As filed with the Securities and Exchange Commission on September 30, 1998
Registration Statement No. 333-27119
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
OVM INTERNATIONAL HOLDING CORP.
(Name of Small Business Issuer in its Charter)
Nevada 3531 88-0344135
(State or other juris- (Primary Standard (I.R.S. Employer
diction of incorporation Industrial Classifi- Identification No.)
or organization) cation Code Number)
West 516 Sprague Avenue No. 3 Longguan Road, Liuzhou City,
Spokane, Washington 99204 Guangxi Zhuang Autonomous Region,
(509) 747-8590 People's Republic of China
(Address and telephone (Address of principal place
number of principal of business or intended principal
executive offices) place of business)
Ching Lung Po
OVM International Holding Corp.
West 516 Sprague Avenue
Spokane, Washington 99204
(509) 747-8590
(Name, address and telephone number of agent for service)
With copies to:
James M. Schneider, Esq.
Atlas, Pearlman, Trop & Borkson, P.A.
200 East Las Olas Boulevard
Suite 1900
Fort Lauderdale, Florida 33331
(954) 763-1200
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [X]
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Proposed Proposed
Each Class Maximum Maximum
of Securities Amount Offering Aggregate Amount of
to be to be price Offering Registra-
Registered Registered per Unit(1) Price(1) tion Fee
<S> <C> <C> <C> <C>
Common Stock
(par value
$.0001 per
share) 50,000 $1.50(2) $75,000 $25.86
Common Stock
issuable under
Warrants 4,000,000(3) $3.00(3) $12,000,000 $3,636.36
Total..................................................................................... $3,662.22
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(b).
(2) The price as estimated based on the average of the closing bid and
asked prices on May 9, 1997.
(3) Represents shares of Common Stock issuable upon exercise of Common
Stock Purchase Warrants exercisable at $3.00 per share on or prior to
December 23, 1999. Also includes such additional indeterminate number
of shares as may be issued under such Warrants by reason of the
anti-dilution provisions contained therein.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
<PAGE>
OVM INTERNATIONAL HOLDING CORP.
Cross Reference Sheet for Prospectus Under Form SB-2
<TABLE>
<CAPTION>
Form SB-2 Item No. and Caption Caption or Location in Prospectus
<S> <C> <C>
1. Forepart of Registration Cover Page; Cross Reference
Statement and Outside Sheet; Outside Front Cover
Front Cover of Prospectus Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Pages of Prospectus
3. Summary Information, Risk Prospectus Summary; High Risk
Factors Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Cover Page
Price
6. Dilution Not Applicable
7. Selling Security-Holders Sales by Selling Security Holders
8. Plan of Distribution Outside Front Cover Page of
Prospectus; Sales by Selling
Security Holders
9. Legal Proceedings Business
10. Directors, Executive Offi- Management
cers, Promoters and Control
Persons
11. Security Ownership of Cer- Principal Shareholders
tain Beneficial Owners and
Management
12. Description of Securities Description of Securities
13. Interest of Named Experts Legal Matters
and Counsel
14. Disclosure of Commission Undertakings
Position on Indemnifica-
tion for Securities Act
Liabilities
15. Organization within Last Not Applicable
Five Years
16. Description of Business Business
iii
<PAGE>
17. Management's Discussion Management's Discussion and
and Analysis and Plan of Analysis or Plan of Operations
Operation
18. Description of Property Business - Properties
19. Certain Relationships and Certain Transactions
Related Transactions
20. Market for Common Equity Price Range for Common Stock;
and Related Stockholder Description of Securities
Matters
21. Executive Compensation Management - Executive Compen-
sation
22. Financial Statements Financial Statements
23. Changes in and Disagree- Not Applicable
ments with Accountants on
Accounting and Financial
Disclosure
</TABLE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
iv
<PAGE>
Subject to Completion Dated September 30, 1998
PROSPECTUS
OVM INTERNATIONAL HOLDING CORP.
4,050,000 Shares of Common Stock
There are 4,050,000 shares of Common Stock (the "Shares"), par value
$.0001 per share ("Common Stock") of OVM International Holding Corp. (the
"Company" or "OVM") being offered by certain shareholders of the Company (the
"Selling Security Holders"), if at all, on a delayed basis, including 4,000,000
shares (the "Warrant Shares") issuable upon the exercise of Common Stock
Purchase Warrants issued by the Company (collectively the "Warrants"). All costs
relating to the processing of the Registration Statement of which this
Prospectus is a part, estimated to be $65,000, will be borne by the Company. See
"Sales by Selling Security Holders" and "Description of Securities."
The Company's Common Stock is traded on a highly limited basis on the
OTC Bulletin Board under the symbol "OVMI." The Company intends to apply for
inclusion of its Common Stock on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") at such time as the Company satisfies
NASDAQ minimum listing requirements. However, there can be no assurances that
the Company's Common Stock will be accepted for inclusion in the NASDAQ System.
Furthermore, there can be no assurances that a substantial trading market for
its Common Stock will develop or be sustained in the future. At June 30, 1998,
the net tangible book value of the Company's Common Stock was approximately Rmb
4.37 (US$0.53) per share. Accordingly, it is likely that the purchasers in this
offering will incur an immediate and substantial dilution from the purchase
price of their shares of Common Stock. See "Price Range of Common Stock" and
"Description of Securities."
------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. POTENTIAL PURCHASERS
SHOULD NOT INVEST IN THESE SECURITIES UNLESS THEY CAN AFFORD A LOSS OF
THEIR ENTIRE INVESTMENT HEREIN. SEE "HIGH RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This date of this Prospectus is _______________, 1998
<PAGE>
The Company has been advised by the Selling Security Holders that they may
sell all or a portion of the Shares offered hereby from time to time in the
over-the-counter market, in negotiated transactions, directly or through brokers
or otherwise, and that such shares will be sold at market prices prevailing at
the time of such sales or at negotiated prices. The Company will not receive any
of the proceeds from the sale of the Shares offered hereby except upon exercise
of the Warrants. In connection with such sales, the Selling Security Holders and
any brokers participating in such sales may be deemed to be underwriters within
the meaning of the Securities Act of 1933. See "Use of Proceeds" and "Sales by
Selling Security Holders."
All costs, expenses and fees in connection with the registration of the
shares of Common Stock offered hereby will be borne by the Company. Brokerage
commissions, if any, directly attributable to the sale of the Shares will be
borne by the Selling Security Holders.
The Company has informed the Selling Security Holders that the
anti-manipulative rules and regulations under the Securities Exchange Act of
1934, including Regulation M thereunder, may apply to their sales in the market
and has furnished each of the Selling Security Holders with a copy thereof. The
Company has also informed the Selling Security Holders of the need for delivery
of copies of this Prospectus in connection with any sale of Shares registered
hereunder.
________________________
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN
THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS
DATE.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and may distribute quarterly reports
containing unaudited summary financial information for each of the first three
quarters of each fiscal year.
2
<PAGE>
The Company has filed with the Securities and Exchange Commission
("Commission") a Registration Statement on Form SB-2 (herein together with all
amendments and exhibits referred to as the "Registration Statement") under the
Securities Act of 1933. Reports and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at 7 World Trade Center New York, New York
10048, Room 1204, Everett McKinley Dirksen Building, 219 South Dearborn Street,
Chicago, Illinois 60604, and Suite 500 East, 5757 Wilshire Boulevard, Los
Angeles, California 90036. Copies of such material can be obtained upon written
request addressed to the Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains
a Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at http://www.sec.gov.
3
<PAGE>
PROSPECTUS SUMMARY
The following is intended to summarize more detailed information and
financial statements and notes thereto which are set forth more fully elsewhere
in this Prospectus or incorporated herein by reference and, accordingly, should
be read in conjunction with such information. Except as otherwise specifically
described in the Registration Statement, of which this Prospectus is a part, all
information gives effect to a one-for-five (1:5) reverse stock split of the
Company's Common Stock, effective August 22, 1996.
Other than historical and factual statements, the matters and items
discussed in this Prospectus are forward-looking statements that involve risks
and uncertainties. Actual results may differ materially from the results
discussed in the forward-looking statements. Certain factors that could
contribute to such differences are discussed with the forward-looking statements
throughout this Prospectus and are summarized in Sections "High Risk Factors"
and "Management's Discussion and Analysis or Plan of Operations."
THE COMPANY
OVM International Holding Corporation (the "Company") was organized under
the laws of the State of Nevada on October 18, 1971 under the name of Mr.
Nevada, Inc., and, following the completion of a limited public offering in
April 1972, commenced limited operations which were discontinued in 1990.
Thereafter, the Company engaged in a reorganization and on several occasions
sought to merge with or acquire certain active private companies or operations,
all of which were terminated or resulted in discontinued negotiations. On
October 20, 1995, the Company changed its name to Intermark Development
Corporation. On November 4, 1996, the Company acquired all of the capital stock
of OVM Development Limited ("ODL"), a British Virgin Islands corporation,
formerly known as Kolcari Investments Limited and changed its name to OVM
International Holding Corporation. ODL owns a 70 percent equity interest in
Liuzhou OVM Construction Machinery Company Limited ("Liuzhou OVM"), a
Sino-foreign equity joint venture incorporated in the People's Republic of China
("PRC" or "China") on May 10, 1995. The PRC venture partner is Liuzhou
Construction Machinery General Factory (the "Factory"), which was a PRC State-
owned enterprise. The Factory was subsequently reorganized into a limited
liability share capital company on January 10, 1995 known as Liuzhou OVM Joint
Stock Company Limited (the "Stock Company"). As used herein, the "Company" or
"OVM" refers to OVM International Holding Corporation and includes, unless the
context otherwise requires, the prior or current operations of ODL, Liuzhou OVM,
the Stock Company, or, if prior to its establishment, the Factory.
Liuzhou OVM has assumed substantially all the businesses originally
carried out by the Factory since January 1, 1995, which principally includes the
4
<PAGE>
manufacture, production, sale and distribution of prestressing equipment,
components and hardware used in the construction of motorways, bridges,
railroads, buildings, hydroelectric dams and power stations in the PRC. The
products include anchorage systems, jacks, electric high-pressure oil pumps,
steel cables, direct display sensors, unbonded prestressing tendons and
ancillary equipment widely used in the construction industry. Liuzhou OVM is the
successor to the manufacturing business originally conducted by the Factory.
Accordingly, the following discussion is principally a description of the
business of Liuzhou OVM or that of its predecessor, the Factory.
OVM's products are distributed throughout the PRC to a diversified
customer base, with a small proportion sold overseas. OVM's PRC customers
include construction and engineering companies and provincial, municipal and
regional construction bureaus across the PRC. Currently, demand in the PRC for
prestressed products is expanding rapidly as the number of infrastructure
construction projects increases.
While the Company's indirect participation in the joint venture originated
in 1995, Liuzhou OVM (inclusive of the operations of the Factory), has
approximately 30 years of operating history in manufacturing prestressing
equipment and related components. Management believes that Liuzhou OVM is the
largest manufacturer of prestressing equipment and related components in the PRC
in terms of total sales and profit before taxation for each of the two years
ended December 31, 1996 and 1997. Management also believes that Liuzhou OVM's
products had an estimated overall market share of approximately 60% in the PRC
in 1997.
The Company's operating offices are located at 1611 B, Kailey Industrial
Centre, 12 Fung Yip Street, Chai Wan, Hong Kong (Telephone No. (852) 25225215;
Facsimile No. (852) 25220634).
THE OFFERING AND OUTSTANDING SECURITIES
Common Stock Outstanding.............. 12,050,000 shares of Common Stock
Common Stock Offered
by Selling Security Holders......... 4,050,000 shares of Common Stock(1)
Proceeds to be received upon
exercise of Warrants................ $12,000,000(2)
Risk Factors........................... Investment in these securities
involves a high degree of risk.
See "High Risk Factors."
OTC Bulletin Board Symbol.............. "OVMI"(3)
5
<PAGE>
____________________
1 Includes 4,000,000 shares issuable upon the exercise of the Warrants.
2 Under the terms of the Warrants, such Warrants are exercisable at $3.00
per Warrant Share on or prior to December 23, 1999.
3 The Company intends to apply for inclusion of its Common Stock on the
NASDAQ SmallCap Market at such time as the Company satisfies NASDAQ
listing requirements. However, there can be no assurances that the Common
Stock will qualify for inclusion at any time in the future. Inclusion on
NASDAQ does not imply that an established trading market will develop or
be sustained for the Common Stock. See "Description of Securities."
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(Not covered by Accountant's Report)
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth the selected historical consolidated
statement of income data for each of the six month periods ended June 30, 1997
and 1998 and each of the years in the two year period ended December 31, 1997,
and the consolidated balance sheet data as of December 31, 1997 and June 30,
1998. The selected historical consolidated financial data of the Company for the
two years ended December 31, 1997 are derived from the audited consolidated
financial statements of the Company for the two years ended December 31, 1997.
The selected historical unaudited consolidated financial data of the Company for
the six month periods ended June 30, 1997 and 1998 are derived from the
unaudited consolidated financial statements of the Company for the six month
periods ended June 30, 1997 and 1998 which, in the opinion of management,
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation.
The selected historical consolidated financial data should be read in
conjunction with, and qualified in their entirety by reference to, the
respective financial statements and their accompanying notes thereto.
6
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL CONSOLIDATED STATEMENT OF INCOME DATA
Six Months Ended June 30, Year Ended December 31,
--------------------------- ------------------------
1997 1998 1998 1996 1997 1997
---- ---- ---- ---- ---- ----
Rmb Rmb *US$ Rmb Rmb *US$
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net sales 54,882 75,226 9,085 161,492 130,962 15,817
Cost of sales (31,705) (53,694) (6,485) (105,008) (83,834) (10,125)
------ ------ ------ ------ ------ ------
Gross profit 23,177 21,532 2,600 56,484 47,128 5,692
Selling & administrative
expenses (16,020) (19,359) (2,338) (27,341) (31,763) (3,836)
Provision for doubtful accounts
and other receivables (3,875) - - (4,329) (10,000) (1,208)
Interest expense, net (230) (1,288) (155) (6,140) (2,104) (254)
Other income, net 980 717 86 3,536 234 28
Foreign exchange
loss, net - - - (24) (700) (85)
**Reorganization expenses - - - (2,547) -- --
------ ------ ------ ------ ------ ------
Income before income
taxes 4,032 1,602 193 19,639 2,795 337
Income taxes - (855) (103) -- (9) (1)
------ ------ ------ ------ ------ ------
Net income after income
taxes 4,032 747 90 19,639 2,786 336
Share of profits of an
associated company 58 1 - 157 34 4
------ ------ ------ ------ ------ ------
Net income before
minority interests 4,090 748 90 19,796 2,820 340
Minority interests (1,748) (586) (71) (7,030) (1,675) (202)
------ ------ ------ ------ ------ ------
Net income 2,342 162 19 12,766 1,145 138
Basic and diluted earnings
per share 0.19 0.01 - 1.06 0.10 0.01
SELECTED HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
As of December 31, As of June 30,
------------------ ------------------
1997 1997 1998 1998
---- ---- ---- ----
Rmb *US$ Rmb *US$
(Amounts in thousands)
<S> <C> <C> <C> <C>
Current assets 222,899 26,920 233,620 28,215
Working capital 63,055 7,615 64,949 7,845
Total Assets 248,640 30,029 258,415 31,209
Current liabilities 159,844 19,305 168,671 20,370
Long term loan from a
related party 3,381 408 3,581 433
Minority interests 26,281 3,174 26,867 3,245
-------- -------- --------- --------
Total liabilities and
minority interests 189,506 22,887 199,119 24,048
-------- -------- --------- --------
Shareholders' equity 59,134 7,142 59,296 7,161
_____________________
</TABLE>
7
<PAGE>
* For convenience, amounts have been converted from Renminbi to US$ at Rmb
8.28 = US$1.00, which represents the single rate of exchange as quoted by the
People's Bank of China on June 30, 1998. No representation is made that
Renminbi amounts could have been, or could be, converted into US$ at that
rate or any other rate.
** Reorganization expenses were incurred in connection with the acquisition
of ODL by the Company which reduced net income for the year ended December 31,
1996 by Rmb 2.5 million (US$302,000), primarily consisting of professional and
consulting fees.
This is a one time expense in connection with the acquisition of ODL by
the Company. Management does not expect the acquisition would have any
significant impact on the future results of operations, liquidity and sources
and uses of capital resources of the Company.
Excluding the reorganization expenses, the Company's net income and
earnings per share for the year ended December 31, 1996 would be Rmb 15.3
million (US$1,848,000) and Rmb 1.27 (US$.15) per share, respectively.
HIGH RISK FACTORS
The shares of Common Stock offered hereby involve a high degree of risk
and is speculative in nature. Prospective investors should carefully consider
the following risks and speculative factors, among others, inherent in and
affecting both the business of the Company and the value of the Common Stock,
including, among other matters, the following risk factors:
LIMITED OPERATING HISTORY
The Company was organized in the State of Nevada on October 18, 1971 and,
as a result of the acquisition of ODL, has acquired a 70% interest in an active
operating company conducting operations in the PRC. Prior to the acquisition of
ODL, the Company had only limited and sporadic operations. The Company and its
operations are subject to all the risks inherent in the establishment and
operation of a new publicly traded business enterprise as described hereafter.
Accordingly, the Shares offered hereby are speculative and involve a high degree
of risk. Inasmuch as the Company has only recently become a public traded
company, there can be no assurance that it will be profitable in the future, at
what price the Shares will trade, or if a listing on an exchange can be secured.
An investment should be made only by persons who can afford to risk of loss of
their investment and only after careful consideration of those significant risk
factors which may affect the Company.
Results of operations in the future will be influenced by numerous
business factors including technological developments, regulatory costs and
impediments, increases in expenses associated with sales growth, market
8
<PAGE>
acceptance of the Company's products, the capacity of the Company to expand and
maintain the quality of its products, competition and the ability of the Company
to control costs. There can be no assurance that revenue growth or profitability
on a quarterly or annual basis can be obtained. Additionally, the Company will
be subject to all the risks incident to a rapidly developing business in a
highly regulated society such as the PRC currently undergoing a political
succession. Prospective investors should consider the frequency with which
relatively newly developed and/or expanding businesses encounter unforeseen
expenses, difficulties, complications and delays, as well as other factors such
as the possibility of competition with larger companies. See "Management's
Discussion and Analysis or Plan of Operations."
BUSINESS DEPENDENT UPON KEY EMPLOYEES
The business of the Company is specialized. The continued employment of
Messrs. Ching Lung Po and Wu Guosen is critical to the Company's business and
the conduct of the Company's operations. There can be no assurance that the
Company will be able to retain Messrs. Ching Lung Po and/or Wu Guosen, who are
not restricted should they depart the Company, or other equally qualified
individuals to run the operations of the Company. No insurance has been
obtained on the lives of such principals. See "Management."
RISK ASSOCIATED WITH EXPANSION AND ACQUISITIONS
The Company has recently acquired ODL and through it acquired its 70%
interest in Liuzhou OVM, and may expand into other areas of product development
that augment Liuzhou OVM's operating capacity. Any acquisitions, joint ventures
or expansion of operations the Company may undertake will entail substantial
risks since they may involve specific operations which may be unfamiliar to the
Company's management. Consequently, shareholders must assume the risks that the
Company (i) may acquire or develop operations for which the Company may not
possess adequate or sufficient managerial background to administer effectively,
(ii) such acquisitions and expansion may ultimately involve expenditure of funds
beyond the resources that will be available to the Company at that time, and
(iii) management of such new or expanded operations may divert management's
attention and resources away from its existing operations. All of these factors
may have a substantial adverse affect on the Company's present and prospective
business activities.
DEPENDENT ON SUPPLIERS; CREDIT ARRANGEMENTS
The major raw materials and components required by Liuzhou OVM include
rubber, steel and mechanical and electrical components such as bearings and
motors. All of the raw materials and components used by Liuzhou OVM are sourced
from PRC suppliers. For each of the two years ended December 31, 1996 and 1997
and six months ended June 30, 1998, the cost of raw materials and components
accounted for approximately 84%,
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<PAGE>
74% and 65% respectively of Liuzhou OVM's total cost of production. It is the
policy of Liuzhou OVM to maintain more than one supplier for certain major raw
materials in order to avoid over reliance on a single source of supply. Liuzhou
OVM has not to date experienced any significant difficulties, nor does
management anticipate any difficulties, in the sourcing or supply of its raw
materials and components. For each of the two years ended December 31, 1996 and
1997 and the six months ended June 30, 1998, the largest ten suppliers of raw
materials and components to Liuzhou OVM accounted for approximately 64.3%, 43.3%
and 53.2%, respectively, of Liuzhou OVM's total purchases. The single largest
supplier accounted for approximately 50.0%, 20.9%, and 18.6%, respectively, for
the same periods. All purchases by Liuzhou OVM are settled in Renminbi. Liuzhou
OVM has formulated a material supply management policy in respect to raw
materials and components used in Liuzhou OVM's production operations. Under this
policy, the stock level of raw materials and components is determined by
reference to planned annual consumption and predetermined stock level for
different types of raw materials and components. The average stock level of
Liuzhou OVM's raw materials and components is approximately two months. See
"Business - Raw Materials and Components."
SUPPLY AND PRICES OF RAW MATERIALS
Steel and rubber account for a substantial portion of Liuzhou OVM's total
raw materials and components consumption (59%, 75% and 78%, respectively, for
each of the two years ended December 31, 1996 and 1997 and the six months
ended June 30, 1998). Steel and rubber are in great demand in the PRC and as a
result, demand has exceeded domestic supply in recent years. The excess demand
over domestic supply was resolved by imports. A shortage of steel and rubber
supply in the PRC market may affect Liuzhou OVM's production and escalate raw
material costs and impact the future profit margins of Liuzhou OVM and the
Company. See "Business - Raw Materials and Components."
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<PAGE>
COMPETITION
The markets for the Liuzhou OVM's products are highly competitive,
involving several other producers. The principal competitive factors with
respect to Liuzhou OVM's products are pricing, product range and quality,
technical advantages and distribution capabilities with varying emphasis on
these factors depending on the market and product. To the extent that Liuzhou
OVM's competitors become more successful with respect to key competitive factors
mentioned herein, Liuzhou OVM's business could be adversely affected. In recent
years, the PRC engaged in extensive negotiations to join the World Trade
Organization ("WTO"), which regulates trading and tariffs among its signatory
states. Although such negotiations are currently stalled, it is expected that
negotiations will restart at some point and that the PRC will eventually assume
a position as a member of the WTO. In such event, it will be required to reduce
further some of its import tariffs to conform with the uniform tariffs under the
WTO. Furthermore, in order to facilitate its re-entry to the WTO, the PRC has
already begun, and is expected to continue, lowering some import tariffs and
reducing certain other restrictions on imports. The PRC's entry into the WTO and
the current policy of lowering import barriers may result in increased
competition in the domestic market by foreign competitors who manufacture and
sell similar products. The outbreak of Asian financial crisis has also adversely
affected the Chinese economy. Some of the infrastructure activities may be
slowed down which may result in reduced demand of the Company's products. See
"Business - Competition."
POLITICAL CONSIDERATIONS
Since 1978, the PRC government under its current leadership has been
reforming, and is expected to continue to reform, the PRC's economic and
political systems. Such reforms have resulted in significant economic growth and
social progress. Many of the reforms are unprecedented or experimental and are
expected to be refined, and improved upon. Other political, economic and social
factors can also lead to further readjustment of the reform measures. This
refinement and readjustment process may not always have a positive effect on the
operations of Liuzhou OVM. Liuzhou OVM's results at times may also be adversely
affected by changes in the PRC's political, economic and social conditions and
by changes in policies of the PRC government, such as changes in laws and
regulations (or the interpretation thereof), the introduction of measures to
control inflation, changes in the rate or method of taxation and imposition of
additional restrictions on currency conversion and remittances abroad. Although
historically there have been periods of political instability, such as during
the "Cultural Revolution," and certain of the reform measures have from
time-to-time been readjusted, because of the broad support for the reform
process and because the economic system in the PRC has already undergone
extensive changes as a result of the success of such
11
<PAGE>
reforms, management believes that the basic principles underlying the reforms
will continue to provide the framework for the PRC's political and economic
system. See "Discussion Pertaining to Certain Conditions Relating to the
People's Republic of China - Political Considerations."
