SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-29482
OVM INTERNATIONAL HOLDING CORP.
(Name of Small Business Issuer in Its Charter)
NEVADA 88-0344135
(State or other jurisdiction (I.R.S. Employer
of incorporation or Organization) Identification No.)
WEST 516 SPRAGUE AVENUE
SPOKANE, WASHINGTON 99204
(Address and Principal Executive Offices)(Zip Code)
(509)747-8590
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Securities Exchange Act of
1934:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Securities Exchange Act of
1934:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
(Title of class)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State registrant's revenues for the year ended December 31, 1997. $15,798,000
State the aggregate market value of the voting stock held by non-affiliates of
the registrant on March 27, 1998 computed by reference to the closing bid price
of the registrant's Common Stock as reported by THE WALL STREET JOURNAL on that
date. $12,875,500
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's Common Stock, par value
$.0001 per share (the "Common Stock"), as of March 27, 1998, was 12,050,000.
Transitional Small Business Disclosure Format (check one):
Yes _____ No X__
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CONVENTIONS
Unless otherwise specified, all references in this report to "US
Dollars" or "US$" are to United States dollars; all references to "Hong Kong
Dollars" or "HK$" are to Hong Kong dollars; and all references to "Renminbi" or
"Rmb" are to Renminbi yuan, which is the lawful currency of the People's
Republic of China ("China" or "PRC"). OVM International Holding Corporation (the
"Company") and OVM Development Limited ("ODL") maintain their accounts in US
Dollars and Hong Kong Dollars, respectively. Liuzhou OVM Construction Machinery
Company Limited ("Liuzhou OVM") maintains its accounts in Renminbi. The
financial statements of the Company and its subsidiaries are prepared in
Renminbi. Translations of amounts from Renminbi to US Dollars and from Hong Kong
Dollars to US Dollars are for the convenience of the reader. Unless otherwise
indicated, any translations from Renminbi to US Dollars or from US dollars to
Renminbi have been made at the single rate of exchange as quoted by the People's
Bank of China (the "PBOC Rate") on December 31, 1997, which was US$1.00 =
Rmb8.29. The Renminbi is not freely convertible into foreign currencies and the
quotation of exchange rates does not imply convertibility of Renminbi into US
Dollars or other currencies. Translations from Hong Kong Dollars have been made
at the single rate of exchange as quoted by the Hongkong and Shanghai Banking
Corporation Limited on December 31, 1997, which was US$1.00 = HK$7.775. All
foreign exchange transactions take place in the PRC either through the Bank of
China or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the People's Bank of China. No representation is made
that the Renminbi or US Dollars amounts referred to herein could be converted
into US Dollars or Renminbi, as the case may be, at the PBOC Rate or at all.
FORWARD-LOOKING STATEMENTS
The following discussion regarding the Company and its business and
operations contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may", "expect", "anticipate",
"believe", "estimate" or "continue" or the negative thereof or other variations
thereon or comparable terminology. The reader is cautioned that all
forward-looking statements are necessarily speculative and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward looking-statements. The
Company does not have a policy of updating or revising forward-looking
statements and thus it should not be assumed that silence by management of the
Company over time means that actual events are bearing out as estimated in such
forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF 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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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.
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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
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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
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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.
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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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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.
Year Ended December 31
1997 1996
---- ----
(Amounts in Thousands)
Product Rmb US$ % Rmb US$ %
- -------
OVM anchorage system 60,711 7,323 46.4 45,205 5,453 28.0
Jack 24,420 2,946 18.6 29,697 3,582 18.4
High-pressure oil pump 4,920 593 3.8 5,996 723 3.7
Cable, tendon and steel wire 7,293 880 5.6 51,797 6,248 32.1
Other equipment and parts 28,224 3,405 21.6 18,901 2,280 11.7
*Others 5,394 651 4.0 9,896 1,194 6.1
------ ----- ---- ------ ------ ----
Total 130,962 15,798 100.0 161,492 19,480 100.0
======= ====== ===== ======= ====== =====
*Others include rubber engineering products, corrugation pipes and digital
display sensors.
