluated at
lower of cost or market price (LCM).
Construction in process represents net value by deducting the amount of
advance from customers.
(e) DEFERRED CHARGES
Deferred charges are amortized by the straight-line method over five years.
(f) PROPERTIES
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is provided on the straight line method using the guideline service lives
prescribed by the government which approximatcly estimated useful lives.
Interests incurred in the period of construction or purchase of fixed
assets are capitalized and carried as a cost of fixed assets.
Major renewals and betterments are capitalized, while maintenance and
repairs are expensed currently.
Upon sale or disposal of properties, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or
charged to income. Then the net gain less applicable income tax is transferred
from unappropriated earnings to capital surplus in the current year of sale of
disposal.
(g) LEGAL SURPLUS AND CAPTIAL SURPLUS
The Articles of Incorporation of the Company provide that 10% of its annual
net income should be set aside as legal surplus until the accumulated surplus
have equalled the company's paid-in capital. This legal surplus may be used to
offset a deficit. Capital surplus shall not be appropriated for uses other than
for offsetting of deficit or transferring to contributed capital.
<PAGE>
(h) RECOGNITION METHOD OF SALE
The Company recognizes the sales revenue by applying the Completed-Contract
Method while the contract will be completed within one year; The other by
applying the Percentage of Completion Method.
Revenues and gains are recognized as most of profit-making processes have
been achieved realized or can be realized.
(i) INCOME TAX
Income tax is provided based on estimated income tax currently payable.
Adjustments of tax liabilities of prior years are added to or deducted from in
the current year's tax provision.
(j) THE EQUITY ADJUSTMENT ON TRANSLATION OF FOREIGN CURRENCY
Foreign currency financial report translation based on FASB Article NO.52.
All the assets and debts are all followed the exchange rate on the date of
balance sheets. The equity of stockbolder's includes the initial retained
earnings according to the balance of the last final preiod and carry forward.
The rest will be exchanged by the historical rate. The dividend will be
calculated bt the rate of declare day. Furthermore, the item of profit and loss
will follow the rate of weighted average at that period. About the exchange
balance after calculation, it will be listed in the equity adjustment in
translation of foreign currency in order to be the adjustment item for the
stockholder's equity.
3. ASSETS MORTGAGED OR PLEDGED
The following assets have been mortgaged or pledged as collaterals for
long-term and short-term loans.
December 31
--------------------------------
Accounts 1994 1993
------------------------- ------------ --------------
Notes Receivable 439,878.28 $ -
------------ --------------
Total 439,878.28 $ -
============ ==============
<PAGE>
4. CASH AND CASH EQUIVALENTS
December 31
--------------------------------
Accounts 1994 1993
------------------------- -------------- --------------
Cash on hand 5,998.32 9,292.75
Bank Deposits 431,093.57 1,080,172.01
-------------- --------------
Total 437,091.89 1,089,464.76
============== ==============
5. NOTES AND ACCOUNTS RECEIVABLE-NET
December 31
--------------------------------
Accounts 1994 1993
------------------------- -------------- --------------
Notes receivable $ 730,008.64 $488,714.80
Accounts receivable 3,530,634.15 498,075.96
-------------- --------------
Subtotal $4,260,642.79 $986,790.76
Less:Allowance for doubtful
accounts (39,473.96) -
-------------- --------------
Net Amount $4,221,168.83 $986,790.76
============== ==============
6. INVENTORIES
December 31
--------------------------------
Accounts 1994 1993
------------------------- -------------- -------------
Constructions in progress $402,462.37 $6,067,537.83
Less: Advance from customers (245,036.33) (120,167.17)
-------------- -------------
Net of inventories $157,426.04 $5,947,370.66
============== =============
<PAGE>
7. RPOPERTY, PLANT AND EQUIPMENT
December 31
--------------------------------
Cost 1994 1993
---------------------------- -------------- --------------
Machinery and equipments $461,715.45 $453,563.46
Transportations 102,240.73 100,435.57
Miscellaneous equipments 186,695.07 177,548.38
Advance payments on land and
buildings purchases 1,064,882.10 -
-------------- --------------
Sub-total $1,815,533.35 $731,547.41
-------------- --------------
Accumlated depreciation
----------------------------
Machinery and equipments $129,711.89 $86,188.47
Transportations 67,048.76 49,563.97
Miscellaneous equipments 92,003.25 67,128.70
-------------- --------------
Sub-total $ 288,763.90 $202,881.14
-------------- --------------
Net $1,526,769.45 $528,666.27
============== ==============
8.SHORT-TERM LOANS
Dec. 31 1994
--------------------------------
Items Amount Interest rate
------------------------ -------------- --------------
Credit loans $571,428.57 8.75%
Mortgaged loans 350,476.19 9.00%
--------------
Total 921,904.76
==============
Dec. 31 1993
--------------------------------
Items Amount Interest rate
------------------------ -------------- --------------
Credit loans $561,377.24 8.75%
--------------
Total $561,377.24
==============
<PAGE>
9. ADVANCES FROM CUSTOMERS
Items December 31,1994 December 31,1993
------------------------ ----------------- -----------------
Advances from customers 6,486,717.56 4,355,072.46
Construction in progress 5,487,574.97 -
----------------- -----------------
Net 999,142.59, 4,355,072.46
================= =================
10. CAPITAL STOCK
Date Description Increase Capital Total Capital
----------- ---------------- ---------------- ---------------
Aug 1989 Set up $ - $ 206,896.55
Nov 1990 Cash Stock 722,900.45 929,797.00
Jan 1991 Cash Stock 295,061.41 1,224,858.41
Aug 1991 Cash Stock 715,900.53 1,940,758.94
4
Par Value $10, 5,200,000 shares are authorized, 5,200,000 shares in 1994
and 1993, respectively.
