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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-29482
OVM INTERNATIONAL HOLDING CORP.
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(Name of Small Business Issuer in Its Charter)
NEVADA 88-0344135
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Organization) Identification No.)
WEST 516 SPRAGUE AVENUE
SPOKANE, WASHINGTON 99204
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(Address and Principal Executive Offices)(Zip Code)
(509)744-8590
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(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
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None None
Securities registered under Section 12(g) of the Securities Exchange Act of
1934:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
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(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, 1998. $20,567,000
State the aggregate market value of the voting stock held by non-affiliates of
the registrant on March 29, 1999 computed by reference to the closing bid price
of the registrant's Common Stock as reported by THE WALL STREET JOURNAL on that
date. $359,580
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of the registrant's Common Stock, par value
$.0001 per share (the "Common Stock"), as of March 29, 1999, was 12,050,000.
Transitional Small Business Disclosure Format (check one):
Yes _____ No X
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DOCUMENTS INCORPORATED BY REFERENCE
None.
CONVENTIONS
Unless otherwise specified, all references in this report to "US
Dollars" or "US$" 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, 1998, which was US$1.00 =
Rmb8.28. 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, 1998, which was US$1.00 = HK$7.75. 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 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 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. Thereafter, the general manager is nominated and appointed by the
board of directors of the joint venture. 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
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products include anchorage systems, jacks, electric high-pressure oil pumps,
steel cables, direct display sensors, unbonded prestressing tendons and
ancillary equipment widely used in the construction industry. Liuzhou OVM is the
successor to the manufacturing business originally conducted by the Factory.
Accordingly, the following discussion is principally a description of the
business of Liuzhou OVM or that of its predecessor, the Factory.
OVM's products are distributed throughout the PRC to a diversified
customer base, with a small 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 1998, the regional gross domestic product in
Guangxi amounted to approximately Rmb 202 billion (US$24 billion), ranking it
15th in the PRC in 1997.
While the Company's indirect participation in the joint venture
originated in 1995, Liuzhou OVM (inclusive of the operations of the Factory) has
over 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, 1997 and 1998. Given the name recognition of the "OVM" brand 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 over 50% in China in 1998.
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STRUCTURE
The following diagram depicts the corporate structure of the Company as at
December 31, 1998.
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| OVM International Holding |
| Corporation (Nevada) |
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|
100%
|
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| OVM Development Limited |
| (British Virgin Islands) |
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|
| -----------------------------
| | Liuzhou OVM Joint Stock |
| | Company Limited (formerly |
| | known as Liuzhou |
| | Construction Machinery |
| | General Factory (People's |
| | Republic of China) |
| -----------------------------
70% |
| 30%
| |
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| Liuzhou OVM Construction | |
| Machinery Company Limited |---------------
|(People's Republic of China) |
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|
|
------------------------------------------------
| |
50% 69.3%
| |
- ----------------------- ------------------------
| OVM Prestress Co. | | Liuzhou Prestress |
| Pte Ltd. (Republic | | Construction Co. Ltd.|
| 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
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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 PRESTRESS CONSTRUCTION CO. LTD. (the "Construction Company") is
a limited liability company established under the laws of PRC on February 28,
1987. The Construction Company was previously a subsidiary company of the Stock
Company. On October 17, 1997, Liuzhou OVM acquired a 69.3% interest in the
Construction Company for consideration of Rmb 6,930,000. The registered capital
of the Construction Company is Rmb 10,000,000.
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 providing prestressing and related
engineering services.
In December 1998, the Company caused the dissolution of a 95% owned
subsidiary, Liuzhou OVM Trading Company Limited (the "Trading Company"), which
was a limited liability company established under the laws of PRC. All the
assets and liabilities of the Trading Company were assumed by Liuzhou OVM at
cost and the retained earnings of the Trading Company were distributed as
dividends to the shareholders.
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 over 50% in
China in 1998.
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.
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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 Tianhong Bridge in Tianjin
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
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 level. In fact,
members can be designed to have zero deflection under the combined effects of
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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.
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, Japan, Pakistan 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 other
institutional shareholders which are mainly technical and research institutes in
the PRC. Liuzhou OVM is also a shareholder of Orient. The Stock Company, being
the successor to 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 among 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. Following its establishment, Liuzhou OVM assumed,
effective from January 1, 1995, certain assets and liabilities together with the
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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 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).
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 and anchoring heavy
objects.
DIGITAL DISPLAY SENSORS. Model SC sensor is equipped with proprietary
capabilities 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
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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, 1998.
Year Ended December 31
----------------------
1998 1997
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(Amounts in Thousands)
Product Rmb US$ % Rmb US$ %
- -------
OVM anchorage system 92,483 11,170 54.3 60,711 7,332 46.4
Jack 22,151 2,675 13.0 24,420 2,949 18.6
High-pressure oil pump 6,113 738 3.6 4,920 594 3.8
Cable, tendon and steel wire 15,198 1,836 8.9 7,293 881 5.6
Other equipment and parts 27,426 3,312 16.1 28,224 3,409 21.6
*Others 6,923 836 4.1 5,394 651 4.0
------- ------ ---- ------ ------ ----
Total 170,294 20,567 100.0 130,962 15,816 100.0
======= ====== ===== ======= ====== =====
- -----------------
*Others include rubber engineering products, corrugation pipes and digital
display sensors.
For each of the two years ended December 31, 1997 and 1998, the largest
ten customers of the Company, which are mainly construction and engineering
companies and provincial, municipal and regional construction bureaus throughout
the PRC, accounted for approximately 20.2% and 13.5%, respectively, of the
Company's total sales by value. The largest customer of the Company for each of
the two years ended December 31, 1997 and 1998 accounted for approximately 4.1%
and 3.8%, respectively, of the Company's total sales by value. No single
customer accounted for more than 10% in 1997 and 1998, respectively.
For each of the two years ended December 31, 1997 and 1998,
approximately 96% and 94%, 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 107 full-time
employees, of which 23 are after sales technicians. These personnel are
responsible for conducting marketing research, training seminars, 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, Ningbo, Kunming. The Company also maintains
overseas offices in Hong Kong and Singapore. 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.
The Company has entered into non-exclusive agreements with some agency
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, 1997 and 1998.
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 4% and 6% of the
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Company's total sales for each of the two years ended December 31, 1998. All
export sales are denominated in U.S. dollars.
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 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. In prior years, all of the raw materials and components used by the
Company were sourced from PRC suppliers and/or through the manufacture of
various components at its own facilities which were settled in Rmb. In 1998,
approximately 20% of the total purchases were imported from Japan and were
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settled in US dollars. The imported raw materials have better quality but with
slightly higher price than the domestic raw materials. For each of the two years
ended December 31, 1997 and 1998, the cost of raw materials and components
accounted for approximately 74% and 62%, 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, 1997 and 1998, the largest
ten suppliers of raw materials and components of the Company accounted for
approximately 43.3% and 39.7%, respectively, of the Company's total cost of
purchases, while the largest supplier accounted for approximately 20.9% and
16.0% of the Company's total cost of purchases, respectively, for the same
periods.
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 1998, the regional gross domestic product of
Guangxi amounted to approximately Rmb 202 billion (US$24 billion), ranking it
15th in the PRC in 1997.