THE PRC'S ECONOMY, ECONOMIC REFORM AND INFLATION
The economy of the PRC differs from the economies of most countries
belonging to the Organization for Economic Cooperation and Development in such
respects as structure, government involvement, level of development, growth
rate, capital reinvestment, allocation of resources, self-sufficiency, rate of
inflation and balance of payments position, among others. In the past, the
economy of the PRC has been primarily a planned economy subject to State plans.
Since 1992, the PRC government has adopted a policy to transform its economy to
a more market oriented socialist one. Although the majority of productive assets
in the PRC is still owned by the PRC government, the portion of the PRC economy
subject to State plans has been gradually diminishing. In 1997, the working
report of PRC's premier reaffirmed that PRC will continue to promote economic
reform, with particular focus on reforming large and medium size state-owned
enterprises, in order to accelerate the process of achieving a socialist market
economy.
The PRC economy has experienced significant growth in the past decade, but
such growth has been uneven geographically and among various sectors of the
economy. Economic growth has also, at times, been accompanied by rising
inflation, with the national retail inflation rate reaching 21.7% per annum in
1994. Beginning in 1993, the PRC government implemented various successful
policies to restrain the rate of such economic growth and control inflation and
otherwise regulate economic expansion. While inflation has since moderated, with
the national retail inflation rate falling to 14.8%, 6.1% and 1.4% per annum in
1995, 1996 and the first eight months of 1997, respectively, there can be no
assurance that inflation will not increase in the future or that further
measures to combat inflation and speculative activities will not be implemented
in a manner that may adversely affect the profitability of Liuzhou OVM over
time.
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<PAGE>
A significant portion of the economic activity in the PRC is related to
exports and may therefore be affected by developments in the economies of the
PRC's principal trading partners. The United States annually reconsiders the
renewal of "Most Favored Nation" ("MFN") trading status for the PRC, which
provides the PRC with certain trading privileges available generally to trading
partners of the United States. Although in July 1998, the PRC's MFN Status was
renewed for a further year without restrictions, there can be no assurance that
the continuation of such status will be obtained in the future. In the event
that the PRC's MFN status were not renewed in any given year, exports of
products to the United States would be affected. See "Discussion Pertaining to
Certain Conditions Relating to the People's Republic of China - The PRC's
Economy and Economic Reform."
GOVERNMENT CONTROL OF CURRENCY CONVERSION AND EXCHANGE RATE RISKS
All of Liuzhou OVM's domestic sales are denominated in Renminbi, the official
currency of the PRC. Export sales are denominated in U.S. dollars and account
for only 16% and 4% of total sales respectively for each of the two years ended
December 31, 1996 and 1997 and 2% for the six months ended June 30, 1998. The
PRC government imposes control over the convertability of Renminbi into foreign
currencies. Prior to January 1, 1994, all foreign exchange transactions
involving Renminbi in the PRC had to take place either through the authorized
financial institutions at the official exchange rate set by the State
Administration for Exchange Control ("SAEC"), the PRC government agency
responsible for matters relating to foreign exchange administration, or at local
foreign exchange swap centers at exchange rates largely determined by supply and
demand. However, transactions effected through swap centers required the prior
approval of the SAEC.
On January 1, 1994, the PRC government abolished its two-tier exchange
rate system and replaced it with a unified managed floating exchange rate system
largely based on market supply and demand. Under the new system, the People's
Bank of China publishes a daily exchange rate of Renminbi (the "PBOC Exchange
Rate") based on the previous day's dealings in the inter-bank foreign exchange
market. Financial institutions authorized to deal in foreign currency may enter
into foreign exchange transactions at exchange rates within an authorized range
above or below the PBOC Exchange Rate according to market conditions. Currently,
foreign investment enterprises ("FIEs") (including Sino-foreign joint ventures
such as Liuzhou OVM) are required to apply to the SAEC for "Foreign exchange
registration certificates" ("FERCs"). With such FERC (which are granted to FIEs
upon fulfilling certain specified conditions and which are reviewed annually by
the SAEC) and authorization from the SAEC (which is obtained on a
transaction-by- transaction basis), FIEs may enter into transactions at the swap
centers to obtain foreign exchange for their needs.
13
<PAGE>
During the period between 1990 and the end of 1993, the value of the
Renminbi against the U.S. dollar declined steadily. Although the Renminbi has
revalued against the U.S. dollar moderately since January 1, 1994 and the PRC
government has stated its intention to intervene in the future to support the
value of the Renminbi, there can be no assurance that exchange rates will not
become volatile or that the Renminbi will not devalue again against the U.S.
dollar. Exchange rate fluctuations may adversely affect Liuzhou OVM's financial
performance. See "Discussion Pertaining to Certain Conditions Relating to the
People's Republic of China - Government Control of Currency Conversion and
Exchange Rate Risks."
LEGAL SYSTEM
Since 1979, many laws and regulations dealing with economic matters in
general have been promulgated in the PRC. Despite this activity in developing
the legal system, the PRC does not have a comprehensive system of laws. In
addition, enforcement of existing laws may be uncertain and sporadic, and
implementation and interpretation thereof inconsistent. The PRC judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. Even where
adequate law exists in the PRC, it may be difficult to obtain swift and
equitable enforcement of such law, or to obtain enforcement of a judgment by a
court of another jurisdiction. The PRC's legal system is based on written
statutes and, therefore, decided legal cases are without binding legal effect,
although they are often followed by judges as guidance. The interpretation of
PRC laws may be subject to policy changes reflecting domestic political changes.
As the PRC legal system develops, the promulgation of new laws, changes to
existing laws and the pre-emption of local regulations by national laws may
adversely affect foreign investors. The trend of legislation over the past 18
years has, however, significantly enhanced the protection afforded foreign
investors in enterprises in the PRC. However, there can be no assurance that
changes in such legislation or interpretation thereof will not have an adverse
effect upon the business and prospects of the Company and its operating
division, Liuzhou OVM.
Liuzhou OVM's activities in the PRC are by law subject, in some particular
cases, to administrative review and approval by various national and local
agencies of the PRC government. In particular, part of the Liuzhou OVM's current
operations and the realization of its future expansion programs in the PRC will
be subject to PRC government approvals. See "Discussion Pertaining to Certain
Conditions Relating to the People's Republic of China Legal System."
14
<PAGE>
NO ASSURANCE OF PROTECTION FOR PROPRIETARY RIGHTS; RELIANCE ON TRADE SECRETS AND
PATENTS
Liuzhou OVM's method of operations will have only limited proprietary
protection as it is unlikely that it will be able to secure meaningful
proprietary protection relevant to its methods of business operations. There are
no unique barriers for others to emulate the Liuzhou OVM's methods of operations
except for those barriers and limitations confronting anyone engaged in
undertaking innovative activities and obtaining credibility in an emerging
industry. Liuzhou OVM, as an alternative strategy, will seek to maintain its
proprietary rights by trade secret protection and by the use of non-disclosure
agreements with its employees. There can be no assurance that meaningful
proprietary protection can be obtained, Liuzhou OVM will be able to enter into
or enforce agreements which restrict competitive activities of its employees, or
that various individuals trained by Liuzhou OVM may not seek to engage in
competitive activities subsequent to their employment by the Liuzhou OVM. See
"Business - Intellectual Property Rights."
ASSETS OUTSIDE OF THE U.S.; ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN
PERSONS
While the Company is a U.S. corporation with executive offices in the
State of Nevada, it is a holding company for entities which are domiciled
outside the U.S. The Company's statutory agent for the receipt of any process
within the United States is Nevada Agency and Trust Company, 50 West Liberty
Street, Suite 880, Reno, Nevada 89501. Nevada Agency and Trust Company is not
affiliated with the Company, and there is no affiliated representative of the
Company located in the United States that is authorized to accept service of
process on behalf of the Company. For the foreseeable future, a substantial
portion of the Company's assets will be held or used outside the U.S.
Enforcement by investors of civil liabilities under the Federal securities laws
may also be affected by the fact that while the Company is located in the U.S.,
its principal subsidiary and operations will be located outside the U.S., none
of the Company's contemplated executive officers or directors will be U.S.
residents, and all or a substantial portion of the assets of the Company will be
located outside the U.S.
MARKET ACCEPTANCE
There can be no assurance that Liuzhou OVM's products can be successfully
marketed on a continued basis, or that any or all of the products will be
commercially accepted outside the PRC. Even if commercial acceptance is
achieved, the appeal of Liuzhou OVM's products may be limited given the wide
range of competitive products and systems available. Management has not
conducted any marketing or feasibility studies or surveys relating to the
marketability of Liuzhou OVM's products. See "Business - Sales and Marketing."
15
<PAGE>
VOTING CONTROL OF THE COMPANY
The Company's management and their affiliates will own a substantial
majority of the Company's outstanding Common Stock following the offering as a
consequence of the recent acquisition of ODL by the Company, and thus will be
able to elect all of the Company's directors and control the Company. The
Company's Articles of Incorporation do not provide for cumulative voting. Thus,
investors in this Offering will have only a minority interest in the Company and
no ability to control or readily influence the conduct of affairs of the
Company. See "Principal Shareholders."
LIMITED TERM OF JOINT VENTURE
Liuzhou OVM, the Company's operating subsidiary in the PRC, is governed by
the PRC Joint Venture Laws, its Joint Venture Agreement and Articles of
Association. The Joint Venture Agreement and the Articles of Association of
Liuzhou OVM have been approved by the requisite government authorities. In
accordance with the government approvals granted for the joint ventures, its
term is initially restricted to expire on May 10, 2025. Its initial term may be
extended upon the mutual agreement of the parties to the joint venture and the
approval of the applicable PRC government agencies. There can be no assurance
that Liuzhou OVM will continue following the expiration of its initial term. The
existence of Liuzhou OVM may also be terminated in certain limited circumstances
under the PRC Joint Venture Laws including, inability to continue operations due
to severe losses, failure of a party to honor its obligations under the Joint
Venture Agreement or Articles of Association in such a manner as to impair the
operation of the joint venture company. See "Business - History and Development
of Liuzhou OVM."
RELIABILITY OF INFORMATION
The information contained herein regarding the PRC has been sourced from a
variety of government and private publications and is based on various
discussions between representatives of the Company and certain PRC government
officials. In some cases, independent verification of this information is not
available and there can be no assurance that the source from which it is taken
or on which it is based are wholly reliable. Official statistics in relation to
the PRC may also be produced on a basis different from that used in more
developed countries. If such official statistics are materially inaccurate, the
present and future economic prospects of the PRC could be materially different
from those which currently appear to be the case. Accordingly, no assurance can
be given as to the completeness or reliability of available official and public
information.
16
<PAGE>
REPATRIATION OF EARNINGS FROM PRC
Pursuant to the relevant laws and regulations for Sino-foreign joint
venture enterprises, earnings of the Company's operating subsidiary, Liuzhou
OVM, a Sino-foreign equity joint venture enterprise, is available for
distribution in the form of cash dividends to each of the joint venture partners
after Liuzhou OVM (1) satisfies all tax liabilities; (2) provides for losses in
previous years; and (3) makes appropriation to reserve funds, as determined at
the discretion of the board of directors. These appropriations include general
reserve fund, enterprise expansion fund and staff bonus and welfare fund. The
Company has been advised that Liuzhou OVM intends to allocate as appropriations
of up to 10-15% of the net income as reflected in its statutory financial
statements.
Earnings reflected in the financial statements prepared in accordance with
United States GAAP differ from those reflected in the statutory financial
statements of Liuzhou OVM. In accordance with the relevant laws and regulations
for Sino-foreign joint venture enterprises, profit available for distribution by
Liuzhou OVM is based on the statutory financial statements. Consequently, a
portion of the earnings included in the retained earnings of the Company is not
available for distribution to the Company and therefore is not available for
distribution as dividends to the shareholders of the Company.
Profit distribution of Liuzhou OVM is declared and payable in Renminbi. If
Liuzhou OVM has foreign currency available after meeting its operational needs,
the Company may receive its share of any distributions to the joint venture
partners in foreign currency to the extent available. The amount of foreign
currency remitted to the Company will be determined with reference to the then
prevailing PBOC Exchange Rate. Only if foreign currency is not available and
only if the Company desires to obtain the foreign currency equivalent of
Renminbi distributions will it be necessary to convert such distributions at a
swap center. However, there can be no assurance that shortages of foreign
currency at the swap centers will not restrict Liuzhou OVM to obtain sufficient
foreign currency to pay distributable profits in foreign currency. If such a
shortage occurs, the Company may accept Renminbi payments which can be held or
reinvested in other projects. In such circumstances, this may affect the
Company's ability to pay dividends in U.S. dollars. See "Discussion Pertaining
to Certain Conditions Relating to the People's Republic of China Repatriation of
Earnings from PRC."
NO DIVIDENDS ANTICIPATED TO BE PAID
The Company has not paid any cash dividends on its Common Stock since its
inception and does not anticipate paying cash dividends in the foreseeable
future. The future payment of dividends is directly dependent upon future
17
<PAGE>
earnings of the Company, the capital requirements of the Company, its financial
requirements and other factors to be determined by the Company's Board of
Directors. For the foreseeable future, it is anticipated that earnings, if any,
which may be generated from the Company's operations will be used to finance the
growth of the Company, and that cash dividends will not be paid to common stock
shareholders. See "Dividend Policy."
IMMEDIATE SUBSTANTIAL DILUTION TO PURCHASERS IN THIS OFFERING
Initial purchasers of the Common Stock of the Company offered hereby will
incur an immediate and substantial dilution from the purchase price of their
shares. As of June 30, 1998, the net tangible book value of the Company's
Common Stock was approximately Rmb 4.37(US$0.53).
POSSIBLE RESALES OF SECURITIES BY CURRENT SHAREHOLDERS AND DEPRESSIVE EFFECT ON
MARKET
There are currently 8,850,000 shares of the Company's Common Stock
outstanding which were "restricted securities" as that term is defined by Rule
144 under the Securities Act of 1933 as amended, (the "Securities Act"),
inclusive of shares being registered pursuant to this Registration Statement of
which this Prospectus is a part. Certain of such shares will be eligible for
public sale only if registered under the Securities Act or if sold in accordance
with Rule 144. Under Rule 144, a person who has held restricted securities for a
period of one year may sell a limited number of shares to the public in ordinary
brokerage transactions. Sales under Rule 144 may have a depressive effect on the
market price of the Company's Common Stock due to the potential increased number
of publicly held securities. The timing and amount of sales of Common Stock
covered by the Registration Statement of which this Prospectus is a part, as
well as such subsequently filed registration statement, could also have a
depressive effect on the market price of the Company's Common Stock. See "Shares
Eligible for Future Sales."
LIMITED MARKET FOR THE COMPANY'S COMMON STOCK; POSSIBLE VOLATILITY OF SECURITIES
PRICES
There is currently only a limited trading market for the Common Stock of
the Company. The Common Stock of the Company trades on the OTC Bulletin Board
under the symbol "OVMI" which is a limited market and subject to substantial
restrictions and limitations in comparison to the NASDAQ System. There can be no
assurance that a substantial trading market will develop (or be sustained, if
developed) for the Common Stock upon completion of this offering, or that
purchasers will be able to resell their securities or otherwise liquidate their
investment without considerable delay, if at all. Recent history relating to the
18
<PAGE>
market prices of newly public or recently listed companies indicates that, from
time to time, there may be significant volatility in the market price of the
Company's securities because of factors unrelated, as well as related, to the
Company's operating performance. There can be no assurances that the Company's
Common Stock will ever qualify for inclusion within the NASDAQ System or that
more than a limited market will ever develop for its Common Stock. See "Price
Range of Common Stock."
BROKER-DEALER SALES OF COMMON STOCK AND LIMITATION ON MARKETABILITY
The Company's Common Stock is not presently included for trading on the
NASDAQ System, and while the Company intends to apply in the near term, there
can be no assurances that the Company will ultimately qualify for inclusion
within that system. The Nasdaq Stock Market, Inc. has recently adopted certain
changes to the entry and maintenance criteria for listing eligibility on The
Nasdaq SmallCap Market. The entry standards now require at least $4 million in
net tangible assets or $750,000 in net income in two of the last three years.
The entry standards also require a public float of at least 1 million shares, a
$5 million market value of public float, a minimum bid price of $4.00 per share,
at least three market makers, and at least 300 round lot shareholders. The newly
enacted maintenance standards (as opposed to entry standards) require at least
$2 million in net tangible assets or $500,000 in net income in two of the last
three years, a public float of at least 500,000 shares, a $1 million market
value of public float, a minimum bid price of $1.00 per share, at least two
market makers, and at least 300 round lot shareholders. The Company currently
does not meet the minimum NASDAQ (SmallCap) criteria, and no assurance can be
given that the Common Stock of the Company will ever qualify for inclusion on
the NASDAQ System. Until the Company's shares are approved for inclusion in the
NASDAQ system, the Company's Common Stock will be traded in the over-the-counter
markets on the OTC Bulletin Board. As a result, the Company's Common Stock is
covered by a Securities and Exchange Commission rule that imposes additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally
institutions with assets in excess of $5,000,000 or individuals with net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by the rule, the broker-dealer must
make a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
Company's securities and may also affect the ability of shareholders to sell
their shares in the secondary market. See "Description of Securities."
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<PAGE>
PENNY STOCK RULES
Any shares which trade under $5.00 per share are considered Penny Stocks.
The Shares offered hereby are being sold for under $5.00 per share and will be
considered Penny Stock. There is no assurance a market for the Common Stock of
the Company will develop. In the event that the share price does not reach $5.00
per share, these shares will be subject to the Penny Stock Rules promulgated
under the Securities Exchange Act of 1934. These rules regulate broker-dealer
practices in connection with transactions in "penny stocks." Penny stocks
generally are equity securities with a price of less than $5.00 (other than
securities registered on certain national securities exchanges or quoted on the
NASDAQ system, provided that current price and volume information with respect
to transactions in such securities is provided by the exchange or system). The
Penny Stock Rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held
in the customer's account. The bid and offer quotations, and the broker dealer
and salesperson compensation information, must be given to the customer orally
or in writing prior to effecting the transaction and must be given to the
customer in writing before or with the customer's confirmation.
In addition, the Penny Stock Rules require that prior to a transaction in
a penny stock not otherwise exempt from such rules, the broker and/or dealer
must make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. These disclosure requirements may have the effect of reducing
the level of purchases in the instant offering and trading activity in the
secondary market for the Company's Common Stock. If the Company's Shares are, or
become, subject to the Penny Stock Rules, investors in this offering may find it
more difficult to sell such securities.
PRICE RANGE OF COMMON STOCK
There is currently only a highly limited trading market for the Common
Stock of the Company. The Common Stock of the Company trades on the OTC Bulletin
Board under the symbol "OVMI" which is a limited market and subject to
substantial restrictions and limitations in comparison to the NASDAQ System. The
Company's Common Stock was included on the OTC Bulletin Board on April 21, 1997.
The following table sets forth the high and low bid prices for the Company's
Common Stock since the commencement of trading and for the periods indicated.
High Low
---- ---
June 1, 1997 - June 30, 1997 $1.375 $1.25
July 1, 1997 - September 30, 1997 $1.375 $1.375
October 1, 1997 - December 31, 1997 $1.375 $1.25
January 1, 1998 - March 31, 1998 $4.375 $0.4375
April 1, 1998 - June 30, 1998 $4.125 $3.75
- ---------------------
* While the Company's common stock was approved for listing on the OTC Bulletin
Board on April 21, 1997, no quotes are available prior to June 1997.
As of March 27, 1998, the approximate number of record holders of the
Company's Common Stock was 521.
The Company also has 4,000,000 outstanding warrants to purchase shares
at US$3.00 per warrant on or prior to December 23, 1999.
The Company has not paid any cash dividends on its Common Stock since
incorporation. As the Company has significant capital requirements in the
future, it is not anticipated that funds will be available for the issuance of
dividends in the foreseeable future. It is the management's intention to
reinvest all the income attributable to the Company to finance the expansion of
its business.
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<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since
incorporation. As the Company has significant capital requirements in the
future, it is not anticipated that funds will be available for the issuance of
dividends in the foreseeable future. The Company presently intends to retain
future earnings, if any, to finance the expansion of its business, and its
future dividend policy will depend on the Company's earnings, if any, capital
requirements, expansion plans, financial condition and other relevant factors.
Payment of dividends are also restricted based on the commercial laws of the
PRC. See "Discussion Pertaining to Certain Conditions Relating to the People's
Republic of China - Repatriation of Earnings from PRC."
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1998. No effect is given to the exercise of the Warrants which are
exercisable at $3.00 per share on or prior to December 23, 1999.
21
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June 30, 1998
--------------
(Amounts in Thousands)
Rmb US$(*)
Short term debt.............................. 40,420 4,882
Long term debt............................... - -
Shareholders' equity:
Common stock, $.0001 par value per share;
40,000,000 shares authorized; 12,050,000
shares issued and outstanding............. 10 1
Additional paid-in capital................... 30,795 3,719
Retained earnings............................ 28,425 3,433
Reserves..................................... 66 8
------ ------
Total shareholders' equity................ 59,296 7,161
------ ------
Total capitalization...................... 99,716 12,043
======= ======
___________________________
(*) The data under the "US $" column has been translated from Renminbi solely
for convenience at US$1.00 = Rmb 8.28 which represents the single rate of
exchange as quoted by the People's Bank of China on June 30, 1998.
See "Description of Securities" included elsewhere herein for a
description of the terms of the Warrants.
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock
for the accounts of the Selling Security Holders. There is included in the
Registration Statement of which this Prospectus is a part, 4,000,000 shares of
Common Stock underlying Warrants issued in connection with the Company's
previous private placement. If all of the Warrants were exercised in their
entirety, the Company would receive total proceeds, before expenses, of
approximately $12,000,000. Inasmuch as the holders of all of the Warrants have
no obligation to exercise such Warrants, the Company is not in a position to
evaluate when and if such derivative securities will ever be exercised and the
amount of proceeds that may be realized therefrom. Accordingly, the Company is
not able to allocate specifically at this time the proceeds that may be received
from the exercise of the Warrants, and any proceeds realized will be utilized
for the purchase of production facilities and technical equipment, expanding the
production capacity and existing product range, enhancing the Company's research
and development and for general working capital purposes. To the extent the
proceeds of such exercise are not used immediately, they will be invested in
certificates of deposit, savings deposits, other interest bearing instruments or
will be left in the checking accounts of the Company.
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<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The following table sets forth the selected historical consolidated
statement of operations data for each of the six month periods ended June 30,
1997 and 1998 and each of the years in the two year period ended December 31,
1997, and the consolidated balance sheet data as of June 30, 1998 and December
31, 1997. The selected historical consolidated financial data of the Company for
the two years ended December 31, 1997 are derived from the audited consolidated
financial statements of the Company for the two years ended December 31, 1997.
The selected historical consolidated financial data of the Company for the six
month periods ended June 30, 1997 and 1998 are derived from the unaudited
consolidated financial statements of the Company for the six month periods
ended June 30, 1997 and 1998 which, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation. The selected historical consolidated financial data should be
read in conjunction with, and qualified in their entirety by reference to, the
respective financial statements and their accompanying notes thereto.