For each of the two years ended December 31, 1996 and 1997, 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% and 20.2%, 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 accounted for approximately 30.0%
and 4.1%, respectively, of the Company's total sales by value. The single
largest customer
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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.
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$5,834,000) 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
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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, the cost of raw materials and
components accounted for approximately 84% and 74%, 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, the largest
ten suppliers of raw materials and components of the Company accounted for
approximately 64.3% and 43.3%, respectively, of the Company's total cost of
purchases, while the largest supplier accounted for approximately 50.0% and
20.9% 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$4,688,000), 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.
-11-
<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 Rmb300,000 (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 were Rmb 1,152,000 (US$139,000)
and Rmb 4,467,000 (US$539,000), 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% and 1.4% of total sales for each of the two years ended December 31, 1996
and 1997. For each of the two years ended December 31, 1996 and 1997, the
aggregate research and development expenses incurred by the Company amounted to
approximately Rmb 453,000 (US$55,000) and Rmb 1,849,000 (US$223,000),
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.
LEGAL SYSTEM
Since 1979, many laws and regulations addressing economic matters in
general have been promulgated in the PRC. Despite this activity in developing
the legal
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<PAGE>
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
operations or prospects of the Company.
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.
ITEM 2. DESCRIPTION OF PROPERTIES
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".
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending or threatened against
the Company or any of its subsidiaries as of December 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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
- ---------------------
* 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, 1998.
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 Form
10-KSB consist of 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 8.29 which represents the single rate of exchange as quoted by the People's
Bank
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<PAGE>
of China on December 31, 1997. 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.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items
from the Company's Statement of Operations expressed as a percentage of the
Company's net sales.
Years ended December 31,
1996 1997
---- ----
Net sales 100.0% 100.0%
Cost of sales 65.0 64.0
Gross profit 35.0 36.0
Selling and administrative
expenses 16.9 24.3
Provision for bad debt expenses 2.7 7.7
Interest expenses, net 3.8 1.6
Other income 2.2 0.2
Foreign exchange loss - 0.5
Reorganizational expenses 1.6 -
Income before income taxes 12.2 2.1
Income taxes - -
Net income after income taxes 12.2 2.1
Share of profit of an associated
company 0.1 -
Net income before minority
interests 12.3 2.1
Minority interests 4.4 1.2
Net income 7.9 0.9
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$3,683,000) or 19% to Rmb 130,962,000
(US$15,798,000) compared to Rmb 161,492,000 (US$19,480,000) 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$5,834,000) 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$1,129,000) or 16.6% to Rmb
47,128,000 (US$5,685,000) for the year ended December 31, 1997 compared to Rmb
56,484,000 (US$6,814,000) 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
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<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$533,000) or 16% to Rmb 31,763,000
(US$3,831,000) for the year ended December 31, 1997 compared to Rmb 27,341,000
(US$3,298,000) 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 BAD DEBT EXPENSES. The provision for bad debt expenses
increased by Rmb 5,671,000 (US$684,000) or 131% to Rmb 10,000,000 (US$1,206,000)
for the year ended December 31, 1997 compared to Rmb 4,329,000 (US$522,000) 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$827,000) and Rmb 87,188,000 (US$10,517,000), 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$5,609,000) and Rmb 58,838,000
(US$7,097,000), 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$741,000) 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$440,000) 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. 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.
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<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, 1997 and 1996 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.
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 62,349,000
(US$7,521,000) and Rmb 63,055,000 (US$7,606,000), as of December 31, 1996 and
1997, respectively. Net cash provided by operating activities for the year ended
December 31, 1996 was Rmb 35,293,000 (US$4,257,000). Net cash used in operating
activities was Rmb 4,063,000 (US$490,000) for the year ended December 31, 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, 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 were Rmb 1,152,000 (US$139,000) and Rmb 4,467,000
(US$539,000), respectively.