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.
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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, 1997 and 1998 were Rmb 4,467,000 (US$539,000)
and Rmb 11,832,000 (US$1,429,000) and, respectively.
COMPETITION
The Company, through its indirect ownership of Liuzhou OVM and
inclusive of the operations of the Factory, has over 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,
1997 and 1998. 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, 1998 are estimated as
follows:
Estimated
Name Market Share (%)
- ---- ----------------
Liuzhou OVM 50
Liuzhou City Construction Equipment Factory 8
Hefei Wei Shanli Engineering Co. Ltd. 6
Others 36
---
100
===
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
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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. 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 74
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.
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, 1998, 97 full-time employees including 34 engineers. Since 1989,
the Company has developed 40 new products, of which 16 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
1.4% and 0.7% of total sales for each of the two years ended December 31, 1997
and 1998. For each of the two years ended December 31, 1997 and 1998, the
aggregate research and development expenses incurred by the Company amounted to
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approximately Rmb 1,849,000 (US$223,000) and Rmb 1,128,000 (US$146,000),
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 20, 2005
OVM 37 1207928 September 14, 1998 September 13, 2008
OVM 6 1215642 October 14, 1998 October 13, 2008
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 Liuzhou OVM:
Registration Date of
Patent Number Application Date of expiry
- ------ ------ ----------- --------------
Light-weight fire proof
adhesive board 95229844.9 December 29, 1995 December 29, 2005
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
Internal supporter of
Hydraulic lifting jack 97223202.8 May 23, 1997 May 23, 2007
Clipping device of
Hydraulic lifting jack 97223201.X May 23, 1997 May 23, 2007
Protector of steel cable 97217686.1 May 23, 1997 May 23, 2007
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Registration Date of
Patent Number Application Date of expiry
- ------ ------ ----------- --------------
Lifting device of hydraulic
Jack 97219235.2 June 20, 1997 June 20, 2007
Squeezing machine 97220322.2 July 1, 1997 July 1, 2007
Prestressed external cable 97220321.4 July 1, 1997 July 1, 2007
Prestressed anchorage of
Suspension bridge 97220320.6 July 1, 1997 July 1, 2007
Fixing device of bunched
Steel wire multi-anchorage 97220324.9 July 1, 1997 July 1, 2007
Hydraulic drilling device 97220318.4 July 1, 1997 July 1, 2007
Fixing device of bunched
Steel wire multi tensioning
Anchorage 97220323.0 July 1, 1997 July 1, 2007
Positioning device of
Suspension tube 97219481.9 July 5, 1997 July 5, 2007
Squeezing spring 97220194.7 July 11, 1997 July 11, 2007
Sealing device 97219876.8 July 16, 1997 July 16, 2007
Anti-vibration device 97219875.X July 16, 1997 July 16, 2007
Prestressed anchorage 97219877.6 July 16, 1997 July 16, 2007
Adhesive anti-corrosive
Bunched steel wire 97221872.6 July 25, 1997 July 25, 2007
Manual controller of
Hydraulic lifting anchorage 97224527.8 August 13, 1997 August 13, 2007
Anchorage working clip 97224320.8 August 8, 1997 August 8, 2007
Anchorage chipping tool 97244491.2 August 8, 1997 August 8, 2007
Angle precision tool of
Anchor head 97224536.7 August 15, 1997 August 15, 2007
Spring steel wire tensioning
Mode 97224192.2 August 16, 1997 August 16, 2007
Digital hydraulic lifting
And lazar inspecting tool 97229729.4 October 10, 1997 October 10, 2007
Cohesive device 97250188.6 November 24, 1997 November 24, 2007
Heavy-weight hydraulic
Lifting controller 97226645.3 September 15, 1997 September 15, 2007
Heavy object descending
Hydraulic controller 97248226.1 November 4, 1997 November 4, 2007
Hydraulic bore jack 97244363.0 November 16, 1997 November 16, 2007
Flat anchor bottom board 97244362.2 November 16, 1997 November 16, 2007
Non-adhesive anchor head
Anti-corrosive device 98209920.7 January 8, 1998 January 8, 2008
Diversified pressure
Protective anchor 98211605.5 March 11, 1998 March 11, 2008
Exchanging conducting device 97230012.0 December 3, 1997 December 3, 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
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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, 1998, the Company had a total of 933 full-time
employees, 866 and 60 of which were employed by Liuzhou OVM and the Construction
Company, respectively, with the balance being employed in administrative
positions by the Company (5 employees) and ODL (2 employees). These employees
are employed as follows:
Production 556
Administration and management 78
Quality control 74
Research and development 65
Technical, process design and control 32
Sales, marketing and after sales service 107
Raw materials supply 21
---
933
===
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 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.
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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, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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
1997 Fiscal Year, quarter ended
June 30, 1997 $1.38 $1.25
September 30, 1997 $1.38 $1.38
December 31, 1997 $1.38 $1.25
1998 Fiscal Year, quarter ended
March 31, 1998 $4.00 $0.38
June 30, 1998 $4.00 $3.75
September 30, 1998 $3.75 $0.16
December 31, 1998 $0.13 $0.03
- ---------------------
* 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 17, 1999, the approximate number of record holders of the
Company's Common Stock was 794.
The Company also has 4,000,000 outstanding warrants to purchase shares
at U$$3.00 per warrant on or prior to December 23, 1999.
The Company has not paid any cash dividends on its Common Stock since
incorporation. As the Company has significant capital requirements in the
future, it is not anticipated that funds will be available for the issuance of
dividends in the foreseeable future. It is the management's intention to
reinvest all the income attributable to the Company to finance the expansion of
its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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
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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, 1997 and 1998.
The discussions below is presented in the Company's primary operating
currency which is the Renminbi Yuan ("Rmb"). For information purposes these
amounts have been translated into U.S. dollars at an exchange rate of $1.00 =
Rmb 8.28 which represents the single rate of exchange as quoted by the People's
Bank of China on December 31, 1998. This U.S. dollars information is presented
for convenience only. No representation is made that Renminbi amounts could have
been, or could be, converted into U.S. dollars at that rate throughout the years
presented.
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,
1997 1998
---- ----
Net sales 100.0% 100.0%
Cost of sales 64.0 71.0
Gross profit 36.0 29.0
Selling and administrative
expenses 32.0 26.3
Interest expenses, net 1.6 0.8
Other income 0.2 0.4
Foreign exchange loss 0.5 -
Income before income taxes 2.1 2.3
Income taxes - 0.9
Net income after income taxes 2.1 1.4
Share of profit of an associated
company - -
Net income before minority
interests 2.1 1.4
Minority interests 1.2 0.9
Net income 0.9 0.5
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997.
NET SALES AND GROSS PROFIT. Net sales for the year ended December 31,
1998 increased by Rmb 39,332,000 (US$4,750,000) or 30% to Rmb 170,294,000
(US$20,567,000) compared to Rmb 130,962,000 (US$15,817,000) in the prior year.
