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SECURITIES AND EXCHANGE COMMISSION
FORM 20-F/A
AMENDMENT NO.4
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934 OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 -- FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 -- For the transition period from to
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Commission file number: 0-96764
DIGITAL STAR INC.
(Exact name of Registrant as specified in its charter)
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BRITISH VIRGIN ISLANDS
(Jurisdiction of incorporation or organization)
Room 1806, Hutchison House
10 Harcourt Road, Central
Hong Kong
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act
NONE
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class Which the Securities are Registered
------------------- -----------------------------------
<S> <C>
Class A Common Stock, NONE
par value $0.0001 per share
Class B Common Stock,
par value $0.0001 per share
</TABLE>
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Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act
NONE
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the
Registration Statement.
As of November 9, 1999, 2,000,000 Class A shares, par value $0.0001 per share
(collectively, with the Class A and Class B Stock not yet issued and
outstanding, the "Common Stock"), were issued and outstanding.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark which financial statement item the registrant has elected
to follow. Item 17 [ ] Item 18 [X]
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PART I
ITEM 1. DESCRIPTION OF THE BUSINESS.
1A. GENERAL
Digital Star Inc. (the "Company") was incorporated on September 15, 1999
under the International Business Companies Act of the British Virgin Islands
(the "IBC Act"). The Company is a development stage company and has no
operations to date other than issuing shares and options to its original
shareholders and authorizing those actions in connection with the filing of this
Form 20-F (the "Registration Statement"), as described more fully herein.
The Company has been formed in accordance with the requirements for forming
a blank check company (a "Blank Check Company") as defined in Section 7(b)(3) of
the Securities Act of 1933, as amended (the "Securities Act"). The Company
intends to provide a method for a foreign or domestic private company to become
a reporting company whose securities are qualified for trading in the United
States secondary market, pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
As such, the Company will attempt to locate and negotiate with a business
entity (a "Target Company") for the merger with or consolidation of, the full or
partial acquisition of, or the entering into any other business combination with
a Target Company. No assurances can be given that the Company will be successful
in locating, negotiating or merging with, acquiring, or entering into any other
business combination with any Target Company.
1B. PERCEIVED BENEFITS
There are certain perceived benefits to being a company with a class of
publicly-traded securities. These are commonly thought to include the following:
* the ability to use registered securities to make acquisitions of assets
or businesses;
* increased visibility in the financial community;
* facility of borrowing from financial institutions;
* improved trading efficiency;
* shareholder liquidity;
* greater ease in raising capital;
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* compensation of key employees through stock options and similar stock
plans;
* enhanced corporate image; and
* a presence in the United States capital market.
1C. POTENTIAL TARGET COMPANIES
Target Companies that may be interested in any form of business combination
with the Company could include, without limitation, the following:
* a company for which the primary purpose of becoming public is the use of
its securities for the acquisition of assets or businesses;
* a company which is unable to find an underwriter of its securities or is
unable to find an underwriter of securities on terms acceptable to it;
* a company which wishes to become public with less dilution of its common
stock than would occur upon an underwriting of additional equity;
* a company which believes that it will be able to obtain investment
capital on more favorable terms after it has become public;
* a foreign company which desires to make an initial entry into the United
States capital market;
* a special situation company, such as a company seeking a public market
to satisfy redemption requirements under a qualified Employee Stock
Option Plan; and
* a company seeking one or more of the other perceived benefits of
becoming a public company.
The officers, directors and shareholders are currently composed of the same
individuals. See ITEM 5, "DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS"
and ITEM 7, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS". A business
combination with a Target Company will normally, but not necessarily, involve
the transfer to the Target Company of the majority of the issued and outstanding
common stock of the Company, and the partial or complete substitution by the
Target Company of the Company's current officers and directors.
No assurances can be given with respect to the Company's ability to enter
into a business combination, nor can assurances be made regarding the terms of
any business combination or the nature of the Target Company with which the
Company may enter into a business combination. See ITEM 1D(2), "SPECULATIVE
NATURE OF THE COMPANY'S PROPOSED PLAN OF OPERATION".
The proposed business activities described herein classify the Company as a
Blank Check Company. The Securities and Exchange Commission (the "Commission")
and many states have enacted statutes, rules and regulations limiting the sale
of securities of Blank Check Companies. The officers and directors do not intend
to undertake any efforts to cause a market to develop in the Company's
securities until such time as the Company has successfully implemented its
business plan described herein.
The Company is voluntarily filing this Registration Statement with the
Commission and is under no obligation to do so under the Exchange Act.
1D. PLAN OF OPERATIONS
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For the remainder of the fiscal year, the Company anticipates no operations
other than the following activities: (i) continued initial organization of the
Company, (ii) preparing and filing this Registration Statement and (iii)
preliminary and general oral conversations by its officers and directors with
respect to engaging in a merger with or acquisition of another company, which
may or may not lead to such a merger or acquisition in the remainder of this
fiscal year. The Company does not know of or have an established plan to enter
into any arrangement, agreement or understanding in the remainder of the fiscal
year with respect to engaging in a merger with or acquisition of a specific
Target Company. The Company has no present plans to thoroughly research the
market for Target Companies, and has no plans to materially expand the number of
people it employs for the remainder of the fiscal year.
1E. RISK FACTORS
The Company's business is subject to numerous risk factors, including but
not limited to the following:
(1) NO OPERATING HISTORY OR REVENUE AND MINIMAL ASSETS.
The Company has had no operating history (other than operations in
connection with the formation of the company and the filing of this
Registration Statement), revenues or earnings from operations and has
no significant assets or financial resources. The Company will, in all
likelihood, sustain operating expenses without corresponding revenues,
at least until the consummation of a business combination, if any.
This may result in the Company incurring a net operating loss that
will increase continuously until the Company can consummate a business
combination with a Target Company. There is no assurance that the
Company can identify such a Target Company and consummate such a
business combination.
(2) SPECULATIVE NATURE OF THE COMPANY'S PROPOSED PLAN OF OPERATIONS.
The success of the Company's proposed plan of operation will depend to
a great extent on the operations, financial condition and management
of the identified Target Company following any business combination.
While the Company's officers, directors and current shareholders will
likely prefer business combinations with entities having established
operating histories, there can be no assurance that the Company will
be successful in locating Target Companies meeting such criteria. In
the event the Company completes a business combination, of which there
can be no assurance, the success of the Company's operations will be
dependent upon the business operations and financial results of the
Target Company and numerous other factors beyond the Company's
control.
(3) SCARCITY OF AND COMPETITION FOR BUSINESS OPPORTUNITIES AND
COMBINATIONS.
The Company currently has no way of distinguishing itself from other
blank check companies seeking merger or acquisition candidates, and
also anticipates that it will be an insignificant participant in the
business of seeking mergers with and acquisitions of business
entities. A large number of established and well-financed operating
entities, including venture capital firms, are active in mergers with
and acquisitions of Target Companies. Nearly all such entities have
significantly greater financial resources, technical expertise and
managerial capabilities than the Company and, consequently, the
Company will be at a competitive disadvantage in identifying possible
business
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opportunities and successfully negotiating and completing a business
combination. Moreover, the Company will also compete with numerous
other small public and private companies, including other blank check
companies with registered classes of securities, in seeking merger or
acquisition candidates.
(4) NO AGREEMENT FOR BUSINESS COMBINATION OR OTHER TRANSACTION -- NO
STANDARDS FOR BUSINESS COMBINATION.
The Company has no current arrangement, agreement or understanding
with respect to engaging in a merger with or acquisition of a specific
Target Company. There can be no assurance that the Company will be
successful in identifying and evaluating suitable business
opportunities, locating a Target Company or concluding a business
combination. The officers and directors have not identified any
particular industry or specific business within an industry for
evaluation by the Company. There is no assurance that the Company will
be able to negotiate a business combination on terms favorable to the
Company. In implementing a structure for a particular business
acquisition with a Target Company, the Company may also become a party
to a merger, consolidation, reorganization, joint venture or licensing
agreement with another corporation or entity. The Company has not
established a specific length of operating history or a specified
level of earnings, assets, net worth or other criteria which it will
require a Target Company to have achieved, or without which the
Company would not consider a business combination with such Target
Company. Accordingly, the Company may enter into a business
combination with a Target Company having losses, no significant
operating history, limited or no potential for immediate earnings,
limited assets, negative net worth or other negative characteristics.
