As filed with the Securities and Exchange Commission on July 9, 1999.
Registration No. 333-78899
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HI-Q WASON, INC.
------------------------
(Exact Name of registrant
as specified in charter)
British Virgin Islands 5149 Not Applicable
---------------------- ---- --------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of incorporation Industrial Classification Identification
or organization) Code Number) Number)
4th Floor, 52 Lane 232, Hu Lin Street
Hsin Yi District
Taipei, Taiwan, Republic of China
011 886(2)2990-8306
--------------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Gary A. Agron
5445 DTC Parkway, Suite 520
Englewood, Colorado 80111
(303) 770-7254
--------------------------------------------------
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies of all communications to:
Gary A. Agron, Esq. Jay M. Kaplowitz, Esq.
Law Office of Gary A. Agron Gersten, Savage & Kaplowitz, LLP
5445 DTC Parkway, Suite 520 101 East 52nd Steet
Englewood, Colorado 80111 New York, NY 10022-6018
(303) 770-7254 (212) 752-9700
(303) 770-7257(fax)
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ X ]
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box:
|_| [EXHIBIT INDEX LOCATED PAGE _____ OF THIS FILING]
<TABLE>
<CAPTION>
===================================================================================================
CALCULATION OF REGISTRATION FEE
Title of Each Class Amount Proposed Proposed Maximum Amount
of Securities To Be Maximum Aggregate of
to be Registered Registered Price Per Offering Price(1) Registration Fee
Share
===================================================================================================
<S> <C> <C> <C> <C>
Common Stock, no 1,265,000 $7.00 $8,855,000 $2,613
par value Shares(2)
Common Stock 110,000 $8.40 $ 924,000 $ 272
underlying the Shares
Representative's
Warrants (3)
- ---------------------------------------------------------------------------------------------------
Total................................................................... $2,885(4)
===================================================================================================
</TABLE>
(1) Estimated solely for computing the amount of the registration fee pursuant
to Rule 457(a) under the Securities Act.
(2) Includes the overallotment option granted to the Representative of 210,000
shares.
(3) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number
of shares of common stock issuable upon exercise of the Representative's
Warrants is subject to adjustment in accordance with the anti-dilution
provisions of such warrants.
(4) Previously paid.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion dated July 9, 1999
1,100,000 Shares of Common Stock
HI-Q WASON, INC. [LOGO]
We are one of Taiwan's largest providers of bottled water delivered
directly to residences and businesses.
We are offering 1,100,000 shares of common stock priced at $7.00 per share.
We intend to apply for listing of our common stock on the Nasdaq SmallCap
Market under the symbol "HIQW."
See "Risk Factors" beginning on page _______ to read about factors you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
Per Share Total
--------- -----
Public offering price: $7.00 $7,700,000
Underwriting discounts and commissions: $ .70 $ 770,000
Proceeds to Hi-Q Wason, Inc.: $6.30 $6,930,000
We have granted the underwriters an option for 45 days to purchase up
to an additional 165,000 shares at the same price indicated above solely to
cover overallotments.
NUTMEG SECURITIES, LTD.
The date of this prospectus is , 1999.
<PAGE>
[INSIDE FRONT COVER PAGE: PICTURE OF INTERIOR OF WATER BOTTLING FACILITY]
2
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES AND CERTAIN
FOREIGN ISSUER CONSIDERATIONS
We are a British Virgin Islands holding company, and all of our assets are
located in the Republic of China. In addition, all of our directors and officers
are non-residents of the United States, and all or a substantial portion of the
assets of these non-residents are located outside the United States. As a
result, it may be difficult for investors to effect service of process within
the United States upon these non-residents or to enforce against them judgments
obtained in United States courts, including judgments predicated upon the civil
liability provisions of the securities laws of the United States or any state
thereof. There is uncertainty as to whether courts of the Republic of China or
the British Virgin Islands would enforce (i) judgments of United States courts
obtained against us or these non-residents predicated on the civil liability
provisions of the securities laws of the United States or any state thereof or
(ii) in original actions brought in the Republic of China or the British Virgin
Islands, liabilities against the Company or these non-residents predicated upon
the securities laws of the United States or any state thereof. We have
designated the Law Office of Gary A. Agron, 5445 DTC Parkway, Suite 520,
Englewood, Colorado 80111, as our agent for service of process in the United
States with respect to this offering.
There are no treaties between the Republic of China and the United States,
nor between the British Virgin Islands and the United States providing for the
reciprocal enforcement of foreign judgments. However, the courts of the Republic
of China and the British Virgin Islands may accept a foreign judgment as
evidence of a debt due. An action may be commenced in the Republic of China or
the British Virgin Islands for recovery of this debt. However, a Chinese or
British Virgin Islands court will only accept a foreign judgment as evidence of
a debt due, if: (i) the judgment is for a liquidated amount in a civil matter;
(ii) the judgment is final and conclusive and has not been stayed or satisfied
in full; (iii) the judgment is not directly or indirectly for the payment of
foreign taxes, penalties, fines or charges of a like nature (in this regard, a
Chinese or British Virgin Islands court is unlikely to accept a judgment of an
amount obtained by doubling, trebling or otherwise multiplying a sum assessed as
compensation for the loss or damages sustained by the person in whose favor the
judgment is given); (iv) the judgment was not obtained by actual or constructive
fraud or duress; (v) the foreign court has taken jurisdiction on grounds that
are recognized by the private international law rules in the Republic of China
as to conflict of laws in the Republic of China or common law rules as to
conflict of laws in the British Virgin Islands; (vi) the proceedings in which
the judgment was obtained were not contrary to natural justice (i.e., the
concept of fair adjudication); (vii) the proceedings in which the judgment was
obtained, the judgment itself and the enforcement of the judgment are not
contrary to the public policy of the Republic of China or the British Virgin
Islands; (viii) the person against whom the judgment is given is subject to the
jurisdiction of the Chinese or the British Virgin Islands courts; and (ix) the
judgment is not on a claim for contribution in respect of damages awarded by a
judgment that does not satisfy the foregoing. Enforcement of a foreign judgment
in the Republic of China or the British Virgin Islands also may be limited or
otherwise affected by applicable bankruptcy, insolvency, liquidation,
arrangement, moratorium or similar laws relating to or affecting creditors'
rights generally and will be subject to a statutory limitation of time within
which proceedings may be brought.
Under United States law, majority and controlling stockholders generally
have certain "fiduciary" responsibilities to minority stockholders. Shareholder
action must be taken in good faith and actions by controlling stockholders that
are obviously unreasonable may be declared null and void. While we believe
there are no material differences between the protection afforded to minority
stockholders of a company organized as an International Business Company under
3
<PAGE>
the law of the British Virgin Islands from those generally available to
stockholders of corporations organized in the United States, there may be
circumstances where the British Virgin Islands law protecting the interests of
minority stockholders may not be as protective as the law protecting minority
stockholders in United States jurisdictions. Under British Virgin Islands law, a
shareholder of a company organized as an International Business Company under
the laws of the British Virgin Islands may bring an action against a company,
even if other stockholders do not wish to bring an action and even though no
wrong has been done to the shareholder personally. This is a representative
action (i.e., an action on the shareholder's own behalf and on behalf of other
persons in his class, or similarly situated). Instances where such
representative actions may be brought include: (i) to compel a company to act in
a manner consistent with the Memorandum of Association and Articles of
Association; (ii) to restrain directors from acting on resolutions, where notice
of a stockholders' meeting failed adequately to inform stockholders of a
resolution proposed at the meeting; (iii) to restrain a company, where it
proposes to perform an act not authorized by the Memorandum of Association and
the Articles of Association or to seek damages from director to compensate a
company from the consequences of such an unauthorized act, or to recover
property of a company disposed of pursuant to such unauthorized act; (iv) to
restrain a company from acting upon a resolution that was not made in good faith
and for the benefit of stockholders as a whole; (v) to redress where a
resolution passed at a stockholders' meeting was not properly passed (e.g., it
was not passed with the necessary majority); (vi) to restrain a company from
performing an act which is contrary to law; and (vii) to restrain a company from
taking any action in the name and for the benefit of a company. Such an action
also may be brought against directors and promoters who have breached their
fiduciary duties to the company, though acts amounting to a breach of a
fiduciary duty can be ratified by a general meeting of stockholders, in the
absence of fraud. Such actions against directors and promoters only may be
taken, however, if such directors and promoters have power to influence the
action taken by a general meeting by means of, for instance, their votes as
stockholders, thereby preventing a company from suing them in the company's
name. Although British Virgin Islands law does permit a shareholder of a British
Virgin Islands company to sue its directors representatively or derivatively,
the circumstances in which any such action may be brought as set forth above may
result in the rights of stockholders of a British Virgin Islands company being
more limited than those of stockholders in a United States company.
CURRENCY TRANSLATIONS
Our published financial statements are presented in New Taiwan dollars, the
lawful currency of the Republic of China. In this Prospectus, references to
"U.S. dollars", "US$" or "$" are to U.S. currency and references to "New Taiwan
dollars" or "NT" are to the Republic of China currency. Solely for the
convenience of the reader, this prospectus contains translations of certain NT
amounts into U.S. dollars at specified rates. These translations should not be
construed as representations that the NT amounts actually represent such U.S.
dollar amounts or could be converted into U.S. dollars at the rate indicated.
Unless otherwise stated, the translations of NT to U.S. dollars have been made
at the exchange rate of NT33.17 to US$1.00, which represents the noon buying
rate of the Federal Reserve Bank of New York on March 31, 1999. See "Exchange
Rates" for historical information regarding the exchange rate.
4
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus.
Our Business
We are one of Taiwan's largest providers of bottled water delivered
directly to residences and businesses and have a leading market share position
in Taipei and Hsinchu, Taiwan. Our primary focus is on the bottling, marketing
and delivery of high quality drinking water in five-gallon and three-gallon
bottles to homes and offices, and the related sale or rental of water coolers.
Our Opportunity
We believe that the alternative to tap water market represents an
attractive industry opportunity due to the strong growth in demand for bottled
water. According to the Taiwan Beverage Industry Union, per capita water
consumption in Taiwan increased ten-fold between 1980 and 1997 from 1.2 gallons
per capita to 12.1 gallons per capita and is expected to reach 18.2 gallons per
capita by 2001. Moreover, sales of bottled water in Taiwan grew at an annual
rate of 13.9% from 1986 to 1996 and is projected to grow at an annual rate of
16.5% between 1996 and 2001. Moreover, bottled water volume in Taiwan increased
from 28.7 million gallons in 1980 to 242.8 million gallons in 1997 and is
projected to reach 364 million gallons in 2001. We believe this growth will
continue to be driven by concerns related to the quality of tap water, the trend
toward consumer selection of healthy products and consumer taste preferences for
bottled water.
We deliver bottled water to an installed base of approximately 5,000 water
coolers in our markets. We believe that direct delivery bottled water companies
enjoy certain advantages over retailers of bottled water because:
o Bottled water customers are reluctant to change from one company to
another due to increased cost and inconvenience; and
o Competition tends to be limited due to the capital costs associated
with the purchase of water coolers, reusable water bottles, bottling
equipment and delivery trucks.
By virtue of our market share position in the Taiwanese bottled water
market, we believe we have a number of competitive advantages over smaller
operators, including more efficient distribution operations, the availability of
purchasing synergies, superior customer service and better established
infrastructure. We intend to use a portion of the proceeds of the offering to
acquire some of these smaller bottled water companies who do not have a
sufficiently developed distribution system, management infrastructure or
financial resources to compete with larger companies. To date, we have not
entered into any agreements to acquire any other companies.
5
<PAGE>
Our Strategy
We expect to benefit from the growing demand for quality drinking water by
increasing our installed base of water coolers, increasing the water and related
products we offer through our delivery system, and consolidating a part of the
highly fragmented bottled water industry in Taiwan. Specifically, we intend to
continue to pursue the following business strategies:
o Focus on the water cooler segment within the growing "alternative to
tap water" market, which enjoys higher margins, less competition and
greater operating leverage than either the retail bottled water or the
water filter businesses;
o Pursue strategic acquisitions by consolidating some of the more than
500 small water bottling companies in Taiwan and improving the
operations of these companies;
o Leverage our infrastructure by increasing route density and by using
our route systems to offer products which are complementary to our
bottled water, including cups, cooler sanitation services and related
products; and
o Provide outstanding customer service by:
o reliably delivering bottled water on schedule;
o meeting customer shortages with the quick delivery of refills;
o providing regular maintenance and sanitation of water coolers;
and
o effectively addressing other customer needs.
Our History and Offices
We were incorporated as an international business company of the British
Virgin Islands in April 1999, at which time we acquired all of the common stock
of Hi-Q Wason, Inc., a Taiwanese corporation, for 471,429 shares of our common
stock. Hi-Q Wason was organized in November 1995 to provide bottled water
delivered directly to residences and businesses and is now our operating
subsidiary. Our corporate offices are located at 4th Floor, 52 Lane 232, Hu Lin
Street, Hsin Yi District, Taipei, Taiwan, Republic of China, telephone number
011-886-2-2990-8306.
The Offering
Securities offered (1)................. 1,100,000 shares of common stock.
Common Stock Outstanding
Prior to Offering .................... 471,429 shares of common stock.
Common Stock to be Outstanding
After Offering (2).................... 1,571,429 shares of common stock.
Use of Proceeds........................ Developing new bottling facilities,
marketing expenses, acquisition of
other bottling companies and working
capital. See "Use of Proceeds."
6
<PAGE>
Proposed Nasdaq SmallCap
Market Symbol......................... HIQW
Risk Factors........................... Please read the Risk Factors section
of this prospectus as investment in
our common stock involves a high
degree of risk and could result in a
loss of your entire investment.
(1) If the overallotment option granted to the underwriters is exercised in
full, 165,000 additional shares of common stock will be sold, with
estimated net proceeds to be received of $1,004,850 after deducting
commissions and expenses.
(2) Excludes 110,000 shares of common stock issuable upon exercise of purchase
warrants to be issued to Nutmeg Securities, Ltd. , as the representative of
the underwriters upon completion of the offering. See "Underwriting."
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
We prepare our financial statements in accordance with generally accepted
accounting principles in the United States, which we refer to as US GAAP. The
following summary statement of operations data for the years ended December 31,
1998, 1997 and 1996 and the balance sheet data as of December 31, 1998 and 1997
were derived from our audited financial statements included elsewhere in this
prospectus. The following summary statement of operations data for the period
from November 20, 1995 (inception) to December 31, 1995 and the balance sheet
data as of December 31, 1996 and 1995 was derived from our audited financial
statements, not included in this prospectus. The following summary statement of
operations data for the three months ended March 31, 1999 and 1998, and the
selected balance sheet data as of March 31, 1999 was derived from our unaudited
financial statements included elsewhere in this prospectus and, in our opinion,
includes all adjustments, consisting only of normal recurring adjustments,
necessary to fairly state this information. The results of operations for these
interim periods are not necessarily indicative of the results that may be
expected for the full year. Since the information presented below is only a
summary and does not provide all of the information contained in our financial
statements, including the related notes, you should read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements.
Unless otherwise indicated, all information in this prospectus assumes no
exercise of the overallotment option granted to the underwriters.