The Company's capital expenditure has been principally funded by the
short-term bank loans. As at December 31, 1996 and 1997, the Company had
outstanding short term bank loans of Rmb 41,424,000 (US$4,997,000) and Rmb
41,420,000 (US$4,996,000), 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
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<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. The
Company is having, and will continue to have, formal communications with all of
its significant customers, payers, suppliers, and other third parties to
determine the extent, if any, to which the Company's interface systems could be
impacted by any third party Year 2000 issues and related remedies. 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.
ITEM 7. FINANCIAL STATEMENTS
The Company's audited consolidated financial statements for two years
ended December 31, 1996 and 1997 are included herewith as Appendix A and
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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
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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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.
ITEM 10. 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>
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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
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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 March 31, 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 amounted to Rmb 1,894,000 (US$228,000) and Rmb 2,032,000 (US$245,000),
respectively.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 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
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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 March 31, 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
Mr. Ching Lung Po 6,057,000(2) 50.2%
Room 1015, Blck M. Telford Garden
Kowloon Bay, Hong Kong(4)
Mr. 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
Officers and Directors as a group 6,057,000 50.2%
(8 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)
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<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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 extension of the installment due date was requested by Kolcari
(the Company's wholly-owned subsidiary, now known as ODL) because it was
determined by the joint venture partners that the joint venture did not yet
require the balance of Kolcari's capital contribution for the joint venture's
operating requirements. In the event Kolcari defaults in the payment of its
installment obligation, and such default continues for 30 days following written
notice of default from the Stock Company (the PRC joint venture partner), the
Stock Company may apply for revocation of the joint venture. However, if both
parties to the joint venture agree to a further extension of the payment date,
it can generally be expected that such extension will be approved by the
governing regulatory authority. Management believes that Kolcari has sufficient
funds available to it to permit it to meet its final installment obligation to
the joint venture.
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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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 amounted to and Rmb 6,884,000 (US$830,000) and Rmb 14,094,000
(US$1,700,000), 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$965,000) (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
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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, Liuzhou OVM
had sales amounting to approximately Rmb33,000 (US$4,000) and Rmb 998,000
(US$121,000), 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 and Rmb 4,391,000 (US$530,000) and Rmb 7,378,000
(US$890,000), respectively, for the year ended December 31, 1997. 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: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, a rental income of Rmb 684,000 (US$82,000) and Rmb 684,000 (US$82,000),
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) and Rmb 816,000 (US$98,000), respectively,
was incurred by Liuzhou OVM for each of the two years ended December 31, 1996
and 1997.
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PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements are filed as a part of this Form
10-KSB in Appendix A hereto:
Independent auditors' report, together with consolidated financial
statements for the Company and subsidiaries, including:
a. Consolidated statements of income for the two years ended
December 31, 1996 and 1997
b. Consolidated statements of changes in shareholders' equity for
the two years ended December 31, 1996 and 1997
c. Consolidated balance sheets as of December 31, 1997
d. Consolidated statements of cash flows for the two years ended
December 31, 1996 and 1997
e. Notes to consolidated financial statements
REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1997, the
Company filed no reports on Form 8-K.
EXHIBITS
Exhibits Exhibit Description
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)
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 Accounts
Receivable and Allocation of Expenses Incurred on the Collection
of Accounts Receivable(1)
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10.11 1996 Stock Option Plan(1)
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, Buildings
and Motor Vehicles(3)
10.15 Supplementary Agreement Concerning the Provision 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)
27 Financial Data Schedule(3)
- ----------------------------
(1) Incorporated by reference to the exhibit of the same number filed with the
Company's Registration Statement on Form SB-2 (File No. 333-27119).
(2) Incorporated by reference to Exhibit 4 to the Company's Registration
Statement on Form 8-A filed January 8, 1998.