The increase was mainly due to goods return of Rmb 51,000,000 (US$6,159,000) in
prior year. This increasing effect was partly offset by the reduction of selling
prices of some major products of the Company due to keen competition. Net sales
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represent the invoiced value of goods sold net of sales tax and returns. The
inventory level of raw materials and components as of the year ended December
31, 1998 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 increased by Rmb 2,239,000 (US$270,000) or 4.8% to Rmb
49,367,000 (US$5,962,000) for the year ended December 31, 1998 compared to Rmb
47,128,000 (US$5,692,000) in 1997. The gross profit margin decreased by 7%
points to 29.0% for the year ended December 31, 1998 from 36.0% for the
corresponding period in 1997. This decrease was primarily attributable to the
reduction in selling prices of some major products of the Company due to keen
competition.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses increased by Rmb 3,010,000 (US$364,000) or 7% to Rmb 44,773,000
(US$5,408,000) for the year ended December 31, 1998 compared to Rmb 41,763,000
(US$5,044,000) in the corresponding period in 1997. The increase was due to the
increase in selling expenses, which was in line with the increase in net sales
of the Company, and the increase in salary expenses. This increasing effect was
partially offset by the reduction of provision for doubtful accounts by Rmb
8,355,000 (US$1,009,000) or 84% to Rmb 1,645,000 (US$199,000) for the year ended
December 31, 1998 compared to Rmb 10,000,000 (US$1,208,000) for the
corresponding period in 1997. 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. The significant decrease in
provision for bad debt expenses in 1998 was mainly due to recovery of most of
the aged debtors and less specific provisions for doubtful debtors were made as
most of them are considered recoverable.
INTEREST EXPENSES, NET. Net interest expenses decreased by Rmb796,000
(US$96,000) or 38% to Rmb 1,308,000 (US$158,000) for year ended December 31,
1998 compared to Rmb 2,104,000 (US$254,000) in the corresponding period in 1997.
The decrease was primarily due to the decrease in average bank loan interest
rates from approximately 12% in 1997 to 7-8% in 1998.
OTHER INCOME. Other income increased from Rmb 234,000 (US$28,000) for
the year ended December 31, 1997 to Rmb 603,000 (US$73,000) for the year ended
December 31, 1998. The increase in other income was due to more income from the
sales of accessory products such as packaging materials.
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 30% exclusive of
local tax. Accordingly, no income tax was provided for the year ended December
31, 1997 as it was within the third profitable years of operations. The income
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of Liuzhou OVM for the year ended December 31, 1998 was subject to 15% income
tax rate. It is the management's intention to reinvest all the income
attributable to the Company derived from Liuzhou OVM in 1998 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, and 30.7% equity interest in Liuzhou Prestress Construction Co. Ltd.
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 63,055,000
(US$7,615,000), and Rmb 40,961,000 (US$4,947,000) as of December 31, 1997 and
1998, respectively. Net cash provided by/(used in) operating activities was (Rmb
4,063,000 (US$491,000)) and Rmb 22,449,000 (US$4,063,000) for the year ended
December 31, 1997 and 1998, respectively. 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, 1998, the cash flow used in
investing activities related principally to the acquisition of property,
machinery and equipment.
Capital expenditures for production equipment for the two years ended
December 31, 1997 and 1998 were Rmb 4,467,000 (US$539,000) and Rmb 11,832,000
(US$1,429,000) , respectively.
The Company's capital expenditure has been principally funded by the
short-term bank loans. As at December 31, 1997 and 1998, the Company had
outstanding short term bank loans of Rmb 41,420,000 (US$5,002,000) and Rmb
36,860,000 (US$4,452,000) and, 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
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
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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 0.8%% per annum in 1995, 1996 and 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 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In March 1998, the American Institute of Certified Public Accountants
issue Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which is effective for
fiscal years beginning after December 15, 1998. The Company plans to adopt SOP
98-1 on January 1, 1999. SOP 98-1 will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtained software for internal use. The Company currently expenses such costs as
incurred. The Company does not anticipate that the adoption of SOP 98-1 will
have a significant effect on its results of operations or financial position.
YEAR 2000 ISSUE
The Year 2000 issue is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-digit
format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company's State of Readiness
The Company and its subsidiaries use a limited amount of computer
software primarily in connection with their accounting and financial reporting
systems. Such programs are in the process of being upgraded so that they are
year 2000 compatible.
In addition to software issues, certain of the computer hardware of the
Company and its subsidiaries may need to be replaced with more current
technology. The Company is currently in the process of determining the extent to
which its and its subsidiaries' hardware and other embedded chip equipment and
facilities is not year 2000 compatible, however, neither the Company nor its
subsidiaries maintains a significant amount of computer hardware or other
equipment or facilities which utilize embedded chip technology.
The Costs to Address the Company's Year 2000 Issues
The Company has determined that certain of its accounting and related
software will require upgrading in order to become year 2000 compatible and is
currently in the process of initiating those upgrades. Management does not
believe that the costs of upgrading such software will be material.
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The Company is in the process of identifying which of its and its
subsidiaries' hardware and other equipment and facilities utilizes embedded chip
technology which is not year 2000 compatible. Neither the Company nor its
subsidiaries maintains a significant amount of computer hardware or other
embedded systems, and management believes that the costs of identifying and
correcting potential year 2000 hardware and embedded system problems will not be
material, even if such hardware and embedded systems require replacement.
Based on the limited use of computer software, hardware and embedded
systems by the Company and its subsidiaries, the progress the Company and its
subsidiaries have made in identifying and addressing their year 2000 issues, and
the Company's plan and timeline to complete the compliance program, management
does not foresee significant risks associated with year 2000 compliance by the
Company and its subsidiaries at this time. The Company believes that the costs
directly associated with the year 2000 issue will be less than US$20,000 and
that all required upgrades and replacements will be completed prior to the end
of the third quarter of 1999.
Customer, Supplier and Other Third Party Year 2000 Issues
The Company has material third party relationships with it suppliers,
customers, financial institutions and other third parties with which it conducts
business. If any of these third parties suffer year 2000 deficiencies or
failures, such occurrences could have a material, adverse effect on the Company
and the operation of its business. Accordingly, management has requested and is
evaluating documentation from the Company's significant suppliers and customers,
financial institutions and other third parties relating to their Year 2000
compliance plans. At this time, management has not yet received sufficient
certifications to be assured that such suppliers, customers, financial
institutions, and other third parties have fully considered and mitigated any
potential material impact of the year 2000 deficiencies. Therefore, management
cannot, at this time, predict the potential costs to the Company or its
subsidiaries of any adverse impact or effect of any year 2000 deficiencies by
these third parties.
The Risks of the Company's Year 2000 Issues and Contingency Plans
Although the Company believes that its internal exposure to the year
2000 issue is limited and that its remediation efforts will be successful in
addressing its year 2000 issues, there can be no assurance that such remediation
efforts will be successful or that its upgraded software or any newly installed
systems will be fully year 2000 compatible. At this time, the Company is unable
to accurately predict the consequences of failed remediation efforts or a
failure of the Company's upgraded software or new systems to effectively address
the year 2000 issue, although management does not believe that any such failures
will result in a material, adverse effect on the Company or its subsidiaries, or
the operation of their business.
Any failure of the software or systems of the suppliers, customers,
financial institutions or other third parties with which the Company or its
subsidiaries conducts business to address their year 2000 issues could impair
the Company's ability to perform normal operational functions. Because the
Company is still evaluating the status of the systems of the third parties with
which the Company and its subsidiaries conduct business, management has not yet
developed a comprehensive contingency plan to address the potential adverse
consequences the year 2000 compliance by the parties have on the Company.