8
<PAGE>
<TABLE>
<CAPTION>
Three-months ended March 31, Years ended December 31,
----------------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995(1)
------------- ---- ----------------- ---- ---- ------
$(2) NT NT $(2) NT NT NT NT
---- -- -- ---- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues 231,420 7,676,197 5,053,631 912,971 30,283,239 19,784,732 9,187,588 170,640
Cost of revenues (89,027) (2,953,039) (2,186,780) (339,870) (11,273,488) (8,330,002) (4,451,269) (798,891)
Selling, general and
administrative expense (106,055) (3,517,829) (2,448,342) (395,424) (13,116,209) (10,088,498) (5,581,969) (657,751)
Operating income (loss) 36,338 1,205,329 418,509 177,677 5,893,542 1,366,232 (845,650) (1,286,002)
Other income (expense),
net (3,650) (121,079) (27,011) (9,257) (307,068) (115,305) 10,815 1,192
Income tax expense (8,172) (271,063) (97,874) (42,534) (1,410,847) (305,250) -0- -0-
Net income (loss) 24,516 813,187 293,624 125,886 4,175,627 945,677 (834,835) (1,284,810)
Basic earnings (loss)
per common share 0.05 1.72 0.62 0.27 8.86 2.01 (1.77) (2.73)
Weighted average common
shares outstanding(3) 471,429 471,429 471,429 471,429 471,429 471,429 471,429 471,429
March 31, 1999 Years ended December 31,
---------------- --------------------------------------------------------------
1998 1997 1996 1995(1)
----------------------- ---- ---- ------
$(2) NT $(2) NT NT NT NT
---- -- ---- -- -- -- --
Balance sheet data:
Working capital 127,233 4,220,346 45,442 1,507,324 6,207,750 (2,375,014) 1,083,459
Property and equipment,
net 679,308 22,532,647 688,711 22,844,554 13,193,564 5,339,769 2,451,331
Total assets 1,016,221 33,708,051 936,446 31,061,917 21,397,061 8,887,655 5,348,568
Capital lease obligations
and short-term
borrowings 119,388 3,960,108 132,456 4,393,576 1,267,400 5,472,089 -0-
Stockholders' equity 718,566(4) 23,834,846 693,447 23,001,659 18,826,032 2,880,355 3,715,190
</TABLE>
(1) Period from November 20, 1995 (inception) to December 31, 1995.
(2) Translated into United Stated dollars solely for the convenience of the
readers using the noon buying rate of the Federal Reserve Bank of New York
on March 31, 1999 of NT33.17 to $1.
(3) Represents the shares we issued to acquire Hi-Q Wason, Inc., the Taiwanese
corporation, in April 1999. See "Our History and Offices."
(4) Upon completion of the offering our as adjusted stockholders' equity and
net tangible book value will be $7,167,566.
9
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock. If
any of these risks occur, our business, results of operations and financial
condition could be adversely affected. This could cause the trading price of our
common stock to decline, and you might lose part or all of your investment.
This prospectus also contains certain forward-looking statements that are
based on beliefs and assumptions of our management. Often, you can recognize
these statements because we use words such as "believe", "anticipate", "intend",
"estimate" and "expect" in the statements. Our actual performance in 1999 and
beyond could differ materially from the forward-looking statements contained in
this prospectus. However, we are not obligated to release publicly any revisions
to the forward-looking statements contained in this prospectus.
In Order To Grow Through Acquisitions We Must Obtain Acquisition Candidates,
Personnel and Capital
We intend to grow internally as well as through the acquisition of other
water bottling companies. Our ability to grow will require the availability of
suitable acquisition candidates and the availability of financing, neither of
which can be assured. Growth through acquisitions also involves risks that could
adversely affect our operating results, including difficulties in integrating
the operations and personnel of acquired companies and the potential loss of key
employees of acquired companies.
Implementation of our proposed expansion strategy will also be dependent
upon our ability to:
o Hire and retain skilled management, financial, marketing and other
personnel;
o Monitor operations;
o Control costs; and
o Maintain effective quality and inventory controls.
Our growth strategy and plans may be affected by:
o Delays in our marketing efforts;
o Changes in economic or market conditions;
o Our ability to make capital expenditures; and
o Competition.
There can be no assurance that we will be able to successfully implement
our acquisition strategy or otherwise expand our operations.
We may require additional debt or equity financing beyond the proceeds of
the offering to fund our operations. To the extent that we raise additional
funds, we will be subject to potentially significant interest expense for debt
financing or dilution to our stockholders for equity financing. There can be no
assurance that additional financing will be available to us on reasonable terms
or at all.
10
<PAGE>
Our Foreign Operations Involve Risk That Could Materially Affect Our Business
All of our operations are in Taiwan. Foreign operations are subject to a
number of special risks, such as risks of fluctuations in currency exchange
rates, regional and national economic conditions, economic and political
destabilization, restrictive actions by foreign governments such as restrictions
on transfer of funds and unexpected changes in the regulatory environment, and
changes in foreign laws regarding trade, investment and taxes. Any of these
factors could have a material adverse effect on our business.
Our Business Is Subject To Government Regulation That Could Subject Us To
Significant Penalties
Our operations are subject to the jurisdiction of governmental and
regulatory agencies which regulate the quality of drinking water in Taiwan. We
believe that we are in substantial compliance with all applicable laws and
regulations and have all required permits and licenses to conduct our business.
However, any failure by us to comply with existing and future laws and
regulations could subject us to significant penalties. In addition, there can be
no assurance that current laws or regulations will not be modified in a manner
that imposes additional costs on us.
We Face Significant Competition From Larger Competitors
The beverage industry in general, and the bottled water market in
particular, are competitive. We compete with local bottled water companies and
larger beverage companies. Certain of our competitors possess greater financial,
personnel, marketing and other resources than we and may be better able to
withstand market conditions within the beverage industry. We may encounter
increased competition in the future. In addition, a change in consumer
preferences from bottled water to other beverages would have a material adverse
effect on our business.
We Depend On Certain Key Personnel To Manage Our Company
We are dependent on the continued services of certain members of our
management team, including Tuan-Yuan Hu, our Chief Executive Officer. The loss
of, or inability to replace, any key personnel could have a material adverse
effect on our business.
We Could Be Liable For Personal Injury Claims Resulting From Product Defects
We are engaged in a business which could expose us to possible liability
claims from others, including personal injury claims for providing water that
injures or sickens the user. We maintain insurance coverage that we believe is
typical for companies in our industry. There can be no assurance, however, that
our insurance will be sufficient to cover potential claims or that an adequate
level of coverage will be available in the future on acceptable terms.
It May Be Difficult To Serve Us With Legal Process Or Enforce Judgments Against
Us Or Our Management
We are a British Virgin Islands holding company, and all of our assets are
located in Taiwan. In addition, all of our directors and officers are
non-residents of the United States, and all or a substantial portion of the
11
<PAGE>
assets of these non-residents are located outside the United States. As a
result, it may not be possible to effect service of process within the United
States upon such persons. Moreover, there is doubt as to whether the courts of
the British Virgin Islands or Taiwan would enforce (1) judgments of United
States courts against us, or directors or our officers predicated on the civil
liability provisions of the securities laws of the United States or any state
thereof or (2) in original actions brought in the British Virgin Islands or
Taiwan, liabilities against us or other non-residents predicated upon the
securities laws of the United States or any state thereof.
Our New Investors' Stock Value Will Be Diluted
New investors will incur an immediate and substantial reduction in the book
value per share of our common stock of approximately $2.44 per share between the
net tangible book value per share after the offering of $4.56 and the public
offering price of $7.00 per share. Our existing stockholders acquired their
shares of common stock at prices below $7.00 and, accordingly, new investors
will bear most of the risks inherent in an investment in us.
Our Underwriters May Influence Our Common Stock Price
A significant amount of our common stock may be sold to customers of our
underwriters. Such customers subsequently may engage in transactions for the
sale or purchase of common stock through or with these underwriters. Although
they have no obligation to do so, the underwriters may make a market in the
common stock, and this market-making activity may be discontinued at any time.
The price and liquidity of our common stock may be significantly affected by the
degree, if any, of the underwriters' participation in such market. If the
underwriters cease making a market, the market and market price for our common
stock may be adversely affected and the holders may be unable to sell our common
stock.
As A Non-U.S. Company, We Are Not Required To Provide Timely Information To The
Public
We are a foreign private issuer within the meaning of the rules under the
Securities Exchange Act of 1934, as amended. As such, we are exempt from certain
provisions applicable to United States public companies, including: (1) the
rules under the Securities Exchange Act requiring the filing with the Securities
and Exchange Commission of quarterly reports on Form 10-Q or current reports on
Form 8-K; (2) the sections of the Securities Exchange Act regulating the
solicitation of proxies, consents or authorizations in respect of a security
registered under the Securities Exchange Act; and (3) the sections of the
Securities Exchange Act requiring insiders to file public reports of their stock
ownership and trading activities and establishing insider liability for profits
realized from any "short-swing" trading transaction. Because of these
exemptions, investors in the offering are not afforded the same protections or
information generally available to investors in public companies organized in
the United States.
Failure Of Third Party Computer Systems To Achieve Year 2000 Compliance Could
Adversely Affect Our Business
Many currently installed computer systems and software products are coded
to accept only two- digit entries to represent years in the date code field.
Computer systems and products that do not accept four-digit entries will need to
be upgraded or replaced to accept four-digit entries to distinguish years
beginning with 2000 from prior years. We evaluated the Year 2000 issue as it
relates to our entire internal computer system as well as computer systems
operated by third parties and we believe all of our systems are Year 2000
compliant. Computer systems operated by third parties with which our systems
12
<PAGE>
interface may not continue to properly interface with our systems or be
compliant on a timely basis with Year 2000 requirements. Any failure of the
systems of third parties to achieve Year 2000 compliance could adversely affect
our business.
Future Sales Of Our Common Stock Or Shares Issuable Upon Exercise Of Stock
Options Could Adversely Affect Our Stock Price And Our Ability To Raise Funds In
New Stock Offerings
We currently have 471,429 shares of common stock outstanding which may be
sold beginning in April 2000 under Rule 144 of the Securities Act subject to an
agreed one year lock-up of such shares we have entered into with the
representative of the underwriters. Sale of substantial amounts of common stock,
or the perception that sales could occur, could reduce the market price of our
common stock. All of our stockholders have agreed not to sell or otherwise
transfer any of their shares until one year from the date of this prospectus
without the prior written consent of the representative of the underwriters. A
total of 300,000 shares of common stock have been reserved for issuance upon the
exercise of stock options which may be granted under our 1999 Stock Option Plan
and 110,000 shares have been reserved upon exercise of common stock purchase
warrants to be issued to the representative of the underwriters. The holders of
any stock options or common stock purchase warrants we issue will have the
opportunity to profit from an increase in the market price of our common stock.
The existence of these stock options and common stock purchase warrants may also
affect our ability to obtain other financing.
13
<PAGE>
USE OF PROCEEDS
After payment of underwriting commissions and other expenses of the
offering, the net proceeds of the offering are estimated to be $6,449,000
($7,453,850 if the overallotment option is exercised). We expect to use
approximately $1,385,000 of such proceeds to develop new bottling facilities,
approximately $700,000 for marketing expenses including the salaries and
expenses of newly hired sales and marketing personnel, approximately $500,000
for equipment, including reusable water bottles, approximately $2,700,000 to
acquire other small bottling companies in Taiwan, and approximately $1,164,000
for working capital. To date we have not entered into any agreements to acquire
any other companies. There may be changes in our proposed use of proceeds due to
changes in our business.
Proceeds not immediately needed will be invested in bank certificates of
deposit, insured bank deposit accounts or similar investments.
DIVIDEND POLICY
We do not intend to pay dividends on our common stock in the foreseeable
future. Instead, we will retain our earnings to finance the expansion of our
business and for general corporate purposes.
EXCHANGE RATES
We have prepared our financial statements in accordance with US GAAP and
have published these statements in NT, which is the legal tender currency of the
Republic of China. All references to "U.S. dollars", "dollars" or "$" are to
United States dollars. Conversion of amounts from NT to United States dollars
for the convenience of the reader has been made at the noon buying rate of the
Federal Reserve Bank on March 31, 1999 of $1.00 = NT33.17.
The following table sets forth certain information concerning exchange
rates between NT and U.S. dollars for the periods indicated:
Noon Buying Rate (1)
---------------------------------------
Period End Average(2) High Low
---------- ---------- ---- ---
Calendar Year (NT per US$)
1994 . . . . . . . . . . . . . . 26.29 26.43 27.09 26.02
1995 . . . . . . . . . . . . . . 27.29 26.51 27.55 25.17
1996 . . . . . . . . . . . . . . 27.52 27.48 27.95 27.17
1997 . . . . . . . . . . . . . . 32.80 29.06 32.80 27.34
1998 . . . . . . . . . . . . . . 32.27 33.50 35.00 32.05
1999 (through March 31) . . . . 33.17 32.88 33.20 32.13
(1) The noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of
New York.
(2) Determined by averaging the rates on the last business day of each month
during the relevant period.
14
<PAGE>
DILUTION
All information provided in the two dilution tables below has been reported
in United States dollars for the convenience of the reader using the noon buying
rate of the Federal Reserve Bank of New York on March 31, 1999 of NT33.17 to $1.
At March 31, 1999, the net tangible book value of our outstanding shares of
common stock was $718,566 or $1.52 per share. "Net tangible book value" per
share represents the total amount of our tangible assets, less the total amount
of our liabilities, divided by the number of shares of common stock outstanding
and has been prepared as if we acquired Hi Q Wason, Inc., the Taiwanese
corporation, as of March 31,1999. Without taking into account any changes in net
tangible book value after March 31, 1999, other than to give effect to the sale
of the shares of common stock offered hereby at an initial public offering price
of $7.00 per share, less underwriting discounts and commissions and estimated
costs of the offering, our net tangible book value at March 31, 1999 would have
been $7,165,716 or approximately $4.56 per share. This represents an immediate
increase in net tangible book value of $3.04 per share of common stock to our
existing stockholders and an immediate dilution of $2.44 per share to new
investors. "Dilution" per share represents the difference between the price to
be paid by the new stockholders and the net tangible book value per share of
common stock immediately after this offering.
The following table illustrates this per share dilution:
Initial public offering price per share $7.00
Net tangible book value per share before
the offering (1) $1.52
Increase in net tangible book value per share
attributable to new investors purchasing
in the offering $3.04
Net tangible book value per share after the offering $4.56
-----
Dilution per share to new investors $2.44
The following table sets forth the number of shares of common stock
purchased, the total consideration paid and the average price per share paid by
our existing stockholders as of March 31, 1999 and new investors purchasing the
shares of common stock offered hereby:
Average
Shares Purchased Total Consideration Price
Number Percentage Amount Percentage Per Share
------ ---------- ------ ---------- ---------
New investors 1,100,000 70.0% $7,700,000 92.7% $7.00
Existing
stockholders(1) 471,429 30.0% $ 602,954 7.3% $1.28
---------- ---- ---------- ----
TOTALS 1,571,429 100.0% $8,302,954 100.0%
(1) Computed as if we acquired Hi-Q Wason, Inc., the Taiwanese corporation, as
of March 31, 1999.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization and short-term debt as of
March 31, 1999, and as adjusted capitalization, after deducting underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1999
Historical (As Adjusted) (1)
---------- -----------------
$ (2) NT $ NT
----- -- ---- --
<S> <C> <C> <C> <C>
Current installments of
capital lease obligations 47,578 1,578,164 47,578 1,578,164
------ --------- ------ ---------
Capital lease obligations,
excluding current installments 71,810 2,381,944 71,810 2,381,944
Stockholders' equity (3)
Preferred stock, 5,000,000
no par value shares
authorized, no shares
issued -0- -0- -0- -0-
Common stock, 20,000,000
no par value shares
authorized, 471,429
shares outstanding,
1,571,429 shares
outstanding as adjusted (1) -0- -0- -0- -0-
Additional paid-in capital 602,954 20,000,000 7,051,954 233,913,310
Retained earnings 115,612 3,834,846 115,612 3,834,846
---------- ----------- ---------- ------------
Total stockholders' equity 718,566 23,834,846 7,167,566 237,748,156
---------- ----------- ---------- ------------
Total capitalization 790,376 26,216,790 7,239,376 240,130,100
========== =========== ========== ============
</TABLE>
(1) As adjusted to reflect the sale of 1,100,000 shares of common stock offered
hereby at an offering price of $7.00 per share and the application of the
net proceeds. See "Use of Proceeds."