(3) Filed herewith
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OVM INTERNATIONAL HOLDING CORP,
By: /s/Ching Lung Po
-------------------------------
Ching Lung Po, Chairman of
Board, President and Principal
Executive Officer
By: /s/Kwok Kwan Hung
-------------------------------
Kwok Kwan Hung, Principal
Financial and Accounting
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Ching Lung Po Chairman of the April 15, 1998
- ---------------------- Board of Directors,
Ching Lung Po President and Chief
Executive Officer
/s/ Wu Guosen Vice Chairman of the April 15, 1998
- ----------------------- Board
Wu Guosen
/s/Kwok Kwan Hung Director April 15, 1998
- -----------------------
Kwok Kwan Hung
-33-
<PAGE>
/s/Wan Ying Lin Director April 15, 1998
- -----------------------
Wan Ying Lin
/s/Cheung Lai Treasurer April 15, 1998
- -----------------------
Cheung Lai
/s/Wan Wai On Secretary and Director April 15,1998
- -----------------------
Wan Wai On
-34-
<PAGE>
APPENDIX A
Independent auditors' report, together with consolidated financial
statements for the Company and subsidiaries, including:
a. Consolidated statements of income for the two years ended
December 31, 1996 and 1997
b. Consolidated statements of changes in shareholders' equity for
the two years ended December 31, 1996 and 1997
c. Consolidated balance sheets as of December 31, 1997
d. Consolidated statements of cash flows for the two years ended
December 31, 1996 and 1997
e. Notes to consolidated financial statements
-35-
<PAGE>
Consolidated Financial Statements
OVM INTERNATIONAL HOLDING CORPORATION
December 31, 1997
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
OVM INTERNATIONAL HOLDING CORPORATION
Report of Independent Auditors ................................. F-1
Consolidated Balance Sheet ..................................... F-2
Consolidated Statements of Income .............................. F-3
Consolidated Statements of Cash Flows .......................... F-4
Consolidated Statements of Changes in Shareholders' Equity ..... F-5
Notes to Consolidated Financial Statements ..................... F-6 - F-22
<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-1
<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 RMB13,076 4 113,671 13,712
Inventories 5 34,745 4,191
Prepayments, deposits and other receivables,
net of allowance of RMB1,253 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$0.0001 each
Additional paid-in capital 14 30,795 3,715
Currency translation adjustments 66 8
Retained earnings 28,263 3,409
-------- --------
Total stockholders' equity 59,134 7,133
-------- --------
Total liabilities and stockholders' equity 248,640 29,992
======== ========
The accompanying notes form an integral part of these
consolidated financial statements.
</TABLE>
F-2
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
Year ended December 31,
Notes 1996 1997 1997
RMB RMB US$
---- ---- ----
<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 RMB4,203 and RMB12,815;
sub-contracting charges paid to related parties of
RMB6,884 and RMB14,094; rental expenses for
leasing of plant and machinery from related parties
of RMB2,673 and RMB3,406 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 RMB3,648 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-3
<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-4
<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-5
<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 (RMB51,000) which includes a registered capital of
US$4,000 (RMB34,000). 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 (RMB23,800). 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-6
<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-7
<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-8
<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$1.00 = RMB8.29. No representation is made that the RMB amounts
could have been, or could be, converted into US$ at that rate on
December 31, 1997 or at any other date.
F-9
<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 RMB453
and RMB1,849, 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-10
<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-11
<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-12
<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 RMB191 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 RMB37,420 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 RMB164.
F-13
<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-14
<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 RMB5,785 and RMB1,664 (RMB0.48 and
RMB0.14 per share), respectively.
F-15
<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 RMB31,700 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 RMB9,711.
No deferred income taxes have been provided as the effect of all
temporary differences is not material.
F-16
<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,
RMB34,234 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 : RMB8.30 US$1: RMB8.29
Singapore dollars ("S$") S$1: RMB5.83 S$1: RMB4.97
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 RMB1,410 and RMB1,332,
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 RMB484 and RMB700,
respectively.
The JV has no obligation for the payment of pension benefits beyond
the annual contributions described above.