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ITEM 7. FINANCIAL STATEMENTS
The Company's audited consolidated financial statements for two years
ended December 31, 1998 and 1997 are included herewith and incorporated herein
by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At a meeting on February 10, 1999, the Board of Directors of the
Company approved the engagement of Horwath Gelfond Hochstaft Pangburn & Co. as
independent auditors of the Company for the fiscal year ended December 31, 1998,
to replace the firm of Ernst & Young ("E&Y"), who were dismissed as the
Company's auditors effective February 10, 1999.
The reports of E&Y on the Company's financial statements for the past
two years did not contain an adverse opinion or disclaimer of opinion, and were
not qualified or modified as to uncertainty, audit scope, or accounting
principles.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1997, and in subsequent interim
period, there were no disagreements with E&Y on any matters of accounting
principles or practices, financial statements disclosure, or audition scope and
procedures which, if not resolved to the satisfaction of E&Y would have caused
E&Y to make reference to the subject matter in their report.
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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
as at March 31, 1999. 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 52 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 50 Director of the Company
Deng Xiao Qiong 47 Director and Chief Financial Officer
of the Company and Deputy General
Manager of Liuzhou OVM
Peng Fang 38 Vice President of the Company and
Deputy General Manager of Liuzhou OVM
Tang Xiaoping 37 Vice President of the Company and
Deputy General Manager of Liuzhou OVM
Cheung Lai 45 Treasurer of the Company and Director
of Liuzhou OVM
Wan Wai On 25 Director and Corporate Secretary of
the Company
MR. CHING LUNG PO, aged 52, 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
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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 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 50, 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 38, 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 45, 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 37, 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 recognized as one of the "Ten Most
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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.DENG XIAO QIONG, aged 47 bas been a Director and the Principal
Financial and Accounting Officer of the Company since January 1999. She is also
the director and Deputy General Manager of Liuzhou OVM. Ms. Deng graduated from
Guangxi Broadcasting Television University specializing in industrial accounting
and obtained the title of accountant in 1987. She joined the Factory as the
deputy accounting supervisor in July 1984. In March 1988, she became the Deputy
Chief Accountant of the Factory and in January 1991, she became the Chief
Accountant of the Factory. Ms. Deng has many years' of experience in financial
management. She is responsible for financial management and control of Liuzhou
OVM and is also responsible for the Company's finance and tax matters, as well
as the overall accounting operations of the Company.
MR. WAN WAI ON, aged 25, 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, 1997 and 1998.
Currently, the Company 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
Xiaoping and Ms. Deng Xiaoqiong, 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, 1998 $62,016 -0- $ -0- $ -0-
President and CEO 1997 $62,016 -0- $ -0- $ -0-
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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, 1998 to each person named in the Summary Compensation Table.
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
- ---- ------- ----------- ---------- ----
Ching Lung Po, -0- -0- -0- -0-
President and CEO
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, 1998 to each person named in the Summary Compensation Table and the
unexercised options held as of the end of the 1998 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
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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 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, 1999, no incentive stock options had been granted.
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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, Ms.
Tang Ziaoping and Ms. Deng Xiao Qiong, 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, 1997 and 1998 amounted to Rmb 2,032,000 (US$245,000) and Rmb 1,428,000
(US$172,000), respectively.
At the end of 1997, Liuzhou OVM implemented an additional retirement
plan of a PRC insurance company for its staff. Under this retirement plan, the
staff will only benefit from the plan if they work in Liuzhou OVM until the
defined age of retirement. The qualified staff is entitled to receive a defined
monthly pension benefit starting from the date of defined age of retirement for
the rest of his life. The total one time premium for the retirement plan of Rmb
4,661,000 (US$563,000) was paid by Liuzhou OVM for the year ended December 31,
1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1999, certain
information regarding the Company's Common Stock beneficially owned by (i) each
shareholder known by the Company to be the beneficial owner of five (5%) percent
or more of the Company's outstanding Common Stock, (ii) each of the Company's
directors, and (iii) all executive officers and directors as a group. In
general, a person is deemed to be a "beneficial owner" of a security if that
person has or shares the power to vote or direct the voting of such security, or
the power to dispose or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which the person has
the right to acquire beneficial ownership within sixty (60) days. As of March
31, 1999, 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
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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) 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
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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 of US$630,000 having been paid as at December 31, 1998.
Following the establishment of Liuzhou OVM, a series of comprehensive
services, leases and assets transfer agreements were entered into between
Liuzhou OVM and the Stock Company and its affiliates. Description of these
agreements are set forth below.
Pursuant to a lease agreement dated June 5, 1995 between Liuzhou OVM
and the Stock Company, the Stock Company agreed to lease and use rights with
gross area of approximately 60,000 sq. meters, production plants and premises
with a gross area of approximately 9,463 sq. meters and 22 transportation
vehicles, to Liuzhou OVM. The lease covering the land use rights, production
plants and premises is for a 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.
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The aggregate subcontracting charges for each of the two years ended December
31, 1997 and 1998 amounted to Rmb 14,094,000 (US$1,702,000) and Rmb 7,312,000
(US$883,000), respectively.
In accordance with an agreement dated June 5, 1995 and a supplementary
agreement dated december 18, 1995 between Liuzhou OVM and the Stock Company, the
Stock Company agreed to transfer its intangible assets including trademarks,
patents, technology and know-how related to existing products and products under
development to Liuzhou OVM at a total consideration of Rmb 8,000,000
(US$966,000) (the "Transfer Fee"). An annual royalty equal to 0.6% of the net
sales (after deducting VAT) is payable by Liuzhou OVM until the full Transfer
Fee is settled. The royalty is payable by Liuzhou OVM each year commencing
January 1, 1997.
In accordance with an agreement dated June 8, 1995 between Liuzhou OVM
and the Stock Company, certain assets and liabilities and the business of the
Stock Company were transferred to Liuzhou OVM commencing January 1, 1995. Under
this agreement, Liuzhou OVM assumed the business of the Stock Company effective
January 1, 1995.
On November 4, 1996, the Company completed the acquisition of all of
the capital stock interests of Kolcari Investments Limited (which thereafter
changed its name to OVM Development Limited) in exchange for 8,800,000 shares of
Common Stock of the Company. In connection with the acquisition, the
shareholders of ODL, Hoi Wai Investments, Ltd., NJI No. 1 (A) Investment Fund,
NJI No. 1 (B) Investment Fund, Nomura/Jarco East Asia Growth Fund, received
6,057,000 shares, 685,750 shares, 685,750 shares and 1,371,500 shares,
respectively, of the Company. Such shareholders acquired their capital stock
interests in ODL on August 17, 1995 for an aggregate cash consideration of
US$2,000,000.
In accordance with a supplementary agreement dated July 29, 1997
between Liuzhou OVM and the Stock Company, the Stock Company agreed to pay an
annual service fee to Liuzhou OVM for the collection of the accounts receivable
and other 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, 1997 and 1998, Liuzhou OVM
had sales amounting to approximately Rmb 998,000 (US$121,000) and Rmb 460,000
(US$56,000), 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
4,391,000 (US$530,000) and Rmb 7,378,000 (US$890,000), respectively, for the
year ended December 31, 1997 and Rmb 24,960,000 (US$3,014,000) and Rmb
19,250,000 (US$2,325,000), respectively, for the year ended December 31, 1998.