23
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL CONSOLIDATED STATEMENT OF INCOME DATA
Six Months Ended June 30, Year Ended December 31,
--------------------------- ------------------------
1997 1998 1998 1996 1997 1997
---- ---- ---- ---- ---- ----
Rmb Rmb *US$ Rmb Rmb *US$
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net sales 54,882 75,226 9,085 161,492 130,962 15,817
Cost of sales (31,705) (53,694) (6,485) (105,008) (83,834) (10,125)
------ ------ ------ ------ ------ ------
Gross profit 23,177 21,532 2,600 56,484 47,128 5,692
Selling & administrative
expenses (16,020) (19,359) (2,338) (27,341) (31,763) (3,836)
Provision for doubtful accounts
and other receivables (3,875) - - (4,329) (10,000) (1,208)
Interest expense, net (230) (1,288) (155) (6,140) (2,104) (254)
Other income, net 980 717 86 3,536 234 28
Foreign exchange
loss, net - - - (24) (700) (85)
**Reorganization expenses - - - (2,547) -- --
------ ------ ------ ------ ------ ------
Income before income
taxes 4,032 1,602 193 19,639 2,795 337
Income taxes - (855) (103) -- (9) (1)
------ ------ ------ ------ ------ ------
Net income after income
taxes 4,032 747 90 19,639 2,786 336
Share of profits of an
associated company 58 1 - 157 34 4
------ ------ ------ ------ ------ ------
Net income before
minority interests 4,090 748 90 19,796 2,820 340
Minority interests (1,748) (586) (71) (7,030) (1,675) (202)
------ ------ ------ ------ ------ ------
Net income 2,342 162 19 12,766 1,145 138
Basic and diluted earnings
per share 0.19 0.01 - 1.06 0.10 0.01
SELECTED HISTORICAL CONSOLIDATED BALANCE SHEET DATA:
As of December 31, As of June 30,
------------------ ------------------
1997 1997 1998 1998
---- ---- ---- ----
Rmb *US$ Rmb *US$
(Amounts in thousands)
<S> <C> <C> <C> <C>
Current assets 222,899 26,920 233,620 28,215
Working capital 63,055 7,615 64,949 7,845
Total Assets 248,640 30,029 258,415 31,209
Current liabilities 159,844 19,305 168,671 20,370
Long term loan from a
related party 3,381 408 3,581 433
Minority interests 26,281 3,174 26,867 3,245
-------- -------- --------- --------
Total liabilities and
minority interests 189,506 22,887 199,119 24,048
-------- -------- --------- --------
Shareholders' equity 59,134 7,142 59,296 7,161
_____________________
</TABLE>
24
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* For convenience, amounts have been converted from Renminbi to US$ at Rmb
8.28 = US$1.00, which represents the single rate of exchange as quoted by the
People's Bank of China on June 30, 1998. No representation is made that
Renminbi amounts could have been, or could be, converted into US$ at that rate
or any other rate.
** Reorganization expenses were incurred in connection with the acquisition
of ODL by the Company which reduced net income for the year ended December 31,
1996 by Rmb 2.5 million (US$302,000) primarily consisting of professional and
consulting fees.
This is a one time expense in connection with the acquisition of ODL by the
Company. Management does not expect the acquisition would have any significant
impact on the future results of operations, liquidity and sources and uses of
capital resources of the Company.
Excluding the reorganization expenses, the Company's net income and
earnings per share for the year ended December 31, 1996 would be Rmb 15.3
million (US$1,848,000) and Rmb 1.27 (US$.15) per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
OVERVIEW
THE COMPANY
The Company is a Nevada holding company whose only significant asset is
a wholly-owned British Virgin Islands subsidiary, OVM Development Limited, which
owns a 70% interest in Liuzhou OVM, a Sino-foreign equity joint venture company
established under the laws of the PRC which is principally engaged in the
manufacture and sale of prestressing equipment, components and hardware used in
the construction of motorways, bridges, railroads, buildings, hydroelectric dams
and power stations in the PRC. Accordingly, the Company will derive its revenues
from the distributions paid to the Company by ODL resulting from distributions
paid by Liuzhou OVM. Liuzhou OVM pays distributions to its joint venture
partners in accordance with their percentage interests as follows: ODL (70%) and
the Stock Company (30%).
The Company's Financial Statements appearing elsewhere in this
Prospectus consist of the unaudited consolidated financial statements of the
Company for the six month periods ended June 30, 1997 and 1998 and the
audited consolidated financial statements of the Company for two years ended
December 31, 1996 and 1997.
The discussions below is presented in the Company's primary operating
currency which is the Renminbi Yuan ("Rmb"). For information purposes these
amounts have been translated into U.S. dollars at an exchange rate of $1.00 =
Rmb 8.28 which represents the single rate of exchange as quoted by the People's
Bank of China on June 30, 1998. This U.S. dollars information is presented
for convenience only. No representation is made that Renminbi amounts could have
been, or could be, converted into U.S. dollars at that rate throughout the years
presented.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items from the Company's Statements of Income expressed as a percentage of
the Company's net sales.
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
1996 1997 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 65.0 64.0 57.8 71.4
Gross profit 35.0 36.0 42.2 28.6
Selling and administrative
expenses 16.9 24.3 29.2 25.8
Provision for doubtful accounts
and other receivables 2.7 7.7 7.1 -
Interest expenses, net 3.8 1.6 0.4 1.7
Other income, net 2.2 0.2 1.8 1.0
Foreign exchange loss - 0.5 - -
Reorganization expenses 1.6 - - -
Income before income taxes 12.2 2.1 7.3 2.1
Income taxes - - - 1.1
Net income after income taxes 12.2 2.1 7.3 1.0
Share of profits of an associated
company 0.1 - 0.1 -
Net income before minority
interests 12.3 2.1 7.4 1.0
Minority interests 4.4 1.2 3.2 0.8
Net income 7.9 0.9 4.2 0.2
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
NET SALES AND GROSS PROFIT. Net sales for the year ended December 31,
1997 decreased by Rmb 30,530,000 (US$3,687,000) or 19% to Rmb 130,962,000
(US$15,817,000) compared to Rmb 161,492,000 (US$19,504,000) in the prior year.
The decrease was mainly due to an indent sales (a sales directly matched with a
purchase) of steel wire, amounting to approximately Rmb 48,363,000
(US$5,841,000) and accounted for approximately 30% of the total sales for the
year ended December 31, 1996. No such indent sales was made in 1997. The
management also believes that the Asian financial crisis that has occurred in
the second half year of 1997 caused the slow down of the infrastructure
activities in the PRC. Net sales represent the invoiced value of goods sold net
of sales tax and returns. Sales returns for each of the two years ended December
31, 1997 and 1996 were immaterial. The inventory level of raw materials and
components as of the year ended December 31, 1997 was approximately two months
usage. The inventory level of finished goods and work in progress as of the end
of any period shall vary according to the sales order on hand.
Gross profits decreased by Rmb 9,356,000 (US$1,130,000) or 16.6% to Rmb
47,128,000 (US$5,692,000) for the year ended December 31, 1997 compared to Rmb
56,484,000 (US$6,822,000) in 1996. The decrease in gross profit was primarily
due to the reduction in net sales. The gross profit margin increased by 1%
points to 36% for the year ended December 31, 1997 from 35% for the
corresponding period in 1996. This increase was primarily attributable to the
purchase of certain raw
26
<PAGE>
materials from new suppliers which supplied at a lower cost, resulting in
improved gross profits for certain products.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased by Rmb 4,422,000 (US$534,000) or 16% to Rmb 31,763,000
(US$3,836,000) for the year ended December 31, 1997 compared to Rmb 27,341,000
(US$3,302,000) in the corresponding period in 1996. The increase was primarily
related to the increased costs associated with the Company's effort to solicit
new customers and to collect debts. In addition, increased legal and
professional fees were incurred by the Company during the current year as
compared to the last year following the completion of the reverse merger of the
Company in November 1996. Also, the Company incurred more expenses on scientific
research in order to improve the quality of the Company's products during the
current year. Selling and administrative expenses as a percentage of sales were
24.3% for the year ended December 31, 1997 compared to 16.9% for the
corresponding period in 1996 due to the aforementioned reasons.
PROVISION FOR DOUBTFUL ACCOUNTS AND OTHER RECEIVABLES. The provision for
bad debt expenses increased by Rmb 5,671,000 (US$685,000) or 131% to Rmb
10,000,000 (US$1,208,000) for the year ended December 31, 1997 compared to Rmb
4,329,000 (US$523,000) for the corresponding period in 1996. The Company has
reviewed the recoverability of individual debtors and made specific provisions
for doubtful debtors on a prudent basis and also adopted a general provision
policy on all other accounts receivable and other receivables which is
calculated primarily based on 50% of those outstanding balances with age over
one year and 10% of those balances with age of six months but not exceeding
twelve months.
As of December 31, 1997, the net amounts of accounts receivable aged
between six months and twelve months, and over twelve months, were Rmb 6,858,000
(US$828,000) and Rmb 87,188,000 (US$10,530,000), respectively. Most of these
balances are attributable to products sold to contractors of infrastructure
construction projects which are generally completed in stages and extend for a
relatively long period of time. As a result, the average outstanding period of
the Company's accounts receivable are typically longer than those of other
industries in the PRC. However, management believes that, based upon past
experience, the risk of not recovering these outstanding balances is low because
most of the debtors are well established local construction bureaus and the
relevant projects are government funded.
As of December 31, 1997 and 1996 the net amounts of related party
accounts receivable were Rmb 46,501,000 (US$5,616,000) and Rmb 58,838,000
(US$7,106,000), respectively. The recoverability of these balances is guaranteed
by the PRC joint venture partner.
INTEREST EXPENSES, NET. Net interest expenses decreased by Rmb 4,036,000
(US$487,000) or 66% to Rmb 2,104,000 (US$254,000) for year ended December 31,
1997 compared to Rmb 6,140,000 (US$742,000) in the corresponding period in 1996.
The decrease was primarily due to the receipt of interest income from related
parties during 1997 amounted to Rmb 3,648,000 (US$441,000) for amounts due from
them which bear an interest rate equivalent to the average bank borrowing rate.
No interest was charged to related parties in 1996.
OTHER INCOME, NET. Other income decreased significantly by 93% from Rmb
3,536,000 (US$427,000) for the year ended December 31, 1996 to Rmb 234,000
(US$28,000) for the year ended December 31, 1997. The significant decrease in
other income was due to income derived in 1996 from leasing of fixed assets to
third parties and service fee received from collection of debts on behalf of the
Stock Company. No such income was earned in 1997. The other income for the year
ended December 31, 1997 mainly represented the income from the sales of
accessory products such as packaging materials.
27
<PAGE>
INCOME TAXES. According to an approval issued by the State Tax Bureau
of the Liuzhou City dated July 22, 1996, the income of Liuzhou OVM is fully
exempted from corporate income tax for three years commencing from the first
profitable year of operations followed by a 50% exemption for the next four
years, after which income will be taxable at the full rate of 33%. Accordingly,
no income tax was provided for the years ended December 31, 1996 and 1997 as
they were within the second and third profitable years of operations,
respectively. The income taxes for the year ended December 31, 1997 was incurred
by Liuzhou OVM's subsidiary since there is no tax exemption and reduction
obtained from the State Tax Bureau. It is the management's intention to reinvest
all the income attributable to the Company derived from Liuzhou OVM in 1997 and,
accordingly, no US tax liability was provided.
SHARE OF PROFITS OF AN ASSOCIATED COMPANY. The share of profit of an
associated company arose from the 50% ownership interest held by Liuzhou OVM in
OVM Prestress Co. Pte Ltd., a company incorporated in the Republic of Singapore.
MINORITY INTERESTS. Minority interests represent the 30% equity
interest in Liuzhou OVM, owned by the Stock Company, the PRC joint venture
partner.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET SALES AND GROSS PROFIT. For the first half year of 1998, net sales
increased by Rmb 20,344,000 (US$2,457,000) or 37.1% to Rmb 75,226,000
(US$9,085,000) from Rmb 54,882,000 (US$6,628,000) in the corresponding period of
the prior year. Given the adverse impact of the Asian financial crisis on the
Chinese economy, some of the infrastructure activities were slowed down or
suspended. It was the Company's policy to reduce the prices to boost sales in
the first half year of 1998. The increase in net sales revenue was mainly due
to more sales contracts received and completed during the period.
Gross profits decreased by Rmb 1,645,000 (US$199,000) or 7.1% to
Rmb 21,532,000 (US$2,600,000) for the six months ended June 30, 1998 compared to
Rmb 23,177,000 (US$2,799,000) in the corresponding period of the prior year. The
decrease in gross profit was a result of the Company's policy to reduce prices
in order to boost sales.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased by Rmb 3,339,000 (US$403,000) or 20.8% to Rmb 19,359,000
(US$2,338,000) for the six months ended June 30, 1998 as compared to
Rmb 16,020,000 (US$1,935,000) in the corresponding period in 1997. The increase
was primarily related to the increased costs associated with the Company's
effort to promote sales. In addition, more legal and professional fees were
incurred by the Company during the current period as compared to the prior
period.
PROVISION FOR DOUBTFUL ACCOUNTS AND OTHER RECEIVABLES. No additional
provision for bad debt expenses was charged to the income statements during the
six months period ended June 30, 1998 because the management considered that the
period-end allowance for doubtful accounts was adequate.
INTEREST EXPENSES, NET. Interest expenses decreased by Rmb 778,000
(US$94,000) or 22.5% to Rmb 2,676,000 (US$323,000) for the six months ended June
30, 1998, as compared to Rmb 3,454,000 (US$417,000) in the corresponding period
in 1997. The decrease in interest expenses in the six months period ended June
30, 1998 was due to the decrease in the average bank borrowing rates during the
current period. Interest income mainly represented the income received on the
amounts due from related parties, bear interest at the average bank borrowing
rates. Interest income decreased by Rmb 1,836,000 (US$222,000) or 56.9% to
Rmb 1,388,000 (US$168,000) for the six months ended June 30, 1998 as compared to
Rmb 3,224,000 (US$389,000) in the corresponding period in 1997. The decrease was
mainly due to the reduction of balances with related parties and the average
bank borrowing rates.
OTHER INCOME, NET. Other income decreased by Rmb 263,000 (US$32,000) or
26.8% from Rmb 980,000 (US$118,000) for the six months ended June 30, 1997 to
Rmb 717,000 (US$86,000) for the corresponding period in 1998. The decrease was
primarily related to less income being earned from leasing of equipment for the
current period as compared to the corresponding period in 1997.
INCOME TAXES. According to an approval issued by the State Tax Bureau
of the Liuzhou City dated July 22, 1996, the income of Liuzhou OVM is fully
exempted from income tax for three years commencing from the first profitable
year of operations followed by a 50% exemption for the next four years, after
which the income is taxable at the full rate of 33%. No income tax was payable
in 1997 as this was the third profitable year of operation of Liuzhou OVM.
Income tax was payable in 1998 at 16.5% as this was the fourth profitable year
of operation of Liuzhou OVM. Liuzhou OVM's subsidiary, Liuzhou OVM Trading Co.
Ltd., which was established in 1997 was subject to income tax at the full rate
of 33%. It is management's intention to reinvest all the income attributable to
the Company derived from Liuzhou OVM in 1998 and, accordingly, no U.S. tax
liability should be payable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to fund inventories, accounts
receivable and capital expenditures. The Company has financed its working
capital requirements through a combination of internally generated cash, short
term bank loans and advances from affiliates.
The Company has a working capital surplus of Rmb 64,949,000
(US$7,844,000) as of June 30, 1998 compared to Rmb 63,055,000 (US$7,615,000) as
of December 31, 1997. Net cash provided by operating activities for the six
months ended June 30, 1998 was Rmb 10,853,000 (US$1,311,000) as compared to net
cash used in operating activities of Rmb 6,874,000 (US$830,000) for the
corresponding period in 1997. Net cash flows from the Company's operating
activities are attributable to the Company's income and changes in operating
assets and liabilities.
For the two years ended December 31, 1997 and the six months ended
June 30, 1998, the cash flow used in investing activities related principally
to the acquisition of property, machinery and equipment.
Capital expenditures for production equipment for the two years ended
December 31, 1996 and 1997 and the six months ended June 30, 1998 were Rmb
1,152,000 (US$139,000), Rmb 4,467,000 (US$539,000) and Rmb 1,111,000
(US$134,000), respectively.
The Company's capital expenditure has been principally funded by the
short-term bank loans. As at December 31, 1997 and June 30, 1998, the Company
had outstanding short term bank loans of Rmb 41,420,000 (US$5,002,000) and Rmb
40,420,000 (US$4,882,000) respectively.
The Company estimates that the expansion program of the Company will be
funded partially by the retained profits and by additional borrowings.
Management believes that it is and will continue to be able to secure the
external debt financing it requires to complete the program on schedule. In
addition, management anticipates continuing to utilize cash on hand and cash
flows from operations to mitigate its external financing requirements for the
next twelve months.
IMPACT OF INFLATION ON RESULTS OF OPERATIONS, LIABILITIES AND ASSETS
As a measure to control inflation, the PRC government has reinstated
controls on bank credits, limits on loans for fixed assets and restrictions on
28
<PAGE>
state bank lending. This austerity plan, first announced in June 1993, seems to
have been relaxed during the first half of 1996. There is no assurance that the
austerity program will be completed in the proximate future, nor any assurance
that if it were terminated it might not be later reinstated. While inflation has
moderated since 1994, with the national retail inflation rate falling to 14.8%,
6.1% and 1.4%% per annum in 1995, 1996 and the first eight months of 1997,
respectively, there can be no assurance that inflation will not increase in the
future or that further measures to combat inflation and speculative activities
will not be implemented in a manner that may adversely affect the profitability
of the Company over time.
IMPACT OF THE YEAR 2000
The Securities and Exchange Commission, in Staff Legal Bulletin No. 5
(CF/IM), has stated that public operating companies should consider whether they
will be affected by any material expenditures, problems or uncertainties
associated with the Year 2000 issue, which affects many existing computer
systems that use only two digits to identify a year in the date field. The
Company believes that the matters raised by Staff Legal Bulletin No. 5 are not
applicable in any material way to its own computer systems, and the Company
intends to confirm that any computer systems that the Company may purchase or
lease in the future will have addressed the Year 2000 issue.
The Company is currently determining the extent to which it may be
impacted by third parties' failure to remedy their own Year 2000 issues. While
the Company continues to address the year 2000 issue, there can be no assurance
that the systems of other companies with which the Company's systems interact
will be timely converted and would not have an adverse effect on the Company's
business.
29
<PAGE>
DISCUSSION PERTAINING TO CERTAIN CONDITIONS
RELATING TO THE PEOPLE'S REPUBLIC OF CHINA
World Trade Organization
- ------------------------
In recent years, the PRC engaged in extensive negotiations to join the
World Trade Organization ("WTO"), which regulates trading and tariffs among its
signatory states. Although such negotiations are currently stalled, it is
expected that negotiations will restart at some point and that the PRC will
eventually assume a position as a member of the WTO. In such event, it will be
required to reduce further some of its import tariffs to conform with the
uniform tariffs under the WTO. Furthermore, in order to facilitate its reentry
to the WTO, the PRC has already begun, and is expected to continue, lowering
some import tariffs and reducing certain other restrictions on imports. The
PRC's entry into the WTO and the current policy of lowering import barriers may
result in increased competition in the domestic market by foreign competitors
who manufacture and sell similar products.
POLITICAL CONSIDERATIONS
Since 1978, the PRC government under its current leadership has been
reforming, and is expected to continue to reform, the PRC's economic and
political systems. Such reforms have resulted in economic growth and certain
30
<PAGE>
social progress. Many of the reforms are unprecedented or experimental and are
expected to be refined and improved upon. Other political, economic and social
factors can also lead to further readjustment of the reform measures. This
refinement and readjustment process may not always have a positive effect on the
operations of the Company. The Company's results at times may also be adversely
affected by changes in the PRC's political, economic and social conditions and
by changes in policies of the PRC government, such as changes in laws and
regulations (or the interpretation thereof), the introduction of measures to
control inflation, changes in the rate of method of taxation and imposition of
additional restrictions on currency conversion and remittances abroad. Although
historically there have been periods of political instability, such as during
the "Cultural Revolution," and certain of the reform measures have from
time-to-time been readjusted, because of the broad support for the reform
process, the economic system in the PRC has already undergone extensive changes
as a result of the success of such reforms. Management believes that the basic
principles underlying the reforms will continue to provide the framework for the
PRC's political and economic system.
THE PRC'S ECONOMY AND ECONOMIC REFORM
The economy of the PRC differs from the economies of most countries
belonging to the Organization for Economic Cooperation and Development in such
respects as structure, government involvement, level of development, growth
rate, capital reinvestment, allocation of resources, self-sufficiency, rate of
inflation and balance of payments position, among others. In the past, the
economy of the PRC has been primarily a planned economy subject to State plans.
Since 1992, the PRC government has adopted a policy to transform its economy to
a more market oriented socialist one. Although the majority of productive assets
in the PRC is still owned by the PRC government, the portion of the PRC economy
subject to State plans has been gradually diminishing. In 1997, the working
report of PRC's premier reaffirmed that PRC will continue to promote economic
reform, with particular focus on reforming large and medium size state-owned
enterprises, in order to accelerate the process of achieving a socialist market
economy.
The PRC economy has experienced significant growth in the past decade, but
such growth has been uneven geographically and among various sectors of the
economy. Beginning in 1993, the PRC government implemented various successful
policies to restrain the rate of such economic growth and control inflation and
otherwise regulate economic expansion.
31
<PAGE>
As a result, GDP growth slowed down from 14.0% in 1992 to 9.8% in 1996, while
inflationd declined to 14.8% in 1995 and to 6.1% in 1996. Although inflation has
eased since 1995, no assurance can be given that inflation will not increase in
the future or that further measures to combat inflation and speculative
activities will not be implemented in a manner that may adversely affect the
profitability of the Company over time.
GOVERNMENT CONTROL OF CURRENCY CONVERSION AND EXCHANGE RATE RISKS
All the Company's domestic sales are denominated in Renminbi, the official
currency of the PRC. Export sales are denominated in U.S. dollars and account
for only 16% and 4% of total sales by value respectively for each of the two
years ended December 31, 1997.
Since Liuzhou OVM's products are sold in the PRC primarily in Renminbi
transactions, its revenues and profits are predominantly in Renminbi, and will
have to be converted to pay dividends to the Company in hard currency. The PRC
government imposes control over the convertability of Renminbi into foreign
currencies. Prior to January 1, 1994, all foreign exchange transactions
involving Renminbi in the PRC had to take place either through the authorized
financial institutions at the official exchange rates set by the State
Administration for Exchange Control ("SAEC"), the PRC government agency
responsible for matters relating to foreign exchange administration, or at local
foreign exchange swap centers at exchange rates largely determined by supply and
demand. However, transactions effected through swap centers required the prior
approval of the SAEC.
On January 1, 1994, the PRC government abolished its two-tier exchange
rate system and replaced it with a unified managed floating exchange rate system
largely based on market supply and demand. Under the new system, the People's
Bank of China publishes a daily exchange rate of Renminbi (the "PBOC Exchange
Rate") based on the previous day's dealings in the inter-bank foreign exchange
market. Financial institutions authorized to deal in foreign currency may enter
into foreign exchange transactions at exchange rates within an authorized range
above or below the PBOC Exchange Rate according to market conditions.
Currently, foreign investment enterprises ("FIEs") (including Sino-foreign
joint ventures such as Liuzhou OVM) are required to apply to the SAEC for
"Foreign exchange registration certificates" ("FERCs"). With such FERCs (which
are granted to FIEs upon fulfilling certain specified conditions and which are
reviewed annually by the SAEC) and authorization from the SAEC (which is
obtained on a transaction-by-transaction basis), FIEs may enter into
transactions at the swap centers to obtain foreign exchange for their needs.
32
<PAGE>
REPATRIATION OF EARNINGS FROM PRC
Pursuant to the relevant laws and regulations for Sino-foreign joint
venture enterprises, earnings of the Company's operating subsidiary, Liuzhou
OVM, a Sino-foreign equity joint venture enterprise, is available for
distribution in the form of cash dividends to each of the joint venture partners
after Liuzhou OVM (i) satisfies all tax liabilities; (ii) provides for losses in
previous years; and (iii) makes appropriation to reserve funds, as determined at
the discretion of the board of directors. These appropriations include general
reserve fund, enterprise expansion fund and staff bonus and welfare fund. The
Company has been advised that Liuzhou OVM intends to allocate as appropriations
of up to 10-15% of the net income as reflected in its statutory financial
statements.
Earnings reflected in the financial statements prepared in accordance with
US GAAP differ from those reflected in the statutory statements of Liuzhou OVM.
In accordance with the relevant laws and regulations for Sino-foreign joint
venture enterprises, profit available for distribution by Liuzhou OVM is based
on the statutory financial statements. Consequently, a portion of the earnings
included in the retained earnings of the Company is not available for
distribution to the Company and therefore is not available for distribution as
dividends to the shareholders of the Company.