(2) Translated into United States dollars solely for the convenience of the
readers using the noon buying rate of the Federal Reserve Bank of New York
on March 31, 1999 of NT33.17 to $1.
(3) The historical stockholders' equity information represents our consolidated
stockholders' equity as if we owned 100% of the common shares of Hi-Q
Wason, Inc. (Taiwan) as of March 31, 1999.
16
<PAGE>
SELECTED FINANCIAL DATA
We prepare our financial statements in accordance with US GAAP. The
following summary statement of operations data for the years ended December 31,
1998, 1997 and 1996 and the balance sheet data as of December 31, 1998 and 1997
were derived from our audited financial statements included elsewhere in this
prospectus. The following summary statement of operations data for the period
from November 20, 1995 (inception) to December 31, 1995 and the balance sheet
data as of December 31, 1996 and 1995 was derived from our audited financial
statements, not included in this prospectus. The following summary statement of
operations data for the three months ended March 31, 1999 and 1998, and the
selected balance sheet data as of March 31, 1999 was derived from our unaudited
financial statements included elsewhere in this prospectus and, in our opinion,
includes all adjustments, consisting only of normal recurring adjustments,
necessary to fairly state this information. The results of operations for these
interim periods are not necessarily indicative of the results that may be
expected for the full year. Since the information presented below is only a
summary and does not provide all of the information contained in our financial
statements, including the related notes, you should read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
Three-months ended March 31, Years ended December 31,
----------------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995(1)
------------- ---- ----------------- ---- ---- ------
$(2) NT NT $(2) NT NT NT NT
---- -- -- ---- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues 231,420 7,676,197 5,053,631 912,971 30,283,239 19,784,732 9,187,588 170,640
Cost of revenues (89,027) (2,953,039) (2,186,780) (339,870) (11,273,488) (8,330,002) (4,451,269) (798,891)
Selling, general and
administrative expense (106,055) (3,517,829) (2,448,342) (395,424) (13,116,209) (10,088,498) (5,581,969) (657,751)
Operating income (loss) 36,338 1,205,329 418,509 177,677 5,893,542 1,366,232 (845,650) (1,286,002)
Other income (expense),
net (3,650) (121,079) (27,011) (9,257) (307,068) (115,305) 10,815 1,192
Income tax expense (8,172) (271,063) (97,874) (42,534) (1,410,847) (305,250) -0- -0-
Net income (loss) 24,516 813,187 293,624 125,886 4,175,627 945,677 (834,835) (1,284,810)
Basic earnings (loss)
per common share 0.05 1.72 0.62 0.27 8.86 2.01 (1.77) (2.73)
Weighted average common
shares outstanding(3) 471,429 471,429 471,429 471,429 471,429 471,429 471,429 471,429
March 31, 1999 Years ended December 31,
---------------- --------------------------------------------------------------
1998 1997 1996 1995(1)
----------------------- ---- ---- ------
$(2) NT $(2) NT NT NT NT
---- -- ---- -- -- -- --
Balance sheet data:
Working capital 127,233 4,220,346 45,442 1,507,324 6,207,750 (2,375,014) 1,083,459
Property and equipment,
net 679,308 22,532,647 688,711 22,844,554 13,193,564 5,339,769 2,451,331
Total assets 1,016,221 33,708,051 936,446 31,061,917 21,397,061 8,887,655 5,348,568
Capital lease obligations
and short-term
borrowings 119,388 3,960,108 132,456 4,393,576 1,267,400 5,472,089 -0-
Stockholders' equity 718,566 23,834,846 693,447 23,001,659 18,826,032 2,880,355 3,715,190
</TABLE>
(1) Period from November 20, 1995 (inception) to December 31, 1995.
(2) Translated into United Stated dollars solely for the convenience of the
readers using the noon buying rate of the Federal Reserve Bank of New York
on March 31, 1999 of NT33.17 to $1.
(3) Represents the shares we issued to acquire Hi-Q Wason, Inc., the Taiwanese
corporation, in April 1999. See "Our History and Offices."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We were incorporated and began operations in 1995. Our revenue consists
primarily of the sale of bottled water and the related sale or rental of water
coolers. As of December 31, 1998, we served an installed base of approximately
5,000 water coolers as compared to 3,500 at December 31, 1997. The growth in
customer accounts resulted in increased revenue during 1998, which we attribute
to an effective customer retention and referral program and increased customer
water consumption. We anticipate that our customer base and revenue will
continue to expand as sales of bottled water increase and we expand into new
markets.
Transportation expenses comprise the largest controllable component of our
variable expenses. Transportation expenses include truck drivers' salaries and
bonuses, lease expenses and fuel, insurance, repair and maintenance expenses
associated with our delivery trucks.
Depreciation and amortization expenses consist primarily of the
depreciation of our delivery trucks, water coolers, bottles and the bottling
equipment. Depreciation and amortization are expected to increase as we continue
to purchase additional assets.
Bottled water sales are subject to seasonal variations with decreased sales
during cold weather months and increased sales during warm weather months. Water
cooler rentals are typically paid monthly and do not reflect any seasonal
effects.
Results of Operations
Three Month Period Ended March 31, 1999 and 1998
Revenue. Total revenue for the three month period ended March 31, 1999
increased 52% to NT7,676,000 from NT5,054,000 in the comparable period in 1998
due to our customer retention program, increased marketing efforts, additional
customers and increased water consumption from existing customers. Bottled water
sales increased from NT4,698,000 in 1998 to NT7,064,000 in the 1999 period,
which represented an increase of 50%. Our marketing efforts increased our water
cooler sales and rental income 72% to NT612,000 in the 1999 period from
NT355,000 in the 1998 period. We believe that as a percentage of sales, water
cooler sales and rental income will remain at approximately 8% of sales.
Cost of Revenue. Cost of revenue increased from NT2,187,000 in 1998 to
NT2,953,000 in 1999 which represents an increase of 35%. Cost of bottled water
sales increased 31% to NT2,596,000 in 1999 from NT1,989,000 in 1998. Cost of
water cooler sales and rentals increased to NT357,000 in 1999 from NT197,000 in
1998 as a result of increased water cooler and rental income. The increase in
cost of revenue was due to increased sales and increased depreciation and rental
expenses resulting from our new facilities in Hsinchu, Taiwan. Cost of water
sales included NT700,000 and NT515,100 for water purification fees for 1999 and
1998, respectively, charged by Han Tao Pure Water Proprietor, a company that
holds a license to produce purified water, which is wholly-owned by our Chief
Executive Officer.
19
<PAGE>
We have a contract under which Han Tao provides purified water to us at Han
Tao's cost. We recently applied for our own water purification license and
expect to obtain it by December 1999. When we obtain the license, we will
terminate our contract with Han Tao.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to NT3,518,000 in 1999 from NT2,448,000 in
1998. This is primarily due to additional transportation costs which included
delivery drivers' salaries, depreciation costs of the delivery trucks and fuel
costs. Additional sales and marketing staff salaries also contributed to
increased selling, general and administrative expenses. We expect selling,
general and administrative expenses, as a percentage of sales, to decrease as
revenue increases.
Operating Income. Operating income increased to NT1,205,000 in 1999 from
NT418,000 in 1998. As a percentage of sales, operating income increased to 16%
for the three months ended March 31, 1999 from 8% during the same period in
1998. The increase in operating income was due to increased sales volume and
increased gross profit and was somewhat offset by increased personnel costs and
depreciation expenses due to the expansion of our operations. We believe that
operating income will continue to increase as our sales increase.
Interest Expense. Interest expense increased from NT29,000 for the
three-month period of 1998 to NT109,000 in the same period in 1999. This
increase was primarily due to new capital leases entered into for production
equipment through sale-leaseback transactions in the last half of 1998. We were
not charged any interest on our short-term borrowings from our Chief Executive
Officer in 1999 or 1998. The short-term borrowings from our Chief Executive
Officer were fully paid as of March 31, 1999. We do not anticipate borrowing
funds from our Chief Executive Officer in the future.
Income Taxes. Our effective income tax rate remained consistent at 25% in
both 1999 and 1998, and we expect to remain at 25% in the future.
Net Income. Net income increased from NT293,624 (NT0.62 per share) in 1998
to NT813,187 (NT1.72 per share) in 1999 due to the factors described above.
Years Ended December 31, 1998 and 1997
Revenue. Total revenue increased 53% to NT30,283,000 from NT19,785,000 in
1997. Bottled water sales increased from NT17,335,000 in 1997 to NT27,946,000 in
1998, which represented an increase of 61%. Water cooler sales and rental income
decreased slightly to NT2,337,000 in 1998 from NT2,449,000 in 1997. This
increase in total revenue was primarily the result of new customers and the
opening of our new bottling facilities in Hsinchu.
Cost of Revenue. Cost of revenue increased from NT8,330,000 in 1997 to
NT11,273,000 in 1998, which represents an increase of 35%. Cost of bottled water
sales increased 40% to NT9,740,000 in 1998 from NT6,969,000 in 1997. Cost of
water cooler sales and rentals increased to NT1,534,000 in 1998 from NT1,361,000
from 1997 as a result of increased water cooler costs. The increase in cost of
revenue was due to an increase in sales of bottled water and increased
depreciation and overhead expenses resulting from the new facilities in Hsinchu.
Cost of water sales include NT3,134,000 and NT2,176,000 for water purification
fees for 1998 and 1997, respectively, charged by Han Tao Pure Water Proprietor.
20
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales, decreased to 43% or
NT13,116,000 during 1998 from 51% or NT10,088,000 in 1997. This decrease was
primarily due to sales increases without proportional increases in fixed
expenses such as depreciation and salaries.
Operating Income. Operating income increased to NT5,894,000 during 1998
from NT1,366,000 in 1997. As a percentage of sales, operating income increased
to 19% in 1998 from 7% in 1997. The increase in operating income is due to
increased sales volume and increased gross profit. We believe that operating
income will continue to increase as sales increase.
Interest Expense. Interest expense increased from NT127,000 in 1997 to
NT227,000 in 1998. This is primarily due to a new capital lease entered into for
production equipment through a sale-leaseback transaction in 1998. During 1998
and 1997, we also had average outstanding borrowings from our Chief Executive
Officer of approximately NT1,500,000 and NT2,700,000. The funds were loaned to
us on an interest-free basis and were used for working capital.
Income Taxes. Our effective income tax rate increased from 24% in 1997 to
25% in 1998. The effective tax rate in 1997 was slightly lower than our
statutory rate of 25% due to a reversal of the deferred tax asset valuation
allowance of NT67,000.
Net Income. Net income increased from NT946,000 (NT2.01 per share) in 1997
to NT4,176,000 (NT8.86 per share) in 1998 due to the factors described above.
Years Ended December 31, 1997 and 1996
Revenue. Total revenue increased 115% to NT19,785,000 from NT9,188,000 in
1996. Bottled water sales increased from NT7,898,000 in 1996 to NT17,335,000 in
1997, which represented an increase of 120%. Water cooler sales and rental
income increased 90% to NT2,449,000 in 1997 from NT1,290,000 in 1996. The
increase was primarily due to new customers, the retention of existing customers
and increases in consumption of bottled water during 1997.
Cost of Revenue. Cost of revenue increased from NT4,451,000 in 1996 to
NT8,330,000 in 1997, which represents an increase of 87%. Cost of bottled water
sales increased 81% to NT6,969,000 in 1997 from NT3,842,000 in 1996. Cost of
water cooler sales and rentals increased to NT1,361,000 in 1997 from NT610,000
in 1996 as a result of increased water cooler sales and rental income. The
increase in cost of revenue is primarily due to an increase in sales and an
increase in depreciation expenses. Cost of water sales include NT2,176,000
andNT1,284,000 for water purification fees for 1998 and 1997, respectively,
charged by Han Tao Pure Water Proprietor.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales, decreased to 51% or
NT10,088,000 during 1997 from 61% or NT5,582,000 in 1996. This is primarily due
to sales increases without proportional increases in fixed expenses. The overall
increase from 1996 to 1997 is primarily due to increased depreciation of
delivery vehicles and the addition of employees.
21
<PAGE>
Operating Income. Operating income increased to NT1,366,000 during 1997
from an operating loss of NT846,000 in 1996. The increase in operating income
was due to increases in sales of bottled water and water coolers without
proportional increases in operating expenses such as salaries, depreciation and
office expenses.
Interest Expense. Total interest expense of NT127,000 was incurred in 1997
due to new capital leases for bottling equipment. There was no interest charged
in 1997 or 1996 relative to borrowings from our Chief Executive Officer of
approximately NT2,700,000 and NT4,200,000, respectively.
Income Taxes. We did not record a tax benefit on pre-tax losses of
NT835,000 in 1996. The taxable loss incurred in 1996 was not available for
future carryforward. We also provided full valuation allowance against our
deferred income tax asset balance as of December 31, 1996. The valuation
allowance was subsequently reversed in 1997, which reduced our effective tax
rate to 24% from the statutory rate of 25%.
Net Income (loss). Net income increased to NT946,000 (NT2.01 per share)
from a net loss of NT885,000 (NT1.77 per share) due to the factors described
above.
Liquidity and Capital Resources
We have generally financed our operations from a combination of vendor
financing, short-term borrowings from our Chief Executive Officer, capital
leases and cash generated from operations. We purchase water coolers and cooler
equipment through vendor financing. Generally, vendors extend credit without
interest charges for a period of 90 days to 120 days. We lease water processing
and bottling equipment and trucks from financial institutions under capital
lease arrangements.
Cash provided by operating activities for the period ended March 31, 1999
was NT1,167,000 compared to NT1,634,000 during the same period in 1998. The
decrease in our cash provided by operating activities was primarily the result
of an increase in other current assets due to costs incurred related to this
offering. The decrease in cash provided by operating activities was somewhat
offset by an increase in accounts payable as a portion of these costs were not
paid as of March 31, 1999.
During the three months ended March 31, 1999, we made capital expenditures
of NT762,000 mainly for reusable water bottles. We entered into a
sales-leaseback transaction to refinance bottling equipment and to provide funds
for other capital expenditures and to pay off the short-term borrowings from our
Chief Executive Officer, which was NT1,300,000 as of December 31, 1998.