Liuzhou OVM also leases certain plant and machinery to the Stock
Company's affiliates. For each of the two years ended December 31, 1997 and
1998, a rental income of Rmb 684,000 (US$82,000) and nil, 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
816,000 (US$98,000) and Rmb 824,000 (US$100,000) and, respectively, was incurred
by Liuzhou OVM for each of the two years ended December 31, 1997 and 1998.
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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 balance sheets as of December 31, 1998
b. Consolidated statements of income for the two years ended
December 31, 1998 and 1997
c. Consolidated statements of cash flows for the two years ended
December 31, 1998 and 1997
d. Consolidated statements of changes in shareholders' equity for
the two years ended December 31, 1998 and 1997
e. Notes to consolidated financial statements
REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1998, the
Company filed no reports on Form 8-K. However, on March 29, 1999, the Company
filed a report on Form 8-K dated February 10, 1999, which reported, in Item 4,
the changes in the Company's certifying accountant. No financial statements were
filed.
EXHIBITS
- --------
<TABLE>
<CAPTION>
Exhibits Exhibit Description
- -------- -------------------
<S> <C>
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)
-35-
<PAGE>
RESTUBED TABLE
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)
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(4)
27 Financial Data Schedule(4)
</TABLE>
- ----------------------------
(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) Incorporated by reference to exhibits on the Company's Form 10-KSB for the
fiscal year December 31, 1997.
(4) Filed herewith
-36-
<PAGE>
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.
April 15, 1999 OVM INTERNATIONAL HOLDING CORP,
By:/s/Ching Lung Po
-------------------------------
Ching Lung Po, Chairman of
Board, President and Principal
Executive Officer
By:/s/Deng Xiao Qiong
-------------------------------
Deng Xiao Qiong, 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
--------- ----- ----
Chairman of the
Board of Directors,
President and Chief
/s/ Ching Lung Po Executive Officer April 15, 1999
- ----------------------
Ching Lung Po
/s/ Wu Guosen Vice Chairman of the
- ---------------------- Board April 15, 1999
Wu Guosen
-38-
<PAGE>
/s/Deng Xiao Qiong Director April 15, 1999
- -----------------------
Kwok Kwan Hung
/s/Wan Ying Lin Director April 15, 1999
- -----------------------
Wan Ying Lin
/s/Cheung Lai Treasurer April 15, 1999
- -----------------------
Cheung Lai
/s/Wan Wai On Secretary and Director April 15, 1999
- ----------------------
Wan Wai On
-38-
<PAGE>
APPENDIX A
Independent auditors' report, together with consolidated financial
statements for the Company and subsidiaries, including:
a. Consolidated balance sheets as of December 31, 1998
b. Consolidated statements of income for the two years ended
December 31, 1998 and 1997
c. Consolidated statements of cash flows for the two years ended
December 31, 1998 and 1997
d. Consolidated statements of changes in shareholders' equity for
the two years ended December 31, 1998 and 1997
e. Notes to consolidated financial statements
<PAGE>
OVM INTERNATIONAL HOLDING CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Contents Page
Report of Independent Auditors F-1
Consolidated balance sheets as of December 31, 1998 F-2
Consolidated statements of income for the two years F-3
ended December 31, 1998 and 1997
Consolidated statements of cash flowsfor the two years F-4
ended December 31, 1998 and 1997
Consolidated statements of changes in shareholders' equity F-5
for the two years ended December 31, 1998 and 1997
Notes to consolidated financial statements F-6 to F-21
<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 and its subsidiaries as of December 31, 1998,
and the related consolidated statements of income, cash flows and changes in
shareholders' equity for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly, in all material respects, the financial position of OVM
International Holding Corporation and its subsidiaries as of December 31, 1998,
and the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
/s/ Horwath Gelfond Hochstaft Pangburn & Co.
Denver, Colorado
April 3, 1999
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998
(Amounts in thousands except share data)
Note RMB US$
--- ---
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and bank balances 25,419 $ 3,070
Accounts receivable, net of allowance of RMB8,243 53,715 6,487
Inventories 4 32,316 3,903
Prepayments, deposits and other receivables, net of allowance of RMB1,253 15,504 1,872
Due from related parties 17 31,198 3,768
----------- -----------
Total current assets 158,152 19,100
Property, machinery and equipment, net 5 21,302 2,573
Accounts receivable, non current, net of allowance of RMB6,478 10,125 1,223
Investments 6 8,873 1,071
Other assets:
Deferred assets 7 4,979 601
Staff housing loans 8 2,391 289
Intangible assets 9 6,503 785
----------- -----------
Total assets 212,325 $ 25,642
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Notes payable 10 36,860 $ 4,452
Accounts payable 36,262 4,379
Advance payments by customers 12,171 1,470
Other payables and accrued liabilities 16,762 2,024
Due to related parties 17 2,770 335
Taxes payable 12,366 1,494
----------- -----------
Total current liabilities 117,191 14,154
Long term related party loan 17 3,069 371
Other long term debt 11 1,050 127
----------- -----------
Total liabilities 121,310 14,652
----------- -----------
Minority interests in consolidated subsidiaries 31,138 3,761
----------- -----------
Commitments and contingencies 12,22
Shareholders' equity:
Common stock, 40,000,000 shares, par value of US$0.0001 authorized;
12,050,000 shares, issued and outstanding 13 10 1
Additional paid-in capital 13 30,795 3,715
Retained earnings 29,038 3,503
Accumulated other comprehensive income 34 10
----------- -----------
Total shareholders' equity 59,877 7,229
----------- -----------
Total liabilities and shareholders' equity 212,325 $ 25,642
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Amounts in thousands except share data)
1998 1997
---- ----
Note RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C> <C>
Sales:
Related parties 17 27,630 $ 3,337 8,636 $ 1,042
Others 142,664 17,230 122,326 14,756
----------- ----------- ----------- -----------
Net sales 170,294 20,567 130,962 15,798
Cost of sales, including costs incurred to
related parties of RMB36,440 and
RMB30,315 in 1998 and 1997, respectively (120,927) (14,605) (83,834) (10,113)
----------- ----------- ----------- -----------
Gross profit 49,367 5,962 47,128 5,685
Selling and administrative expenses (44,773) (5,408) (41,763) (5,038)
----------- ----------- ----------- -----------
Income from operations 4,594 554 5,365 647
Interest expense, including amounts from
related parties of RMB555 and RMB892
in 1998 and 1997, respectively (4,633) (560) (6,192) (747)
Interest income, including amounts from
related parties of RMB3,096 and
RMB3,648 in 1998 and 1997, respectively 3,325 402 4,088 493
Other income 603 73 234 28
Foreign exchange gain (loss) 23 3 (700) (84)
----------- ----------- ----------- -----------
Income before income taxes 3,912 472 2,795 337
Income taxes 14 (1,585) (191) (9) (1)
----------- ----------- ----------- -----------
2,327 281 2,786 336
Minority interests (1,565) (189) (1,675) (202)
Equity in earnings of unconsolidated
subsidiary 13 2 34 4
----------- ----------- ----------- -----------
Net income 775 $ 94 1,145 $ 138
=========== =========== =========== ===========
Basic and diluted earnings per share 3(k) 0.06 $ 0.01 0.10 $ 0.01
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Amounts in thousands except share data)
1998 1997
---- ----
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 775 $ 94 1,145 $ 138
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interests 1,565 189 1,675 202
Equity in earnings of unconsolidated subsidiary (13) (2) 34 4
Depreciation 2,145 259 2,104 254
Amortization 251 30 251 30
Decrease (increase) in assets:
Accounts receivable 49,938 6,031 (8,747) (1,055)
Inventories 6,654 804 1,235 149
Prepayments, deposits and other receivables (1,460) (176) (3,072) (371)