Profit distribution of Liuzhou OVM is declared and payable in Renminbi. If
Liuzhou OVM has foreign currency available after meeting its operational needs,
the Company may receive its share of any distributions to the joint venture
partners in foreign currency to the extent available. The amount of foreign
currency remitted to the Company will be determined with reference to the then
prevailing PBOC Exchange Rate. Only if foreign currency is not available and
only if the Company desires to obtain the foreign currency equivalent of
Renminbi distributions will it be necessary to convert such distributions at a
swap center. However, there can be no assurance that shortages of foreign
currency at the swap centers will not restrict Liuzhou OVM to obtain sufficient
foreign currency. If such a shortfall occurs, the Company may accept Renminbi
payments which can be held or reinvested in other projects. In such
circumstances, this may affect the Company's ability to pay dividends in U.S.
dollars.
LEGAL SYSTEM
Since 1979, many laws and regulations dealing with economic matters in
general have been promulgated in the PRC. Despite this activity in developing
the legal system, the PRC does not have a comprehensive system of laws. In
addition, enforcement of existing laws may be uncertain and sporadic, and
implementation and interpretation thereof inconsistent. The PRC judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. Even where
33
<PAGE>
adequate law exists in the PRC, it may be difficult to obtain swift and
equitable enforcement of such law, or to obtain enforcement of a judgment by a
court of another jurisdiction. The PRC's legal system is based on written
statutes and, therefore, decided legal cases are without binding legal effect,
although they are often followed by judges as guidance. The interpretation of
PRC laws may be subject to policy changes reflecting domestic political changes.
As the PRC legal system develops, the promulgation of new laws, changes to
existing laws and the pre-emption of local regulations by national laws may
adversely affect foreign investors. The trend of legislation over the past 18
years has, however, significantly enhanced the protection afforded foreign
investors in enterprises in the PRC. However, there can be no assurance that
changes in such legislation or interpretation thereof will not have an adverse
effect upon the business and prospects of the Company.
The Company's activities in the PRC are by law subject, in some particular
cases, to administrative review and approval by various national and local
agencies of the PRC government. In particular, part of the Company's current
operations and the realization of its future expansion programs in the PRC will
be subject to PRC government approvals.
BUSINESS
INTRODUCTION
OVM International Holding Corporation (the "Company") was organized
under the laws of the State of Nevada on October 18, 1971 under the name of Mr.
Nevada, Inc., and, following the completion of a limited public offering in
April 1972, commenced limited operations which were discontinued in 1990.
Thereafter, the Company engaged in a reorganization and on several occasions
sought to merge with or acquire certain active private companies or operations,
all of which were terminated or resulted in discontinued negotiations. On
October 20, 1995, the Company changed its name to Intermark Development
Corporation. On November 4, 1996, the Company acquired all of the capital stock
of OVM Development Limited ("ODL"), formerly known as Kolcari Investments
Limited, a British Virgin Islands corporation, and changed its name to OVM
International Holding Corporation.
ODL owns a 70 percent equity interest in Liuzhou OVM Construction
Machinery Company Limited ("Liuzhou OVM"), a Sino-foreign equity joint venture
incorporated in the People's Republic of China (the "PRC") on May 10, 1995. The
PRC venture partner is Liuzhou Construction Machinery General Factory (the
"Factory"), which was a PRC State-owned enterprise. The Factory was subsequently
reorganized into a limited liability share capital company on January 10, 1995
known as Liuzhou OVM Joint Stock Company Limited (the "Stock Company"). ODL and
the Stock Company are parties to the Articles of Association and Joint Venture
Contract dated April 18, 1995 which establishes the basis of their relationship.
The joint venture contract is for a 30-year term which may be terminated under
certain limited circumstances as agreed upon by the parties. These Articles
establish a board of directors consisting of seven persons, a majority of which
are designated by ODL. The board of directors has a responsibility for all major
financial and operations decisions relating to the activities of the venture
which require approval of a simple majority of directors (i.e. over 50%),
although all major decisions affecting the structure of the joint venture
require unanimous approval of the directors. The regular operations of the joint
venture are to be overseen by the general manager and other deputy general
managers, and the Stock Company is responsible for the nomination for the
appointment by the board of directors of the initial general manager whose term
expires in April 1998. ODL, in addition to providing initial cash contributions
to the joint venture, is responsible to assist in the purchase of machinery and
equipment outside the PRC, to promote products and assist in obtaining contracts
outside the PRC and to assist in certain training, personnel and procurement
functions. As used herein, the "Company" or "OVM" refers to OVM International
Holding Corporation and includes, unless the context otherwise requires, the
prior or current operations of ODL, Liuzhou OVM, the Stock Company, or, if prior
to its establishment, the Factory.
Liuzhou OVM has assumed substantially all the businesses originally
carried out by the Factory since January 1, 1995 which principally includes the
manufacture, production, sale and distribution of prestressing equipment,
components and hardware used in the construction of motorways, bridges,
railroads, buildings, hydroelectric dams and power stations in the PRC. The
products include anchorage systems, jacks, electric high-pressure oil pumps,
steel cables, direct display sensors, unbonded prestressing tendons and
ancillary equipment widely used in the construction industry. Liuzhou OVM is the
successor to the manufacturing business originally conducted by the Factory.
Accordingly, the following discussion is principally a description of the
business of Liuzhou OVM or that of its predecessor, the Factory.
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<PAGE>
OVM's products are distributed throughout the PRC to a diversified
customer base, with a small portion being sold overseas. OVM's PRC customers
include construction and engineering companies and provincial, municipal and
regional construction bureaus across the PRC.
The Company's head office and production facilities are located in
Liuzhou Municipality, the industrial city of Guangxi Zhuang Autonomous Region
("Guangxi"), with a site area of approximately 60,000 square meters. The total
gross floor area of production and related facilities comprising buildings and
structures is approximately 9,463 sq. meters. Long term land use rights for the
land and the buildings on which these facilities are situated are held by the
Stock Company and leased to Liuzhou OVM.
Guangxi has substantial mineral resources and is well known as a base
of non-ferrous metals such as manganese, tin, arsenic and bentonite. According
to China Statistical Yearbook 1997, the regional gross domestic product in
Guangxi amounted to approximately Rmb 187 billion (US$23 billion), ranking it
15th in the PRC in 1996.
While the Company's indirect participation in the joint venture
originated in 1995, Liuzhou OVM (inclusive of the operations of the Factory),
has approximately 30 years of operating history in manufacturing prestressing
equipment and related components. Management believes that Liuzhou OVM is the
largest manufacturer of prestressing equipment and related components in the PRC
in terms of total sales and profit before taxation for each of the two years
ended December 31, 1996 and 1997. Given the well recognized "OVM" brand name in
the PRC, the quality of Liuzhou OVM's product line and Liuzhou OVM's after sales
and customer support systems, management believes that Liuzhou OVM has
established and will continue to maintain a significant competitive position in
the PRC prestressing equipment industry. Management believes that OVM's products
had an estimated overall market share of approximately 60% in China in 1997.
35
<PAGE>
STRUCTURE
The following diagram depicts the corporate structure of the Company.
-----------------------------
| OVM International Holding |
| Corporation (Nevada) |
-----------------------------
|
100%
|
-------------------------------
| OVM Development Limited |
| (British Virgin Islands) |
-------------------------------
|
| -------------------------------
| | Liuzhou OVM Joint Stock |
| | Company Limited (formerly |
| | known as Liuzhou |
| | Construction Machinery |
| | General Factory (People's |
| | Republic of China) |
| --------------------------------
70% |
| 30%
| |
------------------------------- |
| Liuzhou OVM Construction | |
| Machinery Company Limited |---------------
|(People's Republic of China) |
-------------------------------
| |
50% 95%
| |
- ------------------------------- ----------------------------------
| OVM Prestress Co. Pte Ltd. | | Liuzhou OVM Trading Co. Ltd. |
| (Republic of Singapore) | | (People's Republic of China) |
- ------------------------------- ----------------------------------
OVM DEVELOPMENT LIMITED ("ODL"), formerly known as Kolcari Investments
Limited is a private limited company incorporated in the British Virgin Islands
on May 3, 1994.
LIUZHOU CONSTRUCTION MACHINERY GENERAL FACTORY (the "Factory"), located
in Liuzhou City, Guangxi Zhuang Autonomous Region, the PRC, was the largest
State-owned manufacturer of prestressing equipment in China. The Factory has
been operating in the PRC since 1967. The Factory was subsequently reorganized
into a limited liability share capital company on January 10, 1995 under the
name of Liuzhou OVM Joint Stock Company Limited (the "Stock Company").
LIUZHOU OVM CONSTRUCTION MACHINERY COMPANY LIMITED. ("Liuzhou OVM") is
a Sino-foreign equity joint venture established under the laws of PRC on May 10,
1995 and owned 70% by ODL and 30% by the Stock Company. The registered capital
of Liuzhou OVM is US$4 million.
LIUZHOU OVM TRADING COMPANY LIMITED (the "Trading Company") is a
limited liability company established under the laws of PRC on December 8, 1997
and owned
36
<PAGE>
95% by Liuzhou OVM and 5% by the employees of Liuzhou OVM. The registered
capital of the Trading Company is RMB 500,000.
OVM PRESTRESS CO. PTE LTD is a private limited company incorporated in
the Republic of Singapore on December 11, 1993 that is 50% owned by Liuzhou OVM
and 50% owned by Wee Poh Construction Co. (Pte) Ltd., an unaffiliated third
party, and is principally engaged in the provision of prestressing and related
engineering services.
SUMMARY OF BUSINESSES
The Company is principally engaged in the manufacture and sale of
prestressing equipment and ancillary products. Prior to the establishment of
Liuzhou OVM in May 1995, which took over the Stock Company's business effective
at January 1, 1995, the business was carried out by the Factory (and
subsequently the Stock Company, which is the largest manufacturer of
prestressing equipment and related components in the PRC).
Liuzhou OVM supplies a wide range of prestressing equipment and
ancillary products which are essential for the production of prestressed
concrete and are widely used in infrastructure projects such as highways,
railroads, bridges, buildings and power stations. Management believes that
Liuzhou OVM's products had an estimated overall market share of approximately
60% in China in 1997.
The Company manufactures a wide array of prestressing equipment and
ancillary products including prestressing anchorage, stressing and lifting
jacks, electric high-pressure oil pumps, unbonded prestressing strand, stay
cable, soil anchor drillers, pipe pullers, steel ducts and ancillary products.
The Company's PRC customers include construction and engineering companies, and
provincial, municipal and regional construction bureaus throughout the PRC. At
present the Company manufactures a range of products which serve various
applications including the construction of bridges and buildings, structural
strengthening and repairs, anchoring in rock and soil and lifting and sliding of
heavy loads. The Company also offers a comprehensive range of professional
engineering consulting services including feasibility studies, structural design
and construction assistance.
The Company has supplied products and provided technical support for
more than 100 major projects in the PRC including Shanghai Yangpu Bridge, one of
the largest cable-stayed bridges in the world, and the lifting of the antenna
masterpole of the Shanghai East Pearl TV and Broadcasting Tower, the tallest
television broadcasting tower in the PRC. The Company's products were also used
in SouthEast Asia projects, such as New Macau-Taipa Bridge in Macau, Mei Bridge
in Vietnam and Serangon Bridge in Singapore.
Liuzhou OVM is one of the several companies designated by the Ministry
of Construction of the PRC as approved manufacturers of prestressing equipment.
The following are some of the major projects in the PRC as well as other
countries in Asia in which products of Liuzhou OVM or its predecessors were
used:
o Yangpu Bridge in Shanghai
o Nanpu Bridge in Shanghai
o Aodang Bridge in Macau
o Reconstruction Engineering of Beijing International Airport
o Beijing-Shenzhen Expressway
o Shuikou Hydropower Station in Fujian Province
o The Dongming Yellow River Bridge
o The Huangshi Yangtze River Bridge
o The New Railway Station in Beijing
o Friendship Gate in Vietnam
37
<PAGE>
o Bridge over Sungei Serangonn, part of Tampines Expressway
Phase III, in Singapore
o East Pearl TV and Broadcasting Tower in Shanghai
OVERVIEW OF PRESTRESSED CONCRETE
Modern structural engineering tends to progress toward more economic
structures through gradually improved methods of design and the use of higher
strength materials. This results in a reduction of cross-sectional dimensions
and consequent weight savings. Significant savings can be achieved by the use of
high strength concrete and steel in conjunction with present-day design methods,
which permit an accurate appraisal of member strength. This process includes
inherent limitations due mainly to the interrelated problems of cracking and
deflection at service loads.
The undesirable characteristics of ordinary reinforced concrete and
steel have been overcome by the development of prestressed concrete which use
steels and concrete of very high strength. The steel, usually in the form of
wires or strands, is embedded in the concrete under high tension that is held in
equilibrium by compressive stresses in the concrete after hardening.
A prestressed concrete member can be defined as one in which there have
been introduced internal stresses of such magnitude and distribution that the
stresses resulting from the given external loading are counteracted to a desired
degree. A prestressed concrete member include anchorage, jacks and its ancillary
equipment. Concrete is basically a compressive material, with its strength in
tension a low and unreliable value. Prestressing applies a precompression to the
member which reduces or eliminates undesirable tensile stresses that would
otherwise be present. Cracking under service loads can be minimized or even
avoided entirely. Deflections may be limited to an acceptable value. In fact,
members can be designed to have zero deflection under the combined effects of
service load and prestress force. Deflection and crack control, achieved through
prestressing, permit the engineer to make use of efficient and economical high
strength steels in the form of strands, wires or bars, in conjunction with
concrete of much higher strength than normal. Thus prestressing results in
overall improvement in performance of structural concrete used for ordinary
loads and spans, and extends the range of application far beyond old limits,
leading not only to much longer spans than previously thought possible, but
permitting innovative new structural forms to be employed.
Prestressed concrete is particularly well suited for use in bridges of
all kinds because of its durability, rigidity, and economy, as well as the
comparative ease with which an aesthetic appearance can be achieved. Prestressed
concrete bridges frequently make use of composite action. Commonly the beams are
precast and placed in position by crane, eliminating the need for obstructing
traffic. The deck slab is then cast in place and locked to the precast units by
stirrups that project upward into the slab. The long-span concrete bridges
require the development of segmentally cast-in-place hollow prestressed concrete
box girders by post-tensioning.
HISTORY AND DEVELOPMENT OF LIUZHOU OVM
The predecessor of Liuzhou OVM, is Liuzhou Construction Machinery
General Factory, which was founded in 1987 under the supervision of Liuzhou
Municipal Mechanical and Electrical Industrial Bureau. The Factory evolved out
of the former Liuzhou Construction and Machinery Plant founded in 1967. The
major products of the Factory included anchorage systems, electric high-pressure
oil pumps, jacks and other ancillary products which were widely used in
infrastructure projects such as the construction of highways, railroads, bridges
and hydro-power stations.
38
<PAGE>
In 1993, the Factory was granted independent import and export rights
by the Ministry of Foreign Trade and Economic Co-operation of the PRC, which
entitled the Factory to handle import and export transactions directly without
going through various independent import and export corporations. Thereafter,
the Factory was actively involved in exploring the overseas prestressing
equipment market, and its products have been sold for use in Hong Kong, Macau,
Vietnam and Singapore. In the same year, following approval by the Commission
for Restructuring the Economic System of Guangxi Zhuang Autonomous Region, the
Factory established Orient Prestress Company Ltd ("Orient"), a joint stock
limited liability company, in conjunction with eight other institutional
shareholders which are mainly technical and research institutes in the PRC. The
Stock Company, being the successor of the Factory (see below), owns
approximately 41% of the equity in Orient and is its largest shareholder.
In December 1994, the Factory was ranked 29th by the State Council
Research and Development Center within the 500 PRC Special Machinery
Manufacturing Enterprises in terms of economic achievement, i.e., sales and
pre-tax profit. On January 10, 1995, upon receipt of approval of the Commission
for Restructuring the Economic System of Guangxi Zhuang Autonomous Region, the
Factory was reorganized into a limited liability share capital company known as
Liuzhou OVM Joint Stock Company Limited.
On May 10, 1995, Liuzhou OVM was established as a Sino-foreign equity
joint venture enterprise. Pursuant to its establishment, Liuzhou OVM took over,
effective from January 1, 1995, certain assets and liabilities together with the
business of the Stock Company which related to the manufacture and sale of
prestressing equipment and ancillary products and certain ancillary functions
including research and development, quality control, sales and marketing,
sourcing and other business support functions. The Stock Company retained
certain assets and liabilities that were not assumed by Liuzhou OVM,
representing mainly investments in various joint ventures and wholly-owned
subsidiaries which are engaged in trading and other businesses that are not
competing with the business of Liuzhou OVM as well as certain other
non-production-related facilities such as welfare facilities, education and
training facilities, recreational, catering, heat, water and electricity
facilities.
PRODUCTS
The Company produces a wide range of products which are mainly used in
prestressed concrete construction, using the pretensioning and post-tensioning
method, which are widely used in the infrastructure projects including
motorways, railroads, bridges, buildings and hydro-power stations. These
products include prestressing anchorage systems, jacks, electric high-pressure
oil pumps, unbonded prestressing tendons, digital display sensors and the
ancillary components. The Company's products are summarized as follows:
PRESTRESSING ANCHORAGE SYSTEMS AND ANCILLARY PRODUCTS. The primary
prestressing anchorage systems manufactured by the Company include tensile end
anchorage, fixed end anchorage and connectors. Prestressing anchorage systems
are used for prestressed concrete construction and construction units using
pretensioning and postensioning methods, as well as rock and soil anchorage,
external cable and stay cable construction.
JACKS. The Company produces various types of jacks including platform,
pushing and cold-drawn jacks which are used for tensioning of strand, lifting
and pushing of engineering structures and cold drawing of reinforced steel with
different parameters such as nominal oil pressure (MPa), jacking/stressing force
(kN) and/or jacking stroke (mm).
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<PAGE>
ELECTRIC HIGH-PRESSURE OIL PUMPS. The Company produces several types of
electric high-pressure oil pumps and hydraulic pressure stations. The oil pumps
and stations are always used with various jacks for lifting the heavy objects or
for anchoring the objects.
DIGITAL DISPLAY SENSORS. Model SC sensor is equipped with a special
device and mainly used for digitally displaying technical parameters of various
jacks and in checking the degree of stress in a short period of time.
UNBONDED PRESTRESSING TENDONS. The Company produces two types of
unbonded prestressing tendons with single or double layer of plastic sheaths,
which are used in construction of prestressed concrete under the post-tensioning
system.
SCREW THREAD STEEL PIPE FOR PRESTRESSED COMPONENTS. The pipe is made of
low carbon steel band, some are zinc coated, and then rolled up spirally. The
pipe is used for forming a hole in the prestressed concrete using the
post-tensioning method.
OTHERS. The Company produces machinery and equipment for its site test
facilities used in the concrete or rock shear test and rock shear elasticity
test in the construction or survey of a dam for a hydraulic power station, and
soil anchor driller for drilling holes in various texture of soils and strong
decayed rock. In the process of dry drilling, the soil is taken off with the
blades of the spiral drill. This drilling method is used under good soil
conditions where no collapse will occur.
SALES AND MARKETING
The following table sets forth the Company's aggregate net sales
revenue by product category for each of the two years ended December 31, 1997
and for the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Year Ended December 31 Six months ended June 30,
1997 1996 1998
---- ---- ----
(Amounts in Thousands) (Amounts in Thousands)
Product Rmb US$ % Rmb US$ % Rmb US$ %
- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OVM anchorage system 60,711 7,332 46.4 45,205 5,460 28.0 40,585 4,902 54.0
Jack 24,420 2,949 18.6 29,697 3,587 18.4 9,315 1,125 12.4
High-pressure oil pump 4,920 594 3.8 5,996 724 3.7 1,356 164 1.8
Cable, tendon and steel wire 7,293 881 5.6 51,797 6,255 32.1 11,769 1,421 15.6
Other equipment and parts 28,224 3,409 21.6 18,901 2,283 11.7 7,013 847 9.3
*Others 5,394 651 4.0 9,896 1,195 6.1 5,188 626 6.9
------ ----- ---- ------ ------ ---- ------- ----- -----
Total 130,962 15,816 100.0 161,492 19,504 100.0 75,226 9,085 100.0
======= ====== ===== ======= ====== ===== ======= ===== =====
</TABLE>
*Others include rubber engineering products, corrugation pipes and digital
display sensors.
For each of the two years ended December 31, 1996 and 1997 and the
six months ended June 30, 1998 the largest ten customers of the Company,
which are mainly construction and engineering companies and provincial,
municipal and regional construction bureaus throughout the PRC, accounted for
approximately 54.9%, 20.2%, and 27.2% respectively, of the Company's total sales
by value. The foregoing amounts do not include sales made to Orient Prestress
Company, Ltd, a related party (see discussion below), for resale. Following the
commencement of operations by Liuzhou OVM, sales to Orient have been
significantly reduced. The largest customer of the Company for each of the two
years ended December 31, 1996 and 1997 and the six months ended June 30, 1998
accounted for approximately 30.0%, 4.1% and 5.4% respectively, of the Company's
total sales by value. The single largest customer
40
<PAGE>
which accounted for more than 10% of the Company's total sales in 1996 was
Kunming Futong Trading Company which accounted for 30.0% of the total sales for
the year ended December 31, 1996. No single customer accounted for more than 10%
in 1997 or the six months ended June 30, 1998.
The significant percentage in 1996 as compared to 1997 was mainly due
to an indent sale (a sale directly matched by a purchase) of steel wire of
approximately Rmb 48,363,000 (US$5,841,000) in 1996. No such indent sale was
made in 1997.
For each of the two years ended December 31, 1996 and 1997,
approximately 84% and 96%, respectively of the Company's total sales was derived
from products sold in the PRC with the balance attributable to products exported
to overseas customers (mainly arranged through an import and export company
wholly-owned by the Stock Company).
The Company also sells its products directly to end-users through its
in house sales and marketing and after sales staff, consisting of 65 full-time
employees, of which 5 are after sales technicians. These personnel are
responsible for conducting marketing research, sales planning, marketing
strategy, order consultation with customers, sales coordination and control, and
payment collection. The Company maintains sales offices in major cities
including Liuzhou, Guangzhou, Xiamen, Shanghai, Beijing, Xian, Wuhan, Chengdu,
Chongqing, Yichang, Kunming and the site of the Three Gorges Dam project. The
Company also maintains overseas offices in Hong Kong, Singapore, and Malaysia.
The Company's marketing efforts include visits to existing and prospective
customers and participation in various exhibitions and trade fairs held in the
PRC at which the Company's products are marketed to local and overseas
customers.
In order to maximize the sales distribution network for the Company's
products, the Company has entered into a sales and purchase agreement with
Orient Prestress Company Ltd. ("Orient"), a company which is owned approximately
41% by the Stock Company. For each of the two years ended December 31, 1996 and
1997, the Company's sales to Orient accounted for 2% and nil, respectively, of
its total sales (see "Certain Relationships And Related Transactions"). Pursuant
to the formal establishment of Liuzhou OVM and commencing January 1996, most of
the sales were conducted on a direct basis instead of to Orient. This accounts
for the insignificant percentage of sales made to Orient for the years ended
December 31, 1996 and 1997. The Company has also entered into other
non-exclusive agency agreements with other companies. However, sales through
these agency arrangements were not significant and accounted for less than 1% of
the Company's total sales for each of the two years ended December 31, 1996 and
1997.
The Company has been expanding overseas markets. Its products have been
exported from the PRC and sold in Pakistan, Singapore, Japan, Hong Kong, Sudan
and Vietnam. The management believes that Liuzhou OVM's products are less costly
than these of the overseas manufacturers and the quality is readily comparable.
The export sales (mainly arranged through an import and export company
wholly-owned by the Stock Company) accounted for approximately 16% and 4% of the
Company's total sales for each of the two years ended December 31, 1997. All
export sales are denominated in U.S. dollars. Due to the Asian financial crisis
occurred in the second half year of 1997, some of the infrastructure activities
in the Asian countries were slowed down. This has caused the reduction of the
Company's export sales in 1997.