Cash provided by operating activities was NT9,291,000 in 1998 compared to
cash used in operating activities of NT695,000 in 1997. The increase in our cash
provided by operating activities was primarily the result of increases in net
income and accrued liabilities and a decrease in prepaid assets. The increase in
cash provided by operating activities was somewhat offset by an increase in
accounts receivable. As of December 31, 1998, our working capital was
NT1,507,000 compared to NT6,208,000 in 1997. The decrease in working capital was
primarily due to capital expenditures made in 1998 using cash generated from
operations.
During 1998, we made capital expenditures of NT12,746,000 for bottling
equipment, reusable water bottles and delivery trucks. Most of the capital
expenditures were financed through cash generated from operations,
sale-leaseback transactions and short-term borrowings from our Chief Executive
Officer.
22
<PAGE>
Cash used by operating activities in 1997 was NT695,000 compared to
NT2,813,000 in 1996. The decrease in cash used by operating activities was
primarily the result of an increase in net income. The increase in net cash
provided by operating activities was somewhat offset by an increase in accounts
receivable and prepaid assets.
During 1997, we made capital expenditures of NT9,435,000 for bottling
equipment, reusable water bottles and delivery trucks. Most of the capital
expenditures were financed through the issuance of common stock and proceeds
from sale-leaseback transactions. Capital expenditures of NT3,559,000 in 1996
were financed by short-term borrowings from our Chief Executive Officer. These
borrowings were repaid in 1997 with the proceeds from a common stock issuance.
During 1997, we issued additional shares of our common stock for
NT15,000,000. We reduced borrowing from our Chief Executive Officer by
NT5,472,000 and made NT1,033,000 in capital lease principle payments.
We anticipate that we will be able to meet our ongoing cash requirements
for at least the next 12 months with cash generated from operations and from
proceeds of this offering.
Economy of Taiwan, Republic of China
The economy of Taiwan differs from the economies of other Asian countries.
Many productive assets in Taiwan are owned by small or mid-sized companies which
primarily export electronic components, computers and other OEM products to U.S.
electronic companies. Up to now, the relatively stable demand for these goods
and a relatively low debt structure have enabled these companies to endure the
Asian financial crisis. The Taiwanese gross domestic product grew at a 3.7% rate
in the fourth quarter of 1998 according to economic data released by the Taiwan
Ministry of Economic Affairs and is expected to grow at a 5% rate for 1999. We
expect to benefit from the growth of the Taiwanese economy in general and the
increased consumption of bottled water in particular. We do not believe
inflation has had a material impact on our operations.
Currency and Exchange Rate
Our functional currency is the NT. Substantially all of our revenue and
expenses are generated in Taiwan and are denominated in NT. Therefore,
fluctuations in exchange rates are not expected to have a significant impact on
our operations.
Year 2000 Issue
The "Year 2000 Issue" is typically the result of limitations of certain
software written using two digits rather than four to define the applicable
year. If software with date-sensitive functions is not Year 2000 compliant, it
may recognize a date using "00" as the year 1900 rather than the year 2000. The
Year 2000 Issue could result in a system failure or miscalculations causing
significant disruption of our operations, including, among other things,
ordering of products and accounts receivable and payable calculations. It is
possible that this disruption could continue for an extended period of time.
23
<PAGE>
We depend on information contained primarily in electronic format in
databases and computer systems maintained by third parties and us. The
disruption of third-party systems or our systems interacting with these third
party systems could prevent us from processing transactions and ordering
products and could materially adversely affect our business and results of
operations.
We have completed an audit of our internal systems and believe these
systems are Year 2000 compliant. However, we are seeking written confirmation of
the Year 2000 status of our third party software. We have not yet received
written confirmation of Year 2000 compliance from any third parties but we do
not believe third party non-compliance will materially adversely affect our
business operations.
24
<PAGE>
OUR BUSINESS
Introduction
We are one of Taiwan's largest providers of bottled water delivered
directly to residences and businesses and have a leading market share position
in Taipei and Hsinchu, Taiwan. Our primary focus is on the bottling, marketing
and delivery of high quality drinking water in five-gallon and three-gallon
bottles to homes and offices, and the related sale or rental of water coolers.
By virtue of our significant market share position in the Taiwan bottled
water market, we expect to benefit from certain competitive advantages over
smaller operators, including what we believe to be more efficient distribution
operations, the availability of purchasing synergies, superior customer service
and better established infrastructure.
We deliver bottled water to an installed base of approximately 5,000 water
coolers in our markets. We believe that direct delivery bottled water companies
enjoy certain advantages over retailers of bottled water because
o Customers are reluctant to change from one bottled water company to
another due to increased cost and inconvenience; and
o Competition tends to be limited due to the capital costs associated
with the purchase of water coolers, reusable water bottles, bottling
equipment and delivery trucks.
Our Industry
According to the Taiwan Beverage Industry Union:
o The Taiwan bottled water market grew at a compounded annual rate of
13.9% from 1986 to 1996, and is projected to grow at an annual rate of
16.5% between 1996 and 2001;
o Bottled water volume in Taiwan increased from 28.7 million gallons in
1980 to 242.85 million gallons in 1997, and is projected to reach 364
million gallons in 2001;
o Per capita bottled water consumption increased ten-fold in Taiwan from
1980 to 1997 with annual consumption increasing from 1.2 gallons per
capita in 1980 to 12.1 gallons per capita in 1997;
o Per capita consumption is expected to reach 18.2 gallons in Taiwan by
2001; and
o Bottled water sales in Taiwan totaled $104 million in 1997.
We believe that growth in bottled water sales has been and will continue to
be driven by the following factors:
25
<PAGE>
o Tap Water Concerns. The aging of the tap water supply infrastructure and
the high cost of adequately maintaining or replacing existing water
delivery systems have resulted in an increasein tap water contamination
incidences in recent years.
o Health Concerns. There is a movement in Taiwan, as well as in many
industrial nations, toward a healthier lifestyle and the consumption of
healthier products. Within the "healthy products" segment, clear or
naturally colored products are experiencing significant growth. Bottled
water is perceived as a product with strong health and fitness appeal.
o Taste Preferences. The taste of tap water is affected by cleaning
substances used to filter water. Products used to sterilize tap water, such
as chlorine, are safe but often produce an undesirable after-taste and
consequently, many people prefer to drink bottled water.
o Favorable Demographics. Consumption of bottled water is much more prevalent
among younger consumers. We believe that, as younger consumers age and
their purchasing power increases, sales of bottled water will continue to
grow.
The bottled water industry is highly fragmented throughout the world. In
Taiwan, the bottled water market is comprised of approximately 500 companies
generating approximately NT3.4 billion of sales. Of these companies, the five
largest companies account for approximately 20% of the total market, with the
remainder comprised of small regional and local companies. We believe that the
industry in Taiwan will consolidate due to the operating advantages of larger
companies, succession issues at many smaller, family-owned companies and the
pressure to meet improving water quality standards. With a significant market
share in Taiwan, we believe that we are well-positioned to benefit from the
growth and consolidation trends in the industry.
Our Business Strategy
We believe that the growth in bottled water sales stems from consumer
dissatisfaction with tap water and increased consumer health consciousness
resulting in the substitution of water for other less healthy beverages. We
expect to benefit from the growing demand for quality drinking water by
increasing our installed base of water coolers, increasing the water and related
products we offer through our delivery system and consolidating a part of the
highly fragmented bottled water industry in Taiwan. Specifically, we intend to
continue to pursue the following business strategies:
o Focus On The Water Cooler Segment Within The Growing Alternative To Tap
Water Market.
We believe that the overall growth of the bottled water industry and the
relatively low level of water cooler penetration in Taiwan compared to the
United States provide us with significant growth opportunities. We believe that
health concerns and problems with the taste and odor of tap water have generated
consumer demand for an alternative to tap water, driving consumers to
increasingly rely on bottled water and filtration systems in order to satisfy
their drinking water needs. We intend to take advantage of this growth in demand
by offering premium bottled water to the direct delivery water cooler segment.
26
<PAGE>
The water cooler segment enjoys higher margins, less competition and
greater operating leverage than the retail bottled water or the water filter
businesses. Sales in this segment are believed to be less price sensitive than
retail sales of bottled water because the customer is generally more concerned
with service and convenience than price. In addition, there are cost and
inconvenience factors associated with changing bottled water suppliers.
Furthermore, bottled water companies have lower advertising costs than retailers
of bottled water because consumers generally do not select a bottled water
provider on the basis of brand name. Competition in the water cooler segment
tends to be more limited than other segments of the industry due to the capital
costs associated with the purchase of water coolers, reusable water bottles,
bottling equipment and delivery trucks. Finally, the significant growth
potential in the bottled water market allow industry participants to focus on
attracting new customers rather than on capturing market share from competitors.
o Pursue Strategic Acquisitions.
We intend to pursue an acquisition strategy which seeks to consolidate the
highly-fragmented Taiwanese bottled water industry. We believe our acquisitions
will be comprised of two segments: larger entities with more sophisticated
management, or "platforms", and smaller, less sophisticated entities known as
"fill-ins" or "spokes" which can be consolidated with platforms. Our approach to
acquiring companies in new markets will be to identify one of the larger bottled
water companies in a market as a platform acquisition, and complement it with
smaller fill-in acquisitions in neighboring or overlapping geographic
territories. We will be generally unwilling to enter a new market through
acquisition unless the company being acquired is one of the market share leaders
and provides the critical mass necessary to act as a platform in that market.
While the purchase price paid for a platform company may be higher than that for
a fill-in acquisitions, we believe we will be able to reduce our average
acquisition cost by acquiring the fill-in companies at more attractive prices
due to the limited strategic options available to these smaller operators. With
over 500 bottled water companies in Taiwan, we anticipate that, for the
foreseeable future, attractive acquisition opportunities will be available for
us.
We believe that consolidation will offer the following cost savings and
synergies:
o Decreased operating costs through elimination of duplicative
administrative costs;
o Decreased production and distribution costs through integration with a
larger, geographically adjacent entity, and the resulting achievement
of greater delivery route density;
o Decreased purchasing costs through realization of economies of scale;
o Improved management control through centralized accounting and
reporting systems;
o Improved marketing efficiency.
We are not currently negotiating any acquisitions, and there can be no
assurance we can successfully negotiate any acquisitions in the future.
o Leverage Existing Infrastructure.
Due to the fixed costs associated with bottled water delivery systems,
additional operating leverage can be achieved by increasing the number of
customers in any one route. We believe we will improve our route density by
increasing our overall customer base and increasing per capita customer
consumption. We also intend to further use our route delivery systems to offer
products which are complementary to our bottled water, including cups, cooler
sanitation services and related products.
27
<PAGE>
o Provide Outstanding Customer Service.
We believe quality of service and reliability of delivery are the primary
competitive factors in the water cooler business. We intend to continue to
provide outstanding customer service by:
o reliably delivering bottled water on schedule;
o meeting customer shortages with the quick delivery of refills;
o providing regular maintenance and sanitation of water coolers; and
o effectively addressing other customer needs.
We monitor on a monthly basis the non-renewal rate of our water cooler
rental agreements, in an effort to continually enhance customer service. Our
non-renewal rate averaged approximately 1.6% per month in 1998 and 1.3% per
month for the three months ended March 31, 1999.
Business and Products
We generated approximately 92.25% of our 1998 revenue from the sale of
bottled water products and 7.5% from the sale or rental of water coolers. The
remaining .25% of 1998 revenue was generated from the sale of paper cups and
related products.
Bottled Water. We sell bottled water for water coolers in two sizes: a
five-gallon (19 liter) bottle and a three-gallon (12 liter) bottle. We also
offer a smaller package for residential customers who may not be able to lift
five- or three-gallon bottles or who may have storage constraints. We offer
water bottles in plastic packages that facilitate storage and that have
non-spill "closed system" caps, preventing water from spilling from the mouth of
the bottle during insertion or removal from the water cooler. While our pricing
varies from market to market, and we frequently offer promotional discounts in
certain markets, we charge on average approximately NT71 for a five-gallon
bottle of water.
We offer only premium drinking water which is drawn from local municipal
sources. The water is passed through a series of carbon filters, processed by
reverse osmosis, passed through a micron filter, ozonated and then bottled. As a
result, our bottled water has 99.9% of all impurities removed from it, including
its natural mineral content.
We have two bottling facilities located in Taipei and Hsinchu, Taiwan,
along with a separate distribution center in Tainan, Taiwan. The Taipei facility
occupies 4,000 square feet and employs 16, while the Hsinchu facility occupies
6,000 square feet and employs 11.
Water Coolers. We have an installed base of approximately 5,000 water
coolers in our markets. Customers usually purchase their water coolers, which
provides us with a relatively stable stream of revenue from the sale of bottled
water. In addition, our installed customer base creates operating efficiencies
that can be used to support additional water cooler installations at an improved
marginal profitability rate. While our pricing varies from market to market and
depends on the water cooler selected by the customer, our current average
monthly rental charge for water coolers is approximately NT363, and our average
sales price is approximately NT5,181.
28
<PAGE>
We purchase our water coolers from one of three suppliers. We strip down,
clean and redeploy returned water coolers prior to all new installations. Our
average cost per water cooler is approximately NT3003, and we estimate that the
average life of a water cooler is five years. The typical pay back period on a
water cooler investment (assuming only rental revenue) is approximately nine
months. In the event of termination of the rental agreement, water coolers can
be readily redeployed at a relatively low cost.
Customers
We have grown from an installed base of approximately 200 water coolers in
1995 to an installed base of approximately 5,000 water coolers as of December
31, 1998. No customer accounted for more than 10% of our revenue in 1998 or in
the three months ended March 31, 1999. Approximately 95% of our revenue in 1998
was derived from sales to commercial establishments, with the remaining 5%
attributable to residential customers. Our commercial customers are generally
larger established businesses, including firms listed on the Taiwan Stock
Exchange, smaller regional and local shops, offices, warehouses, production
facilities and many of Taiwan's international airlines.
Sales and Marketing
We market our products principally through yellow page advertisements,
newspaper advertisements, coupons, product sponsorship programs, direct mail and
various referral programs which are supported by the efforts of salaried sales
and marketing personnel. To supplement this effort, we solicit potential new
customers in specific geographical areas in which we desire to increase the
density of existing routes or in which we desire to establish new routes. A
potential new customer may be offered various introductory promotions including
a free trial offer. Our marketing activity emphasizes the benefits of bottled
water and the convenience of a water cooler.
An important part of our sales, marketing and customer service strategy is
our focus on retaining customers. We experienced an average non-renewal rate for
water cooler rental agreements of 1.6% per month in 1998, which we believe is
lower than the industry average. Our primary strategy for minimizing non-renewal
rates is our focus on customer service. In addition, we employ marketing
strategies to retain customers who indicate they wish to discontinue receiving
bottled water, including commission payments to service representatives for the
customers they help to retain.
Distribution
As of December 31, 1998, we owned or leased 16 trucks used in our
distribution operations. The average cost per new truck is approximately
NT594,000, and we generally deliver to customers within a 90 minute drive from
our facilities. Each truck has a useful life of five years and can hold 100 to
120 five-gallon bottles. Our drivers are generally paid on a
per-delivered-bottle basis, promoting efficiency and therefore, higher
utilization of the delivery trucks. On average, a truck driver services
approximately 300 customers, who typically receive deliveries once a week. In
addition, our drivers actively generate sales and are compensated for each new
customer contract they originate.
We believe that one of the most important factors in the bottled water
business is delivery route efficiency. The average cost of local delivery per
bottle is over four times the cost of preparing a bottle for distribution,
whereas, the marginal distribution cost of an additional bottle on an existing
route is relatively low.