11. RETAINED EARNINGS
The Articles of Incorporation of the Company provide that 10% its annual
net income should be set aside as legal surplus until the accumulated reserve
has equalled the Company's capital stock This legal surplus may be used to
offset deficit.
The annual net income after setting aside the legal surplus shall be
appropriated or dispoed by the stockholders' meeting.
12. INCOME TAX
Items 1994 1993
------------------------- ---------- -----------
Provision of income tax $151,802.69 $ 5,411.06
---------- -----------
INCOME TAX $151,802.69 $ 5,411.06
========== ===========
<PAGE>
13. EARNINGS PER SHARE (EPS)
Items 1994 1993
------------------------- ------------ ------------
Net income $ 407,961.60 $ 26,811.30
Weighted average number of
shares outstanding 5,200,000 5,200,000
------------ ------------
EARNINGS PER SHARE $ 0.08 $ 0.01
============ ============
14. RELATED PARTY TRANSACTIONS
(a) Title and relationship of related parties
Title Relationship with the Company
------------------------- --------------------------------
Chan, Chien-Hue Former President of the Board of Directors
(b) Transaction with Related Parties
(1) Payable to stockholders current: advance from
stockholders without interest paid.
Maximum amount Balance at
Year Related Parties during the Year Year end
------------ --------------------- ------------------ ---------------
1994 Chan, Chien-Hue $ 1,155,720.38 $ -
<PAGE>
POTENTIALISTICS, INC.
(a development stage enterprise)
Financial Statements
and
Auditor's Report
March 31, 1996
and
December 31, 1995 and 1994
<PAGE>
POTENTIALISTICS, INC.
(a development stage enterprise)
CONTENTS
Page
----
Report of Independent Certified Public Accountants 3
Financial Statements
Balance Sheets as of March 31, 1996 and December 31, 1995 and 1994 4
Statements of Operations for the three months ended March 31, 1996 and the
years ended December 31, 1995 and 1994 and for the period May 31, 1989
(date of inception) to March 31, 1996 5
Statement of Changes in Shareholders' Equity for the three months ended
March 31, 1996 and the years ended December 31, 1995 and 1994 and for the
period May 31, 1989 (date of inception) to March 31, 1996 6
Statements of Cash Flows for the three months ended March 31, 1996 and the
years ended December 31, 1995 and 1994 and for the period May 31, 1989
(date of inception) to March 31, 1996 8
Notes to Financial Statements 9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Potentialistics, Inc.
We have audited the accompanying balance sheets of Potentialistics, Inc. (a
Delaware corporation and a development stage enterprise) as of March 31, 1996,
December 31, 1995 and 1994 and the related statements of operations, changes in
shareholders' equity and cash flows for the three months and each of the years
then ended, respectively, and for the period October 12, 1988 (date of
inception) through March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Potentialistics, Inc. (a
development stage enterprise) as of March 31, 1996, December 31, 1995 and 1994,
and the results of its operations and its cash flows for the three months and
each of the years then ended, respectively, and for the period October 12, 1988
(date of inception) through March 31, 1996, in conformity with generally
accepted accounting principles.
/s/ S.W. HATFIELD + ASSOCIATES
------------------------------
S. W. HATFIELD + ASSOCIATES
Dallas, Texas
May 8, 1996
<PAGE>
POTENTIALISTICS, INC.
(a development stage enterprise)
BALANCE SHEETS
March 31, 1996, December 31, 1995 and 1994
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31, December 31,
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
ASSETS $ - $ - $ -
========= ========= =========
LIABILITIES $ - $ - $ -
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred stock - $0.00001 par value.
10,000,000 shares authorized; none
issued and outstanding - - -
Common stock - $0.00001 par value.
50,000,000 shares authorized.