As most of the infrastructure construction projects are capital
intensive and extend for a relatively long time, most of the equipment and
products manufactured by the Company are sold under fixed price contracts. The
production cycle of the Company's products varies from two months to six months.
For certain large contracts, customers are usually required to pay a cash
deposit (the amount of which differs from customer to customer as each contract
is individually negotiated) upon signing of the relevant sales and purchase
contracts, with the remaining balance payable after delivery or on-site
installation by way of bank
41
<PAGE>
collection. All of the contracts concluded with domestic customers are
denominated in Renminbi. For export sales, customers are required to pay a
deposit of at least 30% upon signing of a sales contract, and the balance is
payable after delivery of products by way of telegraphic transfer or bank
collection. Depending on the credit standing of the customers and the contract
sum involved, the Company generally offers credit terms of up to 90 days to
customers.
AFTER SALES SERVICE
The Company's after sales services form an integral part of its
operations. The Company offers a wide range of after sales service to customers
located both in the PRC and overseas. These services include: providing on-site
installation services upon the request of the customer; organizing training
seminars in the PRC for customers from time to time regarding the operations and
technical attributes of the Company's products; responding to customers' request
to modify and assist in the technical operations of the Company's products;
processing of inquiries and feedback from customers and prompt provision of
parts and components; and conducting visits on a regular basis to customers in
order to identify customers' specific needs and level of satisfaction with the
Company's products.
RAW MATERIALS AND COMPONENTS
The major raw materials and components required by the Company include
metallurgical products including steel and rubber products such as high-pressure
rubber pipes as well as mechanical and electrical components such as bearings
and motors. All of the raw materials and components used by the Company are
sourced from PRC suppliers and/or through the manufacture of various components
at its own facility. All the Company's purchases are settled in Rmb. For each of
the two years ended December 31, 1996 and 1997 and the six months ended June 30,
1998 the cost of raw materials and components accounted for approximately 84%,
74% and 65%, respectively, of the Company's total production costs.
The Company has formulated a material supply management policy in
respect of the raw materials and components used in the Company's production
operations. Under this policy, the stock level of raw materials and components
is determined by reference to planned annual consumption and a predetermined
inventory level for different kinds of raw materials and components. The average
inventory level of the Company's raw materials and components is approximately
two months usage.
It is the policy of the Company to maintain more than one supplier for
certain major materials in order to avoid over reliance on a single source of
supply. The Company has long standing relationships with major suppliers and has
not experienced any significant difficulties in sourcing raw materials and
components. The Company has not entered into any long-term purchase arrangements
with any supplier. However, the Company does not anticipate that it will face
any difficulties in the sourcing of its raw materials and components.
For each of the two years ended December 31, 1996 and 1997 and the
six months ended June 30, 1998, the largest ten suppliers of raw materials
and components of the Company accounted for approximately 64.3%, 43.3% and
53.2%, respectively, of the Company's total cost of purchases, while the largest
supplier accounted for approximately 50.0%, 20.9% and 18.6% of the Company's
total cost of purchases, respectively, for the same periods. The significant
percentage in 1996 was due to an indent purchase (purchase directly matched by a
sale) of steel wire of approximately Rmb 38,861,000 (US$4,693,000), which
accounted for 50.0% of total purchases, from Jiangyin Huaxin Steel Cable Company
Ltd. for the year ended December 31, 1996. No such indent purchase was made in
1997.
42
<PAGE>
PRODUCTION FACILITIES AND PROCESS
PRODUCTION FACILITIES
The Company's head office and production facilities are located in
Liuzhou Municipality, the industrial city of Guangxi Zhuang Autonomous Region,
the PRC, with a site area of approximately 60,000 square meters. The total gross
floor area of production workshops and premises is approximately 9,463 square
meters. Guangxi has substantial mineral resources and is recognized as a base of
non-ferrous metals such as manganese, tin, arsenic, and bentonite. According to
the China Statistical Yearbook 1997, the regional gross domestic product of
Guangxi amounted to approximately Rmb 187 billion (US$23 billion), ranking it
15th in the PRC in 1996.
Long term land use rights for the land and buildings on which these
facilities are situated are held by the Stock Company and leased to Liuzhou OVM
at an annual rental of Rmb 300,000 (US$36,000) for a period up to December 31,
1999. The term and annual rental are subject to renewal after December 31, 1999.
The Company's production facilities and equipment include lathe machines,
planers, milling machines, boring machines, drilling machines and other
ancillary production machines such as forklifts, air compressors, welding
machines, shearing machines, jigs, dies, tools and hardening furnaces.
PRODUCTION PROCESS
The production process can be divided into three stages. The first
stage is the production of various parts and components, which involves milling,
grinding, boring, heat treatment, welding, refining and painting and coating.
The second stage is the in-house assembly and testing of the products
manufactured. The final stage is the on-site installation and test run.
PRODUCTION CAPACITY
The Company currently manufactures a wide range of prestressing
equipment and ancillary products. The production capacity of the Company is
mainly dependent on the product mix of the Company, which is subject to
adjustment from time to time, the production floor area available for operation,
the quantity of production equipment and the number and working hours of the
Company's workforce. The Company's product mix and the production output for
each product in a given period are determined by the Company's management after
considering several factors including the number of orders received by the
Company for each product, the forecast of future market demand for different
products and the estimated gross profit margins of different products. The
majority of the Company's production facilities can be used, with or without
adaptation, for the manufacture of different products, though certain facilities
can be used for certain components and special parts only.
The Company's capital expenditure on production equipment for each of
the two years ended December 31, 1996 and 1997 and the six months ended June 30,
1998 were Rmb 1,152,000 (US$139,000), Rmb 4,467,000 (US$539,000) and Rmb
1,111,000 (US$134,000), respectively.
COMPETITION
The Company, through its indirect ownership of Liuzhou OVM and
inclusive of the operations of the Factory, has approximately 30 years' history
of manufacturing prestressing equipment and ancillary components and was the
largest manufacturer in the PRC of these specialized products in terms of sales
revenue and profit before taxation for each of the two years ended December 31,
1996 and
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<PAGE>
1997. The Company believes that Liuzhou OVM has established and should continue
to maintain a strong competitive position in the PRC prestressing equipment
industry. There are only several companies designated by the Ministry of
Construction of the PRC as the manufacturers of these specialized products. The
Company believes that the prestressing market in the PRC is dominated by three
major domestic manufacturers. The names of these manufacturers and their
respective market shares for the year ended December 31, 1997 are estimated as
follows:
Estimated
Name Market Share (%)
- ---- ----------------
Liuzhou OVM 59.4
Kaifeng Construction and Machinery Factory 18.9
Siping Construction and Machinery Factory 6.9
Others 14.8
----------
100.0
==========
Although Liuzhou OVM's competitive advantage over imported products in
terms of pricing may be partially undermined with the PRC's entry into the World
Trade Organization, management believes the Company can maintain its
competitiveness due to the significant pricing differential between the
Company's products and imports, the accessibility and efficiency of after sales
services and the timely availability of components and special parts.
The major export markets of the Company are developing countries in
Asia where infrastructure activities are expected to increase. However, due to
the Asian financial crisis occurred in the second half year of 1997, some of the
infrastructure activities of the Asian countries were slowed down. This has
caused the reduction of the Company's export sales in 1997.
In respect of the domestic market, management believes that the Company
has a competitive advantage over other domestic manufacturers in terms of
product technology and product quality. In addition, the Company's capability to
continuously manufacture and supply parts and components for its products and
after sales services serve to strengthen its competitiveness.
QUALITY CONTROL
The Company is committed to manufacturing high quality products and to
providing a high level of after sales service to its customers. Management
believes that product quality is vital to enhancing the Company's
competitiveness, market position and reputation. In order to maintain and
improve the quality of its products and production standards, the Company has
adopted a comprehensive quality control system which conforms with the
internationally recognized ISO 9001 standards.
The Company has established a quality control team consisting of 70
full-time employees to ensure that the quality of products is consistently
maintained. The major responsibilities of the quality control department
include: (i) devising, implementing and improving quality control procedures in
order to comply with ISO 9001; (ii) conducting inspection of raw materials,
work-in-progress and finished products on a sampling basis; (iii) examining of
parts and components manufactured at each stage of the production process; and
(iv) reviewing and improving quality testing procedures and carrying out
stringent testing of the Company's products.
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<PAGE>
RESEARCH AND DEVELOPMENT
The Company has established a technical process design and control
department and a research and development department. The technical process
design and control department is responsible for developing new production
skills and designing new production processes. The research and development
department is responsible for development of new products and the technological
improvement of products. These two departments of Liuzhou OVM employed at
December 31, 1997, 98 full-time employees including 34 engineers. Since 1989,
the Company has developed 29 new products, of which 13 have obtained scientific
awards from the State, provincial and municipal governmental authorities.
Most of the research and products development programs undertaken by
the company are in cooperation with universities and research institutions in
the PRC. The Company has worked with over 200 universities, testing facilities,
research institutes and local provincial and municipal construction bureaus in
developing its product line.
The Company's annual research and development expenditure accounts for
0.3%, 1.4% and 0.5% of total sales for each of the two years ended December 31,
1996 and 1997 and the six months ended June 30, 1998. For each of the two
years ended December 31, 1996 and 1997 and the six months ended June 30,
1998, the aggregate research and development expenses incurred by the Company
amounted to approximately Rmb 453,000 (US$55,000), Rmb 1,849,000 (US$223,000)
and Rmb 393,000 (US$47,000), respectively
ENVIRONMENTAL PROTECTION
The Company has adopted measures to reduce the level of pollution
caused by its operation and has continuously complied with the PRC's
environmental protection law and regulations. Environmental protection measures
adopted by the Company include the treatment of emulsified effluent and smoke
and dust emitted from boilers of the Company's production facilities. The
Company has never been fined for violation of environmental laws in the PRC.
INTELLECTUAL PROPERTY RIGHTS
The Company's products are currently marketed under the "OVM" trademark
registered in the PRC. Management believes that since inception, Liuzhou OVM has
developed considerable goodwill within the PRC prestressing equipment
manufacturing industry.
The Company has an exclusive license for a term equivalent to the
period of validity (including such extended period as may be permitted under the
law of the relevant jurisdiction) to use the following trademark which is owned
by and registered in the PRC in the name of the Stock Company.
Registration Registration Date of
Trademark Class Number Date Expiry
- --------- ----- ------------- ------------ -------
OVM 6 784409 October 21, 1995 October 21, 2005
The Company has an exclusive license for a term equivalent to the
period of validity (including such extended period as may be permitted under the
law of the relevant jurisdiction) to use the following utility model patents
which are registered in the PRC in the name of the Stock Company:
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<PAGE>
Registration Date of
Patent Number Application Date of expiry
- ------ ------------ ----------- --------------
Stay cable multi-anchorage 90224483.2 November 27, 1990 November 27,1998
Stranded wire & bunched
steel wires prestressed
tensioning anchorage 90208622.7 June 11, 1990 June 11, 1998
Light-weight fire proof
adhesive board 95229844.9 December 29, 1995 December 29, 2005
Hydraulic lifting device 95214166.3 June 7, 1995 June 7, 2005
Hydraulic jack with safety
screw lock 96246803.7 November 21, 1996 November 21, 2006
Anchor bottom board 97204768.9 February 4, 1997 February 4, 2007
High-vibration stranded wire
and bunched steel wire
anchorage 97204767.0 February 4, 1997 February 4, 2007
Liuzhou OVM entered into an agreement with the Stock Company on June 5,
1995 and a supplementary agreement dated December 18, 1995 pursuant to which the
Stock Company granted to Liuzhou OVM an exclusive and assignable right to use
the "OVM" trademark, various patented technical know-how, ISO9001 system,
goodwill and sales network in connection with the manufacturing operations
assumed by the Company following the establishment of the Liuzhou OVM in the PRC
and any territory outside the PRC for a term equivalent to the period of
validity (including such extended period as may be permitted under the law of
the relevant jurisdiction) of the trademark or the relevant patented technical
know-how in consideration of the sum of Rmb 8 million (approximately
US$965,000).
Under these agreements, the Stock Company has undertaken to apply for
any renewal of the registration of the "OVM" trademark and the relevant patents
promptly upon the expiration of the registration of the same and to procure the
registration of the trademark and patents in any territory outside the PRC as
the Company may require, all such renewals and registrations to be made at the
cost of the Company.
EMPLOYEES
As at December 31, 1997, the Company had a total of 956 full-time
employees, 949 of which were employed by Liuzhou OVM, with the balance being
employed in administrative positions by the Company (5 employees) and ODL (2
employees). These employees are employed as follows:
Production 602
Administration and management 98
Quality control 70
Research and development,
technical process design and control 98
Sales, marketing and after sales service 65
Raw materials supply 23
--------
956
========
OVM Prestress Co. Pte. Ltd., a company 50% owned by Liuzhou OVM, employs a total
of 20 full-time employees.
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<PAGE>
PROPERTY
All of the Company's operations are conducted from its 9,463 square
meters facility located in the Liuzhou Municipality, PRC. The facility is leased
at an annual rental of Rmb 300,000 (US$36,000) for a term up to December 31,
1999. The term and the annual rental are subject to renewal after December 31,
1999. See preceding discussion in "Production Facilities and Process".
LEGAL PROCEEDINGS
There are no material legal proceedings pending or threatened against
the Company or any of its subsidiaries as of June 30, 1998.
MANAGEMENT
The following table sets forth the names, positions with the Company and
ages of the executive officers and directors of the Company and Liuzhou OVM.
Directors of the Company will be elected at the Company's annual meeting of
shareholders and serve for one year or until their successors are elected and
qualify. Officers are elected by the Board and their terms of office are, except
to the extent governed by employment contract, at the discretion of the Board.
Name Age Position
- ----- --- --------
Ching Lung Po 51 Chairman of the Board of Directors,
President and CEO of the Company and
Vice Chairman of the Board of
Directors of Liuzhou OVM
Wu Guosen 64 Vice Chairman of the Board of
Directors of the Company and Chairman
of the Board of Directors and General
Manager of Liuzhou OVM
Wan Ying Lin 49 Director of the Company
Kwok Kwan Hung 31 Director and Chief Financial Officer
of the Company
Peng Fang 36 Vice President of the Company and
Deputy General Manager of Liuzhou OVM
Tang Xiaoping 36 Vice President of the Company and
Deputy General Manager of Liuzhou OVM
Cheung Lai 44 Treasurer of the Company and Director
of Liuzhou OVM
Wan Wai On 24 Director and Corporate Secretary of
the Company
Chen Xue Ming 62 Director
Shao Hou Kun 69 Director
MR. CHING LUNG PO, aged 51, is the Chairman of the Board of Directors
and President of the Company and Vice Chairman of the Board of Directors of
Liuzhou OVM. Mr. Ching has more than 20 years experience in the management of
production and technology of industrial enterprises in PRC. In 1988, Mr. Ching
started his own business and established the Shenzhen Hongda Science &
Technology Company Limited in Shenzhen which manufactures electronic products.
Since October 1995, Mr. Ching has been the Chairman of Harbin Asibao Chemical
Fiber Company Limited, a PRC established company. He has also been the Director
of China Resources Development, Inc. (Nasdaq:CHRB), an U.S. corporation, since
February 1998. Mr. Ching graduated from the Harbin Military and Engineering
Institute and holds the title of Senior Engineer. Mr. Ching is responsible for
the overall corporate policy and development strategy of the Company. Mr. Ching
devotes approximately 50% of his time to the affairs of the Company and its
subsidiaries.
MR. WU GUOSEN, aged 64, senior economist, is the Vice Chairman of the
Board of Directors of the Company and Chairman of the Board of Directors and
General
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<PAGE>
Manager of Liuzhou OVM. Mr. Wu graduated from the China Huatung Military
University specializing in civil engineering and enterprise management. He
joined the Factory in late 1984 and continues to serve as the Director and
Secretary of the Communist Party of the Factory. He has been closely involved in
the research and development of anchoring systems and jacks and has over 30
years of technical and enterprise management experience in the prestressing
engineering industry. He has won such titles and awards as "National Machinery
Industry Labour Model" awarded by the Ministry of Machinery in 1994 and "Labour
Model of Guangxi Electronic Industry System" in 1995. He has also held the
position as the Deputy General Manager of the China Rock Anchoring and
Engineering Association since late 1988. Mr. Wu is responsible for the overall
management of Liuzhou OVM. Mr. Wu devotes all of his time to the affairs of the
Company and its subsidiaries.
MR. WAN YING LIN, aged 49, is a Director of the Company and Director of
Liuzhou OVM. Mr. Wan graduated from the Guangxi Liuzhou Institute of Medical
Specialty specializing in administration and management. From January 1988 to
February 1993, he served as the marketing manager in Wai Tong Trading Company in
Hong Kong. In 1993, he joined the Hong Kong Prestressing Concrete Engineering
Company Limited and continues to serve as its manager. Since February 1998, Mr.
Wan has been the Director of China Resources Development, Inc. (Nasdaq:CHRB), an
U.S. corporation. Mr. Wan devotes approximately 50% of his time to the affairs
of the Company and its subsidiaries.
MR. PENG FANG, aged 36, is a Director of the Company and Director and
Deputy General Manager of Liuzhou OVM. He graduated from Dilian Polytechnic
Institute specializing in structuring engineering and obtained the title of
senior engineer in 1993. He was also awarded a masters degree and Ph.D. degree
from the institute. He completed his master degree in December 1986 and a Ph.D.
degree in December 1990. From December 1990 to June 1994, he served as senior
engineer in the Foreign Office of the Ministry of Communications. He joined the
Factory in February 1994 and continues to serve as its Deputy General Manager.
He has considerable knowledge and experience in governmental planning for
transportation and communication. He is responsible for development of the
overseas market of Liuzhou OVM. Mr. Peng devotes all of his time to the affairs
of the Company and its subsidiaries.
MS. CHEUNG LAI, aged 44, is the Treasurer of the Company and Director
of Liuzhou OVM. Ms. Cheung graduated from Heilongjiang Broadcasting Television
University specializing in the English language. From October 1988 to August
1992, she served as sales manager of the Shenzhen Zhenbao Enterprise Company. In
September 1992, she joined Shenzhen Hongda Science & Technology Enterprise
Company Limited and continues to serve as its finance manager. Ms. Cheung
devotes approximately 50% of her time to the affairs of the Company and its
subsidiaries.
MS. TANG XIAOPING, aged 36, is the Vice President of the Company and
Deputy General Manager of Liuzhou OVM. She graduated from Guangxi Broadcasting
Television University specializing in machinery manufacturing. She received the
title of engineer in 1992. She joined the Factory in 1985 and has been the
Deputy General Manager of the Factory since December 1993. She has many years
experience in sales and marketing. She was awarded one of the "Ten Most
Outstanding Sales Person" by the Liuzhou Mechanical and Electrical Industry
Bureau in 1993. She is also the council member of Huadong Prestressing
Technology United Development Center. She is responsible for the sales of
Liuzhou OVM's products. Ms. Tang devotes all of her time to the affairs of the
Company and its subsidiaries.
MR. KWOK KWAN HUNG, aged 31, is a Director and the Principal Financial
and Accounting Officer of the Company and is responsible for the Company's
finance and tax matters, as well as the overall accounting operations of the
Company. Mr. Kwok was awarded a bachelor's degree in Economics from the
University of London and is an associate member of the Chartered Association of
Certified Accountants. He joined Ernst & Young after graduation and worked as
senior auditor until late
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1992. From October 1992 to November 1997, he held the position of Finance
Manager, Financial Controller and Finance Director for three Hong Kong listed
companies. Since December 1997, he has been the Financial Consultant for a Hong
Kong investment banking firm and a Hong Kong listed company. Mr. Kwok devotes
approximately 40% of his time to the affairs of the Company and its
subsidiaries.
MR. WAN WAI ON, aged 24, is a Director and Corporate Secretary of the
Company. Mr. Wan is a graduate of Rutgers University, New Brunswick, New Jersey
where he received a Bachelors of Arts degree. Since graduation in May 1996, he
has been employed as a general manager of a computer company based in Hong Kong.
Mr. Wan devotes approximately 50% of his time to the affairs of the Company.
MR. CHEN XUE MING, aged 62, holds the title of senior economist in the
PRC. Mr. Chen graduated from the Xiamen University with a major in Economics in
1958. From August 1989 to March 1997, he was the department head of the design
and production department of the provincial department of machinery. He has
retired as the department head since April 1997.
MR. SHAO HOU KUN, aged 69, holds the title of senior engineer in the
PRC. Mr. Shao graduated from the Tangshan Institute of Railway specialising in
construction engineering in 1952. From September 1981 to now, he has been the
deputy head of the design institute of the Ministry of Railway.
<PAGE>
Executive Compensation
- -----------------------
No director or executive officer has received compensation in excess of
US$100,000 per year for each of the two years ended December 31, 1996 and 1997.
Effective September 30, 1996, the Company entered into an Employment
Agreement with Kwok Kwan Hung pursuant to which Mr. Kwok will serve as the
Company's Chief Financial Officer. The contract is not for any specified term
and Mr. Kwok is obligated to provide not less than 16 hours on a weekly basis to
the Company. Mr. Kwok is being compensated at the rate of HK$10,000 (US$1,290)
per month. The Company, except for Mr. Kwok, currently has no employment
contracts with any of its officers and directors and maintains no retirement,
fringe benefits or similar plans for the benefit of its officers and directors.
Mr. Wu Guosen, Mr. Peng Fang and Ms. Tang Ziaoping, being officers of Liuzhou
OVM, are eligible to participate in the retirement and pension fund established
by Liuzhou OVM in the PRC. See following discussion under "Retirement and
Pension Fund."
CASH COMPENSATION
The following table shows, for each of the two years ended December 31,
1997, the cash and other compensation paid by the Company to its President and
Chief Executive Officer. None of the executive officers of the Company had
annual compensation in excess of US$100,000.
SUMMARY COMPENSATION TABLE
Name and Other All
Principal Annual Other
Position Year Salary Bonus Compensation Compensation
- --------- ---- ------ ----- ------------ ------------
Ching Lung Po, 1997 $62,016 -0- $ -0- $ -0-
President and CEO 1996 $62,016 -0- $ -0- $ -0-
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to the grant of
options to purchase shares of Common Stock during the fiscal year ended December
31, 1997 to each person named in the Summary Compensation Table.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year ($/Shares) Date
- ---- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Ching Lung Po, -0- -0- -0- -0-
President and CEO
</TABLE>
49
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the exercise
of options to purchase shares of Common Stock during the fiscal year ended
December 31, 1997 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 1997 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- -------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Shares Options/SARs Options/SARs
Acquired at FY-End at FY-End
on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
- -------------------------------------------------------------------------------
Ching Lung Po, -0- -0- -0- -0-
President and CEO
INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
The Board of Directors and a majority of the Company's shareholders
adopted the Company's 1996 Stock Option Plan (the "Plan") on September 5, 1996.
Under the Plan, the Company has reserved an aggregate of 1,000,000
shares of Common Stock for issuance pursuant to options granted under the Plan
("Plan Options"). The Board of Directors or a Committee of the Board of
Directors (the "Committee") of the Company will administer the Plan including,
without limitation, the selection of the persons who will be granted Plan
Options under the Plan, the type of Plan Options to be granted, the number of
shares subject to each Plan Option and the Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended, or options that do not so qualify
("Non-Qualified Options"). Any Incentive Option granted under the Plan must
provide for an exercise price of not less than 100% of the fair market value of
the underlying shares on the date of such grant, but the exercise price of any
Incentive Option granted to an eligible employee owning more than 10% of the
Company's Common Stock must be at least 110% of such fair market value as
determined on the date of the grant. The term of each Plan Option and the manner
in which it may be exercised is determined by the Board of the Directors or the
Committee, provided that no Plan Option may be exercisable more than 10 years
after the date of its grant and, in the case of an Incentive Option granted to
an eligible employee owning more than 10% of the Company's Common Stock, no more
than five years after the date of the grant.
The exercise price of Non-Qualified Options shall be determined by the
Board of Directors or the Committee.