29
<PAGE>
Competition
We compete in the alternative to tap water market in two areas. First, we
compete directly with the approximately 500 bottled water companies in Taiwan.
This segment is highly fragmented with the vast majority of the companies being
operated as small entrepreneurial and family-owned businesses. We believe
quality of service and reliability of delivery are the primary competitive
factors in the bottled water business. Additionally, we believe that the capital
costs associated with the purchase of water coolers, bottling equipment and
delivery trucks create certain barriers to entry.
We also compete indirectly with companies that distribute water through
retail stores and vending machines. The competitive advantage of water coolers
over these alternative distribution channels is primarily based on the
convenience of home or office delivery and, to a lesser extent, price.
Similarly, we compete with providers of on-premises water filtration systems,
including systems distributed through retail outlets. The competitive advantages
of water coolers over filtration systems include better quality assurance of the
water, fewer maintenance requirements and the elimination of filter replacement
requirements.
Properties
We lease a 4,000 square foot bottling and office facility in Taipei, Taiwan
on a lease which expires in October 1999 at a monthly rental of NT70,000. We
also lease a 6,000 square foot bottling and office facility in Hsinchu, Taiwan
on a lease which expires in September 2004 at a monthly rental of NT60,000.
We believe that our bottling and distribution facilities are in good
operating condition and generally have sufficient capacity to handle current
sales volumes.
Employees
As of March 31, 1999, we had approximately 27 full-time employees, of which
15 were in sales, services and distribution, four in maintenance, water
production and warehousing and eight in administration. Our workforce is
non-unionized and temporary workers are used during peak demand periods. We
believe that we enjoy good relations with our employees.
Regulation
Our operations are subject to various laws and regulations, which require
us, among other things, to obtain licenses for our business, to pay annual
license and inspection fees and to comply with quality standards regarding our
bottled water, plants and equipment. We believe that we are currently in
substantial compliance with these laws and regulations. In addition, we do not
believe that the cost of compliance with applicable laws and regulations is
material to our business. However, laws and regulations are subject to change,
and no assurance can be given that future actions by governmental authorities
will not have an adverse effect on our business.
We are in good standing with the International Bottled Water Association,
which mandates compliance with quality control standards worldwide.
30
<PAGE>
OUR MANAGEMENT
Officers and Directors
Information concerning each of our executive officers and directors is set
forth below:
Name Age Position
- ---- --- --------
Tuan-Yuan Hu 43 Chairman of the Board of Directors, Chief
Executive Officer and Chief Financial Officer
Yu Feng Cheng 34 Vice President--Marketing
Terry Tsao 45 Vice President--Operations
Ben-Yu Chow 76 Director
Ben-Yuan Chou 66 Director
F.C. Toyo Tsai 60 Director
Andrew Chu 28 Director
Directors hold office for a period of one year from their election at the
annual meeting of stockholders or until their successors are duly elected and
qualified. Officers are elected by, and serve at the discretion of, the Board of
Directors. Our audit committee consists of Messrs. Chou, Tsai and Chu, and our
compensation committee consists of Messrs. Chou, Hu and Chu.
Tuan-Yuan Hu founded our company in 1995 and has been our Chairman and
Chief Executive Officer since that time. From 1983 to 1993, he was the Vice
President--Operations for Hwa Seng Bottled Water Corporation, one of the largest
and oldest bottled water companies in Taiwan. From 1980 to 1983, Mr. Hu was
general manager of Hsing Feng Advertisement, Ltd., a Taiwan-based advertising
and marketing company.
Yu Feng Cheng joined us as our Vice President--Marketing in 1995. Her
responsibilities include marketing and sales, including advertising development,
direct mail and Yellow Page campaigns. From 1991 to 1995, Ms. Cheng attended and
graduated from Japan University in Japan with a Bachelor of Arts degree. From
1985 to 1991, she was employed by An-Ching Corporation, an investment services
company, as a marketing and customer service manager, managing a team of 25
customer representatives.
Terry Tsao joined us as our Vice President--Operations in 1995. Mr. Tsao is
responsible for the production of bottled water, scheduling of delivery drivers,
sales and promotional campaign execution and delivery routing. From 1992 to
1995, he was the regional manager of Hwa Seng Bottled Water Corporation, where
he was responsible for the daily operation of Hwa Seng's regional offices. From
1983 to 1992, Mr. Tsao was employed by First Bank (Taipei) as its office
manager. His duties included staff scheduling, customer services, administrative
tasks and peer performance evaluations. He graduated from Tan Chang University
in 1992 with a Bachelor of Science degree.
31
<PAGE>
Ben-Yu Chow joined us as a director in 1999. He has served as a consultant
to the International Commercial Bank of China since 1989. From 1938 to 1989, Mr.
Chow was employed by the International Commercial Bank of China in a number of
capacities, including Senior Vice President and subsequently, Executive Vice
President. He served as President of Asia Trust and Investment Corporation and
Director of the National Credit Card Center during his employment with the
International Commercial Bank of China. Mr. Chow earned a Bachelor's degree in
economics from Central University in China.
Ben-Yuan Chou joined us as a director in 1999 and since 1997, has served as
Chairman of Chou's Enterprises, Ltd., a trading and finance company. From 1984
to 1997, Mr. Chou served as President of Chou's Enterprises, Ltd. From 1972 to
1984, he served as the Chairman of the Board for Singapore-based Asia Kingdoms
PTE, Ltd., a trading company. Mr. Chou earned a Bachelor's degree in economics
from Soo-Chow University.
F.C. Toyo Tsai joined us as a director in 1999. Since 1989, Mr. Tsai has
been the Chairman of Jen Tsong Lace Co., Ltd., a Taiwan-based lace manufacturer,
and a director of Triocean Textile Company. From 1954 to 1989, Mr. Tsai served
as President of Lian Zune Textile Co., Ltd.
Andrew Chu joined us as a director in 1999. Since 1997, Mr. Chu has served
as Chief Financial Officer for CPC International Investment Inc., which
specializes in corporate financial consulting for Asian companies. From 1994 to
1997, Mr. Chu served as the Chief Financial Officer of ProtoSource Corporation,
a Nasdaq-traded company.
Executive Compensation
The following table provides certain summary information concerning
compensation paid to our Chief Executive Officer for the years ended December
31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Other Restricted Shares All
Name and Annual Stock Underlying Other
Principal Position Year Salary Bonus Compensation Award(s) Options Compensation
------------------ ---- ------ ----- ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tuan-Yuan Hu......... 1998 NT1,200,000 0 0 0 0 0
Chief Executive 1997 NT1,200,000 0 0 0 0 0
Officer 1996 NT 600,000 0 0 0 0 0
32
</TABLE>
<PAGE>
1999 Stock Option Plan
In April 1999, we adopted a stock option plan (the "Plan") which provides
for the grant of options to officers, directors and key employees. The purposes
of the Plan are to attract and retain the best available personnel, to provide
additional incentives to our employees and to promote the success of our
business.
We have reserved 300,000 shares of common stock for issuance under the
Plan, which is administered by our Board of Directors. Under the Plan, the Board
of Directors determines which individuals will receive options, the time period
during which the options may be partially or fully exercised, the number of
shares of common stock that may be purchased under each option and the option
price. As of the date hereof, no options have been issued.
The per share exercise price of the common stock subject to options must
not be less than the fair market value of the common stock on the date the
option is granted. The stock options are subject to anti-dilution provisions in
the event of stock splits, stock dividends and the like. No stock options are
transferable by an optionee other than by will or the laws of descent and
distribution, and during the lifetime of an optionee, the option is only
exercisable by the optionee. The exercise date of an option granted under the
Plan must not be later than ten years from the date of grant. Any options that
expire unexercised or that terminate upon an optionee's ceasing to be employed
by us will become available once again for issuance. Shares issued upon exercise
of an option rank equally with other shares then outstanding.
33
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the holdings
of common stock (1) by each person who, as of this date, holds of record or is
known by us to hold beneficially or of record, more than 5% of our common stock,
(2) by each director, and (3) by all officers and directors as a group. The
address of each person is our address at 4th Floor, 52 Lane 232, Hu Lin Street,
Hsin Yi District, Taipei, Taiwan, Republic of China.
Percent Percent
Shares of Class of Class
Name Owned(2) Prior to Offering(1) After Offering
---- -------- -------------------- --------------
Tuan-Yuan Hu................ 157,143 33.3 10.0
Yu Feng Cheng............... -0- -0- -0-
Terry Tsao.................. -0- -0- -0-
Ben-Yu Chow................. -0- -0- -0-
Ben-Yuan Chou............... -0- -0- -0-
F.C. Toyo Tsai.............. -0- -0- -0-
Andrew Chu.................. -0- -0- -0-
Lai Ling Tse................ 137,498 29.2 8.8
Sun Hin Enterprise Co., Ltd. 137,498 29.2 8.8
All executive officers and
directors as a group
(7 persons)................ 157,143 33.3 10.0
CERTAIN TRANSACTIONS
In April 1999, we entered into a ten-year contract with Han Tao Pure Waters
Proprietor ("HanTao"), a company owned by Tuan-Yuan Hu, our Chief Executive
Officer, to provide purified water to us. Han Tao holds a license to produce
purified water and provides us with our purified water at NT20 per five gallons
of water, which is approximately Han Tao's production cost. The contract does
not require Han Tao to produce or us to purchase water from the other party. We
have applied and expect to obtain by approximately December 1999 our own license
to purify water although we cannot so assure. Any further transactions with
related parties will be approved by a majority of our disinterested directors.
34
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 20,000,000 shares of no par value common stock,
of which 471,429 shares are outstanding as of the date of this prospectus. Each
share of common stock is entitled to one vote on all matters submitted to a vote
of the stockholders, and cumulative voting is not permitted. Upon issuance,
shares of common stock are not subject to further assessment or call. Subject to
the prior rights of any series of preferred stock that may be issued by us in
the future, holders of common stock are entitled to receive ratably such
dividends that may be declared by the Board of Directors out of funds legally
available therefor and are entitled to share ratably in all assets remaining
after payment of liabilities in the event of our liquidation, dissolution or
winding up. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. The outstanding common
stock is fully paid and nonassessable.
Preferred Stock
Our Memorandum of Association authorizes the issuance of up to 5,000,000
shares of no par value preferred stock with such rights and preferences as may
be determined from time to time by our Board of Directors. Accordingly, under
the Memorandum of Association, the Board of Directors may, without stockholder
approval, issue preferred stock with dividend, liquidation, conversion, voting,
redemption or other rights which could adversely affect the voting power or
other rights of the holders of the common stock. The issuance of any shares of
preferred stock having rights superior to those of the common stock may result
in a decrease of the value or market price of the common stock and could further
be used by the Board of Directors as a device to prevent a change in our
control. We have no other anti-takeover provisions in our Memorandum of
Association. Holders of the preferred stock may have the right to receive
dividends, certain preferences in liquidation and conversion rights.
Shares Eligible for Future Sale
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices. Furthermore, since only a
limited number of shares will be available for sale shortly after the offering
because of certain contractual and legal restrictions on resale (as described
below), sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding 1,571,429 shares
of common stock. Of these shares, 1,100,000 shares sold in the offering (plus
any shares issued upon exercise of the underwriters' overallotment option) will
be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act (generally, officers, directors or 10% stockholders).
The remaining 471,429 shares outstanding are "restricted securities" within
the meaning of Rule 144 under the Securities Act. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144. Sales of restricted securities in the public
market, or the availability of such securities for sale, could adversely affect
the market price of the common stock.
35
<PAGE>
All of our stockholders have entered into lock-up agreements with the
representative of the underwriters providing that they will not offer, sell,
contract to sell, pledge, hypothecate or grant any option to purchase or
otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of one year from
the effective date of the registration statement filed pursuant to this offering
without the prior written consent of the representative of the underwriters. As
a result of these contractual restrictions, notwithstanding possible earlier
eligibility for sale under the provisions of Rule 144, shares subject to lockup
agreements will not be salable until such agreements expire or are waived by the
representative of the underwriters. In addition to the lock-up agreements, all
471,429 shares of our outstanding securities may not be sold until at least
April 2000 under Rule 144.
In general, under Rule 144, a person who has beneficially owned restricted
securities for at least one year is entitled to sell within any three-month
period a number of shares that does not exceed the greater of: (i) one percent
of the number of shares of common stock then outstanding (which will equal
15,714 shares immediately after the offering); or (ii) the average weekly
trading volume of the common stock during the four calendar weeks preceding the
sale. Under Rule 144(k), a person who is not deemed to have been our affiliate
at any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares without complying with the volume limitations of Rule 144.
We have granted certain demand and piggy-back registration rights covering
110,000 shares of common stock underlying the common stock purchase warrants to
be issued to the representative of the underwriters.
Transfer Agent
Corporate Stock Transfer, Inc., Denver, Colorado, is our transfer agent.
The transfer agent's address is 370-17th Street, Suite 2350, Denver, Colorado
80202-4614, and its telephone number is (303) 595-3300.
Exchange Controls and Other Limitations Affecting Stockholders
There are no exchange control restrictions in the Republic of China on the
repatriation of dividends by our subsidiaries. In addition, there are no
material British Virgin Islands laws that impose foreign exchange controls on us
or that affect the payment of dividends, interest or other payments to
non-resident holders of our capital stock. British Virgin Islands law and our
Memorandum of Association and Articles of Association impose no limitations on
the right of non-resident or foreign owners to hold or vote the common stock.
Differences in Corporate Law
Under the laws of most jurisdictions in the U.S., majority and controlling
stockholders generally have certain "fiduciary" responsibilities to the minority
stockholders. Stockholder action must be taken in good faith and actions by
controlling stockholders which are obviously unreasonable may be declared null
and void. British Virgin Islands law protecting the interests of minority
stockholders may not be as protective in all circumstances as the law protecting
minority stockholders in U.S. jurisdictions.
36
<PAGE>
While British Virgin Islands law does permit a stockholder of a British
Virgin Islands company to sue its directors derivatively (i.e., in the name of
and for the benefit of our company) and to sue a company and its directors for
his benefit and for the benefit of others similarly situated, the circumstances
in which any such action may be brought, and the procedures and defenses that
may be available in respect to any such action, may result in the rights of
stockholders of a British Virgin Islands company being more limited than those
of stockholders of a company organized in the U.S.
Our directors have the power to take certain actions without stockholder
approval, including an amendment of our Memorandum of Association or Articles of
Association or an increase or reduction in our authorized capital, which would
require stockholder approval under the laws of most U.S. jurisdictions. In
addition, the directors of a British Virgin Islands corporation, subject in
certain cases to court approval but without stockholder approval, may, among
other things, implement a reorganization, certain mergers or consolidations, the
sale, transfer, exchange or disposition of any assets, property, part of the
business, or securities of the corporation, or any combination thereof, if they
determine it is in the best interests of the corporation, its creditors, or its
stockholders. Our ability to amend our Memorandum of Association and Articles of
Association without stockholder approval could have the effect of delaying,
deterring or preventing our change in control without any further action by the
stockholders, including, but not limited to a tender offer to purchase the
common stock at a premium over then current market prices.