The Company may consider, however, other factors, including (but not
limited to) the Target Company's long-term growth possibilities, as
well as its strategic position relative to other companies in its
location and industry, in deciding to enter into a business
combination.
(5) CONTINUED MANAGEMENT CONTROL, LIMITED TIME AVAILABILITY.
While seeking a business combination, the officers and directors
anticipate keeping their current employment positions as well as
seeking to organize other companies of a similar nature. As such,
demands may be placed on the officers' and directors' time that will
detract from the time they are able to devote to the Company. The
officers and directors intend to devote as much time to the activities
of the Company as required; however, should a conflict arise, there is
no assurance that the officers and directors of the Company would not
attend to other matters prior to those of the Company. Initially, the
officers and directors intend to devote up to ten (10) hours each per
month to the business of the Company, and they intend to increase that
amount of time when the analysis of, and negotiations and consummation
with, a Target Company is conducted. See ITEM 10E, "CONFLICTS OF
INTEREST". The Company's officers have not entered into a written
employment agreement with the Company and they are not expected to do
so in the foreseeable future. The Company has not obtained key man
life insurance on its officers and directors. Notwithstanding the
limited experience and limited time commitment of the officers and
directors, loss of the services of the officers and directors would
adversely affect development of the Company's business and its
likelihood of continuing operations.
(6) CONFLICTS OF INTEREST -- GENERAL.
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The Company's officers and directors participate in other business
ventures that may compete directly with the Company. The officers and
directors will be responsible for seeking, evaluating, negotiating and
consummating a business combination with a Target Company that may
result in terms providing benefits to the officers and directors.
Additional conflicts of interest and non-arms length transactions may
also arise in the future. There are no binding guidelines or
procedures for resolving potential conflicts of interest. Failure by
the officers and directors to resolve conflicts of interest in favor
of the Company could result in liability of the officers and directors
to the Company. However, any attempt by shareholders to enforce a
liability of the officers and directors to the Company would most
likely be prohibitively expensive and time consuming. As the
shareholders and the officers and directors are currently the same
persons, these conflicts of interest also apply to the shareholders.
(7) OTHER BLANK CHECK COMPANIES.
The officers and directors are currently involved in creating
additional Blank Check Companies substantially similar to the Company.
To date, three other companies substantially similar to the Company
have been established, but neither of those companies has taken such
prior action as the filing of a registration statement or any other
securities filing or issuance. The officers and directors anticipate,
however, that two other companies may file registration statements
substantially similar to the Registration Statement of the Company
simultaneously with or soon after this Registration Statement is
filed. A conflict may arise in the event that another Blank Check
Company with which the officers and directors are affiliated files a
Registration Statement and actively seeks a Target Company. The
officers and directors anticipate (but are not required to so effect)
that Target Companies will be located for the Company and other Blank
Check Companies either (i) in chronological order of the date of
formation of such Blank Check Companies; or (ii) by lot. However,
other additional Blank Check Companies that may be formed may differ
from the Company in certain items such as place of incorporation,
number of shares and shareholders, working capital, types of
authorized securities, or other items. It may be that a Target Company
may be more suitable for or may prefer a certain Blank Check Company
formed after the Company. In such case, a business combination might
be negotiated on behalf of the more suitable or preferred Blank Check
Company regardless of date of formation or choice by lot. See ITEM
10C, "DIRECTORS AND OFFICERS OF REGISTRANT -- Current Blank Check
Companies".
(8) REPORTING REQUIREMENTS MAY DELAY OR PRECLUDE ACQUISITION.
Section 13 of the Exchange Act requires companies subject to the
Exchange Act to provide certain information about significant
acquisitions, including certified financial statements for an acquired
company covering one or two complete fiscal years, depending on the
relative size of any acquisition. The time and additional costs that
may be incurred by some Target Companies to prepare such financial
statements may significantly delay or essentially preclude
consummation of an otherwise desirable acquisition by the Company.
Acquisition prospects that do not have or are unable to obtain the
required financial statements may not be appropriate for acquisition
so long as the reporting requirements of the Exchange Act are
applicable.
(9) LACK OF MARKET RESEARCH OR MARKETING ORGANIZATION AND EXPERTISE.
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The Company has neither conducted nor obtained market research
indicating that demand exists for the type of transactions
contemplated by the Company. Even in the event demand exists for a
merger or acquisition of the type contemplated by the Company, there
is no assurance the Company will be successful in completing any such
business combination.
The officers and directors will be responsible for seeking,
evaluating, negotiating and consummating a business combination with
a Target Company. The officers and directors are not, however,
professional business analysts, and are novices relative to the more
established and well-financed entities who are active in mergers with
and acquisitions of Target Companies. Therefore, the Company will
operate at a competitive disadvantage in identifying and completing
business combinations with suitable Target Companies.
(10) LACK OF DIVERSIFICATION.
The Company's proposed operations, even if successful, will probably,
but not necessarily, result in the Company engaging in a business
combination with only one Target Company. The officers and directors
anticipate that the Company will be able to participate in only one
potential business venture because the Company has nominal assets and
limited financial resources. Consequently, the Company's activities
will be limited to those engaged in by the Target Company with which
the Company merges or acquires. The Company's inability to diversify
its activities into a number of areas may subject the Company to
economic fluctuations within a particular business or industry and
therefore increase the risks associated with the Company's
operations This lack of diversification should be considered a
substantial risk to the shareholders of the Company because it will
not permit the Company to offset potential losses from one venture
against gains from another.
(11) REGULATION UNDER THE INVESTMENT COMPANY ACT.
Although the Company will be subject to certain regulation under the
Exchange Act, (and, if involved in a reorganization, potentially the
Securities Act), the officers and directors anticipate that the
Company will not be subject to regulation under the Investment
Company Act of 1940 (the "Investment Company Act"). In the event the
Company engages in business combinations which result in the Company
holding passive investment interests in a number of entities, the
Company could be subject to regulation under the Investment Company
Act. In such event, the Company would be required to register as an
investment company under the Investment Company Act and comply with
the provisions thereof and could be expected to incur significant
registration and compliance costs. The Company has obtained no
formal determination from the Commission as to the status of the
Company under the Investment Company Act. Any violation of the
Investment Company Act could subject the Company to material adverse
consequences.
(12) PROBABLE CHANGE IN CONTROL AND MANAGEMENT.
A business combination involving the issuance of the Company's common
stock will, in all likelihood, result in the shareholders of the
Target Company obtaining a controlling interest in the Company. Any
such business combination may require shareholders of the Company to
sell or transfer all or a portion of the Company's common stock held
by them. Any merger or acquisition
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effected by the Company can be expected to have a significant
dilutive effect on the percentage of shares held by the Company's
shareholders at such time. The resulting change in control of the
Company could potentially result in the partial or complete removal
of the present officers and directors of the Company and a
corresponding reduction in or elimination of their participation in
the future affairs of the Company.
The issuance of previously authorized and unissued common stock of
the Company would also result in a reduction in percentage of shares
owned by the present shareholders of the Company and would most
likely result in a change in control or substitution or replacement
of some or all of the officers and directors of the Company.
The terms of any business combination may include such terms as any
or all of Messrs. Chan and Chan remaining a director, officer and/or
shareholder of the Company or any or all of them becoming consultants
to the Company with compensation should they resign as directors and
officers of the Company and as a result of the consummation of a
business combination. See ITEM 10A, "BACKGROUNDS OF DIRECTORS".
(13) TAXATION.
Tax consequences will, in all likelihood, be major considerations in
any business combination the Company undertakes. Currently, such
transactions may be structured to result in tax-free treatment to
both companies, pursuant to various jurisdictions' tax provisions.