The per Share purchase price of shares subject to Plan Options granted
under the Plan may be adjusted in the event of certain changes in the Company's
capitalization, but any such adjustment shall not change the total purchase
price payable upon the exercise in full of Plan Options granted under the Plan.
Officers, directors, key employees and consultants of the Company and
its subsidiaries (if applicable in the future) will be eligible to receive
Non-Qualified Options under the Plan. Only officers, directors and employees of
the
50
<PAGE>
Company who are employed by the Company or by any subsidiary thereof are
eligible to receive Incentive Options.
All Plan Options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee's employment is
terminated for any reason, other than his death or disability or termination for
cause, or if an optionee is not an employee of the Company but is a member of
the Company's Board of Directors and his service as a Director is terminated for
any reason, other than death or disability, the Plan Option granted to him shall
lapse to the extent unexercised on the earlier of the expiration date or three
months following the date of termination. If the optionee dies during the term
of his employment, the Plan Option granted to him shall lapse to the extent
unexercised on the earlier of the expiration date of the Plan Option or the date
one year following the date of the optionee's death. If the optionee is
permanently and totally disabled within the meaning of Section 22(c)(3) of the
Internal Revenue Code of 1986, the Plan Option granted to him lapses to the
extent unexercised on the earlier of the expiration date of the option or one
year following the date of such disability.
The Board of Directors or the Committee may amend, suspend or terminate
the Plan at any time, except that no amendment shall be made which (i) increases
the total number of shares subject to the Plan or changes the minimum purchase
price therefor (except in either case in the event of adjustments due to changes
in the Company's capitalization), (ii) affects outstanding Plan Options or any
exercise right thereunder, (iii) extends the term of any Plan Option beyond ten
years, or (iv) extends the termination date of the Plan. Unless the Plan shall
theretofore have been suspended or terminated by the Board of Directors, the
Plan shall terminate on September 4, 2006. Any such termination of the Plan
shall not affect the validity of any Plan Options previously granted thereunder.
As of June 30, 1998, no incentive stock options had been granted.
RETIREMENT AND PENSION FUND
The Company does not currently have any retirement and pension fund
program at the level of the parent Company. However, in accordance with
applicable government regulations in the PRC, Liuzhou OVM participates in a
central retirement and pension fund scheme. Mr. Wu Guosen, Mr. Peng Fang and Ms.
Tang Ziaoping, as officers of Liuzhou OVM, are eligible to participate in the
retirement and pension fund established by Liuzhou OVM in the PRC. The Company
currently makes an annual contribution representing 19% of the total wages of
employees to the retirement and pension fund out of which the pensions of the
Company's retired workers are paid. Effective from January 1, 1995, Liuzhou OVM
has internally implemented an additional retirement plan for its staff. Under
this additional plan, the Company is required to contribute 5% of the total
wages of the employees to the retirement plan. The aggregate pension costs
incurred by the Company for each of the two years ended December 31, 1996 and
1997 and the six months ended June 30, 1998 amounted to Rmb 1,894,000
(US$229,000), Rmb 2,032,000 (US$245,000) and Rmb 996,000 (US$120,000),
respectively.
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<PAGE>
CERTAIN TRANSACTIONS
On April 18, 1995, Kolcari Investments Limited (predecessor of ODL) and
the Stock Company entered into a Joint Venture Contract (the "Contract"),
pursuant to which such parties agreed to establish Liuzhou OVM as a joint
venture limited liability company in accordance with the Laws of the PRC on
Sino-Foreign Equity Joint Venture. The Contract provided that Liuzhou OVM's
total initial registered capital of $4 million was to be contributed in assets
and/or cash as follows: the Stock Company (30%) and Kolcari (70%).
Pursuant to an agreement dated June 5, 1995 between Liuzhou OVM and the
Stock Company (successor in interest to the Factory), operating assets and
production facilities of the Factory valued at US$1,423,324, according to a
valuation performed by the PRC State- approved assets valuer, were transferred
to Liuzhou OVM. Of the total value of assets transferred into Liuzhou OVM,
US$1,200,000 represented a capital contribution by the Stock Company for its 30%
equity interest in Liuzhou OVM and the balance of US$223,325 was recorded as a
loan to Liuzhou OVM. The remaining 70% of the issued capital is being provided
by Kolcari through the contribution of cash in the approximate amount of
US$2,800,000, of which US$2,170,000 had been paid as at December 31, 1996 with
the balance to be due on March 31, 1997. Pursuant to a supplementary agreement
entered into among ODL and the Stock Company on March 28, 1997, the due date for
the last installment of US$630,000, representing 22.5% of Kolcari's share of
capital was extended to December 31, 1997. Pursuant to another supplementary
agreement entered into among by ODL and the Stock Company on December 19, 1997,
the due date for the last installment of US$630,000 was further extended to June
30, 1998. The last installment of US$630,000 had subsequently been paid on
June 29, 1998.
Following the establishment of Liuzhou OVM, a series of comprehensive
services, leases and assets transfer agreements were entered into between
Liuzhou OVM and the Stock Company and its affiliates. Description of these
agreements are set forth below.
Pursuant to a lease agreement dated June 5, 1995 between Liuzhou OVM
and the Stock Company, the Stock Company agreed to lease and use rights with
gross area of approximately 60,000 sq. meters, production plants and premises
with a gross area of approximately 9,463 sq. meters and 22 transportation
vehicles, to Liuzhou OVM. The lease covering the land use rights, production
plants and premises is for a
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<PAGE>
term equal to the period of duration of Liuzhou OVM. The rental rate is
renewable every three years with each increment capped below 10%. With respect
to the leasing of the transportation vehicles, the initial lease term is for a
period of three years from the date of the agreement. Pursuant to a
supplementary agreement dated September 28, 1995, the aggregate cost of such
rentals for each of the years ended December 31, 1995 and 1996 was agreed to be
Rmb 300,000 (US$36,000). The rental rate and lease term for the year ended
December 31, 1997 and subsequent years is subject to further negotiation between
the parties. Pursuant to another supplementary agreement dated December 1, 1997,
the aggregate cost of such rentals for each of the three years ended December
31, 1997, 1998 and 1999 was agreed to be Rmb 300,000 (US$36,000). The original
agreement dated June 5, 1995 with respect to the rental rate and lease term was
superseded by the supplementary agreements.
Pursuant to a service agreement dated June 5, 1995, the Stock Company
has agreed to provide Liuzhou OVM with water and electricity services. The
service charge depends on actual consumption by Liuzhou OVM and at a rate equal
to that actually paid by the Stock Company. In addition, Liuzhou OVM has agreed
that the Stock Company will provide Liuzhou OVM services including the provision
of workers' dormitories, medical, recreational facilities and certain social and
related services. The service charge for the provision of such staff welfare
facilities will be adjusted for every three years with each increment capped
below 10%. Pursuant to a supplementary agreement dated December 1, 1997, the
provision of such staff welfare services was ceased and no service charge was
paid effective from January 1, 1997.
As provided under an agreement dated June 5, 1995 among Liuzhou OVM,
the Stock Company and the heat treatment plant (the "Plant") wholly owned by the
Stock Company, the Plant agreed to provide Liuzhou OVM heat treatment
subcontracting services at a discount of 3-5% from the prevailing market rate.
The aggregate subcontracting charges for each of the two years ended December
31, 1996 and 1997 and the six months ended June 30, 1998 amounted to Rmb
6,884,000 (US$831,000), Rmb 14,094,000 (US$1,702,000) and Rmb 12,513,000
(US$1,511,000), respectively.
In accordance with an agreement dated June 5, 1995 and a supplementary
agreement dated december 18, 1995 between Liuzhou OVM and the Stock Company, the
Stock Company agreed to transfer its intangible assets including trademarks,
patents, technology and know-how related to existing products and products under
development to Liuzhou OVM at a total consideration of Rmb 8,000,000
(US$966,000) (the "Transfer Fee"). An annual royalty equal to 0.6% of the net
sales (after deducting VAT) is payable by Liuzhou OVM until the full Transfer
Fee is settled. The royalty is payable by Liuzhou OVM each year commencing
January 1, 1997.
In accordance with an agreement dated June 8, 1995 between Liuzhou OVM
and the Stock Company, certain assets and liabilities and the business of the
Stock Company were transferred to Liuzhou OVM commencing January 1, 1995. Under
this agreement, Liuzhou OVM assumed the business of the Stock Company effective
January 1, 1995.
On November 4, 1996, the Company completed the acquisition of all of
the capital stock interests of Kolcari Investments Limited (which thereafter
changed its name to OVM Development Limited) in exchange for 8,800,000 shares of
Common Stock of the Company. In connection with the acquisition, the
shareholders of ODL, Hoi Wai Investments, Ltd., NJI No. 1 (A) Investment Fund,
NJI No. 1 (B) Investment Fund, Nomura/Jarco East Asia Growth Fund, received
6,057,000 shares, 685,750 shares, 685,750 shares and 1,371,500 shares,
respectively, of the Company. Such shareholders acquired their capital stock
interests in ODL on August 17, 1995 for an aggregate cash consideration of
US$2,000,000.
In accordance with a supplementary agreement dated July 29, 1997
between Liuzhou OVM and the Stock Company, the Stock Company agreed to pay an
annual service fee to Liuzhou OVM for the collection of the accounts receivable
and other
53
<PAGE>
receivables (the "Receivables") injected into Liuzhou OVM by the Stock Company.
The annual fee is calculated at 6.3% on the actual amount collected from the
Receivables in any particular year.
In accordance with an agreement dated October 18, 1996 between Liuzhou
OVM and the Stock Company, the Stock Company and its affiliates agreed to pay
interest against the amounts due to Liuzhou OVM at an interest rate equal to the
prevailing bank borrowing rate with effect from January 1, 1997.
For each of the two years ended December 31, 1996 and 1997 and the six
months ended June 30, 1998, Liuzhou OVM had sales amounting to approximately
Rmb 33,000 (US$4,000), Rmb 998,000 (US$121,000) and Rmb 438,000 (US$53,000),
respectively, to Hong Kong Prestressed Engineering Limited, a company
incorporated in Hong Kong, of which two of the Company's directors, Mr. Wan Ying
Ling, and Mr. Wu Guosen, have a beneficial interest. In addition, Liuzhou OVM
purchases and sells a significant portion of its raw materials to the Stock
Company's affiliates. The amount of such sales and purchases were Rmb 5,335,000
(US$644,000) and Rmb 3,640,000 (US$439,000), respectively, for the year ended
December 31, 1996, Rmb 4,391,000 (US$530,000) and Rmb 7,378,000 (US$891,000),
respectively, for the year ended December 31, 1997 and Rmb 986,000 (US$119,000)
and Rmb 811,000 (US$98,000), respectively, for the six months ended June 30,
1998. In addition, during the year ended December 31, 1996, Liuzhou OVM had
sales of finished goods amounting to Rmb 2,903,000 (US$350,000) (1997 and
1998:Nil) to Orient Prestress Company, Ltd., a company in which the Stock
Company owns a 41% equity interest.
Liuzhou OVM also leases certain plant and machinery to the Stock
Company's affiliates. For each of the two years ended December 31, 1996 and 1997
and the six months ended June 30, 1998, a rental income of Rmb 684,000
(US$83,000), Rmb 684,000 (US$83,000) and Rmb 342,000 (US$41,000), respectively,
was received by Liuzhou OVM. At the same time, the Stock Company's affiliates
also lease certain plant and machinery to Liuzhou OVM and a rental expense of
Rmb 964,000 (US$116,000), Rmb 816,000 (US$99,000) and Rmb 415,000 (US$50,000),
respectively, was incurred by Liuzhou OVM for each of the two years ended
December 31, 1996 and 1997 and the six months ended June 30, 1998.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 30, 1998, certain
information regarding the Company's Common Stock beneficially owned by (i) each
shareholder known by the Company to be the beneficial owner of five (5%) percent
or more of the Company's outstanding Common Stock, (ii) each of the Company's
directors, and (iii) all executive officers and directors as a group. In
general, a person is deemed to be a "beneficial owner" of a security if that
person has or shares the power to vote or direct the voting of such security, or
the power to dispose or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which the person has
the right to acquire beneficial ownership within sixty (60) days. As of June 30,
1998, there were 12,050,000 shares of Common Stock outstanding.
Name and Address or Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership(1) of Class
------------------- ----------------------- ----------
Hoi Wai Investments Limited 5,057,000(2) 41.9%
P.O. Box 116, Road Town
Tortola, British Virgin Islands
NJI No. 1 (A) Investment Fund 685,750(3) 5.8%
6 Battery Road #42-01 Singapore
049909, Republic of Singapore
NJI No. 1(B) Investment Fund 685,750(3) 5.8%
6 Battery Road #42-01n Singapore
049909, Republic of Singapore
Nomura/Jafco East Asia Growth Fund 1,371,500 11.4%
6 Battery Road #42-01 Singapore
049909, Republic of Singapore
Ching Lung Po 6,057,000(2) 50.2%
Room 1015, Blck M. Telford Garden
Kowloon Bay, Hong Kong(4)
Wan Ying Lin -0-(2) --
Flat A, 26/F., Wing Po Mansion, 33
Fort Street, North Point, Hong Kong(5)
Li Kin Hang 1,215,000(6) 9.2%
20/F King Jnin Mansion,
13-15 Yik Yam Street
Happy Valley, Hong Kong
Law Shun Ping 826,200(7) 6.4%
86 Shun Ling Street
3/F San Po Kong,
Kowloon, Hong Kong
Chen Xue Ming -0- -0-
Shao Hou Kun -0- -0-
Kwok Kwan Hung -0- -
Officers and Directors as a group 6,057,000 50.2%
(10 persons)
- ----------------------
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) Includes 1,000,000 shares of capital stock directly owned by Mr. Ching Lung
Po. The balance of 5,057,000 shares of capital stock indicated as held by
Mr. Ching Lung Po and Mr. Wan Ying Lin are held on record by Hoi Wai
Investments Limited. Mr. Ching has a 71.43% controlling interest in Hoi Wai
Investments Limited and, accordingly, all of its shares have been
attributed to Mr. Ching.
(3) All shares of capital stock held by NJI No. 1(A) Investment Fund and NJI
No. 2(B) Investment Fund are held on record by Nomura International (Hong
Kong)
55
<PAGE>
Limited, a nominee shareholder for NJI No. 1(A) Investment Fund and
NJI No. 2(B) Investment Fund.
(4) Mr. Ching Lung Po is Chairman of the Board and President of the Company.
(5) Mr. Wan Ying Lin is a Director of the Company.
(6) Includes 1,200,000 Warrant Shares.
(7) Includes 816,000 Warrant Shares.
SALES BY SELLING SECURITY HOLDERS
The following table sets forth the name of each Selling Security Holder,
the amount of shares of Common Stock held directly or indirectly by each holder
as of the date hereof, the amount of shares of Common Stock to be offered by
each such holder, the amount of Common Stock to be owned by each such holder
following sale of such shares of Common Stock and the percentage of shares of
Common Stock to be owned by each such holder following completion of such
offering. As of the date of this Prospectus, there are 12,050,000 shares of
Common Stock of the Company outstanding.
Percentage Shares
Number Shares be Owned to be
Name of Selling of Shares to be After Owned After
Security Holder Owned Offered Offering Offering
- - --------------- --------- ------- ---------- -----------
Cheng Ming Chuan 267,300 (1) 267,300 (1) -0- --
Feng Yun 259,200 (2) 259,200 (2) -0- --
Wu Li Qing 243,000 (3) 243,000 (3) -0- --
Luo Jian Yue 226,800 (4) 226,800 (4) -0- --
Li Jian Jiang 267,300 (5) 267,300 (5) -0- --
Xia Man Xin 251,100 (6) 251,100 (6) -0- --
Tian Yuan 234,900 (7) 234,900 (7) -0- --
Wu Qing Hua 259,200 (8) 259,200 (8) -0- --
Li Kin Hang 1,215,000 (9) 1,215,000 (9) -0- --
Lau Shun Ping 826,200(10) 826,200(10) -0- --
________________________
56
<PAGE>
(1) Includes 264,000 Warrant Shares underlying the Warrants.
(2) Includes 256,000 Warrant Shares underlying the Warrants.
(3) Includes 240,000 Warrant Shares underlying the Warrants.
(4) Includes 224,000 Warrant Shares underlying the Warrants.
(5) Includes 264,000 Warrant Shares underlying the Warrants.
(6) Includes 248,000 Warrant Shares underlying the Warrants.
(7) Includes 232,000 Warrant Shares underlying the Warrants.
(8) Includes 256,000 Warrant Shares underlying the Warrants.
(9) Includes 1,200,000 Warrant Shares underlying the Warrants.
(10) Includes 816,000 Warrant Shares underlying the Warrants.
In December 1996, the Company issued an aggregate of 50,000 shares of
Common Stock for an aggregate consideration of $75,000 and Warrants to purchase
4,000,000 shares of Common Stock to the aforementioned investors in a private
placement. The Warrants are exercisable at $3.00 per Warrant Share on or prior
to December 23, 1999.
The Company has undertaken to maintain the Registration Statement current
for a period of not less than nine months from the effective date of the
Registration Statement of which this Prospectus is a part in order that sales of
shares of Common Stock may be made by the Selling Security Holders. The Company
has agreed to pay for all costs and expenses incident to the issuance, offer,
sale and delivery of the Common Stock, including, but not limited to, all
expenses and fees of preparing, filing and printing the Registration Statement
and Prospectus and related exhibits, amendments and supplements thereto and
mailing of such items. The Company will not pay selling commissions and expenses
associated with any such sales by the Selling Security Holders. The Company has
agreed to indemnify the Selling Security Holders against civil liabilities
including liabilities under the Securities Act of 1933. The Selling Security
Holders have advised the Company that sales of shares of their Common Stock may
be made from time to time by or for the accounts of the Selling Security Holders
in one or more transactions in the over-the-counter market, in negotiated
transactions or otherwise, at prices related to the prevailing market prices or
at negotiated prices.
DESCRIPTION OF SECURITIES
The Company is currently authorized to issue up to 40,000,000 shares of
Common Stock, $.0001 par value, of which 12,050,000 shares were outstanding as
of the date of this Prospectus. No shares of Preferred Stock are presently
authorized.
Common Stock
- ------------
The Company is authorized to issue up to 40,000,000 shares of Common
Stock, $.0001 par value per Share. Holders of shares of Common Stock are
entitled to share, on a ratable basis, such dividends as may be declared by the
Board of Directors out of funds legally available therefor. Upon liquidation,
dissolution or winding up of the Company, after payment to creditors and holders
of any outstanding shares of Preferred Stock, the assets of the Company will be
divided pro rata on a per Share basis among the holders of the Common Stock.
57
<PAGE>
Each share of Common Stock entitles the holders thereof, to one vote.
Holders of Common Stock do not have cumulative voting rights which means that
the holders of more than 50% of shares voting for the election of Directors can
elect all of the Directors if they choose to do so, and in such event, the
holders of the remaining shares will not be able to elect any Directors. The
By-Laws of the Company require that only a majority of the issued and
outstanding shares of Common Stock of the Company need be represented to
constitute a quorum and to transact business at a shareholders' meeting. The
Common Stock has no preemptive, subscription or conversion rights and is not
redeemable by the Company.
Transfer Agent
- --------------
The Transfer Agent for the shares of Common Stock is CJB Transfer
Services, 6312 South Fiddler's Green Circle, Suite 200-N, Englewood, Colorado
80111.
CERTAIN MARKET INFORMATION
As of the date of this Prospectus, 12,050,000 shares of the Company's
Common Stock are outstanding of which 8,850,000 shares will be "restricted
securities," as such term is defined under the Securities Act of 1933, exclusive
of the Common Stock to be sold pursuant to the Registration Statement of which
this Prospectus is a part.
In general, Rule 144 (as presently in effect), promulgated under the Act,
permits a shareholder of the Company who has beneficially owned restricted
shares of Common Stock for at least one year to sell without registration,
within any three-month period, such number of shares not exceeding the greater
of 1% of the then outstanding shares of Common Stock or, if the Common Stock is
quoted on NASDAQ, the average weekly trading volume over a defined period of
time, assuming compliance by the Company with certain reporting requirements of
Rule 144. Furthermore, if the restricted shares of Common Stock are held for at
least two years by a person not affiliated with the Company (in general, a
person who is not an executive officer, director or principal shareholder of the
Company during the three-month period prior to resale), such restricted shares
can be sold without any volume limitation. Any sales of shares by shareholders
pursuant to Rule 144 may have a depressive effect on the price of the Company's
Common Stock.
LEGAL MATTERS
Legal matters in connection with the securities being offered hereby will
be passed upon for the Company by Atlas, Pearlman, Trop & Borkson, P.A., 200
East Las Olas Boulevard, Suite 1900, Fort Lauderdale, Florida 33301.
58
<PAGE>
EXPERTS
The audited consolidated financial statements of the Company as of
December 31, 1997 and for each of the two years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young, certified public accountants, as set forth in their report
thereon and included therein in the Registration Statement, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, 450
Fifth Street, Washington, D.C., a Registration Statement on Form SB-2 under the
Securities Act of 1933 with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. For further information about the Company
and the securities offered hereby, reference is made to the Registration
Statement and to the exhibits filed as a part thereof. The statements contained
in this Prospectus as to the contents of any contracts or other documents
identified as exhibits in this Prospectus are not necessarily complete, and in
each instance, reference is made to a copy of such contract or document filed as
an exhibit to the Registration Statement. The Registration Statement, including
exhibits, may be inspected without charge at the principal reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of all or any part thereof may be obtained upon payment of fees
prescribed by the Commission from the Public Reference Section of the Commission
at its principal office in Washington, D.C. set forth above. The Commission also
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission at http://www.sec.gov.
59
<PAGE>
Consolidated Financial Statements
OVM INTERNATIONAL HOLDING CORPORATION
(Formerly Intermark Development Corporation)
December 31, 1997
F-1
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
OVM INTERNATIONAL HOLDING CORPORATION
Report of Independent Auditors ................................. F-3
Consolidated Balance Sheet ..................................... F-4
Consolidated Statements of Income .............................. F-5
Consolidated Statements of Cash Flows .......................... F-6
Consolidated Statements of Changes in Shareholders' Equity ..... F-6
Notes to Consolidated Financial Statements ..................... F-8 - F-24
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders,
OVM INTERNATIONAL HOLDING CORPORATION
We have audited the accompanying consolidated balance sheet of OVM
International Holding Corporation (the "Company") and its subsidiaries (the
"Group") as of December 31, 1997, and the related consolidated statements of
income, cash flows and changes in shareholders' equity for each of the two years
in the period ended December 31, 1997. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
OVM International Holding Corporation and its subsidiaries as of December 31,
1997 and the consolidated results of their operations and their cash flows for
each of the two years in the period ended December 31, 1997 in conformity with
accounting principles generally accepted in the United States of America.
ERNST & YOUNG
Hong Kong
March 23, 1998
F-3
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
December 31,
1997 1997
Notes RMB US$
---- ----
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and bank balances 13,956 1,683
Accounts receivable, net of allowance of RMB 13,076 4 113,671 13,712
Inventories 5 34,745 4,191
Prepayments, deposits and other receivables,
net of allowance of RMB 1,253 6 14,026 1,691
Due from related parties 21 46,501 5,609
-------- --------
Total current assets 222,899 26,886
Property, machinery and equipment, net 7 12,738 1,537
Deferred asset 8 1,833 221
Goodwill 9 3,622 437
Intangible assets 10 3,132 378
Interest in an associated company 11 4,416 533
-------- --------
Total assets 248,640 29,992
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans 12 41,420 4,996
Accounts payable 70,666 8,524
Advance payments by customers 10,705 1,291
Other payables and accrued liabilities 22,334 2,694
Due to related parties 21 2,231 269
Sales taxes payable 12,488 1,507
-------- --------
Total current liabilities 159,844 19,281
Long term loan from a related party 21 3,381 408
Minority interests 26,281 3,170
-------- --------
Total liabilities and minority interests 189,506 22,859
-------- --------
Commitments and contingencies 13
Stockholders' equity:
Common stock 14 10 1
Authorized:
40,000,000 shares, par value of US$0.0001 each
Issued and fully paid:
12,050,000 shares, par value of US$0.0001 each
Additional paid-in capital 14 30,795 3,715
Currency translation adjustments 66 8
Retained earnings 28,263 3,409
-------- --------
Total stockholders' equity 59,134 7,133
-------- --------
Total liabilities and stockholders' equity 248,640 29,992
======== ========
The accompanying notes form an integral part of these
consolidated financial statements.