As in most U.S. jurisdictions, the board of directors of a British Virgin
Islands corporation is charged with the management of the affairs of the
corporation. In most U.S. jurisdictions, directors owe a fiduciary duty to the
corporation and its stockholders, including a duty of care, pursuant to which
directors must properly apprise themselves of all reasonably available
information, and a duty of loyalty, pursuant to which they must protect the
interests of the corporation and refrain from conduct that injures the
corporation or its stockholders or that deprives the corporation or its
stockholders of any profit or advantage. Many U.S. jurisdictions have enacted
various statutory provisions which permit the monetary liability of directors to
be eliminated or limited. Under British Virgin Islands law, liability of a
corporate director to the corporation is primarily limited to cases of willful
malfeasance in the performance of his duties or to cases where the director has
not acted honestly and in good faith and with a view to the best interests of
the corporation. However, under our Articles of Association, we will be
authorized to indemnify any director or officer who is made or threatened to be
made a party to a legal or administrative proceeding by virtue of being one of
our directors or officers, provided such person acted honestly and in good faith
and with a view to our best interests and, in the case of a criminal proceeding,
such person had no reasonable cause to believe that his conduct was unlawful.
Our Articles of Association also enable us to indemnify any director or officer
who was successful in such a proceeding against expense and judgments, fines and
amounts paid in settlement and reasonably incurred in connection with the
proceeding.
The foregoing description of certain differences between British Virgin
Islands and U.S. corporate laws is only a summary and does not purport to be
complete or to address every applicable aspect of such laws. However, we believe
that all material differences are disclosed above.
37
<PAGE>
TAXATION
The following is a summary of certain anticipated material U.S. federal
income and British Virgin Islands tax consequences of an investment in the
common stock. The summary does not deal with all possible tax consequences
relating to an investment in the common stock and does not purport to deal with
the tax consequences applicable to all categories of investors, some of which
(such as dealers in securities, insurance companies and tax-exempt entities) may
be subject to special rules. In particular, the discussion does not address the
tax consequences under state, local and other national (e.g., non-U.S. and
non-British Virgin Islands) tax laws. Accordingly, each prospective investor
should consult its own tax advisor regarding the particular tax consequences to
it of an investment in the common stock. The following discussion is based upon
laws and relevant interpretations thereof in effect as of the date of this
Prospectus, all of which are subject to change.
United States Federal Income Taxation
The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person (i.e., a U.S. citizen or resident, a U.S.
corporation, or an estate or trust subject to U.S. federal income tax on all of
its income regardless of source) making an investment in the common stock. For
taxable years beginning after December 31, 1996, a trust will be a U.S. person
only if (i) a court within the United States is able to exercise primary
supervision over its administration and (ii) one or more United States persons
have the authority to control all of its substantial decisions. In addition, the
following discussion does not address the tax consequences to a person who holds
(or will hold), directly or indirectly, 10% or more of the common stock (a "10%
Stockholder"). Non-U.S. persons and 10% Stockholders are advised to consult
their own tax advisors regarding the tax considerations incident to an
investment in the common stock.
A U.S. Investor receiving a distribution with respect to the common stock
will be required to include such distribution in gross income as a taxable
dividend, to the extent of our current or or accumulated earnings and profits as
determined under U.S. federal income tax principles. Any distributions in excess
of such earnings and profits will first be treated, for U.S. federal income tax
purposes, as a nontaxable return of capital, to the extent of the U.S.
Investor's adjusted tax basis in the common stock, and then as gain from the
sale or exchange of a capital asset, provided that the common stock constitutes
a capital asset in the hands of the U.S. Investor. U.S. corporate stockholders
will not be entitled to any deduction for distributions received as dividends on
the common stock.
Gain or loss on the sale or exchange of the common stock will be treated as
capital gain or loss if the common stock is held as a capital asset by the U.S.
Investor. Such capital gain or loss will be long-term capital gain or loss if
the U.S. Investor has held the common stock for more than one year at the time
of the sale or exchange.
A holder of common stock may be subject to "backup withholding" at the rate
of 31% with respect to dividends paid on such common stock if such dividends are
paid by a paying agent, broker or other intermediary in the United states or by
a U.S. broker or certain United States-related brokers to such holder outside
the United States. In addition, the proceeds of the sale, exchange or redemption
of common stock may be subject to backup withholding, if such proceeds are paid
by a paying agent, broker or other intermediary in the United States.
38
<PAGE>
Backup withholding may be avoided by the holder of common stock if such
holder (i) is a corporation or comes within certain other exempt categories or
(ii) provides a correct taxpayer identification number, certifies that such
holder is not subject to backup withholding and otherwise complies with the
backup withholding rules. In addition, holders of common stock who are not U.S.
persons are generally exempt from backup withholding, although such holders may
be required to comply with certification and identification procedures in order
to prove their exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded (or credited against the holder's U.S. federal income
tax liability, if any) provided that amount withheld is claimed as federal taxes
withheld on the holder's U.S. federal income tax return relating to the year in
which the backup withholding occurred. A holder who is not otherwise required to
file a U.S. income tax return must generally file a claim for refund (or, in the
case of non-U.S. holders, an income tax return) in order to claim refunds of
withheld amounts.
British Virgin Islands Taxation
Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of common stock who is not a resident
of the British Virgin Islands is exempt from British Virgin Islands income tax
on dividends paid with respect to the common stock and all holders of common
stock are not liable to British Virgin Islands income tax on gains realized
during that year on sale or disposal of such shares; the British Virgin Islands
does not impose a withholding tax on dividends paid by a company incorporated
under the International Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by the British
Virgin Islands on companies incorporated under the International Business
Companies Act. In addition, the common stock is not subject to transfer taxes,
stamp duties or similar charges.
There is no income tax treaty or convention currently in effect between the
United States and the British Virgin Islands.
39
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
this date, the underwriters named below have agreed to purchase from us the
number of shares of common stock set forth opposite their names below.
Number of
Underwriters Shares
------------ ------
Nutmeg Securities, Ltd
_________________ ..................................
---------
Total............................................... 1,100,000
The underwriting agreement provides that the obligations of the
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock offered hereby (other than
those shares covered by the overallotment option described below) if any are
purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may re-allow, to certain other dealers
a concession not in excess of $____ per share. After the initial offering of the
common stock, the public offering price and other selling terms may be changed
by the representative of the underwriters at any time without notice. The
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
We will pay to the representative of the underwriters a nonaccountable
expense allowance of 3% of the purchase price of all common stock sold in the
offering and issue to the Representative common stock purchase warrants (the
"Representative's Warrants") to purchase up to 110,000 shares at $8.40 per
share.
We have granted to the underwriters an option, exercisable within 45 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of 165,000 additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise such option solely to cover overallotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such underwriter's percentage underwriting commitment as indicated above.
We have agreed to issue the Representative's Warrants to the representative
of the underwriters for a consideration of $100. The Representative's Warrants
are exercisable at any time in the four-year period commencing one year from the
date of this prospectus to purchase up to 110,000 shares of common stock for
$8.40 per share. The Representative's Warrants are not transferable (nor may
they be sold, hypothecated or pledged) for one year from the date of this
prospectus except (i) to an underwriter or a partner or officer of an
underwriter or (ii) by will or operation of law. During the term of the
Representative's Warrants, the holder is given the opportunity to profit from a
rise in the market price of our securities. If we file a registration statement
relating to an equity offering under the provisions of the Securities Act of
1933 at any time during the five-year period following the date of this
prospectus, the holders of the Representative's Warrants or underlying common
stock will have the right, subject to certain conditions, to include in such
registration statement, at our expense, all or part of the underlying common
stock at the request of the holders. Additionally, we have agreed, for a period
of five years commencing on the date of this prospectus, on demand of the
holders of a majority of the Representative's Warrants or the common stock
40
<PAGE>
issued or issuable thereunder, to register the common stock underlying the
Representative's Warrants one time at our expense. The registration of
securities pursuant to the Representative's Warrants may result in substantial
expense to us at a time when we may not be able to afford such expense. The
number of shares of common stock covered by the Representative's Warrants and
the exercise price are subject to adjustment under certain events to prevent
dilution.
We have also agreed with the representative of the underwriters:
o to allow an observer designated by the representative to attend our
board of directors meetings;
o to have the first right to handle Rule 144 sales for our stockholders.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect thereof. We have also
agreed to (1) cause all of our stockholders to sign lockup agreements
prohibiting them from selling, transferring or conveying their shares to anyone
for a period of one year from the date hereof without the written consent of the
representative, (2) elect for five years as one of our directors a nominee
proposed by the representative and (3) grant the representative for three years
the right of first refusal to match the terms of any sale of securities offered
by any other selling agent.
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered hereby will be determined by negotiation among us and the representative
of the underwriters. Among the factors to be considered in determining the
initial public offering price were:
o the history of and the prospects for the industry in which we compete;
o our past and present operations;
o our historical results of operations;
o our prospects for future earnings;
o the recent market prices of securities of generally comparable
companies; and
o the general condition of the securities markets at the time of the
offering.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the securities,
including overallotment, stabilizing and short-covering transactions in such
securities, and the imposition of a penalty bid in connection with the offering.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Harney Westwood & Riegels, as to British Virgin Islands law. Certain legal
matters in connection with the offering will be passed upon for us by the Law
Office of Gary A. Agron, Englewood, Colorado, and for the underwriters by
Gersten, Savage & Kaplowitz, LLP, New York, New York.
EXPERTS
Our financial statements as of December 31, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1998, have been included
herein and in the registration statement in reliance upon the report of KPMG
Certified Public Accountants, appearing elsewhere herein, and upon the authority
of this firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement under the Securities Act, covering the common stock. As permitted by
the rules and regulations of the Commission, this prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits.
For further information with respect to our company and the common stock,
reference is made to the Registration Statement and the exhibits, which may be
examined without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549,
copies of which may be obtained from the Commission upon payment of the
prescribed fees.
41
<PAGE>
We will be subject to the foreign private issuer informational requirements
of the Securities Exchange Act but intend to file reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information may be inspected at the public reference facilities of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of these materials may be obtained at prescribed rates from the
Commission at that address. The reports, proxy statements and other information
can also be inspected at the Commission's regional offices at 7 World Trade
Center, Suite 300, New York, New York 10048, at Northwestern Atrium Center, 500
West Madison, Chicago, Illinois 60621 and on the Commission's Web site at
www.sec.gov.
We will furnish to our stockholders annual reports which will include
audited financial statements. We may also furnish to our stockholders quarterly
financial statements and other reports that may be authorized by our Board of
Directors.
42
<PAGE>
HI-Q WASON INC.
Financial Statements
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996 Financial Statements
Independent Auditors' Report............................................ F-2
Balance Sheets as of December 31, 1998 and 1997......................... F-3
Statements of Operations for the years
ended December 31 1998, 1997 and 1996.................................. F-4
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996....................................... F-5
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................................... F-6
Notes to Financial Statements........................................... F-7
March 31, 1999 and 1998 Quarterly Financial statements (Unaudited)
Balance Sheet as of March 31, 1999...................................... F-13
Statements of Operations for the three-months
ended March 31, 1999 and 1998.......................................... F-14
Statements of Cash Flows for the three-months
ended March 31, 1999 and 1998.......................................... F-15
Notes to Quarterly Financial Statements................................. F-16
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Hi-Q Wason, Inc.:
We have audited the accompanying balance sheets of Hi-Q Wason, Inc. as of
December 31, 1998 and 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the Republic of China, which are substantially equivalent to auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hi-Q Wason, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles in the United States.
The accompanying financial statements as of and for the year ended December 31,
1998 have been translated into United States dollars soley for the convenience
of the readers. We have audited the translation and, in our opinion, the
financial statements expressed in New Taiwan dollars have been translated into
United States dollars on the basis set forth in note 1 of the notes to the
financial statements.
/s/ KPMG Certified Public Accountants
--------------------------------------
KPMG Certified Public Accountants
January 23, 1999, except as to note
1 which is as of April 26, 1999
Taipei, Taiwan
F-2
<PAGE>
<TABLE>
<CAPTION>
HI-Q WASON, INC.
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
-----------------------------
US$ NT$ NT$
--- --- ---
<S> <C> <C> <C>
Current assets:
Cash 28,303 938,791 1,189,299
Notes and accounts receivable, net of allowance for doubtful
accounts of NT$20,000 and NT$15,000, respectively 176,329 5,848,850 3,640,386
Inventories 23,291 772,579 685,896
Prepaid assets (including prepayments of NT$1,000,000 as
of December 31, 1997 to a related party for water purification) 5,826 193,238 2,247,995
Other current assets 145 4,805 94,571
----------- ----------- -----------
Total current assets 233,894 7,758,263 7,858,147
Property and equipment:
Equipment 209,242 6,940,548 3,712,261
Delivery trucks 178,529 5,921,822 4,084,397
Furniture and fixtures 81,487 2,702,898 1,595,947
Reusable water bottles 305,784 10,142,862 5,220,046
Water coolers held for rental 65,027 2,156,956 869,664
Less: accumulated depreciation (151,358) (5,020,532) (2,288,751)
----------- ----------- -----------
Net property and equipment 688,711 22,844,554 13,193,564
Refundable deposits 6,862 227,600 200,600
Deferred income tax assets 6,979 231,500 144,750
----------- ----------- -----------
Total assets 936,446 31,061,917 21,397,061
=========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings from related party 39,192 1,300,000 --
Current installments of capital lease obligations 66,634 2,210,257 925,768
Accrued expenses and other current liabilities 23,932 793,809 275,353
Income tax payable 58,694 1,946,873 449,276
----------- ----------- -----------
Total current liabilities 188,452 6,250,939 1,650,397
Capital lease obligations, excluding current installments 26,630 883,319 341,632
Accrued pension 27,917 926,000 579,000
----------- ----------- -----------
Total liabilities 242,999 8,060,258 2,571,029
----------- ----------- -----------
Stockholders' equity:
Common stock, NT$10 par value, authorized, issued
and outstanding shares of 2,000,000 602,954 20,000,000 20,000,000
Retained earnings (accumulated deficit) 90,493 3,001,659 (1,173,968)
----------- ----------- -----------
Total stockholders' equity 693,447 23,001,659 18,826,032
----------- ----------- -----------
Commitments
Total liabilities and stockholders' equity 936,446 31,061,917 21,397,061
=========== =========== ===========
See accompanying notes to financial statements
F-3
<PAGE>
HI-Q WASON, INC.
Statements of Operations
Years ended December 31, 1998, 1997 and 1996
1998
-------------------- 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
Revenues:
Bottled water sales 842,511 27,946,072 17,335,408 7,897,594
Water cooler sales and rentals 70,460 2,337,167 2,449,324 1,289,994
----------- ----------- ----------- -----------
Total revenues 912,971 30,283,239 19,784,732 9,187,588
Costs and expenses:
Cost of bottled water sales (including
water purification fees of
NT$3,133,600, NT$2,176,100
and NT$1,283,890, respectively,
from a related party) 293,633 9,739,823 6,968,926 3,841,646
Cost of water cooler sales and rentals 46,237 1,533,665 1,361,076 609,623
Selling, general and administrative expenses 395,424 13,116,209 10,088,498 5,581,969
----------- ----------- ----------- -----------
Operating income (loss) 177,677 5,893,542 1,366,232 (845,650)
Interest expense (6,854) (227,342) (127,400) --
Interest income 215 7,120 7,292 10,815
Other income (loss), net (2,618) (86,846) 4,803 --
----------- ----------- ----------- -----------
Income (loss) before income taxes 168,420 5,586,474 1,250,927 (834,835)
Income tax expense (42,534) (1,410,847) (305,250) --
----------- ----------- ----------- -----------
Net income (loss) 125,886 4,175,627 945,677 (834,835)
=========== =========== =========== ===========
Basic earnings (loss) per common share 0.27 8.86 2.01 (1.77)
=========== =========== =========== ===========
Weighted average common shares outstanding 471,429 471,429 471,429 471,429
=========== =========== =========== ===========
See accompanying notes to financial statements
F-4
<PAGE>
HI-Q WASON, INC.