The Company intends to structure any business combination to minimize
the tax consequences to both the Company and the Target Company.
There can be no assurance, however, that any such business
combination will meet the statutory requirements of a tax-free
reorganization or that the parties will obtain the intended tax-free
treatment upon a transfer of stock or assets. A non-qualifying
reorganization could result in the imposition of taxes in any
jurisdiction that may have an adverse effect on all parties to the
transaction. See ITEM 7, "TAXATION".
(14) EMPLOYEES.
The Company has no full time employees. The Company's officers and
directors have agreed to allocate a portion of their time to the
activities of the Company, without compensation. The officers and
directors anticipate that the business plan of the Company can be
implemented by initially devoting no more than ten (10) hours per
month to the business affairs of the Company and, consequently,
conflicts of interest may arise with respect to the limited time
commitment by such officers and directors. See ITEM 1D(5), "RISK
FACTORS -- Continued Management Control; Limited Time Availability".
(15) ADVISORS OF TARGET COMPANY.
A potential Target Company may have an agreement with a consultant or
advisor providing for services of the consultant or advisor to be
continued after any business combination. Additionally, a Target
Company may be presented to the Company only on the condition that
the services of a consultant or advisor be continued after a merger,
acquisition or other business combination. Such preexisting
agreements of Target Companies for the continuation of the services
of attorneys, accountants, advisors or consultants could be a factor
in the selection of a Target Company.
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(16) RISKS ASSOCIATED WITH THE YEAR 2000 PROBLEM
At present, the Company does not own or lease any computer equipment.
However, the Company, and any potential Target Company, may face
material adverse problems in maintaining or upgrading its own (if
any) or interfacing with other computer systems, software, circuitry
or any other electronic device in the correct handling and processing
of any date change. Any such failure could have a material adverse
effect on the Company's financial condition and could also be a
factor in the selection of a Target Company.
(17) ENFORCEMENT OF CIVIL LIABILITIES.
The Company has appointed Mossack Fonseca & Co. (B.V.I.) Ltd.,
P.O. Box 3136, Road Town, Tortola, British Virgin Islands as its
agent upon whom service of process may be served in any action
brought against it under the securities laws of the United States.
All of the Company's officers and directors reside outside the United
States and all of the assets of these persons and of the Company are
or may be located outside of the United States.
The Company has been advised by Conyers Dill & Pearman, its legal
counsel in the British Virgin Islands, that Section 7 to the IBC Act
provides that:
"Subject to Section 74, no member, director, officer, agent, or
liquidator of a company incorporated under this Act is liable for any
debt, obligation, or default of the company, unless specifically
provided in this Act or in any other law for the time being in force
in the British Virgin Islands, and except in so far as he may be
liable for his own conduct and actions."
Section 74 provides that:
"If at any time there is no member of a company incorporated under
this Act, any person doing business in the name of or on behalf of
the company is personally liable for the payment of all debts of the
company contracted during the time and the person may be sued
therefor without joinder in the proceedings of any other person."
The Company has been advised by Conyers Dill & Pearman that the
United States and British Virgin Islands do not have a treaty
providing for reciprocal recognition of and enforcement of judgments
of United States courts in civil and commercial matters and that a
final judgment for the payment of money rendered by any federal or
state courts in the United States based on civil liability, whether
or not predicated solely upon the United States federal securities
laws, would, therefore, not be automatically enforceable in the
British Virgin Islands. The Company has also been advised by Conyers
Dill & Pearman that a final and conclusive judgment obtained in
federal or state courts in the United States under which a sum of
money is payable as compensatory damages (i.e. not being a sum
claimed by a revenue authority for taxes or other charges of a
similar nature by a governmental authority, or in respect of a fine
or penalty or multiple or punitive damages) may be the subject of an
action on a debt in the Supreme Court in the British Virgin Islands
under the common law doctrine of obligation. Such an action should be
successful on the proof that the sum of money is due and payable,
without having to prove the facts supporting the underlying judgment,
as long as:
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(a) such courts had proper jurisdiction over the parties subject to
such judgment,
(b) such courts did not contravene the rules of natural justice of
the British Virgin Islands,
(c) such judgment was not obtained by fraud,
(d) enforcement of the judgment would not be contrary to the public
policy of the British Virgin Islands,
(e) no new admissible evidence relevant to the action is submitted
prior to the rendering of the judgment by the courts of the
British Virgin Islands, and
(f) due compliance is made with the correct procedures under the
laws of the British Virgin Islands.
A British Virgin Islands court may impose civil liability on the
Company or its directors or officers in a suit brought in the Supreme
Court of the British Virgin Islands against the Company or such
persons with respect to a violation of United States federal
securities laws, provided that the facts surrounding such violation
constitute or give rise to a cause of action under British Virgin
Islands law. Only if the above preconditions are satisfied can a
plaintiff under a United States judgment sue the Company or its
officers or directors in the British Virgin Islands upon the debt
created by the United States judgments and would be entitled to
summary judgment without further review of the merits of the United
States case. As such, Conyers Dill & Pearman has advised that it may
be more difficult for potential investors to effect service of
process within the United States upon the Company's officers or
directors, or to enforce against the Company or such persons
judgments obtained in United States courts predicated solely upon the
civil liability provisions of the United States securities laws.
(18) DIRECTOR ACTIONS AND SHAREHOLDER RIGHTS UNDER BRITISH VIRGIN ISLANDS
LAW.
Pursuant to the Company's Memorandum and Articles of Association and
pursuant to the laws of the British Virgin Islands, the Company's
Memorandum and Articles of Association may be amended by the Board of
Directors without shareholder approval. This includes amendments to
increase or reduce the authorized capital stock of the Company, to
authorize the issuance of different classes of stock including
preferred stock and to issue such stock subject to any designations,
powers, preferences, rights, qualifications, limitations and
restrictions. The Board of Directors may also increase the capital of
the Company without shareholder approval. Further, the Company's
Memorandum and Articles of Association provide that differences which
may arise between the Company and any of its shareholders, their
executors, administrators or assigns relating to the Company's
Memorandum and Articles of Association shall, unless the parties
agree to a single arbitrator, be referred to two arbitrators to be
chosen by each of the differing parties. The ability of the Company
to amend its Memorandum and Articles of Association without
shareholder approval could have the effect of delaying, deterring or
preventing a change in control of the Company without any further
action by the shareholders, including, without limitation, a tender
offer to purchase the Common Stock at a premium over then current
market prices. In addition, issuance of Preferred Stock, without
shareholder approval, on such terms as the Board of
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Directors may determine, could adversely affect the voting power of
the holders of the Common Stock, including the loss of voting control
to others. No amendment to the Memorandum and Articles of Association
will be effective unless and until it is filed with the Companies
Registry of the British Virgin Islands.
Under the laws of most jurisdictions in the United States, majority
and controlling shareholders generally have certain fiduciary duties
to the minority shareholders. Shareholder action must be taken in
good faith and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. However,
Conyers Dill & Pearman has advised that British Virgin Islands law
protecting the interests of minority shareholders may not be as
protective in all circumstances as the law protecting minority
shareholders in United States jurisdictions.
Further, Conyers Dill & Pearman has advised that, while British
Virgin Islands law does permit a shareholder of a British Virgin
Islands company to sue its directors derivatively, and to sue the
Company and its directors for the shareholder's benefit and the
benefit of other shareholders similarly situated, the circumstances
in which any such action may be brought, and the procedures and
defenses that may be available in any such action, may result in the
rights of shareholders of a British Virgin Islands company being more
limited than shareholders of a corporation incorporated in the United
States.
(19) LACK OF DIVIDENDS.
The Company has not paid any cash dividends on its Common Stock. The
future payment of dividends is within the discretion of the Board of
Directors. The Board does not intend to declare any dividends in the
forseeable future, but intends to retain all future earnings, if any,
for use in the Company's merger and acquisition activities.
(20) POLITICAL AND ECONOMIC DEVELOPMENTS AFFECTING HONG KONG.