</TABLE>
F-4
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
Year ended December 31,
Notes 1996 1997 1997
RMB RMB US$
---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Related parties 21 9,477 8,636 1,042
Others 152,015 122,326 14,756
------- ------- -------
Net sales 161,492 130,962 15,798
Cost of sales, including raw materials purchased
from related parties of RMB 4,203 and RMB 12,815;
sub-contracting charges paid to related parties of
RMB 6,884 and RMB 14,094; rental expenses for
leasing of plant and machinery from related parties
of RMB 2,673 and RMB 3,406 in 1996 and 1997,
respectively (105,008) (83,834) (10,113)
------- ------ ------
Gross profit 56,484 47,128 5,685
Selling and administrative expenses (27,341) (31,763) (3,832)
Provision for doubtful accounts and other receivables (4,329) (10,000) (1,206)
Interest expenses 16 (6,140) (6,192) (747)
Interest income, including interest income received
from related parties of Nil and RMB 3,648 in 1996
and 1997, respectively 16 -- 4,088 493
Other income 3,536 234 28
Foreign exchange losses, net (24) (700) (84)
Reorganization expenses 17 (2,547) -- --
------- ------ ------
Income before income taxes 19,639 2,795 337
Income taxes 18 -- (9) (1)
------- ------ ------
19,639 2,786 336
Share of profit of an associated company 157 34 4
------- ------ ------
Net income before minority interests 19,796 2,820 340
Minority interests (7,030) (1,675) (202)
------- ------- -------
Net income 12,766 1,145 138
======= ======= ======
Basic and diluted earnings per share 3(j) 1.06 0.10 0.01
======= ======= ======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-5
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1997
RMB RMB US$
------ ------ -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 12,766 1,145 138
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interests 7,030 1,675 202
Share of profit from an associated company (157) 34 4
Depreciation 1,401 2,104 254
Amortization of goodwill 135 135 16
Amortization of intangible assets 116 116 14
Decrease/(increase) in assets:
Accounts receivable (77,070) (8,747) (1,055)
Inventories 8,297 1,235 149
Prepayments, deposits and other receivables 9,325 (3,072) (371)
Due from related parties 8,111 12,337 1,488
Deferred asset 2,153 -- --
Increase/(decrease) in liabilities:
Accounts payable 43,694 (7,580) (914)
Advance payments by customers 7,996 (842) (102)
Other payables and accrued liabilities 4,423 (615) (74)
Due to related parties (3,517) (3,524) (425)
Sales taxes payable 10,590 1,536 185
------ ------ -----
Net cash provided by/(used in) operating activities 35,293 (4,063) (491)
------ ------ -----
Cash flows from investing activities:
Acquisition of property, machinery and equipment (1,152) (4,467) (539)
------ ------ -----
Net cash used in investing activities (1,152) (4,467) (539)
------ ------ -----
Cash flows from financing activities:
New bank loans 31,524 11,000 1,327
Repayment of bank loans (44,070) (11,004) (1,327)
Proceeds from issue of shares 621 -- --
Repayment of long term loan to a related party (16,280) (61) (7)
Capital contributed by minority shareholder to a subsidiary -- 25 3
------ ------ -----
Net cash used in financing activities (28,205) (40) (4)
------ ------ -----
Net increase/(decrease) in cash and cash equivalents 5,936 (8,570) (1,034)
Cash and cash equivalents, at beginning of year 16,590 22,526 2,717
------ ------ -----
Cash and cash equivalents, at end of year 22,526 13,956 1,683
====== ====== =====
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-6
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
Number of Additional Currency
shares of Common paid-in translation Retained
common stock capital adjustments earnings Total
stock RMB RMB RMB RMB RMB
---------- ------ ---------- ----------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 8,800,000 7 30,174 -- 14,352 44,533
Shares of common stock
owned by the then existing
shareholders of the Company
at the date of Reverse
Acquisition 3,200,000 3 -- -- -- 3
Issue of 50,000 shares of
common stock, par value
US$0.0001 each,
at US$1.50 per share 50,000 -- 621 -- -- 621
Net income -- -- -- -- 12,766 12,766
Currency translation
adjustments -- -- -- 405 -- 405
---------- -- ------ ---- ------ -------
Balance at
December 31, 1996 12,050,000 10 30,795 405 27,118 58,328
Net income -- -- -- -- 1,145 1,145
Currency translation
adjustments -- -- -- (339) -- (339)
---------- -- ------ ---- ------ -------
Balance at
December 31, 1997 12,050,000 10 30,795 66 28,263 59,134
========== == ====== ==== ====== =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-7
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
OVM International Holding Corporation (the "Company") was formerly
known as Intermark Development Corporation ("IDC") which was incorporated
in the State of Nevada, the United States of America.
OVM Development Limited ("ODL") was formerly known as Kolcari
Investments Limited which was incorporated in the British Virgin Islands on
May 3, 1994 with limited liability.
In 1995, ODL entered into an agreement with Liuzhou OVM Joint Stock
Company Limited (the "JV Partner"), which was incorporated in the People's
Republic of China (the "PRC") and was principally engaged in the
manufacture and sale of prestress products used in the construction of
motorways, bridges and buildings, to set up a Sino-foreign equity joint
venture (the "JV") in the PRC under the name of Liuzhou OVM Construction
Machinery Company Limited.
As provided in the joint venture agreement, the total investment for
the JV was US$6,000 (RMB 51,000) which includes a registered capital of
US$4,000 (RMB 34,000). The JV Partner transferred certain of its property,
machinery and equipment to the JV as contribution of 30% of the issued
capital. In addition, the business operations of the JV Partner were taken
up by the JV. The remaining 70% of the issued capital was provided by ODL by
the contribution of cash of US$2,800 (RMB 23,800). Accordingly, ODL has a
controlling interest in the JV through a majority voting interest of 70%.
The above capital injection is to be settled by instalments. As at
December 31, 1997, 70% of ODL's share capital was due and paid. The last
instalment of 30% of ODL's share of capital was originally due on March 31,
1997. Pursuant to a supplementary agreement entered into among ODL and the
JV Partner on March 28, 1997, the due date of the last instalment of 30% of
ODL's share of capital was extended to December 31, 1997. On December 19,
1997, the last instalment due date for 30% of ODL's share of capital was
further extended to June 30, 1998
The net income of the JV after provision for income taxes and
appropriations to various statutory and discretionary reserves will be
shared by the Company and the JV Partner according to their respective
percentage of equity interests and subject to the board of directors'
approval. The term of the JV is 30 years. The JV is principally engaged in
the manufacture and sale of prestress products used in the construction of
motorways, bridges and buildings.
On September 30, 1996, IDC changed its name to OVM International
Holding Corporation.
With effect on November 4, 1996, pursuant to an acquisition agreement
(the "Agreement") among the Company and ODL and the then shareholders of
ODL, the Company issued 8,800,000 shares of its common stock to the
original shareholders of ODL in exchange for all the issued ordinary shares
of ODL.
F-8
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
The above transactions have been treated as a recapitalisation of ODL with
ODL as the acquirer (the "Reverse Acquisition"). Accordingly, the historical
financial statements of the Group prior to November 4, 1996 are those of ODL
except for share capital which represents that of the Company immediately after
the Reverse Acquisition.
2. BASIS OF PRESENTATION
The consolidated financial statements of the Group include the
accounts of the Company and its subsidiaries. All material intercompany
balances and transactions have been eliminated on consolidation.
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the JV which are prepared in accordance
with the accounting principles and the relevant financial regulations
established by the Ministry of Finance of the PRC.
The principal adjustments made to the statutory financial statements
of the JV to conform to US GAAP include the following:
o Allowance for doubtful accounts and other receivables;
o Reclassification of certain expense items from equity appropriations
to charge against income; and
o Recognition of sales and cost of sales upon delivery to the customers.
The preparation of financial statements in conformity with US GAAP
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.
F-9
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and cash equivalents
Cash and cash equivalents include cash on hand and demand
deposits with banks with an original maturity of three months or less.
(b) Inventories
Inventories are stated at the lower of cost and market value.
Cost is determined on the weighted average basis and in the case of
work in progress and finished goods, comprises direct materials,
direct labor and an appropriate proportion of overheads.
(c) Property, machinery and equipment
Property, machinery and equipment are stated at cost less
accumulated depreciation.
Depreciation is calculated on the straight-line basis to write
off the cost of each asset over its estimated useful life. The
principal annual rates used for this purpose are as follows:
Buildings 8.4%
Plant and machinery 12%
(d) Goodwill
Goodwill is amortised over 30 years on the straight-line basis.
(e) Intangible assets
Intangible assets which represent proprietary technology and
trademarks are stated at cost less accumulated amortization.
Amortization is calculated on the straight-line basis over the
estimated useful life of 30 years.
(f) Associated company
An associated company is a company, not being a subsidiary, in
which the Group exerts a significant influence but does not control
the financial and operating decisions.
The Group's share of the associated company's post-acquisition
results is included in the consolidated statements of income under the
equity method of accounting. The Group's investment in the associated
company is stated at cost plus the Group's share of the associated
company's post-acquisition results and capital transactions.
F-10
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(g) Revenue recognition
Sales represent the invoiced value of goods, net of returns and
allowances, recognized upon delivery of goods to customers.
(h) Income taxes
Income taxes are determined under the liability method as
required by Financial Accounting Standards Board Statement No.109,
"Accounting for Income Taxes".
(i) Foreign currency translation
The functional currency of the operations in the PRC is the
Renminbi ("RMB"). The accounts of foreign operations are prepared in
their functional currency which is their respective local currency and
are translated into RMB using the closing rate method. Under the
closing rate method, the balance sheet of foreign operations is
translated using the rate of exchange (the "Exchange Rate") quoted by
the People's Bank of China at the balance sheet date and the statement
of income is translated at the average rate for the year. Resulting
translation adjustments are reported as a separate component of
equity.
The financial records of the JV are maintained in RMB.
In preparing these financial statements, foreign currency
transactions have been translated into RMB using the Exchange Rate at
the date of transactions. Monetary assets and liabilities denominated
in foreign currencies have been translated into RMB using the Exchange
Rate at the balance sheet date. The exchange gains or losses were
credited or charged to the statement of income.
The market risks associated with changes in exchange rates and
the restrictions over the convertibility of RMB into foreign
currencies are discussed in note 19.
Translation of amounts from RMB into US$ for the convenience of
the reader has been made at the Exchange Rate on December 31, 1997 of
US$1.00 = RMB 8.29. No representation is made that the RMB amounts
could have been, or could be, converted into US$ at that rate on
December 31, 1997 or at any other date.
F-11
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(j) Earnings per share
In 1997, the Financing Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("SFAS128"). SFAS 128 replaced
the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of stock
purchase warrants. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented and, where
appropriate, restated to conform to SFAS 128 requirements.
The computation of basic and diluted earnings per share for the
year ended 31 December, 1996 and 1997 is based on the weighted average
number of 12,002,186 and 12,050,000 shares of common stock
outstanding, respectively.
The weighted average number of shares outstanding have been
adjusted as if the shares issued to the original shareholders of ODL
under the Reverse Acquisition had been completed as at January 1, 1996
(note 17). Stock purchase warrants to subscribe for 4,000,000 shares
of common stock were outstanding during 1996 and 1997 (note 15) but
were not included in the computation of diluted earnings per share for
the years ended December 31, 1996 and 1997 because the warrant
exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
(k) Research and development costs
Research and development costs consist of expenditure incurred
during the course of planned search and investigation aimed at the
discovery of knowledge which will be useful in developing new products
or processes, or significantly enhancing existing products or
production processes, and the implementation of such through design,
testing of product alternatives or construction of prototypes. The
Group expenses all research and development costs as they are
incurred. The research and development costs incurred by the Group
during the years ended December 31, 1996 and 1997 amounted to RMB 453
and RMB 1,849, respectively.
(l) Retirement benefits
The contributions to the retirement plans for the existing
employees are charged to the consolidated statements of income as
services are provided.
(m) Comparative amounts
Certain comparative amounts have been reclassified to conform
with the current year's presentation.
F-12
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
4. ACCOUNTS RECEIVABLE, NET
December 31,
1997
RMB
------------
Accounts receivable 126,747
Allowance for doubtful accounts:
Balance at beginning of year (3,076)
Allowance for the year (10,000)
--------
Balance at end of year (13,076)
--------
Accounts receivable, net 113,671
========
5. INVENTORIES
December 31,
1997
RMB
-----------
Raw materials 11,411
Work in progress 5,632
Finished goods 17,702
--------
34,745
========
6. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES, NET
December 31,
1997
RMB
-----------
Prepayments, deposits and other receivables 15,279
Allowance for doubtful accounts:
Balance at beginning and end of year (1,253)
--------
Prepayments, deposits and other receivables, net 14,026
========
F-13
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
7. PROPERTY, MACHINERY AND EQUIPMENT, NET
December 31,
1997
RMB
At cost: ------------
Buildings 4,221
Plant and machinery 14,129
------
18,350
------
Accumulated depreciation:
Buildings 969
Plant and machinery 4,643
------
5,612
------
Property, machinery and equipment, net 12,738
======
8. DEFERRED ASSET
This represents the deemed value-added tax ("VAT") recoverable arising
from the introduction of the new PRC sales tax system on July 1, 1993 which
was fully implemented from January 1, 1994. Pursuant to a directive issued
by the Ministry of Finance and the State Tax Bureau, the deferred VAT can
be used to offset against the sales tax payable within a period of five
years from January 1, 1995 such that, in general, 20% of the deferred asset
can be utilised each year. The title to the deemed VAT recoverable was
passed by the JV Partner to the JV on January 1, 1995.
9. GOODWILL
December 31,
1997
RMB
------------
At cost 4,027
Accumulated amortization (405)
-----
3,622
=====
F-14
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
10. INTANGIBLE ASSETS
December 31,
1997
RMB
------------
Proprietary technology and trademarks, at cost 3,480
Accumulated amortization (348)
-----
3,132
=====
11. INTEREST IN AN ASSOCIATED COMPANY
December 31,
1997
RMB
------------
Share of net assets 4,416
===========
The Group's share of post-acquisition retained earnings of the
associated company was RMB 191 at December 31, 1997.
The associated company, OVM Prestress Co. Pte. Ltd, is a limited
company incorporated in the Republic of Singapore with a paid-up capital of
S$1,000 on December 11, 1993, 50% of which equity shareholding is held by
the Group. The associated company is principally engaged in the provision
of prestressing and related engineering services.
12. BANK LOANS
All bank loans are denominated in RMB and are unsecured except for
amounts of RMB 37,420 which are secured by the pledge of the JV Partner's
land use right of a certain portion of the land where the factory premises
of the JV are located and by certain plant and machinery held by the JV and
the JV Partner. All bank loans are repayable within one year but are
renewable with the consent of the banks.
Interest on bank loans is payable at the weighted average rate of
12.1% per annum as of December 31, 1997.
13. COMMITMENTS AND CONTINGENCIES
As of December 31, 1997, the Group had outstanding capital commitments
for purchases of equipment and moulds of approximately RMB 164.
F-15
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
14. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
As of November 4, 1996, 3,200,000 shares of common stock of par value
US$0.0001 each were outstanding to the then existing shareholders of the
Company and as of the same day, 8,800,000 shares of common stock of par
value US$0.0001 each were allotted to the then shareholders of ODL pursuant
to the Reverse Acquisition set out in note 1 to the consolidated financial
statements.
On December 16, 1996, 50,000 shares of common stock, par value
US$0.0001, were issued for cash at US$1.50 per share. For each of the
50,000 shares of common stock issued, the subscriber was allotted a total
of 80 stock purchase warrants, each of which is convertible into one share
of common stock, par value US$0.0001 (see note 15).
15. STOCK OPTIONS AND STOCK PURCHASE WARRANTS
The Company adopted a stock option plan (the "Plan") as of September
4, 1996. The Plan allows the Board of Directors, or a committee thereof at
the Board's discretion, to grant stock options to officers, directors, key
employees, consultants and affiliates of the Company. An aggregate of
1,000,000 shares of common stock have been reserved for issuance upon
exercise of the options granted under the Plan. Pursuant to the Plan, the
exercise price shall in no event be less than the fair market value of the
shares of common stock at the date of grant. As at December 31, 1997, no
stock options have been granted under the Plan.
The Company has issued 4,000,000 stock purchase warrants in connection
with the of 50,000 shares of common stock as detailed in note 14. Each of
the warrants is convertible into one share of the Company's common stock at
an original exercise price of US$4.00 per warrant on or prior to December
23, 1997 and US$5.00 per warrant thereafter. On June 27, 1997, the Board of
Directors approved the reduction of the exercise price of the stock
purchase warrants to US$3.00 per warrant exercisable on or prior to
December 23, 1998. An aggregate of 4,000,000 shares of common stock have
been reserved for issuance upon exercise of the stock purchase warrants.
All the stock purchase warrants remained outstanding at December 31, 1997.
F-16
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
16. INTEREST INCOME/EXPENSE
Year ended December 31,
1996 1997
RMB RMB
------ ------
Interest expenses represent:
Interest expense to related parties (494) (872)
Bank loan interest (5,646) (4,770)
Other interest expense -- (550)
------ ------
(6,140) (6,192)
====== ======
Interest income represents:
Bank interest income -- 440
Interest income from related parties -- 3,648
------ ------
-- 4,088
====== ======
17. REORGANIZATION EXPENSES
Concurrent with the Reverse Acquisition set out in note 1 to the
consolidated financial statements, reorganization expenses represented by
professional and consultancy fees were incurred which reduced net income by
RMB 2,547.
18. INCOME TAXES
It is management's intention to reinvest all the income attributable
to the Company earned by its operations outside the United State of America
(the "USA"). Accordingly, no USA corporate income taxes have been provided
in these financial statements.
Under the current laws of the British Virgin Islands (the "BVI"),
dividends and capital gains arising from the Group's investments in the BVI
are not subject to income taxes and no withholding tax is imposed on
payments of dividends to the Company.
Pursuant to an approval issued by the State Tax Bureau of the Liuzhou
City dated July 22, 1996, the income of the JV is fully exempted from income
tax for three years commencing from the first profitable year of operations
followed by a 50% exemption for the next four years, after which the income
is taxable at the full rate of 33%. No income tax is provided as this is the
third profitable year of operation of the JV. The Group's share in the JV's
tax savings resulting from this tax holiday for the years ended December 31,
1996 and 1997 amounted to RMB 5,785 and RMB 1,664 (RMB 0.48 and RMB 0.14 per
share), respectively.
F-17
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
18. INCOME TAXES (continued)
During 1997, a new subsidiary of the JV was set up. This new
subsidiary is subject to income tax at the full rate of 33%. The current
year taxation is charged on this new subsidiary's taxable profit earned
during the year.
A reconciliation of the effective income tax rates with the statutory
income tax rate in the PRC is as follows:
Year ended December 31,
1996 1997
RMB RMB
---- ----
Statutory income tax 33% 33%
Computed expected tax expenses 6,481 922
Impact of tax holiday of the JV (8,264) (2,377)
Item which gives rise to no tax benefit:
Net loss of the Company and ODL 1,339 1,014
Others 444 450
------ ------
Taxation charges for the year -- 9
====== ======
The Company's share in the undistributed earnings of the Company's
foreign subsidiaries amounted to RMB 31,700 at December 31, 1997. Because
those earnings are considered to be indefinitely invested, no provision for
United States corporate income taxes on those earnings has been provided.
Upon distribution of those earnings in the form of dividends or otherwise,
the Company would be subject to USA corporate income taxes. Unrecognized
deferred USA corporate income tax in respect of these undistributed
earnings, less the Company's expenses available for deduction for tax
purposes, as at December 31, 1997 was RMB 9,711.
No deferred income taxes have been provided as the effect of all
temporary differences is not material.
F-18
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
19. FOREIGN CURRENCY EXCHANGE
The Renminbi ("RMB") is not freely convertible into foreign
currencies.
Effective from January 1, 1994, a single rate of exchange is quoted
daily by the People's Bank of China. Enterprises operating in the PRC can
enter into exchange transactions through the Bank of China or other
authorized institutions. Payments for imported materials are subject to the
availability of foreign currency, which is dependent on the foreign
currency denominated earnings of the enterprises, or must be arranged
through the authorized institutions. Approval for exchange at the
authorized institutions is granted to enterprises in the PRC for valid
reasons such as purchases of imported materials and remittance of earnings.
While conversion of RMB into United States dollars or other foreign
currencies can generally be effected at the authorized institutions, there
is no guarantee that it can be effected at all times. At December 31, 1997,
RMB 34,234 of the Group's shareholders' equity was subject to exchange
conversion restriction.
The exchange rates as of December 31, 1996 and 1997 were:
December 31,
1996 1997
---- ----
United States dollars ("US$") US$1 : RMB 8.30 US$1: RMB 8.29
Singapore dollars ("S$") S$1: RMB 5.83 S$1: RMB 4.97
20. RETIREMENT PLANS
The Company does not have any retirement plans while the JV has a
defined contribution retirement plan for its staff. As stipulated by the
PRC government regulations, the JV is required to contribute to PRC
insurance companies organized by the PRC government which are responsible
for the payments of pension benefits to retired staff. The monthly
contribution of the JV was equal to 19% of the basic salaries of the
existing staff. The pension costs incurred by the JV during the years ended
December 31, 1996 and 1997 amounted to RMB 1,410 and RMB 1,332,
respectively.
Moreover, the JV has internally implemented an additional defined
contribution plan for its staff. The JV has to contribute 5% of the monthly
basic salaries of the existing staff. On retirement, the staff members are
entitled to a lump sum payment in respect of the previous contributions.
The pension costs incurred by the JV for the additional plan during the
years ended December 31, 1996 and 1997 amounted to RMB 484 and RMB 700,
respectively.
The JV has no obligation for the payment of pension benefits beyond
the annual contributions described above.
F-19
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
21. RELATED PARTY TRANSACTIONS AND BALANCES
A significant portion of the business undertaken by the Group during
the years has been effected with other State-owned enterprises in the PRC
and on such terms as determined by the relevant PRC authorities. All these
transactions including the transactions summarised in this note represent
realised revenues and expenses to the Group.
After the commencement of operation of the JV in 1995, the JV Partner
became an investment holding company and engaged in the trading of building
and construction materials, import and export of construction equipment,
other than prestressing equipment, construction design and consultation
services which are in different segments from the products and services
provided by the JV. The JV Partner remains a State-owned enterprise of
which the majority is owned by the Mechanical and Electrical Industrial
Bureau of the Liuzhou City Government. The significant transactions of the
Group with the JV Partner and its subsidiaries are summarised below:
Year ended December 31,
1996 1997
RMB RMB
---------- -----------
JV Partner:
Rental expenses for leasing of land and buildings,
plant and machinery and motor vehicles 1,709 2,590
Debt collecting services income 1,305 --
Interest income -- 269
Interest expenses (494) (556)
====== =======
Subsidiaries of the JV Partner:
Rental income from leasing of plant and machinery 684 684
Sales of raw materials 5,335 4,391
Purchases of raw materials (3,640) (7,378)
Sales of finished goods 1,206 3,247
Sub-contracting charges (6,884) (14,094)
Interest income -- 1,082
Interest expenses -- (316)
====== =======
In addition, the Group had significant transactions with associated
companies of the JV Partner, as summarised below:
Year ended December 31,
1996 1997
RMB RMB
---------- -----------
Purchases of raw materials (563) (5,437)
Sales of finished goods 2,903 --
Rental expenses for leasing of plant and machinery (964) (816)
Interest income -- 2,297
====== ======
F-20
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
21. RELATED PARTY TRANSACTIONS AND BALANCES (continued)
During the years ended December 31, 1996 and 1997, the Group had sales
amounting to RMB 33 and RMB 998, respectively to Hong Kong Prestressed
Engineering Limited ("HK Prestress"), a company incorporated in Hong Kong,
of which two of the Company's directors, Mr. Guo Sen Wu and Mr. Ying Lin
Wan, have a beneficial interest.