Due from related parties 8,843 1,068 12,337 1,488
Deferred assets (3,146) (380) - -
Staff housing loans (973) (118) - -
Receivable from equity investee (673) (81) - -
Increase (decrease) in liabilities:
Accounts payable (34,404) (4,155) (7,580) (914)
Advance payments by customers (1,098) (133) (842) (102)
Other payables and accrued liabilities (6,317) (763) (615) (74)
Due to related parties 539 65 (3,524) (425)
Taxes payable (177) (21) 1,536 185
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities 22,449 2,711 (4,063) (491)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property, machinery and equipment (4,082) (493) (4,467) (539)
Purchase of investment (3,230) (390) - -
Investment in newly formed subsidiary (6,257) (756) - -
----------- ----------- ----------- -----------
Net cash used in investing activities (13,569) (1,639) (4,467) (539)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Increase in notes payable 15,910 1,921 11,000 1,327
Repayment of notes payable (12,960) (1,565) (11,004) (1,327)
Repayment of long term related party loan (312) (38) (61) (7)
Other - - 25 3
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 2,638 318 (40) (4)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 11,518 1,390 (8,570) (1,034)
Exchange difference (55) (3) - -
Cash and cash equivalents at beginning of year 13,956 1,683 22,526 2,717
----------- ----------- ----------- -----------
Cash and cash equivalents at end of year 25,419 $ 3,070 13,956 $ 1,683
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Amounts in thousands except share data)
Accumulated
Number of Additional other
shares of Common paid-in Retained comprehensive
common stock capital earnings income Total
stock RMB RMB RMB RMB RMB
----- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996 12,050,000 10 30,795 27,118 405 58,328
-----------
Comprehensive income:
Net income - - - 1,145 - 1,145
Currency translation
adjustments - - - - (339) (339)
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income 806
Balances at
December 31, 1997 12,050,000 10 30,795 28,263 66 59,134
-----------
Comprehensive income:
Net income - - - 775 - 775
Currency translation
adjustments - - - - (32) (32)
----------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income 743
Balances at
December 31, 1998 12,050,000 10 30,795 29,038 34 59,877
=========== =========== =========== =========== =========== ===========
U.S.$ $ 1 $ 3,715 $ 3,503 $ 10 $ 7,229
=========== =========== =========== =========== ===========
</TABLE>
F-5
The accompanying notes are an integral part of these financial statements.
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
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, in 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.
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 highways, bridges and buildings, to set up a Sino-foreign equity
joint venture in the PRC under the name of Liuzhou OVM Construction
Machinery Company Limited (the "JV").
As provided in the joint venture agreement, the total investment
for the JV was US$4,000 (RMB34,000). The JV Partner transferred certain
of its property, machinery and equipment to the JV as its 30%
contribution. In addition, the business operations of the JV Partner
were acquired by the JV. The remaining 70% investment was provided by
ODL in 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 contributions are to be made in instalments.
As at December 31, 1997, 70% of ODL's capital was paid. The last
instalment of 30% of ODL's share of capital contributions 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 ODL's capital contribution was extended
to December 31, 1997. On December 19, 1997, the instalment due date for
ODL's capital contribution was further extended to June 30, 1998. On
June 25, 1998, ODL paid the last instalment of the capital contribution
in accordance with the terms of the supplementary agreement dated
December 19, 1997.
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.
F-6
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
1. Organization and principal activities (continued)
On September 30, 1996, IDC changed its name to OVM
International Holding Corporation. Effective 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. These transactions have been
treated as a recapitalization of ODL with ODL as the acquirer (the
"Reverse Acquisition").
During 1997, the JV set up a new subsidiary, Liuzhou OVM
Trading Company Limited ("OVM Trading"), which was incorporated in the
PRC. The JV owns a 95% interest in OVM Trading with the remaining 5%
interest held by a third party. OVM Trading was principally engaged in
the sale of the prestressed products manufactured by the JV. At the end
of 1998, OVM Trading was liquidated and its operations were transferred
to a branch of the JV.
During 1998, the JV acquired 69.3% of a newly formed entity,
Liuzhou OVM Prestressed Engineering Company Limited ("OVM
Prestressed"), which was incorporated in the PRC. The remaining
interests of OVM Prestressed are held by an affiliate of the JV Partner
(20%) and a third party (10.7%) in the PRC. OVM Prestressed is
principally engaged in the provision of engineering services for
prestressed construction projects.
2. Basis of presentation
The consolidated financial statements of the Company 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 and its
subsidiaries 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 and its subsidiaries to conform to US GAAP include
the following:
o Allowance for doubtful accounts, other receivables
and inventories;
o Reclassification of certain expense items from equity
appropriations to charge against income; and
o Recognition of sales and cost of sales upon delivery
of product to 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 year. Actual results could differ from those estimates.
F-7
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
3. Summary of significant accounting policies
(a) Cash and cash equivalents
Cash and cash equivalents include cash on hand and
deposits with banks with an original maturity of three months
or less.
(b) Inventories
Inventories are stated at the lower of cost or
market. 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 overhead.
(c) Property, machinery and equipment
Property, machinery and equipment are stated at cost
less accumulated depreciation.
Depreciation is calculated on a 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, machinery and equipment 12%
(d) Intangible assets
Intangible assets which include goodwill, proprietary
technology and trademarks are stated at cost less accumulated
amortization. Amortization is calculated on a straight-line
basis over 30 years.
(e) Investments
An equity investment represents an investment in a
Company in which the Company may exert significant influence
but does not control the financial and operating decisions.
The Company's share of the equity investment's
post-acquisition results is included in the consolidated
statements of income under the equity method of accounting.
The Company's investment is stated at cost plus the Company's
share of post-acquisition operating results and capital
transactions.
Long term investments which are neither subsidiaries
nor equity investments are stated at cost.
F-8
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
3. Summary of significant accounting policies (continued)
(f) Revenue recognition
Sales represent the invoiced value of goods, net of
returns and allowances, recognized upon delivery of goods to
customers.
(g) Income taxes
Income taxes are determined under the liability
method as required by Financial Accounting Standards Board
Statement No.109, "Accounting for Income Taxes".
(h) 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 at 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 comprehensive income.
The financial records of the JV and its subsidiaries
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 15.
Translation of amounts from RMB into US$ for the
convenience of the reader has been made at the Exchange Rate
on December 31, 1998 of US$1.00 = RMB8.280. No representation
is made that the RMB amounts could have been, or could be,
converted into United States dollars at that rate on December
31, 1998 or at any other date.