25,003,314 issued and outstanding,
respectively 250 250 250
Contributed capital 2,694 2,694 2,694
Deficit accumulated during
the development stage (2,944) (2,944) (2,944)
--------- --------- ---------
Total shareholders' equity - - -
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ - $ - $ -
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
POTENTIALISTICS, INC.
(a development stage enterprise)
STATEMENTS OF OPERATIONS
Three months ended March 31, 1996
and years ended December 31, 1995 and 1994
and the period October 12, 1988 (date of inception)
through March 31, 1996
<TABLE>
<CAPTION>
Period from
October 12, 1988
Three months (date of inception)
ended Year ended Year ended through
March 31, December 31, December 31, March 31,
1996 1995 1994 1996
<S> <C> <C> <C> <C>
REVENUES $ - $ - $ - $ -
----- ----- ----- -----
EXPENSES
Rent and management fees - - - 1,100
Other expenses - - - 1,711
Amortization of
organization costs - - - 133
----- ----- ----- -----
Total expenses - - - 2,944
----- ----- ----- -----
NET LOSS $ - $ - $ - $(2,944)
===== ===== ===== =====
Net loss per weighted-average
share of common stock
outstanding nil nil nil nil
Weighted-average number
of shares of common
stock outstanding 25,003,314 25,003,314 25,003,314 25,003,314
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
POTENTIALISTICS, INC.
(a development stage enterprise)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three months ended March 31, 1996
and years ended December 31, 1995 and 1994
and the period October 12, 1988 (date of inception)
through March 31, 1996
<TABLE>
<CAPTION>
Deficit
accumulated
during the
Common Stock Contributed development
Shares Amount capital stage Total
<S> <C> <C> <C> <C> <C>
Issuance of stock at formation 25,000,000 $250 $ - $ - $ 250
Capital contributed to
support development - - 600 - 600
Net loss for the period - - - (606) (606)
----------- -------- -------- -------- -------
Balances at
December 31, 1988 25,000,000 250 600 (600) 244
Capital contributed to
support development 3,314 - 2,082 - 2,082
Net loss for the year - - - (569) (569)
----------- -------- --------- ------- -------
Balances at
December 31, 1989 25,003,314 250 2,682 (1,175) 1,757
Capital contributed to
support development - - 12 - 12
Net loss for the year - - - (1,697) (1,697)
----------- -------- --------- ------- -------
Balances at
December 31, 1990 25,003,314 250 2,682 (2,872) 72
Net loss for the year - - - (27) (27)
----------- -------- --------- ------- --------
Balances at
December 31, 1991 25,003,314 250 2,682 (2,899) 45
Net loss for the year - - - (27) (27)
----------- -------- --------- ------- --------
Balances at
December 31, 1992 25,003,314 $250 $2,682 $(2,926) $ 18
=========== ======== ========= ======= ========
</TABLE>
- Continued -
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
POTENTIALISTICS, INC.
(a development stage enterprise)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED
Three months ended March 31, 1996
and years ended December 31, 1995 and 1994
and the period October 12, 1988 (date of inception)
through March 31, 1996
<TABLE>
<CAPTION>
Deficit
accumulated
during the
Common Stock Contributed development
Shares Amount capital stage Total
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1992 25,003,314 $250 $2,682 $(2,926) $ 18
Net loss for the year - - - (18) (18)
----------- ------- -------- --------- ---------
Balances at
December 31, 1993 25,003,314 250 2,682 (2,944) -
Net loss for the year - - - - -
----------- ------- -------- --------- ---------
Balances at
December 31, 1994 25,003,314 250 2,682 (2,944) -
Net loss for the year - - - - -
----------- ------- -------- --------- ---------
Balances at
December 31, 1995 25,003,314 250 2,682 (2,944) -
Net loss for the period - - - - -
----------- ------- -------- --------- ---------
Balances at
March 31, 1996 25,003,314 $250 $2,682 $(2,944) $ -
=========== ======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
POTENTIALISTICS, INC.
(a development stage enterprise)
STATEMENTS OF CASH FLOWS
Three months ended March 31, 1996
and years ended December 31, 1995 and 1994
and the period October 12, 1988 (date of inception)
through March 31, 1996
<TABLE>
<CAPTION>
Period from
October 12, 1988
Three (date of
months Year Year inception)
ended ended ended through
March 31, December 31, December 31, March 31,
1996 1995 1994 1996
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss for the period $ - $ - $ - $(2,944)
Adjustments to reconcile
net loss to net cash
provided by operating
activities
Payment of
organization costs - - - (133)
Amortization of
organization costs - - - 133
----- ----- ----- ------
Net cash used in operating activities - - - (2,944)
----- ----- ----- ------
CASH FLOWS FROM
INVESTING ACTIVITIES - - - -
----- ----- ----- ------
CASH FLOWS FROM
FINANCING ACTIVITIES
Issuance of common stock - - - 250
Capital contributed to
support development - - - 2,694
----- ----- ----- ------
Net cash used in financing activities - - - 2,944
----- ----- ----- ------
INCREASE IN CASH - - - -
Cash at beginning of period - - - -
----- ----- ----- ------
Cash at end of period $ - $ - $ - $ -
===== ===== ===== ======
SUPPLEMENTAL DISCLOSURE
OF INTEREST AND INCOME
TAXES PAID
Interest paid for the period $ - $ - $ - $ -
===== ===== ===== ======
Income taxes paid for the period $ - $ - $ - $ -
===== ===== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
POTENTIALISTICS, INC.