The Company's principal office is located in Hong Kong. Accordingly,
the Company may be materially adversely affected by factors affecting
Hong Kong's political situation and its economy or in its
international political and economic relations. Pursuant to the
Sino-British Joint Declaration, the government of the People's
Republic of China ("PRC") began to exercise sovereignty over Hong
Kong, effective July 1, 1997, through the Hong Kong Special
Administrative Region, which was established pursuant to Article 31
of the PRC constitution. The PRC has agreed that (i) Hong Kong's
current social and economic system will remain unchanged for 50 years
after July 1, 1997, with the Special Administrative Region to be
administered by local inhabitants under the PRC's "Basic Law," and
(ii) the laws currently enforced in Hong Kong will remain largely in
unchanged and foreign investment will be protected by the law. There
can be no assurance that the Basic Law as adopted in its present form
will not be changed or interpreted in a materially adverse manner for
the Company in the future or that any such changes or interpretations
would not be given retroactive effect. Accordingly, future political
developments could make it impractical, inefficient or impossible for
the Company to conduct business in or from Hong Kong.
ITEM 2. DESCRIPTION OF PROPERTIES
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2A. GENERAL.
The Company has no properties and currently has no agreements or plans to
acquire any properties. The Company's officers and directors use the offices of
Champ Pacific Capital Limited, Room 1806, Hutchison House, 10 Harcourt Road,
Central, Hong Kong at no cost to the Company. Champ Pacific Capital Limited has
agreed to continue this arrangement at any location it occupies until the
Company completes a transaction with a Target Company. One of the Company's
officers, directors and beneficial owners, Mr. Kevin Sheung Wai Chan, is a
director and fifty percent (50%) beneficial shareholder of Champ Pacific Capital
Limited.
2B. REAL ESTATE INVESTMENT POLICIES.
The Company has no real estate properties and at this time has no
agreements to acquire any properties. The Company does not preclude, however,
the possibility of becoming a party to a business combination with a Target
Company or another corporation or entity, or acquiring stock or assets of an
existing business, in which investments in real estate or interests in real
estate are involved.
ITEM 3. LEGAL PROCEEDINGS.
There is no litigation pending or, to the Company's knowledge, threatened
by or against the Company.
ITEM 4. CONTROL OF REGISTRANT.
The following table sets forth, as of September 30, 1999, each person known
by the Company to be the beneficial owner of ten (10) percent or more of the
Company's outstanding Class A common stock, each of whom are directors
individually and directors and officers of the Company as a group. Each person
has sole voting and investment power with respect to the shares shown. Other
than the rights to exercise options on the Class B Common stock in the amounts
as described below, none of the stockholders listed at this time have any rights
to acquire within sixty (60) days any additional common or preferred stock from
warrants, rights, conversion privilege(s) or similar obligations. No Class B
common stock or preferred stock of the Company has been issued at this time;
however, the individuals listed below are the beneficial owners of rights to
acquire, at an exercise price of US$0.0001 per share, and at any time between
September 15, 1999 and September 14, 2009, the Class B common stock in the
amounts below from stock options, each of whom are directors individually and
directors and officers of the Company as a group.
<TABLE>
<CAPTION>
Title of Name and Address of Beneficial Number of Percentage
Class Owner Shares Owned of Class
-------- ------------------------------ ------------ ----------
<S> <C> <C> <C>
Class A Mr. Kevin Sheung Kwan Chan 1,500,000 75%
Common Stock Room 1806, Hutchison House
10 Harcourt Road, Central
Hong Kong
Class A Mr. Silas Sheung Kwan Chan 500,000 25%
Common Stock Room 1806, Hutchison House
10 Harcourt Road, Central
Hong Kong
Class B Mr. Kevin Sheung Kwan Chan 7,500,000 75%
Common Stock Room 1806, Hutchison House
Options 10 Harcourt Road, Central
Hong Kong
Class B Mr. Silas Sheung Kwan Chan 2,500,000 25%
Common Stock Room 1806, Hutchison House
Options 10 Harcourt Road, Central
Hong Kong
</TABLE>
<PAGE> 13
Beauty Wise Secretaries Limited ("Beauty Wise"), formerly Beauty Wise
Development Limited, a company organized and existing under the laws of
Hong Kong, holds the shares and options of Mr. Kevin Sheung Wai Chan in trust
for Mr. Kevin Sheung Wai Chan's sole benefit pursuant to a Nominee Shareholder
Agreement dated September 15, 1999 between Mr. Kevin Sheung Wai Chan and
Beauty Wise. Mr. Kevin Sheung Wai Chan is the Secretary, one of two Directors
and a 50% shareholder in Beauty Wise.
Fortune Access Nominees Limited ("Fortune Access"), formerly Fortune Access
Development Limited, a company organized and existing under the laws of Hong
Kong, holds the shares and options of Mr. Silas Sheung Kwan Chan in trust for
Mr. Silas Sheung Kwan Chan's sole benefit pursuant to a Nominee Shareholder
Agreement dated September 15, 1999 between Mr. Silas Sheung Kwan Chan and
Fortune Access. Mr. Kevin Sheung Wai Chan is the Secretary, one of two Directors
and a 50% shareholder in Fortune Access.
ITEM 5. NATURE OF THE TRADING MARKET.
The Common Stock of the Company is not yet listed on an exchange or
over-the-counter system. The Company does plan to consider looking at listing
its shares on the OTC Bulletin Board or the Nasdaq Small Cap market in the
future.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
There are no exchange control restrictions on the payment of dividends on
the Common Stock of the Company in Hong Kong, where the Company's principal
executive offices are located, or the British Virgin Islands, where the Company
is incorporated. Currently, the shares in the Company are issued in the currency
of the United States. Other jurisdictions in which the Company may conduct
operations in the future, or where a Target Company is located, may have various
exchange controls.
Although the Company has not entered into any discussions with any
potential Target Company, the Company may seek to merge with or acquire a Target
Company in a number of jurisdictions, including the People's Republic of China
("PRC"), whose currency, the Renminbi, is not freely convertible into foreign
currency. The PRC government imposes control over its foreign currency reserves
in part through direct regulation of the conversion of Renminbi into foreign
currency and through restrictions on foreign trade. Prior to January 1, 1994,
the PRC had a dual exchange rate system, which consisted of the rate fixed
time-to-time by the PRC State Administration of Exchange Control (the "SAEC")
and the rates prevailing in the various swap centers around the country (the
"Swap Rates"). In most cases, foreign enterprises satisfied their need for
foreign currency through such means as exporting products for foreign currency,
selling "import substitute" products in the PRC for payment in foreign currency,
or accessing a swap center. Among the more widely used Swap Rates was the rate
at the swap center in Shanghai. Effective January 1, 1994, a new unitary,
managed floating-rate system was introduced in the PRC to replace the previous
dual-track foreign exchange system, which was abolished pursuant to the Notice
of the People's Bank of China Concerning Further Reform of the Foreign Currency
Control System (the "PBOC Notice"). The conversion of Renminbi into U.S. dollars
must now be based on the rate set by the People's Bank of China, which is set
based on the previous day's PRC interbank foreign exchange market rate and with
reference to current exchange rates on the world financial markets. In
furtherance of these currency reforms, the China Foreign Exchange Trading Center
(the "CFETC") was formally established in Shanghai and began operating in April
1994. The establishment of the CFETC was originally intended to coincide with
the phasing out of the swap centers. However, the swap centers have been
retained as an interim measure and it is envisaged that the local swap centers
will be phased out gradually.
<PAGE> 14
Currently, foreign investment enterprises ("FIEs") in the PRC (including
Sino-foreign equity and co-operative joint ventures) are required to apply to
the local bureau of the SAEC for "foreign exchange registration certificates
foreign investment enterprises." Upon the presentation of appropriate
documentation, FIEs may enter into foreign exchange transactions at swap
centers, or in the future, in the event the unitary exchange rate system is
implemented as anticipated, through the unified market when all swap centers are
consolidated under the CFETC. On January 29, 1996, the State Council promulgated
the Regulations of the People's Republic of China Regarding Foreign Exchange
Control (the "Regulations") which came into effect on April 1, 1996. Pursuant to
the Regulations, conversion of Renminbi into foreign exchange for current
account items is permissible. Conversion of Renminbi into foreign exchange for
capital items, such as direct investment, loans or security is still under the
sole jurisdiction and requires approval of the SAEC.