F-17
<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-18
<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 RMB33 and RMB998, 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
RMB8,147 and RMB1,003, 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-19
<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
RMB8,147 and RMB1,003, 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-20
<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 RMB36,815.
F-21
<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 RMB300, respectively.
F-22
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBERS DESCRIPTION
- ------- -----------
10.14 Supplementary Agreement on the Leasing of Land, Buildings and
Motor Vehicles
10.15 Supplementary Agreement Concerning the Provision of Welfare
Facilities
10.16 Agreement Concerning Interest on the Amounts due from OVM Joint
Stock Co. Ltd. and its Affiliates
10.17 Supplementary Agreement to Extend the Date of Installment
Contribution
21 Subsidiaries of the Registrant
27 Financial Data Schedule
-60-
EXHIBIT 10.14
Supplementary Agreement on the Leasing of Land,
Buildings and Motor Vehicles
(LJ9701-C)
Party A: Liuzhou OVM Joint Stock Co., Ltd.
Party B: Liuzhou OVM Construction Machinery Co., Ltd.
WHEREAS both parties have entered into an Agreement Concerning the
Leasing of Land, Buildings and Motor Vehicles dated June 5, 1995 and a
Supplementary Agreement dated September 28, 1995.
Upon friendly negotiation between both parties to this Agreement,
matters with respect to the leasing of land, buildings and motor vehicles for
the fiscal years 1997 to 1999 were agreed as follows:
1. The land, buildings and motor vehicles that leased by Party B from Party A
were detailed as follows: 1.1 the land with a gross area of 60,000 square
meters; 1.2 the buildings, warehouses and offices with a gross area of
9,463 square meters; 1.3 22 vehicles for transportation purposes.
2. For each of three fiscal years 1997 to 1999, Party B pays Party A the
rental of Rmb300,000, respectively, for leasing of the land, buildings and
motor vehicles detailed above.
3. For fiscal years 2000 and thereafter, the rental shall be subject to
further negotiation between the two parties.
For and on behalf of
Party A: Liuzhou OVM Joint Stock Co., Ltd.
/s/ Wu Guosen
- --------------------------
Wu Guosen
For and on behalf of
Party B: Liuzhou OVM Construction Machinery Co., Ltd.
/s/ Ching Lung Po
- --------------------------
Ching Lung Po
Dated: December 1, 1997
EXHIBIT 10.15
Supplementary Agreement Concerning the
Provision of Welfare Facilities
(LJ9701-E)
Party A: Liuzhou OVM Joint Stock Co., Ltd.
Party B: Liuzhou OVM Construction Machinery Co., Ltd.
Since the establishment of Party B, both parties to this Agreement have
undergone structural changes on the internal operation and management. Staff
welfare facilities originally managed and operated by Party A like canteen,
dormitory and medical facilities, are now independently run or subcontracted.
Party A is no longer responsible for the costs in providing these staff welfare
services. The costs for using these facilities have been taken into
consideration in determining the staff payroll and the employees are now
required to pay for the use of these facilities.
Accordingly, upon mutual agreement, Articles 5, 6 and 7 of the original
Agreement Concerning the Provision of Power, Water Supply and Welfare Facilities
date June 5, 1995, which govern the requirement by Party B to pay an
administration fee to Party A in the use of the welfare facilities by Party B's
employees, will be cancelled with effect from January 1, 1997.
For and on behalf of
Party A: Liuzhou OVM Joint Stock Co., Ltd.
/s/ Wu Guosen
- --------------------------
Wu Guosen
For and on behalf of
Party B: Liuzhou OVM Construction Machinery Co., Ltd.
/s/ Ching Lung Po
- --------------------------
Ching Lung Po
Dated: December 1, 1997
EXHIBIT 10.16
Agreement Concerning Interest on the Amounts due from
OVM Joint Stock Co. Ltd. and its Affiliates
(LJ9701-B)
Party A: Liuzhou OVM Joint Stock Co., Ltd.
Party B: Liuzhou OVM Construction Machinery Co., Ltd.