Statements of Changes in Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
Common stock Reained earnings
------------ (accumulated
Par value deficit) Total
Shares NT$ NT$ NT$
------ --- --- ---
Balance at January 1, 1996 500,000 5,000,000 (1,284,810) 3,715,190
Net loss -- -- (834,835) (834,835)
----------- ----------- ----------- -----------
Balance at December 1, 1996 500,000 5,000,000 (2,119,645) 2,880,355
Issuance of common shares 1,500,000 15,000,000 -- 15,000,000
Net income -- -- 945,677 945,677
----------- ----------- ----------- -----------
Balance at December 31, 1997 2,000,000 20,000,000 (1,173,968) 18,826,032
Net income -- -- 4,175,627 4,175,627
----------- ----------- ----------- -----------
Balance at December 31, 1998 2,000,000 20,000,000 3,001,659 23,001,659
=========== =========== =========== ===========
See accompanying notes to financial statements
F-5
<PAGE>
HI-Q WASON, INC.
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998
------------------ 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
Cash flows from operating activities:
Net income (loss) 125,886 4,175,627 945,677 (834,835)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 192 6,366 15,000 --
Depreciation 87,526 2,903,220 1,593,005 670,221
Deferred income tax benefit (2,615) (86,750) (144,750) --
Loss (gain) on disposal of property and equipment 2,618 86,846 (12,121) --
Changes in operating assets and liabilities:
Notes and accounts receivable (66,772) (2,214,830) (1,686,696) (1,829,764)
Inventories (2,613) (86,683) (100,962) 220,591
Prepaid assets 61,946 2,054,757 (2,220,660) --
Other current assets 2,706 89,766 81,054 126,313
Accounts payable -- -- -- (1,610,045)
Accounts payable to related party -- -- (30,939) 30,939
Income tax payable 45,149 1,497,597 449,276 --
Accrued expenses and other current liabilities 15,630 518,456 106,081 145,939
Accrued pension 10,461 347,000 311,000 268,000
----------- ----------- ----------- -----------
Cash provided by (used in) operating activities 280,114 9,291,372 (695,035) (2,812,641)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (384,257) (12,745,818) (9,434,679) (3,558,659)
Proceeds from sale of property and equipment 3,158 104,762 -- --
Increase in refundable deposits (814) (27,000) (17,000) (3,200)
----------- ----------- ----------- -----------
Cash used in investing activities (381,913) (12,668,056) (9,451,679) (3,561,859)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Net decrease (increase) in short-term borrowings from
related party 39,192 1,300,000 (5,472,089) 5,472,089
Payments of capital lease obligations (50,462) (1,673,823) (1,032,600) --
Proceeds from sale-leaseback transactions 105,517 3,499,999 2,300,000 --
Issuance of common shares -- -- 15,000,000 --
----------- ----------- ----------- -----------
Cash provided by financing activities 94,247 3,126,176 10,795,311 5,472,089
----------- ----------- ----------- -----------
Net increase (decrease) in cash (7,552) (250,508) 648,597 (902,411)
Cash at beginning of year 35,855 1,189,299 540,702 1,443,113
----------- ----------- ----------- -----------
Cash at end of year 28,303 938,791 1,189,299 540,702
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest 6,854 227,342 127,400 --
=========== =========== =========== ===========
See accompanying notes to financial statements
F-6
</TABLE>
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
(1) Organization, Principal Activities and Basis of Presentation
Hi-Q Wason, Inc. (the "Company") was incorporated on July 4, 1995 under the
Company Law of the Republic of China (Taiwan). The Company commenced its
operations on November 20, 1995. The Company is primarily engaged in the
manufacture and sale of bottled water and sale and rental of water coolers
in Taiwan.
In April 1999, the stockholders of the Company established a holding
company in the British Virgin Islands to acquire 100% of the outstanding
shares of the Company. The newly formed company, Hi-Q Wason, Inc. ("BVI")
issued 471,429 shares of common stock to the stockholders of the Company in
exchange for their common share ownership in the Company on April 26, 1999.
The BVI intends to issue an additional 1,100,000 shares of common stock in
an initial public offering in the United States.
The accompanying financial statements have been prepared on a historical
cost basis to reflect the financial position and results of operations of
the Company in accordance with accounting principles generally accepted in
the United States. Earnings per share information has been prepared using
the outstanding common shares of BVI.
The financial statements are stated in New Taiwan dollars. Translations of
New Taiwan dollar amounts into United States dollars in the 1998 financial
statements are included solely for the convenience of the readers, using
the noon buying rate of the Federal Reserve Bank of New York on March 31,
1999 of NT$33.17 to US$1. The convenience translations should not be
construed as representations that the New Taiwan dollar amounts have been,
could have been, or could in the future be, converted into United States
dollars at this or any other rate of exchange.
(2) Summary of Significant Accounting Policies
Revenue recognition
The Company recognizes revenue from the sale of water coolers and bottled
water upon shipment. Income earned from the rental of water coolers is
recognized over the rental service period.
Inventories
Inventories primarily consist of water coolers. Inventories are valued at
the lower of cost or net realizable value. Cost determined is by the
first-in, first-out (FIFO) method.
Property and equipment
Property and equipment is stated at cost. The Company provides for
depreciation of plant and equipment utilizing the straight-line method over
the estimated useful lives of the assets. Equipment is depreciated over 5
to 10 years, furniture and fixtures over 5 to 8 years and reusable water
bottles and delivery trucks over 5 years.
F-7
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
Water coolers held for rental are depreciated on a straight-line basis over
their estimated useful life of 5 years. Accumulated depreciation related to
these assets amounted to NT$240,793 (US$7,260) and NT$77,970 as of December
31, 1998 and 1997, respectively.
Assets recorded under capital leases are recorded at the lower of the
present value of the lease payments (including bargain purchase price) or
the fair value of the assets at the inception date of the lease.
Amortization of such assets is provided over the life of the lease for
leases that do not contain a bargain purchase option. For leases that
contain a bargain purchase option, amortization is provided over the
estimated useful lives of the assets.
Accrued pension
---------------
Pursuant to the ROC Labor Standards Law (the "Law") the Company has
established a defined benefit retirement plan for all full-time employees.
This plan provides for lump-sum retirement benefits to retiring employees
based on length of service, age and certain other factors. In addition, the
Law requires that the Company fund the plan annually at a rate of 2% to 15%
of total employee salaries. The plan is funded through deposits with the
Central Trust of China, a governmental institution that administrates
pension investments for all entities in Taiwan. As of December 31, 1998,
the Company had not yet contributed funds to the Central Trust of China.
In accordance with Statement of Financial Accounting Standards No. 87
"Employers' Accounting for Pensions," the Company records a pension accrual
in the financial statements based on the projected benefit obligation, less
the fair value of plan assets, plus or minus any unrecognized gains or
losses.
Advertising expense
-------------------
Advertising costs are expensed as incurred. Advertising costs, including
product promotion costs, amounted to NT$1,520,384 (US$45,836), NT$432,223
and NT$215,435 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Income taxes
------------
Income taxes are accounted for under the asset and liability. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax asset and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized as income
in the period that includes the enactment date.
F-8
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
(3) Related Party Transactions
The Company borrows funds for operations from Tuan-Yuan Hu, the chief
executive officer and a stockholder of the Company, on an interest free
basis. The average outstanding borrowings from Tuan-Yuan Hu were
approximately NT$1,500,000 (US$45,222), NT$2,700,000 and NT$4,200,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The
outstanding balance relating to these borrowings was NT$1,300,000
(US$39,192) and NT$0 as of December 31, 1998 and 1997, respectively. The
borrowings are due on demand from Tuan-Yuan Hu.
In 1997, the Company entered into a contract with Han Tao Wason Pure Water
Proprietor, a company wholly owned by Tuan-Yuan Hu, for water purification.
The contract expired on December 31, 1998. The contract stipulated that Han
Tao Pure Water Proprietor would perform water purification services for the
Company at cost over the contract period. The processing fee amounted to
NT$3,133,600 (US$94,471), NT$ 2,176,100 and NT$1,283,890 for the years
ended December 31, 1998, 1997 and 1996, respectively. As of December 31,
1997, the related prepaid fees amounted to $1,000,000. The Company expects
to renew this contract in 1999.
(4) Allowance for Doubtful Accounts
The movements in the allowance for doubtful accounts from January 1, 1996
to December 31, 1998 is shown below:
<TABLE>
<CAPTION>
1998
------------------ 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
<S> <C> <C> <C> <C>
Balance at beginning of year 452 15,000 - -
Bad debt expense 192 6,366 15,000 -
Less: accounts receivable written off (41) (1,366) - -
--- -------- ------- ------
Balance at end of year 603 20,000 15,000 -
=== ====== ====== ======
</TABLE>
F-9
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
(5) Capital Leases
As of December 31, 1998 and 1997, assets recorded under capital leases were
as follows:
1998
---------------- 1997
US$ NT$ NT$
--- --- ---
Equipment 174,856 5,799,999 2,300,000
Less: accumulated depreciation (11,579) (384,091) (121,970)
-------- --------- ---------
163,277 5,415,908 2,178,030
======== ========= =========
The equipment recorded under capital leases resulted from sale-leaseback
transactions. Cash received from the sale-leaseback transactions equaled
the new book value of the assets on the dates of the leaseback
transactions.
Future minimum payments for capitalized leases were as follows as of
December 31, 1998:
US$ NT$
--- ---
1999 75,897 2,517,500
2000 29,921 992,500
-------- ----------
Total minimum lease payments 105,818 3,510,000
Less: amount representing interest (12,554) (416,424)
-------- ----------
Present value of net minimum lease payment 93,264 3,093,576
Less: current installments (66,634) (2,210,257)
-------- ---------
Long-term obligation 26,630 883,319
======== ==========
(6) Income Taxes
The Company is subject to income tax at a rate of 25%. Additionally, the
Company is subject to a retained earnings tax of 10% related to earnings
generated after December 31, 1997 if the earnings are not distributed to
the stockholders in the following year. The dividend distribution may be in
the form of stock or cash. The Company plans to avoid the payment of the
10% tax related to 1998 earnings by distributing a stock dividend and/or
employing other tax planning strategies.
The components of income tax expense (benefit) for the years ended December
31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998
---------------- 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
<S> <C> <C> <C>
Current income tax expense 45,149 1,497,597 450,000 -
Deferred income tax benefit (2,615) (86,750) (144,750) -
------- --------- ------- ----
Total income tax expense (benefit) 42,534 1,410,847 305,250 -
======= ========= ======= ====
F-10
</TABLE>
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
The following is a reconciliation of income taxes calculated at the
statutory rate of 25% to the actual income tax expense for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998
-------------- 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) at 25% statutory rate 42,105 1,396,619 312,732 (208,709)
Expenses disallowed for tax purposes 429 14,228 59,518 -
Non-deductible operating loss - - - 141,709
Valuation allowance - - - 67,000
Reversal of valuation allowance - - (67,000) -
------- ---------- -------- --------
Actual income tax expense 42,534 1,410,847 305,250 -
======= ========== ======== ========
</TABLE>
A valuation allowance of NT$67,000 was recorded as of December 31, 1996 to
offset the related deferred income tax asset balance. The valuation
allowance was reversed in 1997.
The deferred income tax asset balance of NT$231,500 (US$6,979) and
NT$144,750 as of December 31, 1998 and 1997 relates to temporary
differences between the financial statement carrying amount of the accrued
pension balance and the tax basis of this balance. Management believes that
the Company will more likely than not recover the deferred income tax asset
balance through future earnings.
(7) Pension Plan
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 132, "Employers' Disclosures about Pensions and Others
Postretirement Benefits." The provisions of SFAS No. 132 revise employers'
disclosures about pension plans. The statement does not change the
measurement or recognition of these plans. The following provides a
reconciliation of the projected benefit obligation and the unfunded status
of the Company's pension plan.
<TABLE>
<CAPTION>
1998
-------------- 1997
US$ NT$ NT$
--- --- ---
<S> <C> <C> <C>
Projected benefit obligation at beginning of year 15,375 510,000 268,000
Service cost 9,436 313,000 294,000
Interest cost 1,056 35,000 17,000
(Gain) loss on projected benefit obligation 1,176 39,000 (69,000)
------- ------- -------
Projected benefit obligation at end of year 27,043 897,000 510,000
Fair value of plan assets - - -
Unfunded status of plan 27,043 897,000 510,000
Unrecognized actuarial gain 874 29,000 69,000
------- ------- -------
Accrued pension at end of year 27,917 926,000 579,000
======= ======= =======
F-11
</TABLE>
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
The discount rate and rate of compensation increase used in the above
calculation was 6.5% and 5.0%, respectively, at both December 31, 1998 and
1997.
The components of net pension cost for the years ended December 31, 1998,
1997 and 1996 are summarized as follows:
1998
-------------- 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
Service cost 9,436 313,000 294,000 260,000
Interest cost 1,055 35,000 17,000 8,000
Amortization of actuarial gain (30) (1,000) - -
------ ------- ------- -------
Net pension cost 10,461 347,000 311,000 268,000
====== ======= ======= =======
(8) Commitments
The Company has entered into operating leases for office and manufacturing
space. Minimum lease payments in future years under these noncanceable
operating leases are as follows:
US$ NT$
--- ---
1999 22,309 740,000
2000 23,515 780,000
2001 24,118 800,000
2002 25,324 840,000
2003 16,883 560,000
------- ---------
112,149 3,720,000
======= =========
The Company recorded rental expense aggregating NT$798,000 (US$24,058),
NT$396,000 and NT$756,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
(9) Fair Value of Financial instruments
The carrying amount of short-term borrowings to related party at December
31, 1998 and 1997 approximates fair value due to the short-term nature of
the borrowings.
(10) Segment Information
The Company classifies its operations into one operating segment, consumer
water products. For the years ended December 31, 1998, 1997 and 1996, all
sales were made to customers located in Taiwan. Additionally, all assets of
the Company were located in Taiwan as of December 31, 1998 and 1997.
F-12
<PAGE>
HI-Q WASON, INC.