As a result of the adoption of the unitary exchange rate system on
January 1, 1994, the official bank exchange rate for Renminbi to U.S. dollars
experienced an immediate devaluation of approximately 50% to
US$1.00 .2 = Rmb 8.7000. Any future volatility or devaluation of the Renminbi
could have a material adverse effect on the Company's business, results of
operations and financial condition.
Management believes that the Company, if it merges with or acquires a
Chinese Target Company, would be able to obtain all required approvals for the
conversion and remittance abroad of foreign currency necessary for the
operations of any Chinese Target Company's business. However, such approvals do
not guarantee the availability of foreign currency, and no assurance can be
given that the Company would be able to convert sufficient amounts of foreign
currency in the PRC's foreign exchange markets in the future at acceptable
rates, or at all, for the repayment of debt, payments of interest, purchases of
equipment or payment of dividends, if any, and payments for services and other
contracts.
CERTAIN FOREIGN ISSUER CONSIDERATIONS
The Company is an International Business Company incorporated under the
provisions of the IBC Act. The transfer of shares between persons regarded as
residents outside of the British Virgin Islands is not subject to any exchange
controls. Likewise, issues and transfers of shares involving any person regarded
as resident in the British Virgin Islands are not subject to exchange control
approval. There are no limitations on the rights of non-British Virgin Islands
owners of the Common Stock to hold or vote their shares. Because the Company has
been formed pursuant to the IBC Act, there are no restrictions on its ability to
transfer funds into and out of the British Virgin Islands or to pay dividends to
U.S. residents who are holders of the Common Stock.
In accordance with the Company's Memorandum and Articles of Association,
share certificates are only issued as shares registered on the books of the
Company. In the case of a representative acting in a special capacity (for
example, as an executor or trustee), the Company is not bound to investigate or
incur any responsibility in respect of the proper administration of any such
estate or trust. The Company takes no notice of any trust applicable to any of
its shares whether or not it had notice of such trust.
As a company subject to the IBC Act, the Company may not: (i) transact
business with persons resident in the British Virgin Islands except as set out
in Section 5(2) of the IBC Act; (ii) own an interest in real property situated
in the British Virgin Islands, other than a lease of property for use as an
office from which to communicate with shareholders or where books and records of
the Company are prepared and maintained; (iii) maintain a banking or trust
business, unless it is licensed under the British Virgin Islands Banks and
Trusts Companies Act of 1990; (iv) transact business as an insurance or a
<PAGE> 15
reinsurance company, insurance agency or insurance broker, unless it is licensed
under an enactment authorizing it to transact that business; (v) maintain the
business of company management unless it is licensed under the British Virgin
Islands Company Management Act, 1990; or (vi) maintain the business of providing
a registered office or act as the registered agent for companies incorporated in
the British Virgin Islands.
There are no restrictions on the degree of foreign ownership of the
Company. The Company is subject neither to taxes on its income or dividends nor
to any foreign exchange controls in the British Virgin Islands. In addition, the
Company is not subject to capital gains tax in the British Virgin Islands, and
profits can be accumulated by the Company, as deemed by management to be
required, without limitation.
ITEM 7. TAXATION.
The following discussion summarizes tax consequences material to a holder
of Common Stock of the Company under present British Virgin Islands, United
States, Hong Kong and the People's Republic of China tax laws. The discussion
does not deal with all possible tax consequences relating to the Company's
operations or ownership of the Common Stock and does not purport to deal with
the tax consequences applicable to particular investors, some of which
(including banks, securities dealers, insurance companies and tax-exempt
entities, as well as financial institutions, broker-dealers, tax-exempt
organizations or persons or particular classes of U.S. holders of at least 10%
of the voting power of the value of the Company's stock) may be subject to
special rules. In particular, the discussion does not address the tax
consequences under state, local and other national tax laws. The following
discussion is based upon laws and relevant interpretations thereof in effect as
of the date of this Registration Statement, all of which are subject to change
retroactively and prospectively.
ANY PROSPECTIVE INVESTOR IN THE COMPANY SHOULD CONSULT WITH HIS OR HER OWN
TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER TO PURCHASE,
OWN AND DISPOSE OF THE SECURITIES, INCLUDING THE EFFECTS OF APPLICABLE BRITISH
VIRGIN ISLANDS, HONG KONG, PRC AND/OR UNITED STATES FEDERAL, STATE, LOCAL OR
OTHER TAX LAWS, AS WELL AS POSSIBLE CHANGES IN THE TAX LAWS.
BRITISH VIRGIN ISLANDS TAXATION.
Under the IBC Act as currently in effect, a holder of Common Stock of the
Company 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 of the Company. A holder of Common Stock of the Company is not liable for
British Virgin Islands income tax on gains realized on the sale or disposal of
such shares. The British Virgin Islands does not impose a withholding tax on
dividends paid by the Company to its shareholders due to its incorporation under
the IBC Act.
There are no capital gains, gift and inheritance, or income taxes levied by
the British Virgin Islands on companies incorporated under the IBC Act. In
addition, the Common Stock of the Company 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. As an exempted company, the
Company is required to pay the British Virgin Islands government an annual
license fee based on the Company's stated authorized capital.
UNITED STATES FEDERAL INCOME TAXATION.
<PAGE> 16
The following is a summary of material United States federal income tax
consequences arising from the purchase, ownership and disposition of the Common
Stock to holders who are United States citizens, individuals resident in the
United States for purposes of United States federal income tax, or domestic
corporations who purchase Common Stock in any future offering and hold such
Common Stock as capital assets (a "U.S. holder"). A U.S. holder must allocate
the purchase price for the Common Stock on the date of issuance as the U.S.
holder's tax basis in his Common Stock for federal tax purposes.
Cash dividends paid out of the Company's current and accumulated earnings
and profits to a holder of Common Share who is a U.S. holder will be taxed as
ordinary income for United States federal income tax purposes. Cash
distributions in excess of the current and accumulated earnings and profits of
the Company will first be treated, for United States federal income tax
purposes, as a nontaxable return on capital to the extent of the United States
Investor's basis in the Common Share and then as gain from the sale or exchange
of a capital asset.
In general, a U.S. holder, other than a shareholder owning 10% or more of
the voting power of the Company, will be entitled to claim a foreign tax credit
only for taxes, if any, imposed on dividends paid to such U.S. holder (such as
withholding taxes) and not for taxes, if any, imposed on the Company or on any
entity in which the Company has made an investment. The amount of the foreign
tax credit that may be claimed is limited to that proportion of the tax against
which the credit is taken that the holder's taxable income from non-United
States sources bears to the holder's entire taxable income for that taxable
year. The foreign tax credit limitation is applied separately to different
categories of income. Generally, for purposes of applying such foreign tax
credit limitations, dividends are included in the passive income category.
The amount of the gross distributions actually or constructively received
by a U.S. Common Stock holder will be included as ordinary income to the extent
such distribution is paid from current or accumulated earnings and profits of
the Company, as determined under United States federal income tax principles.
Such distributions will not be eligible for the dividends that receive
deductions allowed to United States corporations. Distributions in excess of the
Company's current and accumulated earnings and profits are treated as a
non-taxable return of basis to the extent thereof, and then as a gain from the
sale of Common Stock.
A U.S. holder will recognize capital gain or loss upon the sale or other
disposition of the Common Stock in an amount equal to the difference between the
amount realized and the U.S. holder's tax basis in the Common Stock. Such gain
or loss will be long-term capital gain or loss if the Common Stock has been held
for more than one year at the time of the sale or other disposition. Long-term
capital gain of a non-corporate U.S. holder is generally subject to tax at more
favorable rates than ordinary income or short-term capital gain.