In 1996, the Group's accounts receivable and other receivables of
RMB 8,147 and RMB 1,003, respectively, which were acquired by the Group
through an acquisition of a subsidiary in 1995, were transferred back to
the JV Partner at book value.
The balances with related parties are as follows:
December 31,
1997
RMB
------------
Due from related parties:
JV Partner 21,490
Subsidiaries of the JV Partner 12,524
Associated companies of the JV Partner 10,268
HK Prestress 2,219
------
46,501
======
Due to related parties:
Subsidiaries of the JV Partner 1,445
Current portion of long term loan from the JV partner 786
------
2,231
======
Long term portion of long term loan from JV Partner 3,381
======
All balances with related parties are unsecured, interest-free and
repayable on demand except for the long term loan from the JV Partner which
is repayable by annual instalments calculated at 0.6% of the gross sales
before VAT of each year commencing January 1, 1997 and has been discounted
at an effective annual interest rate of 12.6%. Prior to January 1, 1997,
all the balances with related parties were interest-free. With effect from
January 1, 1997, these balances, except for the above-mentioned long term
loan, bear interest at the average bank borrowing rates. The weighted
average interest rate as at December 31, 1997 was 12.1% per annum.
F-21
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
22. SUPPLEMENTAL CASH FLOW INFORMATION
Year ended December 31,
1996 1997
RMB RMB
---------- -----------
Interest paid 7,336 5,985
===== =====
Income taxes paid -- --
===== =====
NON-CASH ACTIVITIES
In 1996, the Group's accounts receivable and other receivables of
RMB 8,147 and RMB 1,003, respectively, which were acquired by the Group
through an acquisition of a subsidiary in 1995, were transferred back to
the JV Partner at book value.
23. FINANCIAL INSTRUMENTS
The carrying amounts reported in the Group's balance sheet for current
assets and current liabilities, except for bank loans, qualifying as
financial instruments approximate their fair values because of the short
maturity of such instruments. The carrying amounts of bank loans
approximate their fair value based on the borrowing rates currently
available for bank loans with similar terms and average maturities.
24. NATURE OF OPERATIONS AND CONCENTRATION OF RISK
The Group manufactures and sells substantially all prestress products
used in the construction of motorways, bridges and buildings in the PRC.
Accordingly, the credit risk arising from accounts receivable of the JV is
concentrated with the PRC government which is usually the initiator of
these large scale capital projects.
The PRC economy has, for many years, been a centrally-planned economy,
operating on the basis of annual, five-year and ten-year state plans
adopted by central PRC governmental authorities which set out national
production and development targets. The PRC government has been pursuing
economic reforms since it first adopted its "open-door" policy in 1978.
There is no assurance that the PRC government will continue to pursue
economic reforms or that there will not be any significant change in its
economic or other policies, particularly in the event of any change in the
political leadership of, or the political, economic or social conditions in
the PRC. There is also no assurance that the Group will not be adversely
affected by any such change in government policies or any unfavourable
change in the political, economic or social conditions, the laws or
regulations or the rate or method of taxation in the PRC.
F-22
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
24. NATURE OF OPERATIONS AND CONCENTRATION OF RISK (continued)
As many of the economic reforms which have been or are being
implemented by the PRC government are unprecedented or experimental, they
may be subject to adjustment or refinement which may have adverse effects
on the Group. Further, through state plans and other economic and fiscal
measures, it remains possible for the PRC government to exert significant
influence on the PRC economy.
Details of the Group's sales and purchases to customers during the
year, which accounted for 10% or more of the respective total sales and
purchases, are as follows:
Year ended December 31,
1996 1997
% %
Sales: ---------- -----------
Kunming Futong Trading Company 20 --
=== ===
Purchases:
Jiang Yiu Huaxin Steel Cable Co., Ltd. 50 --
Pu Lin Jufung Trading Ltd. -- 13
Others 50 87
--- ---
100 100
=== ===
25. DISTRIBUTION OF PROFITS
The Company's ability to pay dividends is primarily dependent on the
Company receiving distributions from the JV in the PRC.
Pursuant to the relevant laws and regulations of Sino-foreign joint
venture enterprises, and the JV's articles of association, the JV is
required to make appropriations to a general reserve fund, an enterprise
development fund and an employee welfare and incentive fund, in which the
percentage of annual appropriations are subject to the decision of the JV's
board of directors. The appropriations to the employee welfare and
incentive fund have been charged to the statement of income. The other
appropriations, if any, are accounted for as reserve funds in the balance
sheet and are not available for distribution as dividends to the joint
venture partners of the JV. In accordance with a board resolution, no
appropriations were made to the reserve funds by the JV for 1996 and 1997.
As described in note 2 to the consolidated financial statements, the
net income of the JV as reported in the US GAAP financial statements
differs from that as reported in the JV's PRC GAAP financial statements. In
accordance with the relevant laws and regulations in the PRC, the profits
available for distribution are based on the PRC GAAP financial statements
of the JV. At December 31, 1997, the Group's share in the JV's
distributable profits amounted approximately to RMB 36,815.
F-23
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share data)
26. OPERATING LEASE COMMITMENTS
At December 31, 1997, future minimum payments under operating leases
for the leasing of buildings in Liuzhou from the JV Partner was as follows:
RMB
Payable in:
1998 300
---
Total minimum lease payments 300
===
The rental for the years 1999 and thereafter is subject to mutual
negotiations between the Company and the JV Partner.
Rental expenses under operating leases for the years ended December
31, 1996 and 1997 amounted to RMB Nil and RMB 300, respectively.
F-24
<PAGE>
Condensed Unaudited Consolidated Financial Statements
OVM INTERNATIONAL HOLDING CORPORATION
June 30, 1998
F-25
<PAGE>
INDEX TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
OVM INTERNATION HOLDING CORPORATION
Condensed Consolidated Income Statements .......................... F-27
Condensed Consolidated Balance Sheet............................... F-28
Condensed Consolidated Statements of Cash Flows.................... F-29
Notes to Condensed Consolidated Financial Statements............... F-30
F-26
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OVM INTERNATIONAL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1998 1997 1998
---- ---- ---- ---- ---- ----
Notes RMB RMB US$ RMB RMB US$
-----
<S> <C> <C> <C> <C> <C> <C>
SALES 46,731 28,897 5,644 75,226 54,882 9,085
COST OF SALES (36,435) (15,602) (4,400) (53,694) (31,705) (6,485)
---------- ---------- ---------- ---------- ----------- ----------
GROSS PROFIT 10,296 13,295 1,244 21,532 23,177 2,600
SELLING AND ADMINISTRATION
EXPENSES (10,440) (7,924) (1,261) (19,359) (16,020) (2,338)
PROVISION FOR DOUBTFUL
ACCOUNTS AND OTHER
RECEIVABLES - (3,875) - - (3,875) -
INTEREST EXPENSES (1,644) (707) (199) (2,676) (3,454) (323)
INTEREST INCOME 280 1,546 34 1,388 3,224 168
OTHER INCOME, NET 319 34 38 717 980 86
---------- ---------- ---------- ---------- ----------- ----------
INCOME/(LOSS) BEFORE INCOME
TAXES (1,189) 2,369 (144) 1,602 4,032 193
INCOME TAXES 2 (229) - (28) (855) - (103)
---------- ---------- ---------- ---------- ----------- ----------
NET INCOME/(LOSS) AFTER
INCOME TAXES (1,418) 2,369 (172) 747 4,032 90
SHARE OF PROFIT/(LOSS) OF AN
ASSOCIATED COMPANY (4) 23 - 1 58 -
---------- ---------- ---------- ---------- ----------- ----------
NET INCOME/(LOSS) BEFORE
MINORITY INTEREST (1,422) 2,392 (172) 748 4,090 90
MINORITY INTERESTS 515 (1,226) 62 (586) (1,748) (71)
---------- ---------- ---------- ---------- ----------- ----------
NET INCOME/(LOSS) (907) 1,166 (110) 162 2,342 19
========== ========== ========== ========== ========== ==========
BASIC AND DILUTED EARNINGS/
(LOSS) PER SHARE (0.08) 0.10 (0.01) 0.01 0.19 -
========== ========== ========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 12,050,000 12,050,000 12,050,000 12,050,000 12,050,000 12,050,000
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-27
<PAGE>
OVM INTERNATIONAL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1998 1997 1998
RMB RMB US$
Notes (Unaudited) (Note A) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and bank balances 22,898 13,956 2,765
Accounts receivable, net of allowance
of RMB 13,076 (1997: RMB 13,076) 102,282 113,671 12,353
Inventories 3 37,685 34,745 4,551
Prepayments, deposits and other 22,262 14,026 2,689
receivables
Due from related parties 48,493 46,501 5,857
---------- ---------- ----------
Total current assets 233,620 222,899 28,215
Interest in an associated company 4,417 4,416 533
Property, machinery and equipment, net 4 13,074 12,738 1,579
Deferred asset 675 1,833 82
Goodwill 3,555 3,622 429
Intangible assets 3,074 3,132 371
---------- ---------- ----------
Total assets 258,415 248,640 31,209
========== ========== ==========
LIABILITIES, MINORITY INTERESTS
AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans 40,420 41,420 4,882
Accounts payable 68,163 70,666 8,232
Advance payments by customers 14,979 10,705 1,809
Other payables and accrued liabilities 23,774 22,334 2,871
Due to related parties 9,575 2,231 1,156
Sales taxes payable 10,905 12,488 1,317
Income taxes payable 855 - 103
---------- ---------- ----------
Total current liabilities 168,671 159,844 20,370
Long term loan from a related party 3,581 3,381 433
Minority interests 26,867 26,281 3,245
---------- ---------- ----------
Total liabilities and minority interests 199,119 189,506 24,048
---------- ---------- ----------
Stockholders' equity:
Common stock 10 10 1
Authorized:
40,000,000 (1997: 40,000,000) shares,
par value of US$0.0001 each
Issued and fully paid:
12,050,000 (1997: 12,050,000) shares,
par value of US$0.0001 each
Additional paid-in capital 30,795 30,795 3,719
Exchange reserve 66 66 8
Retained earnings 28,425 28,263 3,433
---------- ---------- ----------
Total stockholders' equity 59,296 59,134 7,161
---------- ---------- ----------
Total liabilities, minority interests and
Stockholders' equity 258,415 248,640 31,209
========== ========== ==========
</TABLE>
Note A: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-28
<PAGE>
OVM INTERNATIONAL HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997 1998
RMB RMB US$
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 162 2,342 20
Adjustments to reconcile net income to
net cash provided by operating activities:
Share of profit of an associated company (1) (58) -
Minority interests 586 1,748 71
Depreciation 775 744 94
Amortization of goodwill 67 68 8
Amortization of intangible assets 58 57 7
Decrease/(increase) in assets:
Accounts receivable 11,389 (8,900) 1,375
Inventories (2,940) 1,177 (355)
Prepayments, deposits and other receivables (8,236) (5,011) (995)
Due from related parties (1,992) 2,776 (241)
Deferred asset 1,158 (112) 140
Increase/(decrease) in liabilities:
Accounts payable (2,503) (103) (302)
Advance payments by customers 4,274 (1,163) 516
Other payables and accrued liabilities 1,440 (766) 174
Due to related parties 7,344 (1,342) 887
Sales taxes payable 855 - 103
Income taxes payable (1,583) 1,669 (191)
---------- ---------- ----------
Net cash provided by/(used in) operating activities 10,853 (6,874) 1,311
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property, machinery and equipment (1,111) (476) (134)
---------- ---------- ----------
Net cash provided by/(used in) financing activities (1,111) (476) (134)
---------- ---------- ----------
Cash flows from financing activities:
Repayments of bank loans (1,000) (500) (121)
Advance/(repayments) of long term loan from a 200 589 24
related party
---------- ---------- ----------
Net cash provided by/(used in) financing activities (800) 89 (97)
---------- ---------- ----------
Net increase/(decrease) in cash and cash equivalent 8,942 (7,261) 1,080
Cash and cash equivalent, at beginning of period 13,956 22,526 1,685
---------- ---------- ----------
Cash and cash equivalent, at end of period 22,898 15,265 2,765
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-29
<PAGE>
OVM INTERNATIONAL HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months period ended June
30, 1998, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
For the convenience of the reader, amounts in Renminbi ("RMB") have
been translated into United States dollars ("US$") at the rate of
US$1.00 = RMB 8.28 quoted by the People's Bank of China as at June 30,
1998. No representation is made that the RMB amounts could have been,
or could be, converted into US$ at that rate.
<TABLE>
<CAPTION>
2. INCOME TAXES
According to an approval issued by the State Tax Bureau of the Liuzhou
City dated July 22, 1996, the income of Liuzhou OVM Construction
Machinery Company Limited ("JV"), a PRC subsidiary of the Company, is
fully exempted from income tax for three years commencing from the
first profitable year of operations, followed by a 50% exemption for
the next four years, after which the income is taxable at the full rate
of 33%. No income tax was provided in 1997 as this was the third
profitable year of operations of the JV. Income tax was provided in
1998 at 16.5% as this was the fourth profitable year of operations of
the JV. Another subsidiary of the Company in the PRC, Liuzhou Trading
Co. Ltd., which was established in 1997 was subject to income tax at
the full rate of 33%.
3. INVENTORIES
June 30, December 31,
1998 1997
RMB RMB
<S> <C> <C>
Raw materials 13,034 11,411
Work in progress 4,261 5,632
Finished goods 20,390 17,702
---------- ----------
37,685 34,745
========== ==========
4. PROPERTY, MACHINERY AND EQUIPMENT, NET
June 30, December 31,
1998 1997
RMB RMB
At cost:
Buildings 4,221 4,221
Plant and machinery 15,240 14,129
---------- ----------
19,461 18,350
---------- ----------
Accumulated depreciation:
Buildings 1,071 969
Plant and machinery 5,316 4,643
---------- ----------
6,387 5,612
---------- ----------
Property, machinery and equipment, net 13,074 12,738
========== ==========
</TABLE>
F-30
<PAGE>
No person has been authorized to give
any information or to make any
representations other than those
contained in this Prospectus in
connection with this offering, and any
information or representations not
contained herein must not be relied upon
as having been authorized by the Company
or any other person. This Prospectus
does not constitute an offer to sell or
a solicitation of an offer to buy any
securities other than the securities to
which it relates, or any offer to or
solicitation of any person in any
jurisdiction in which such offer or
solicitation would be unlawful. Neither
the delivery of this Prospectus nor any
offer or sale made hereunder shall,
under any circumstances, create an
implication that information herein is OVM INTERNATIONAL
correct at any time subsequent to the HOLDING CORP.
date hereof.
___________ 4,050,000 SHARES
TABLE OF CONTENTS COMMON STOCK
Page
----
Prospectus Summary.........
High Risk Factors.......... ________________________________
Price Range of Common
Stock....................
Dividend Policy............ PROSPECTUS
Capitalization.............
Use of Proceeds............ ________________________________
Summary Financial
Information..............
Management's Discussion
and Analysis or Plan of
Operations............... __________, 1998
Discussion Pertaining to
Certain Conditions
Relating to the People's
Republic of China........
Business...................
Management.................
Certain Transactions.......
Principal Shareholders.....
Sales by Selling
Security Holders.........
Description of Securities..
Certain Market
Information..............
Legal Matters..............
Experts....................
Additional Information.....
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Executive Officers
Article VI of the Company's Bylaws provides as follows:
"6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The corporation shall, to the maximum extent and in the manner permitted by the
General Corporation Law of Nevada, indemnify each of its directors and officers
against expenses (including attorneys' fees), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation. For purposes of this Section 6.1, a "director" or "officer" of
the corporation includes any person (i) who is or was a director or officer of
the corporation, (ii) who is or was serving at the request of the corporation as
a director ore officer of another corporation, partnership, joint venture, trust
or other enterprise, or (iii) who was as director or officer of a corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the manner
permitted by the General Corporation Law of Nevada, to indemnify each of its
employees and agents (other than directors and officers) against expense
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section an "employee" or "agent" of the corporation (other than
a director or officer includes any person (i) who is or was an employee or agent
of the corporation, (ii) who is or was serving at the request of the corporation
as an employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation of the
corporation or of another enterprise at the request of such predecessor
corporation."
The above indemnification provisions notwithstanding, the Company is
aware that insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy was expressed in the act and is
therefore unenforceable.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and resale of the securities offered hereby. The
Company is responsible for the payment of all expenses in connection with the
Offering.
Registration fee under
the Securities Act of 1933.................. $ 2,095.00*
Blue Sky filing fees and expenses............ 1,000.00*
Printing and engraving expenses.............. 10,000.00*
Legal fees and expenses...................... 25,000.00*
Accounting fees and expenses................. 25,000.00*
Miscellaneous................................ 1,905.00*
----------
Total............................... $65,000.00*
*Estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
All transactions described hereafter give effect to the Company's
one-for-five (1:5) reverse stock split effective August 22, 1996.
On February 22, 1996, the Company issued 400,000 shares of Common Stock
to four investors located in Germany for an aggregate consideration of $20,000.
This transaction was undertaken following the execution of a letter of intent to
acquire I.Q. Golf, Inc., an operating company, on February 22, 1996. This
acquisition was abandoned when the company to be acquired could not supply the
Company with audited financial statements. All of these investors were
accredited investors within the meaning of Section 501 of the Securities Act of
1933 or were otherwise qualified investors, and were provided with appropriate
information or documentation relevant to the Company. Accordingly, the
transaction was undertaken in accordance with Rule 504 under Regulation D of the
Securities Act of 1933.
On September 4, 1996, the Company issued an aggregate of 2,800,000
shares of Common Stock to ten non-U.S. citizens (i.e, European and Asian
investors) for an aggregate purchase price of $56,000. This transaction was
undertaken following the execution of a letter of intent between ODL and the
Company on August 21, 1996, and which transaction was ultimately consummated.
All of these investors were accredited investors within the meaning of Section
501 of the Securities Act of 1933 or were otherwise qualified investors, and
were provided with appropriate information and documentation relevant to the
Company. Accordingly, the transaction was undertaken in accordance with Rule 504
under Regulation D of the Securities Act of 1933.
II-2
<PAGE>
On November 4, 1996 the Company acquired all of the capital stock of
ODL from four investors based in Hong Kong and Singapore in exchange for
8,800,000 shares of Common Stock of the Company. Inasmuch as each of the
investors was an accredited investor within the meaning of Section 501 of the
Securities Act of 1933, as well as being sophisticated investors and having been
provided with various information and documentation concerning the Company, the
issuance and exchange was effected in accordance with Section 4(2) of the Act.
Between December 13 and December 16, 1996 the Company issued 50,000
shares of its Common Stock and Warrants to purchase 4,000,000 Warrant Shares to
a group of ten investors, all of whom were non-U.S. persons. Inasmuch as each of
the investors was an accredited investor within the meaning of Section 501 of
the Securities Act of 1933, as well as being sophisticated investors and having
been provided with various information and documentation concerning the Company,
the issuance and exchange was effected in accordance with Rule 506 and Section
4(2) of the Securities Act of 1933.
<PAGE>
ITEM 27. EXHIBITS
Exhibits Description of Document
2.1 Acquisition Agreement dated November 4, 1996 (1)
3.1 Articles of Incorporation and Amendments thereto(1)
3.2 Bylaws (1)
4.1 Form of Common Stock Purchase Warrant dated December 16,
1996 (1)
4.2 Specimen of Common Stock Certificate (2)
5. Opinion of Atlas, Pearlman, Trop & Borkson, P.A. as to the
validity of securities being registered (1)
10.1 Joint Venture Contract between Liuzhou OVM Joint Stock Co.
Ltd. and Kolcari Investments Limited and Articles of
Association for Sino-Foreign Equity Joint Venture(1)
10.2 Agreement Concerning Entrustment of the Heat Treatment
Plant with Processing Tasks (1)
10.3 Agreement Concerning Transfer of Intangible Assets (1)
10.4 Agreement Concerning the Provision of Power, Water Supply
and Welfare Facilities (1)
10.5 Supplementary Agreement on the Transfer of Intangible
Assets (1)
10.6 Agreement Concerning the Leasing of Land, Buildings and
Motor Vehicles (1)
10.7 Supplementary Agreement on the Leasing of Land, Buildings
and Motor Vehicles (1)
10.8 Agreement Concerning Matters Relating to the Establishment
of the Financial Accounts for the Joint Venture(1)
10.9 Agreement concerning the Injection of Assets of three
Production Workshops (1)
10.10 Supplementary Agreement Concerning Collection of Account
Receivables and Allocation of Expenses Incurred on the
Collection of Accounts Receivable (1)
10.11 1996 Stock Option Plan (1)
II-3
<PAGE>
10.12 Employment Agreement with Kwok Kwan Hung (1)
10.13 Agreement to Extend Date of Installment Contribution (1)
10.14 Supplementary Agreement on the Leasing of Land, Buildingd, and
Motor Vehicles (3)
10.15 Supplementary Agreement Concerning the Provisions of WelFare
Facilities (3)
10.16 Agreement concerning Interest on the amounts due from OVM
Joint Stock Co. Ltd. and its Affiliates (3)
10.17 Supplementary Agreement to Extend the Date of Installment
Contribution (3)
21 Subsidiaries of the Registrant (3)
23(i) Consent of Ernst & Young (4)
23(ii) Consent of Atlas, Pearlman, Trop & Borkson, P.A. (included
as part of Exhibit 5) (1)
27 Financial Data Schedule (4)
- ---------------------
1 Previously filed
2 Incorporated by reference to Exhibit 4 to the Company's Registration on Form
8-A filed January 8, 1998
3 Incorporated by reference to the exhibit of the same number filed with the
Company's Annual Report on form 10-KSB (File No. 0-29482)
4 Filed herewith
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities being made, a post-effective amendment to this Registration
Statement:
(i) To include any Prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information set forth in the Registration Statement;
(iii) To include any additional or changed material
information with respect to the plan of distribution.
(2) For determining any liability under the Securities Act of
1933, as amended, treat each post-effective amendment as a new registration
statement relating to the securities offered, and the offering of the securities
at that time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove any of the
securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "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 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
II-4
<PAGE>
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 Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this POST-EFFECTIVE
AMENDEMENT to its Registration Statement to be signed on its behalf by the
undersigned in Hong Kong on September 28, 1998.
OVM INTERNATIONAL HOLDING CORP.
By:/s/Ching Lung Po
----------------------------
Ching Lung Po, Chairman of
Board and President
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Ching Lung Po and Wu Guosen or either of
them, such person's true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for such person and in such person's name,
place and stead, in any and all capacities (including such persons' capacity as
a director and/or officer of OVM International Holding Corp.) to sign any and
all amendments (including post-effective amendments pursuant to Rule 462(b) or
otherwise) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorney-in-fact and agent, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement was signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the
/s/Ching Lung Po Board of Directors,
- ------------------------- President and Principal September 28, 1998
Ching Lung Po Executive Officer
/s/Wu Guosen Vice Chairman of the September 28, 1998
- ------------------------- Board
Wu Guosen
/s/Kwok Kwan Hung Principal Financial September 28, 1998
- ------------------------- and Accounting
Kwok Kwan Hung Officer and Director
/s/Wan Ying Lin Director September 28, 1998
- -------------------------
Wan Ying Lin
/s/Cheung Lai Treasurer September 28, 1998
- -------------------------
Cheung Lai
/s/Wan Wai On Secretary and Director September 28, 1998
- -------------------------
Wan Wai On
/s/Chen Xue Ming Director September 28, 1998
- -------------------------
Chen Xue Ming
/s/Shao Huo Kun Director September 28, 1998
- -------------------------
Shao Huo Kun
</TABLE>
II-6
Consent of Independent Auditors
We consent to the reference to our firm under the caption "EXPERTS" and to the
use of our report dated March 23, 1998, in the Post-effective Amendment No. 1 to
the Registration Statement (Form SB-2 No. 333-27119) of OVM International
Holding Corporation for the registration of 50,000 shares of its common stock
and 4,000,000 shares of common stock issuable upon the exercise of common stock
purchase warrants issued by the Company.
Ernst & Young
Hong Kong
September 28, 1998