(a development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Potentialistics, Inc. (Company) was incorporated on October 12, 1988, under the
laws of the State of Delaware, as a wholly-owned subsidiary of Texas American
Group, Inc., a publicly-owned corporation (TAG). TAG caused the Company to
register 1,585,733 shares of its initial 25,000,000 issued and outstanding
shares of common stock with the Securities and Exchange Commission on Form S-18.
TAG then distributed the registered shares to TAG shareholders. The Company has
had no substantial operations or substantial assets since inception. The
business purpose of the Company is to seek out and obtain a merger, acquisition
or outright sale transaction whereby the Company's shareholders will benefit.
The Company has not engaged in any negotiations from inception and has not
undertaken any steps to initiate the search for a merger or acquisition
candidate.
The Company is considered in the development stage and, as such, has generated
no significant operating revenues and has incurred cumulative operating losses
of approximately $3,000.
The Company's majority shareholder has continued to maintain the corporate
status of the Company and provides all nominal working capital support on the
Company's behalf. Because of the Company's lack of operating assets, its
continuance is fully dependent upon the majority shareholder's continuing
support. The majority shareholder intends to continue the funding of nominal
necessary expenses to sustain the corporate entity.
The preparation of 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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
The Company considers all cash on hand and in banks, including accounts in
book overdraft positions, certificates of deposit and other highly-liquid
investments with maturities of three months or less, when purchased, to be
cash and cash equivalents.
2. Income taxes
The Company files its own separate federal income tax return. The Company
has no net operating loss carryforwards available to offset financial
statement or tax return taxable income in future periods.
3. Loss per share
Loss per share is computed by dividing the net loss by the weighted-average
number of shares of common stock and common stock equivalents, if any,
outstanding during the year/period.
NOTE C - RELATED PARTY TRANSACTIONS
For the period October 12, 1988 (date of inception) through December 31, 1989,
TAG provided office space and management services to the Company for a monthly
fee. Total expenses under this arrangement aggregated $1,100 for the cumulative
period.
<PAGE>
ITEM 14.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company's independent auditor for the fiscal years ended December
31, 1995, 1994 and 1993 was Scott Hatfield + Associates.
The accounting firm of Scott Hatfield + Associates was dismissed on
March 31, 1996. During the fiscal year ended December 31, 1996, and the interim
period subsequent to December 31, 1996, there have been no disagreements with
Scott Hatfield + Associates on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure or any reportable
events. Registrant has requested that Scott Hatfield + Associates furnish it
with a letter addressed to the Securities and Exchange Commission stating
whether it agrees with the above statements.
The Company engaged the accounting firm of Horwath & Co., CPAS. as
independent auditors for the Company, effective as of February 10, 1996. During
the fiscal years ended December 31, 1995 , 1994 and 1993 and the interim period
subsequent to December 31, 1995, there have been no consultations with Horwath &
Co., CPAS on any matter of accounting principles to a specific transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on the Company's financial statements.
ITEM 15.
FINANCIAL STATEMENTS AND EXHIBITS
(a) The financial statements filed as part of this Registration Statement as
Item 13 are listed in the Index to Financial Statements contained therein.
(b) The following documents are filed as exhibits to this Registration
Statement:
2.1 Stock Purchase Agreement dated May 6, 1996 by and among the Company,
Goung Hei Investment Co., Ltd. and Halter Capital Corporation.*
2.2 Stock Exchange Agreement dated April 15, 1996 by and among the
Company, Goung Hei Investment Corporation and Qualyserve Construction
Co., Ltd. *
3.1 Articles of Incorporation of the Company, as amended to date. *
3.2 Bylaws of the Company.*
4.1 Specimen Common Stock Certificate.*
10.1 Leases for Properties.*
* to be filed by amendment.
17
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Company caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: September 23, 1996 GOUNG HEI INVESTMENT CO., LTD.
/s/ Tsung-Chun, Chiu
By:______________________________________
Tsung-Chun, Chiu, Chief Financial Officer
<PAGE>