However, if the Company is deemed to be a passive foreign investment
company ("PFIC"), upon the receipt of certain distributions from the Company or
a disposition of the Common Stock, each U.S. holder will be liable for United
States federal income tax computed generally at the highest applicable rate as
if such distribution or gain had been recognized ratably over the period the
U.S. holder held such Common Stock, plus interest on the tax allocable to prior
years including within such holding period. Such tax and interest will be
payable by the U.S. holder for the year in which the distribution or gain is
actually realized, regardless of whether losses, credits or other tax benefits
would have been available to the U.S. holder to offset such income if it had
actually been realized in such prior tax years. Under certain circumstances, if
the Company were a PFIC, distributions and dispositions of shares in a direct or
indirect foreign corporate subsidiary of the Company may be attributed in whole
or in part to a U.S. holder, and such
<PAGE> 17
U.S. holder may be taxed under the PFI rules with respect to such distributions
or dispositions.
The Company will be treated as a PFIC if in the current tax year or any
prior tax year, either (i) seventy-five (75) percent or more of the gross income
of the Company is passive income, or (ii) on average, at least fifty (50)
percent of the assets of the Company (by value or, if the Company elects, by
their adjusted basis for computing earnings and profits) produce or are held for
the production of passive income ("passive assets"). Under special
"look-through" rules, the Company is considered to own its pro rata share of the
gross income and assets of any corporation which the Company owns (or is
considered to own) twenty-five (25) percent or more of the stock (by value).
Passive income for purposes of the PFIC rules generally includes dividends,
interest and other types of investment income.
The Company anticipates that under the look-through rules most of its
income will not constitute passive income and that most of its investments
therein will not constitute passive assets. Accordingly, the Company does not
anticipate that it will be treated as a PFIC based on the nature of its
business; however, there can be no assurance that they will not be treated as
such.
Alternatively, a U.S. holder could elect to treat the Common Stock as an
investment in a qualified electing fund ("QEF"). In such a case, the PFIC rules
described above would not apply; instead, the U.S. holder would be required to
include currently in his income his pro-rata share of the Company's ordinary
earnings (as ordinary income) and his pro-rata share of the Company's net
capital gains (as long-term capital gain), whether or not distributions with
respect to such earnings or gains are actually made to the U.S. holder. If the
U.S. holder makes the QEF election for the first year in which the Company is a
PFIC, the investor will be required to include its share of such income only for
tax years in which the Company meets either the income test or the asset test
and not in other tax years. Once made, the QEF election will be effective for
the tax year and all subsequent tax years, and may be revoked only with the
consent of the United States Internal Revenue Service.
The Company intends to notify U.S. holders in the event that it concludes
it will be treated as a PFIC for any tax year to enable the U.S. holders the
ability to consider whether to make the QEF election, although the Company has
no obligation to do so nor should U.S. holders rely on the Company doing so.
Prospective investors should consult with their own tax advisors regarding the
possible treatment of the Company as a PFIC, its effect, and the eligibility,
manner and advisability of making a QEF election in such case.
A U.S. holder will be subject to "backup withholding" at the rate of
thirty-one (31) percent with respect to dividends paid on the Common Stock and
any proceeds of the sale, exchange or redemption of the Common Stock which are
paid through a paying agent, broker or other intermediary in the United States
or a United States broker or certain United States-related brokers to such
holder outside the United States unless the U.S. holder (i) qualifies as an
exempt payee (including, without limitation, a corporation), and when required,
demonstrates this fact or (ii) provides a correct taxpayer identification number
(or certifies that he has applied for a taxpayer identification number),
certifies that such holder is not subject to backup withholding and otherwise
complies with the backup withholding rules. Backup withholding is not an
additional tax; rather the stockholder is entitled to a credit against his
United States federal income tax for the amount of any backup withholding. In
addition, a United States investor who fails to furnish his taxpayer
identification number may be subject to a penalty.
A U.S. holder who owns or acquires five (5) percent or more in value of the
Company's stock may be required to file certain additional reports with
<PAGE> 18
respect to the Company with the United States Internal Revenue Service and may
be subject to a penalty for failing to do so.
HONG KONG TAXATION.
Under the laws of Hong Kong, as currently in effect, a holder of Common
Stock is not subject to Hong Kong tax on dividends paid with respect to such
shares and no holder of Common Stock is liable for Hong Kong tax on gains
realized on sale or other disposition of such Common Stock except that those
persons who are classified for Hong Kong purposes as dealers in securities in
Hong Kong may be subject to Hong Kong tax in respect of any gain resulting from
the disposition of Common Stock. Hong Kong does not impose a withholding tax on
dividends paid by the Company. In addition, the Company will not be subject to
Hong Kong taxes as a result of its receipt of dividends from any of its
subsidiaries.
PRC TAXATION.
Currently, there is no material connection with the Company and the PRC for
tax claims to be made by PRC tax authorities. However, the Company is looking to
merge with or acquire a Target Company in the future, which may (but not
necessarily) be an operating entity in the PRC. The Company anticipates that
there would be no material consequences to holders of the Common Stock solely as
a result of the purchase, ownership and disposition of the Common Stock after
any potential merger or acquisition with a Chinese Target Company. There is an
income tax treaty in effect between the United States and the PRC.
ITEM 8. SELECTED FINANCIAL DATA.
SUMMARY FINANCIAL AND OPERATING DATA
The selected information set forth below should he read in conjunction
with, and is qualified in its entirety by reference to, the consolidated
financial statements of the Company included in this Registration Statement as
prepared by Arthur Andersen & Co., independent public accountants. The Company
prepares its financial statements in accordance with United States generally
accepted accounting principles ("U.S. GAAP").
BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(Amounts expressed in United States dollars)
<TABLE>
<S> <C>
ASSET
Cash $20,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued liabilities $ 5,000
Stockholders' equity:
Common Stock -- Class A, $0.0001 par value; 400,000,000 shares authorized; 2,000,000
shares issued and outstanding 200
Common Stock -- Class B, $0.0001 par value; 100,000,000 shares authorized; Nil issued
and outstanding --
Additional paid-in capital 19,800
Accumulated deficit (5,000)
Total stockholders' equity 15,000
Total liabilities and stockholders' equity $20,000
</TABLE>
<PAGE> 19
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM SEPTEMBER 15, 1999 (DATE OF INCORPORATION)
TO SEPTEMBER 30, 1999
(Amounts expressed in United States dollars except for per share data)
<TABLE>
<S> <C>
Selling, general and administrative expenses $ (5,000)
Provision for income taxes --
Net loss $ (5,000)
Loss per common share -- Basic 0.25cents
</TABLE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
With the exception of any historical matters herein, this Registration
Statement may contain "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (except as may be limited by Section
27A(b)(2)(D) of the Securities Act and Section 21E(b)(2)(D) of the Exchange
Act). The Company's actual results could differ materially from the results, if
any, discussed in such forward-looking statements. Any such forward-looking
statements should be read only in conjunction with this entire Registration
Statement and the exhibits hereto.
9A. GENERAL BUSINESS PLAN
The Company's purpose is to seek, investigate and, if such investigation
warrants, attempt to enter into some form of business combination with a Target
Company seeking the perceived advantages of having a class of securities
registered under the Exchange Act. The Company will not restrict its search to
any specific business, industry or geographical location and the Company may
participate in a business venture of virtually any kind or nature. It is
impossible to predict at this time the status of any business in which the
Company may become engaged, in that such business may need to seek additional
capital, may desire to have its shares publicly traded, or may seek other
perceived advantages which the Company may offer. The Company is also not
restricted from implementing a structure for a particular business acquisition
with a Target Company in which the Company also becomes a party to a merger,
consolidation, reorganization, joint venture, or licensing agreement with a
third party corporation or entity. The Company has not identified any Target
Companies and has not entered into any negotiations regarding such business
combination to date. None of the Company's officers or directors have engaged
in any negotiations with any representative of any company regarding the
possibility of any business combination between the Company and such other
company to date.