F-9
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
3. Summary of significant accounting policies (continued)
(i) Earnings per share
In 1997, the Financing Accounting Standards Board
issued Statement No.128, "Earnings per Share" ("SFAS 128").
Earnings per share amounts for all periods have been presented
in conformity with SFAS 128 requirements.
The computation of basic and diluted earnings per
share for the years ended December 31, 1998 and 1997 is based
on the weighted average number of 12,050,000 shares of common
stock outstanding.
Stock purchase warrants to subscribe for 4,000,000
shares of common stock were outstanding during 1998 and 1997
(note 13) but were not included in the computation of earnings
per share for the years ended December 31, 1998 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.
(j) Research and development costs
Research and development costs consist of
expenditures 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 Company expenses all research and development costs as
they are incurred. Research and development costs incurred by
the Company during 1998 and 1997 were RMB1,128 and RMB1,849
respectively.
(k) Advertising costs
Advertising costs are expensed by the Company as
incurred. Total advertising costs incurred by the Company
during 1998 and 1997 were RMB524 and RMB171 respectively.
(l) Retirement benefits
The contributions to the PRC and internally
implemented retirement plans for the existing employees are
charged to the consolidated statements of income as services
are provided.
The total contribution of RMB4,661 to an additional
retirement plan for the existing employees is being amortized
over 20 years as future services are provided (note 16).
F-10
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
3. Summary of significant accounting policies (continued)
(m) Comparative amounts
Certain comparative amounts have been reclassified to
conform with the current year's presentation.
4. Inventories
RMB
---
Raw materials 13,320
Work in progress 9,253
Finished goods 9,743
---------
32,316
=========
5. Property, machinery and equipment, net
RMB
---
Cost:
Buildings 4,221
Plant, machinery and equipment 25,961
---------
30,182
---------
Accumulated depreciation:
Buildings 1,324
Plant, machinery and equipment 7,556
---------
8,880
---------
Property, machinery and equipment, net 21,302
=========
F-11
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
6. Investments
RMB
---
Equity investment (a)
Cost 4,709
Share of post-acquisition retained earnings 204
Currency translation adjustment (443)
---------
4,470
Investment at cost (b) 3,730
Receivable from equity investee 673
---------
8,873
=========
(a) The equity investment, OVM Prestress Co. Pte. Ltd, is a
company incorporated in the Republic of Singapore, 50% of
which is owned by the Company. The equity investment is
principally engaged in the provision of prestressing and
related engineering services.
(b) During 1998, the JV acquired an interest in Orient Prestress
Company Limited ("Orient Prestress"), which was incorporated
in the PRC. The Company has not adopted the equity method of
accounting for Orient Prestress in the consolidated financial
statements as the Company is not in a position to exercise any
significant influence on the day to day management and
operation of Orient Prestress.
7. Deferred assets
RMB
---
VAT recoverable (a) 559
Retirement costs (b) 4,420
---------
4,979
=========
(a) 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 beginning 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 sales tax payable for a period of five years from
January 1, 1995 such that 20% of the deferred asset can be
utilized each year. The right to recover the VAT was passed by
the JV Partner to the JV on formation.
(b) This represents the cost of a retirement plan entered into by
the JV during 1998 for its staff and is being amortized over
20 years. Amortization for the year ended December 31, 1998
was RMB241 (note 16).
F-12
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
8. Staff housing loans
Housing loans are advanced to the existing staff of the JV for
the purchase of residential properties. The loans are collateralized by
the properties purchased, bear interest at approximately 0.3% per annum
and are repayable over periods of 3 to 15 years.
9. Intangible assets
RMB
---
Goodwill 4,207
Proprietary technology and trademarks, at cost 3,480
Accumulated amortization (1,004)
---------
6,503
=========
10. Notes payable
All bank loans are denominated in RMB and are unsecured except
for RMB30,860 which is collateralized 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 was incurred at the weighted average
rate of 8.4% per annum during 1998 (12.1% in 1997).
11. Other long term debt
Other long term loans were made by the Technical Department of
the Liuzhou City Government to the JV for the purpose of carrying out
research and development. The loans are unsecured, guaranteed by a
subsidiary of the JV Partner and are repayable in 2000 except for
RMB320, which is not subject to repayment if the projects prove to be
successful.
12. Commitments and contingencies
As of December 31, 1998, the Company had outstanding capital
commitments for purchases of equipment and molds of approximately
RMB272.
F-13
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
13. Common stock and additional paid-in capital
On December 16, 1996, 50,000 shares of common stock, 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. The Company has issued a total of 4,000,000 stock
purchase warrants in connection with the issuance and each of the
warrants allows for the purchase of one share of the Company's common
stock at an original exercise price of US$4.00 per warrant through
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 through
December 23, 1998. On September 29, 1998, the Board of Directors
further approved to extend the exercise period through December 23,
1999. The exercise price of the stock purchase warrants remained at
US$3.00 per warrant. 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, 1998.
The Company adopted a stock option plan (the "Plan") as of
September 4, 1996. The Plan allows the Company, 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 options granted under the Plan.
Pursuant to the Plan, the exercise price must be at least equal to the
fair market value of the shares of common stock at the date of grant.
As at December 31, 1998, no stock options have been granted under the
Plan.
14. Income taxes
It is management's intention to reinvest all the income
attributable to the Company earned by its operations outside the United
State. Accordingly no U.S. 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 Company'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 exempt
from Chinese national 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
30% exclusive of local income tax of 3%. The JV is also exempt from the
local income tax rate throughout the term of the joint venture.
Provision for income tax of 15% has been made as the three years full
tax exemption commencing from the first profitable year in 1995 expired
during the year. The Company's share in the JV's tax savings resulting
from this tax holiday for the years ended December 31, 1998 and 1997
amounted to RMB360 and RMB1,664 (RMB0.04 and RMB0.14 per share),
respectively.
F-14
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
14. Income taxes (continued)
OVM Trading was incorporated in 1997 and subject to income tax
at the full rate of 33%. Taxation was charged on this new subsidiary's
taxable profit earned during the years ended December 31, 1998 and
1997. In December 1998, the subsidiary was liquidated and deregistered
from the tax authorities of the PRC.
Liuzhou OVM Prestressed was formed in 1998 and is only subject
to business tax of 3% on sales and is exempt from national and local
income tax indefinitely.
A reconciliation of the effective income tax rates with the
statutory income tax rate in the PRC is as follows:
<TABLE>
<CAPTION>
1998 1997
RMB RMB
--- ---
<S> <C> <C>
Statutory income tax 30% 30%
Computed expected tax expense 1,291 922
Impact of tax holiday of the JV (514) (2,377)
Item which gives rise to no tax benefit:
Net loss of the Company and ODL 638 1,014
Others 170 450
--------- ---------
Taxation charges for the year 1,585 9
========= =========
</TABLE>
The Company's share in the undistributed earnings of the
Company's foreign subsidiaries amounted to RMB33,064 and RMB31,700 at
December 31, 1998 and 1997 respectively. 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 U.S. corporate income taxes.
Unrecognized deferred U.S. corporate income tax in respect of these
undistributed earnings, less the Company's expenses available for
deduction for tax purposes, as at December 31, 1998 and 1997 was
RMB9,873 and RMB9,711 respectively.