WHEREAS Party A and its affiliates have been utilizing the bank loan
facilities and liquid funds of Party B.
NOW THEREFORE, pursuant to mutual negotiation, it is agreed that Party
B shall charge interest to Party A and its affiliates for their use of Party B's
bank loans and liquid funds as follows:
1. Party A and its affiliates agree to pay interest to Party B on their use of
Party B's bank loans and liquid funds;
2. The interest charge shall be calculated based on the prevailing average
bank borrowing rate;
3. The interest shall be paid by Party A and its affiliates to Party B at the
end of each individual fiscal year.
4. This Agreement shall become effective from January 1, 1997.
For and on behalf of
Party A: Liuzhou OVM Joint Stock Co., Ltd.
/s/ Wu Guosen
- --------------------------
Wu Guosen
For and on behalf of
Party B: Liuzhou OVM Construction Machinery Co., Ltd.
/s/ Ching Lung Po
- --------------------------
Ching Lung Po
Dated: December 1, 1997
EXHIBIT 10.17
Supplementary Agreement to Extend the
Date of Installment Contribution
(LJ9702)
Party A: Liuzhou OVM Joint Stock Co., Ltd.
Party B: OVM Development Limited (formerly known as "Kolcari
Investment Limited")
WHEREAS, both parties entered into a Joint Venture Contract (the "Contract")
dated May 1, 1995, pursuant to which, both parties agreed to establish Liuzhou
OVM Construction Machinery Co., Ltd. ("Liuzhou OVM"), as a joint venture limited
liability company. The Contract also provided that Party B should contribute
cash in an amount of US$2,800,000. As of the end of fiscal year 1995, Party B
had already made the cash contribution of US$2,170,000 under two installments,
with the balance of US$630,000 which remains outstanding as at the date of this
Agreement. Pursuant to an Agreement to Extend Date of Installment Contribution
between the parties dated March 28, 1997, both parties agreed to extend the due
date for the last installment up to December 31, 1997.
NOW, upon friendly negotiation, both parties agreed to further extend the due
date for the last installment contribution of US$630,000 by Party B to June 30,
1998. The extension of the due date for the last cash installment shall not, in
any way, affect the rights that have been enjoyed by Party B under the Contract.
For and on behalf of
Party A: Liuzhou OVM Joint Stock Co., Ltd.
/s/ Wu Guosen
- --------------------------
Wu Guosen
For and on behalf of
Party B: OVM Development Limited
/s/ Ching Lung Po
- --------------------------
Ching Lung Po
Dated: December 19, 1997
EXHIBIT 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Name Jurisdiction Percentage Ownership
<S> <C> <C>
OVM Development Limited British Virgin Islands 100%
Liuzhou OVM Construction People's Republic 70% (by ODL)
Machinery Company Limited of China
OVM Prestress Co. Pte. Republic of Singapore 50% (by Liuzhou OVM)
Ltd.
Liuzhou OVM Trading People's Republic 95% (by Liuzhou OVM)
Co. Ltd. of China
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-KSB REPORT OF OVM INTERNATIONAL HOLDING CORP FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> RENMINBI YUAN
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 8.29
<CASH> 13,956
<SECURITIES> 0
<RECEIVABLES> 113,671
<ALLOWANCES> 13,076
<INVENTORY> 34,745
<CURRENT-ASSETS> 222,899
<PP&E> 18,350
<DEPRECIATION> 5,612
<TOTAL-ASSETS> 248,640
<CURRENT-LIABILITIES> 159,844
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 59,124
<TOTAL-LIABILITY-AND-EQUITY> 248,640
<SALES> 130,962
<TOTAL-REVENUES> 135,284
<CGS> 83,834
<TOTAL-COSTS> 83,834
<OTHER-EXPENSES> 32,463
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 6,192
<INCOME-PRETAX> 2,795
<INCOME-TAX> 9
<INCOME-CONTINUING> 2,786
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,145
<EPS-PRIMARY> 0.1
<EPS-DILUTED> 0.1
</TABLE>