The officers and directors anticipate possibly seeking out a Target
Company through solicitation. Such solicitation may include newspaper or
magazine advertisements, mailings and other distributions to law firms,
<PAGE> 20
accounting firms, investment bankers, financial advisors and similar persons,
the use of one or more World Wide Web sites and similar methods. No estimate can
be made as to the number of persons who may be contacted or solicited. The
officers and directors may engage in such solicitation directly or may employ
one or more other entities to conduct or assist in such solicitation. The
officers and directors will pay referral fees to consultants and others who
refer Target Companies for mergers into reporting companies in which the
officers and directors have an interest. Payments are made if a business
combination occurs, and may consist of cash or a portion of the stock in the
Company retained by the officers and directors.
The Company anticipates that the selection of a business opportunity in
which to participate will be complex and a high-risk endeavor. The officers and
directors believe (but have not conducted or obtained any research to confirm)
that there are business entities seeking the perceived benefits of a publicly
registered corporation. Such perceived benefits may include the items listed in
Part 1, Item 1B of this Registration Statement. Business opportunities may be
available in many different industries and at various stages of development, all
of which will make the task of comparative investigation and analysis of such
business opportunities difficult and complex.
The Memorandum and Articles of Association of the Company provides that the
Company may indemnify officers and/or directors of the Company for all losses
and liabilities which he or she may sustain or incur in or about the execution
of the duties of his or her office or otherwise in relation thereto, and no
director or officer shall be liable for any loss, damage or misfortune which
may happen to, or be incurred by the Company in the execution of the duties of
his or her office, or in relation thereto.
The Company has, and will continue to have, no capital with which to
provide the owners of business entities with any cash or other assets. The
Company believes it will be able to offer owners of Target Companies the
opportunity to enter into a business combination with a reporting company
without incurring the cost and time that would be required should a Target
Company decide to become a reporting company on its own. In analyzing
prospective business opportunities, the officers and directors will consider
such matters as: (i) available technical, financial and managerial resources;
(ii) working capital and other financial requirements; (iii) history of
operations, if any; (iv) prospects for the future; (v) nature of present and
expected competition; (vi) quality and experience of management services which
may be available and the depth of that management; (vii) potential for further
research, development or exploration; (viii) specific risk factors not now
foreseeable but which then may be anticipated to impact the proposed activities
of the Company; (ix) potential for growth or expansion; (x) the potential for
profit; (xi) perceived public recognition or acceptance of products, services
or trades; (xii) name identification; and (xiii) other relevant factors. This
discussion of the proposed criteria is not meant to be a restrictive or an
inclusive list of the Company's virtually unlimited discretion to search for and
enter into potential business opportunities. The officers and directors have not
conducted or obtained market research and are not aware of any empirical data to
support the perceived benefits of a merger or acquisition transaction for the
owners of any Target Company. See ITEM 1D(9), "RISK FACTORS -- LACK OF MARKET
RESEARCH OR MARKETING ORGANIZATION AND EXPERTISE".
The Exchange Act requires that any merger or acquisition candidate comply
with certain reporting requirements, which include providing audited financial
statements in any reporting filings made under the Exchange Act. The officers
and directors of the Company will in all likelihood be inexperienced in matters
relating to the business of a Target Company. The officers and directors will
rely upon their own efforts in accomplishing the pre-business combination
purposes of the Company. Outside consultants or advisors may be utilized by the
Company to assist in the search for qualified Target
<PAGE> 21
Companies. If the Company does retain such an outside consultant or advisor,
any cash fee earned by such person will need to be assumed by the Target
Company, as the Company has limited cash assets with which to pay such
obligation.
Following a business combination the Company may benefit from the services
of others in regard to accounting, legal services, underwritings and corporate
public relations. If requested by a Target Company, the officers and directors
of the Company may recommend one or more underwriters, financial advisors,
accountants, law firms, public relations firms or other consultants to provide
such services.
9B. ACQUISITION OF OPPORTUNITIES
It is anticipated that any securities issued in any such reorganization
would be issued in reliance upon exemption from registration under the
Securities Act, any other applicable federal securities laws and state
securities laws. In some circumstances, however, as a negotiated element of its
transaction, the Company may agree to register all or a part of such securities
under the applicable federal or state securities laws immediately after the
transaction is consummated or at specified times thereafter. If such
registration occurs, of which there can be no assurance, it will be undertaken
by the surviving entity after the Company has entered into an agreement for a
business combination or has consummated a business combination and the Company
is no longer considered a Blank Check Company. Until such time as this occurs,
the Company will not register any securities. The issuance of additional
securities and their potential sale into any trading market which may develop
in the Company's securities may depress the market value of the Company's
securities in the future if such a market develops, of which there is no
assurance.
While the terms of a business transaction to which the Company may be a
party cannot be predicted, it is expected that the parties to the business
transaction will desire to avoid the creation of a taxable event and thereby
structure the acquisition as a "tax-free" reorganization under Sections 351 or
368 of the Internal Revenue Code of 1986, as amended (the "Code").
With respect to any negotiations with a Target Company, the officers and
directors expect to analyze, among other factors, the percentage of the Company
Target Company shareholders would acquire in exchange for their shareholdings in
the Target Company. Depending upon, among other things, the Target Company's
assets and liabilities, the Company's shareholders would in all likelihood hold
a substantially lesser percentage ownership interest in the Company following
any such transaction. The percentage of ownership may be subject to significant
reduction in the event that the Company acquires a Target Company with
substantial assets.
The Company will participate in a business opportunity only after the
negotiation and execution of appropriate agreements. Although the terms of such
agreements cannot be predicted, generally such agreements will require certain
representations and warranties of the parties thereto, will specify certain
events of default, will detail the terms of closing and the conditions which
must be satisfied by the parties prior to and after such closing, will outline
the manner of bearing costs, including costs associated with the Company's
attorneys and accountants, and will include miscellaneous other terms.
The Company is currently exempt from certain provisions applicable to U.S.
public companies, including the duty to file its quarterly reports on Form 10-Q
(or 10-QSB, as applicable), as required under the Exchange Act. However, the
Company anticipates that, upon effectiveness of this Registration Statement on
January 9, 2000, it will be subject to the rules and regulations of the Exchange
Act and other laws, rules and regulations as applicable to
<PAGE> 22
foreign companies and as may be necessary for listing its securities in the
future on Nasdaq Small Cap or OTC Bulletin Board.
The officers and directors have agreed that they will advance to the
Company any additional funds which the Company needs for operating capital and
for costs in connection with searching for or completing a business combination
with a target company. The officers and directors are under no obligation to
advance funds to the Company, and they may discontinue such funding at any time.
Such advances will be made without expectation of repayment unless the owners of
the business which the Company acquires or merges with agree to repay all or a
portion of such advances. There is no minimum or maximum amount the officers and
directors will advance to the Company. The Company will not borrow any funds to
make any payments to the Company's promoters, officers, directors or their
affiliates or associates.
9C. COMPETITION
The Company will remain an insignificant participant among the firms that
engage in the acquisition of business opportunities. There are many established
venture capital and financial concerns which have significantly greater
financial and personnel resources and technical expertise than the Company. In
view of the Company's combined extremely limited financial resources and limited
management availability, the Company will continue to be at a significant
competitive disadvantage compared to the Company's competitors. See ITEM 1D(3),
"RISK FACTORS -- SCARCITY OF AND COMPETITION FOR BUSINESS OPPORTUNITIES AND
COMBINATIONS".
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
10A. BACKGROUNDS OF DIRECTORS
The Company has the following officers and directors:
<TABLE>
<CAPTION>
Name Age Positions and Offices Held
---- --- --------------------------
<S> <C> <C>
Kevin Sheung Wai Chan 38 Director
Silas Sheung Kwan Chan 36 Director and Secretary
</TABLE>
There are no agreements or understandings for the officers or directors to
resign at the request of another person and the above-named officer and director
is not acting on behalf of nor will act at the direction of any other person.