Condensed Balance Sheet (Unaudited)
March 31, 1999
Assets US$ NT$
--- ---
Current assets:
Cash 27,798 922,066
Notes and accounts receivable
net of allowance for doubtful
accounts of NT$20,000 184,462 6,118,582
Inventories 21,494 712,964
Prepaid assets 6,599 218,896
Other current assets 81,884 2,716,099
----------- -----------
Total current assets 322,237 10,688,607
Property and equipment:
Equipment 204,808 6,793,487
Delivery trucks 178,529 5,921,822
Furniture and fixtures 81,487 2,702,898
Reusable water bottles 323,209 10,720,842
Water coolers held for rental 65,027 2,156,956
Less: accumulated depreciation (173,752) (5,763,358)
----------- -----------
Net property and equipment 679,308 22,532,647
Refundable deposits 6,966 231,047
Deferred income tax assets 7,710 255,750
----------- -----------
Total assets 1,016,221 33,708,051
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of capital
lease obligations 47,578 1,578,164
Accounts payable 57,277 1,899,875
Accrued expenses and other current
liabilities 22,552 748,036
Income tax payable 67,597 2,242,186
----------- -----------
Total current liabilities 195,004 6,468,261
Capital lease obligations, excluding
current installments 71,810 2,381,944
Accrued pension 30,841 1,023,000
----------- -----------
Total liabilities 297,655 9,873,205
----------- -----------
Stockholders' equity:
Common stock, NT$10 par value,
authorized, issued and
outstanding shares of 2,000,000 602,954 20,000,000
Retained earnings 115,612 3,834,846
----------- -----------
Total stockholders' equity 718,566 23,834,846
----------- -----------
Commitments
Total liabilities and
stockholders' equity 1,016,221 33,708,051
=========== ===========
See accompanying notes to condensed financial statements
F-13
<PAGE>
<TABLE>
<CAPTION>
HI-Q WASON, INC.
Condensed Statements of Operations (Unaudited)
Three-months ended March 31, 1999 and 1998
1999
----------------------- 1998
US$ NT$ NT$
--- --- ---
<S> <C> <C> <C>
Revenues:
Bottled water sales 212,950 7,063,566 4,698,188
Water cooler sales and rentals 18,470 612,631 355,443
---------- ---------- ----------
Total revenues 231,420 7,676,197 5,053,631
Costs and expenses:
Cost of bottled water sales
(including water purification fees of
NT$700,000 and NT$515,100,
respectively, from a related party) 78,257 2,595,780 1,989,288
Cost of water cooler sales and rentals 10,770 357,259 197,492
Selling, general and administrative expenses 106,055 3,517,829 2,448,342
---------- ---------- ----------
Operating income 36,338 1,205,329 418,509
Interest expense (3,287) (109,032) (28,811)
Interest income 54 1,800 1,800
Other loss, net (417) (13,847) --
---------- ---------- ----------
Income before income taxes 32,688 1,084,250 391,498
Income tax expense (8,172) (271,063) (97,874)
---------- ---------- ----------
Net income 24,516 813,187 293,624
========== ========== ==========
Basic earnings per common share 0.05 1.72 0.62
========== ========== ==========
Weighted average common shares outstanding 471,429 471,429 471,429
========== ========== ==========
See accompanying notes to condensed financial statements
F-14
<PAGE>
HI-Q WASON, INC.
Condensed Statements of Cash Flows (Unaudited)
Three-months ended March 31, 1999 and 1998
1999
--------------------- 1998
US$ NT$ NT$
--- --- ---
Cash flows from operating activities:
Net income 24,516 813,187 293,624
Adjustments to reconcile net income to cash
flows provided by operating activities:
Depreciation 31,503 1,044,940 499,814
Deferred income tax benefit (731) (24,250) (21,750)
Gain on disposal of equipment 417 13,847 --
Changes in operating assets and liabilities:
Notes and accounts receivable (7,529) (249,732) (685,222)
Inventories 1,798 59,615 183,948
Prepaid assets (774) (25,658) 501,694
Other current assets (81,739) (2,711,294) 9,401
Accounts payable 57,277 1,899,875 --
Income tax payable 8,903 295,313 119,624
Accrued expenses and other current liabilities (1,380) (45,773) 646,156
Accrued pension 2,924 97,000 87,000
---------- ---------- ----------
Cash provided by operating activities 35,185 1,167,070 1,634,289
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (22,972) (761,980) (703,608)
Proceeds from sale of property and equipment 455 15,100 --
Increase in refundable deposits (104) (3,447) --
---------- ---------- ----------
Cash used in investing activities (22,621) (750,327) (703,608)
---------- ---------- ----------
Cash flows from financing activities:
Net decrease in short-term borrowings from related party (39,192) (1,300,000) --
Payments of capital lease obligations (33,235) (1,102,407) (158,689)
Proceeds from sale-leaseback transactions 59,359 1,968,939 --
---------- ---------- ----------
Cash used in financing activities (13,068) (433,468) (158,689)
---------- ---------- ----------
Net increase in cash (504) (16,725) 771,992
Cash at beginning of period 28,302 938,791 1,189,299
---------- ---------- ----------
Cash at end of period 27,798 922,066 1,961,291
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 3,287 109,032 28,811
========== ========== ==========
See accompanying notes to condensed financial statements
F-15
</TABLE>
<PAGE>
HI-Q WASON, INC.
Notes to Quarterly Financial Statements (Unaudited)
(1) Organization and Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with the United States Securities and Exchange
Commission Regulation S-X for interim financial statements and do not
include all the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the unaudited condensed financial statements include all
adjustments, consisting primarily of recurring accruals, considered
necessary for a fair presentation of the financial position and the results
of operations.
In April 1999, the stockholders of Hi-Q Wason, Inc. ("the Company")
established a holding company in the British Virgin Islands to acquire 100%
of the outstanding shares of the Company. The newly formed company, Hi-Q
Wason, Inc. ("BVI") issued 471,429 shares of common stock to the
stockholders of the Company in exchange for their common share ownership in
the Company on April 26, 1999. The BVI intends to issue an additional
1,100,000 shares of common stock in an initial public offering in the
United States.
The financial statements have been prepared on a historical cost basis to
reflect the financial position and results of operations of the Company in
accordance with accounting principles generally accepted in the United
States. Earnings per share information has been prepared using the
outstanding common shares of BVI.
The financial statements are stated in New Taiwan dollars. Translations of
New Taiwan dollar amounts into United States dollars in the 1999 financial
statements are included solely for the convenience of the readers, using
the noon buying rate of the Federal Reserve Bank of New York on March 31,
1999 of NT$33.17 to US$1. The convenience translations should not be
construed as representations that the New Taiwan dollar amounts have been,
could have been, or could in the future be, converted into United States
dollars at this or any other rate of exchange.
(2) Inventories
Inventories primarily consist of water coolers. Inventories are valued at
the lower of cost or net realizable value. Cost determined is by the
first-in, first-out (FIFO) method.
(3) Other Current Assets
Cost directly related to the pending initial public offering of
NT$2,637,692 (US$79,520) were included in other current assets as of March
31, 1999. These cost will be offset against the proceeds from the offering
as a reduction in additional paid-in capital. In the event that the pending
initial public offering is not finalized, these costs will be expensed in
the period it becomes probable that the offering will not occur.
F-16
<PAGE>
No dealer, salesman or other person has been
authorized to give any information or to make any
representations other than contained in this
prospectus in connection with the offering
described herein, and if given or made, such
information or representations must not be relied
upon as having been authorized by us. This
prospectus does not constitute an offer to sell, 1,100,000 Shares
or the solicitation of an offer to buy, the
securities offered hereby to any person in any
state or other jurisdiction in which such offer or
solicitation is unlawful. Neither the delivery of
this prospectus nor any sale hereunder shall,
under any circumstances, create any implication
that there has been no change in our affairs since
the date hereof.
Hi-Q Wason, Inc.
---------------
TABLE OF CONTENTS Common Stock
Page
Enforceability of Civil Liabilities
and Certain Foreign Issuer
Considerations ................................3
Currency Translations..........................4
Prospectus Summary.............................5
Summary Financial Information..................8
Risk Factors..................................10
Use of Proceeds...............................14
Dividend Policy...............................14
Exchange Rates................................14
Dilution......................................15
Capitalization................................16
Selected Financial Data.......................17
Management's Discussion and --------------------
Analysis of Financial Condition
and Results of Operations...................19
Our Business..................................25 PROSPECTUS
Our Management................................31
Principal Stockholders........................34
Certain Transactions..........................34 ---------------------
Description of Securities.....................35
Taxation......................................38
Underwriting..................................40
Legal Matters.................................41
Experts.......................................41
Additional Information........................41
Financial Statements.........................F-1
NUTMEG SECURITIES, LTD.
Until __________, 1999 (25 days after the
date of this prospectus), all dealers effecting
transactions in the registered securities, whether
or not participating in this distribution, may be
required to deliver a prospectus. This is in _________, 1999
addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with
respect to their unsold allotments or
subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
SEC Registration Statement................................ $ 2,885
NASD Filing Fee........................................... $ 1,478
NASDAQ Application Fee.....................................$ 10,000
Blue Sky Filing Fees.......................................$ 10,000
Blue Sky Legal Fees........................................$ 15,000
Printing Expenses..........................................$ 30,000
Legal Fees and Expenses....................................$ 85,000
Accounting Fees............................................$ 70,000
Transfer Agent Fees....................................... $ 5,000
Miscellaneous Expenses.....................................$ 20,637
---------
Total......................................................$ 250,000(2)
(1) All expenses, except the SEC registration fee and NASD filing fee, are
estimated.
(2) Does not include the underwriters' commissions and expense allowance.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As in most United States jurisdictions, the board of directors of a British
Islands company is charged with the management and affairs of the company, and
subject to any limitations to the contrary in the Memorandum of Association of
the Company, the Board of Directors is entrusted with the power to manage the
business and affairs of the Company (hereinafter the "Company" or the
"Registrant"). In most United States jurisdictions, directors owe a fiduciary
duty to the company and its stockholders, including a duty of care, pursuant to
which directors must properly apprise themselves of all reasonably available
information, and a duty of loyalty, pursuant to which they must protect the
interests of the company and refrain from conduct that injures the company or
its stockholders or that deprives the company or its stockholders of any profit
or advantage. Many United States jurisdictions have enacted various statutory
provisions which permit the monetary liability of directors to be eliminated or
limited. Under British Virgin Islands law, liability of a director to the
company is basically limited to cases of wilful malfeasance in the performance
of his duties or to cases where the director has not acted honestly and in good
faith and with a view to the best interests of the company. However, under its
Memorandum of Association, the Company is authorized to indemnify any person who
is made or threatened to be made a party to a legal or administrative proceeding
by virtue of being a director, officer or liquidator of the Company, provided
such person acted honestly and in good faith and with a view to the best
interests of the Company and, in the case of a criminal proceeding, such person
had no reasonable cause to believe that his conduct was unlawful. The Company's
Memorandum of Association also permits the Company to indemnify any director,
officer or liquidator of the Company who was successful in any proceeding
against expenses and judgments, fines and amounts paid in settlement and
reasonably incurred in connection with the proceeding, where such person met the
standard of conduct described in the preceding sentence.
The Company has provisions in its Memorandum of Association that insure or
indemnify, to the full extent allowed by the laws of the Territory of the
British Virgin Islands, directors, officers, employees, agents or persons
serving in similar capacities in other enterprises at the request of the
Company.
The Company may obtain a directors' and officers' insurance policy.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Registrant sold the following securities
which were not registered under the Securities Act, as amended.
In April 1999 the Registrant issued all 471,429 shares of its unregistered
outstanding common stock to the following persons in exchange for all of the
outstanding common stock of Hi-Q Wason, a Taiwanese corporation.
Name Number of Shares
---- ----------------
Tuan-Yuan Hu 157,143
Lai Ling Tse 137,498
Sun Hin Enterprises, Inc. 137,498
James Clark 39,290
With respect to the sales made, the Registrant relied on the securities
laws of Taiwan, where these transactions occurred, and on Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). No advertising or
general solicitation was employed in offering the securities. The securities
were offered to a limited number of persons all of whom were business associates
of the Registrant or its executive officers and directors, and the transfer
thereof was appropriately restricted by the Registrant. All persons were capable
of analyzing the merits and risks of their investment and acknowledged that they
were acquiring the securities for investment and not with a view toward
distribution or resale and that they understood the speculative nature of their
investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Title
- ----------- -----
1.01 Form of Underwriting Agreement (to be filed by Amendment)
1.02 Form of Representative's Warrant (to be filed by Amendment)
3.01 Memorandum of Association of the Registrant (1)
3.02 Articles of Association of the Registrant (1)
5.02 Opinion of Harney Westwood & Riegels, as British Virgin Island
counsel to the Registrant (to be filed by Amendment) (1)
10.01 Taipei Facilities Lease (1)
10.02 Hsinchu Facilities Lease (1)
10.03 Han Tao Contract For Water Production (1)
23.01 Consent of Harney Westwood & Riegels (Included in 5.01, above.)
23.02 Consent of KPMG Certified Public Accountants (1)
23.03 Consent of KPMG certified Public Accountants
(1) Previously Filed
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
II-2
<PAGE>
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and
Exchange Commission such supplementary and periodic information, documents
and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
(c) That any post-effective amendment filed will comply with the
applicable forms, rules and regulations of the Commission in effect at the
time such post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(e) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(f) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(g) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(h) To provide to the Underwriter, at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to
directors, officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful
II-3
<PAGE>
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public poliicy as expressed in the Act and will be governed by the
final adjudication of such issue.
(j) The undersigned registrant hereby undertakes that it will:
(i) For purposes of determining any liability under the
Securities Act of 1933, as amended, treat the information omitted from
the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by
the registrant under Rule 424(b)(1) or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time
the Commission declared it effective;
(ii) For the purpose of determining any liability under the
Securities Act of 1933, as amended, treat each post-effective
amendment that contains a form of prospectus as a new registration
statement relating to the securities offered therein, and that
offering of such securities at that time as the initial bona fide
offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all the requirements for filing on Form F-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Republic of China, on July 6, 1999.
HI-Q WASON, INC.
By: /s/ Tuan-Yuan Hu
-------------------------------------------
Tuan-Yuan Hu, Chief Executive Officer
Pursuant to the requirements of the Securities Act, as amended, this
registration statement has been signed below by the following persons on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Tuan-Yuan Hu Chairman of the Board of July 6, 1999
- -------------------------- Directors, Chief Executive
Tuan-Yuan Hu Officer, Chief Financial
Officer (Principal
Accounting Officer)
/s/ Yu Feng Cheng Vice President--Marketing July 6, 1999
- -------------------------- and Director
Yu Feng Cheng
/s/ Terry Tsao Vice President--Operations July 6, 1999
- --------------------------
Terry Tsao
/s/ Ben-Yu Chow Director July 6, 1999
- --------------------------
Ben-Yu Chow
/s/ Ben-Yuan Chou Director July 6, 1999
- --------------------------
Ben-Yuan Chou
/s/ F.C. Toyo Tsai Director July 6, 1999
- --------------------------
F.C. Toyo Tsai
/s/ Andrew Chu Director July 6, 1999
- --------------------------
Andrew Chu
/s/ Gary A. Agron Authorized Representative July 6, 1999
- -------------------------- in the United States
Gary A. Agron
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Title
- ----------- -----
1.01 Form of Underwriting Agreement (to be filed by Amendment)
1.02 Form of Representative's Warrant (to be filed by Amendment)
3.01 Memorandum of Association of the Registrant (1)
3.02 Articles of Association of the Registrant (1)
5.02 Opinion of Harney Westwood & Riegels, as British Virgin Islands
counsel to the Registrant (to be filed by Amendment)
10.01 Taipei Facilities Lease (1)
10.02 Hsinchu Facilities Lease (1)
10.03 Han Tao Contract For Water Production (1)
23.01 Consent of Harney Westwood & Riegels (Included in 5.01, above.)
23.02 Consent of KPMG Certified Public Accountants (1)
23.03 Consent of KPMG Certified Public Accountants
- ---------------
(1) Previously Filed
Exhibit 23.03
The Board of Directors
Hi-Q Wason,, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Certified Public Accountants
Taipei, Taiwan
July 8, 1999