No deferred income taxes have been provided as the effect of
all temporary differences is not material.
F-15
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
15. 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, 1998 and 1997, RMB36,143 and RMB34,234 of the
Company's shareholders' equity were subject to exchange conversion
restrictions, respectively.
The exchange rate as of December 31, 1998 and 1997 were:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
United States dollars ("US$") US$1 : RMB8.28 US$1 : RMB8.29
Singapore dollars ("S$") S$1 : RMB4.99 S$1 : RMB4.97
</TABLE>
16. Retirement plans
The Company does not have any retirement plans while the JV
has retirement plans for its staff. As stipulated by the PRC government
regulations, the JV is required to contribute to the 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 is equal to 19% of the basic salaries of the existing staff.
The pension costs incurred by the JV during the years ended December
31, 1998 and 1997 amounted to RMB1,215 and RMB1,332 respectively.
The JV has also internally implemented an additional defined
contribution plan for its staff. Under the plan, the JV contributes 5%
of the monthly basic salaries of the staff. On retirement, the staff
members are entitled to a lump sum payment of the balance in their
accounts. Pension costs incurred by the JV for this plan during the
years ended December 31, 1998 and 1997 amounted to RMB213 and RMB700,
respectively.
At the end of 1997, the JV implemented an additional
retirement plan with a PRC insurance company for its staff. Under this
retirement plan, the staff will only benefit from the plan if they work
in the JV until the defined age of retirement. The qualified staff is
entitled to receive a defined monthly pension benefit starting from the
date of defined age of retirement for the rest of his life. The total
one time premium for the retirement plan of RMB4,661 was paid by the JV
during the year.
The JV has no obligation for the payment of pension benefits
beyond the contributions described above.
F-16
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
17. Related party transactions and balances
A significant portion of the business undertaken by the
Company 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
summarized in this note represent realized revenues and expenses to the
Company.
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, 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
Company with the JV Partner and its subsidiaries are summarized below:
1998 1997
RMB RMB
--- ---
Sales of raw materials 24,960 4,391
Sales of finished goods 663 3,247
Interest income 2,941 1,351
Rental income from leasing of plant
and machinery - 684
Rental expense for leasing of land
and buildings, plant and machinery
and motor vehicles (2,553) (2,590)
Purchases of raw materials (19,250) (7,378)
Sub-contracting charges (7,312) (14,094)
Interest expense (553) (872)
Purchases of finished goods (5,960) -
In addition, the Company had transactions with affiliates of
the JV Partner, as summarized below:
1998 1997
RMB RMB
--- ---
Sales of raw materials 924 -
Sales of finished goods 623 -
Interest income 155 2,297
Rental income from leasing of plant
and machinery 60 -
Rental expense for leasing of plant
and machinery (824) (816)
Sub-contracting charges (541) -
Interest expense (2) -
Purchases of raw materials - (5,437)
F-17
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
17. Related party transactions and balances (continued)
During the years ended December 31, 1998 and 1997, the Company
made sales of RMB460 and RMB998, respectively to a Hong Kong company in
which two of the Company's directors have a beneficial interest.
The balances with related parties are as follows:
RMB
---
Due from related parties:
JV Partner 30,574
Affiliates of the JV Partner 624
------
31,198
======
Due to related parties:
JV Partner 1,631
affiliates of the JV Partner 122
Current portion of long term loan from
the JV Partner 823
Director - Mr Ching Lung Po 194
------
2,770
======
All balances with related parties are unsecured and repayable
on demand except for the long term loan from the JV Partner which is
repayable in 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. Effective 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 during 1998 and
1997 was 8.4% and 12.1% per annum respectively.
F-18
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
18. Supplemental cash flow information
1998 1997
RMB RMB
--- ---
Interest paid 3,891 5,985
======= =======
Income taxes paid 244 -
======= =======
During 1998, the JV acquired a 69.3% interest in OVM
Prestressed, a newly formed entity, for RMB6,930. The assets and
liabilities acquired were:
RMB
---
Fair value of assets acquired 13,069
Liabilities assumed (2,864)
Net assets attributable to minority interests (3,275)
-------
Cash paid 6,930
=======
19. Financial instruments
The carrying amounts reported in the Company's balance sheet
for current assets and current liabilities, except for bank loans and
amounts resulting from related party transactions, 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. The
fair value of the amount resulting from related party transaction
cannot be determined due to the related party nature of the
transactions.
F-19
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
20. Nature of operations and concentration of risk
The Company manufacturers and sells substantially all
prestress products used in the construction of highways, 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 Company 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.
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 Company. 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 Company's purchases from suppliers, which
accounted for 10% or more of the total purchases, are as follows:
1998 1997
---- ----
% %
Purchases:
Hubei Huangshi Metal Materials Company 17 -
Hubei Huangshi Dazhi Steeling Factory 15 -
Pu lin Jufung Trading Ltd. - 13
Others 68 87
------- -------
100 100
======= =======
No customers accounted for 10% or more of the total sales of
the Company during 1998 or 1997.
F-20
<PAGE>
- --------------------------------------------------------------------------------
OVM INTERNATIONAL HOLDING COPRORATION
- --------------------------------------------------------------------------------
21. 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 statements
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 1998 and 1997.
As described in note 2 to the consolidated financial
statements, the net income of the JV and its subsidiaries as reported
in the US GAAP financial statements differs from that as reported in
their 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 and its
subsidiaries. At December 31, 1998 and 1997, the Company's share in the
distributable profits of the JV and its subsidiaries amounted
approximately to RMB37,301 and RMB36,815 respectively.
22. Operating lease commitments
At December 31, 1998, future minimum payments under operating
leases for the leasing of land and buildings, plant and machinery and
motor vehicles in Liuzhou from the JV Partner were as follows:
RMB
---
Payable in:
1999 3,633
2000 3,527
2001 981
--------
Total minimum lease payments 8,141
========
The rental for the years 2002 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, 1998 and 1997 amounted to RMB3,495 and RMB3,406
respectively.
F-21
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBERS DESCRIPTION
- ------- -----------
21 Subsidiaries of the Registrant
27 Financial Data Schedule
Name Jurisdiction Percentage Ownership
- ---- ------------ --------------------
OVM Development Limited British Virgin Islands 100%
Liuzhou OVM Construction People's Republic 70% (by ODL)
Machinery Company Limited of China
Liuzhou Prestress People's Republic 69.3% (by Liuzhou OVM)
Construction Co. Ltd. of China
<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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 8.28
<CASH> 25,419
<SECURITIES> 0
<RECEIVABLES> 61,958
<ALLOWANCES> 8,243
<INVENTORY> 32,316
<CURRENT-ASSETS> 158,152
<PP&E> 30,182
<DEPRECIATION> 8,880
<TOTAL-ASSETS> 212,325
<CURRENT-LIABILITIES> 117,191
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 59,867
<TOTAL-LIABILITY-AND-EQUITY> 212,325
<SALES> 170,294
<TOTAL-REVENUES> 174,245
<CGS> 120,927
<TOTAL-COSTS> 120,927
<OTHER-EXPENSES> 44,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,633
<INCOME-PRETAX> 3,912
<INCOME-TAX> 1,585
<INCOME-CONTINUING> 2,327
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 775
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