Set forth below are summary descriptions containing the name of the
directors and officers of the Company, all positions and offices with the
Company held, the period during which such officer or director has served as
such, and the business and educational experience of each during at least the
last five (5) years:
KEVIN SHEUNG WAI CHAN. Mr. Chan is a director of the Company. From 1985 to
1989, he was with the audit division of Arthur Andersen in Hong Kong. From 1989
to 1994, he was an investment banker with Deutsche Morgan Grenfell in Hong Kong.
From 1994 to the present, Mr. Chan has been a Principal of Champ Pacific Capital
Limited, a financial consulting and advisory firm located in Hong Kong. Mr. Chan
has been a Certified Public Accountant in Hong Kong since 1989, as well as a
fellow member of the Hong Kong Society of Accountants and the Association of
Chartered Certified Accountants. Mr. Chan received his B.So.Sc. in Management
Studies from the University of Hong Kong in 1985.
SILAS SHEUNG KWAN CHAN. Mr. Chan is a director and secretary of the
Company. From 1985 to 1990, Mr. Chan was an Accountant with KPMG Peat Marwick
and Ernst & Young, both located in Hong Kong. From 1990 to 1992, Mr. Chan was
<PAGE> 23
with the Hong Kong Stock Exchange as a Listing Executive. From 1993 to 1997,
Mr. Chan was with Fuji International Finance Limited, an international
investment bank, as Assistant Director. From 1997 to the present, Mr. Chan has
been an executive officer with Champ Pacific Capital Limited, a financial
consulting and advisory firm located in Hong Kong. Mr. Chan is a fellow member
of the Hong Kong Society of Accountants and the Association of Chartered
Certified Accountants since 1989, and has been a Chartered Financial Analyst
since 1997. Mr. Chan received a B.Sc. in Accounting from the University of
Hong Kong in 1985 and an M.B.A. from the University of Birmingham in 1993.
10B. PREVIOUS BLANK CHECK COMPANIES
Since formation of the Company, Messrs. Chan and Chan have formed two
additional British Virgin Islands companies -- Portal Net Limited and Net-Matrix
Limited -- with the intent of them becoming additional Blank Check Companies.
See ITEM 10D, "RECENT TRANSACTIONS BY BLANK CHECK COMPANIES". Prior to
initiating formation of these companies, Messrs. Chan and Chan and the Company
have owned together one other British Virgin Islands Blank Check Company, First
Nets Global Inc., but Messrs. Chan and Chan have not yet registered such company
under the Exchange Act.
10C. CURRENT BLANK CHECK COMPANIES
In addition to First Nets Global Inc., with which they have organized and
established in the British Virgin Islands but have not registered any shares of
such company under the Exchange Act, Messrs. Chan and Chan anticipate being
involved with additional Blank Check Companies with common stock registered
under the Securities Act or the Exchange Act. At present, Messrs. Chan and Chan
have filed a registration statement for Portal Net Limited and Net-Matrix
Limited simultaneously with the Registration Statement for the Company on
November 10, 1999, as amended on February 10, 2000, February 11, 2000, and
June 30, 2000 and anticipate filing amended Registration Statements
simultaneously or on a date soon after this amended Registration Statement is
filed by the Company.
10D. RECENT TRANSACTIONS BY BLANK CHECK COMPANIES
Although Messrs. Chan and Chan have formed the three additional companies
listed in Item 10B and 10C above with the intent of such companies becoming
additional Blank Check Companies, no Registration Statements have been filed
previous to this Registration Statement for these three companies. However,
Messrs. Chan and Chan have filed Registration Statements regarding the shares of
Portal Net Limited and Net-Matrix Limited on the dates set forth above in 10C
and anticipate filing amended Registration Statements simultaneously or on a
date soon after this Registration Statement is filed. At present,
Messrs. Chan and Chan do not have plans to file a registration statement for
First Nets Global Inc. in the immediate future.
10E. CONFLICTS OF INTEREST
The Company's officers and directors expect to register Portal Net Limited,
Net-Matrix Limited, First Nets Global Inc. and other companies of a similar
nature and with a similar purpose as the Company. Consequently, there are
potential inherent conflicts of interest in acting as an officer and director of
the Company. Insofar as the officers and directors are engaged in other business
activities, the officers and directors anticipate that they will devote only a
minor amount of time to the Company's affairs.
A conflict may arise in the event that another Blank Check Company with
which the officers and directors are affiliated is registered and actively seeks
a Target Company. The officers and directors anticipate (but are not required to
so effect) that Target Companies will be located for the Company and other Blank
Check Companies either (i) in chronological order of the date
<PAGE> 24
of formation of such Blank Check Companies; or (ii) by lot. However, other
additional Blank Check Companies that may be formed may differ from the Company
in certain items such as place of incorporation, number of shares and
shareholders, working capital, types of authorized securities, or other items.
It may be that a Target Company may be more suitable for or may prefer a certain
Blank Check Company formed after the Company. In such case, a business
combination might be negotiated on behalf of the more suitable or preferred
Blank Check Company regardless of date of formation or choice by lot. See
ITEM 1D(7), "RISK FACTORS -- OTHER BLANK CHECK COMPANIES".
Mr. Silas Sheung Kwan Chan is an executive officer of Champ Pacific Capital
Limited, and a Director and Secretary of Portal Net Limited, Net-Matrix Limited
and First Nets Global Inc. and expects to organize other companies of a similar
nature and with a similar purpose as the Company. As such, demands may be placed
on the time of Mr. Silas Sheung Kwan Chan that will detract from the amount of
time he is able to devote to the Company. Mr. Silas Sheung Kwan Chan intends to
devote as much time to the activities of the Company as required. However,
should a conflict arise regarding the time demands of Mr. Silas Sheung Kwan
Chan, there is no assurance that Mr. Silas Sheung Kwan Chan would not attend to
other matters prior to those of the Company. Mr. Silas Sheung Kwan Chan projects
that initially up to ten hours per month of his time may be spent locating a
Target Company which amount of time would increase when the analysis of, and
negotiations and consummation with, a Target Company are conducted.
Mr. Kevin Sheung Wai Chan is a Director of Champ Pacific Capital Limited,
Portal Net Limited, Net-Matrix Limited and First Nets Global Inc. and expects to
organize other companies of a similar nature and with a similar purpose as the
Company. As such, demands may be placed on the time of Mr. Kevin Sheung Wai Chan
that may detract from the amount of time he is able to devote to the Company.
Mr. Kevin Sheung Wai Chan intends to devote as much time to the activities of
the Company as required. However, should a conflict arise regarding the time
demands of Mr. Kevin Sheung Wai Chan, there is no assurance that Mr. Kevin
Sheung Wai Chan would not attend to other matters prior to those of the Company.
Mr. Kevin Sheung Wai Chan projects that initially up to ten hours per month of
his time may be spent locating a Target Company which amount of time would
increase when the analysis of, and negotiations and consummation with, a Target
Company are conducted.
At the time of a business combination, the officers and directors expect
that some or all of the shares of common stock owned by the shareholders and
directors will be purchased by the Target Company. The amount of common stock
sold or continued to be owned by the directors cannot be determined at this
time.
The Company may agree to pay finder's fees, as appropriate and allowed, to
unaffiliated persons who may bring a Target Company to the Company where that
reference results in a business combination. The amount of any finder's fee will
be subject to negotiation, and cannot be estimated at this time. No finder's fee
of any kind will be paid to the officers and directors or promoters of the
Company or to their associates or affiliates. No loans of any type have, or will
be, made to the officers, directors or promoters of the Company or to any of
their associates or affiliates.
The Company's officers and directors have not had any negotiations with and
there are no present arrangements or understandings with any representatives of
the owners of any business or company regarding the possibility of a business
combination with the Company.
Any changes in these provisions require the approval of the Board of
Directors. The officers, directors and current shareholders do not intend to
propose any such action and do not anticipate that any such action will occur.
10F. INVESTMENT COMPANY ACT OF 1940
<PAGE> 25
See ITEM 1D (11), "RISK FACTORS -- REGULATION UNDER THE INVESTMENT COMPANY
ACT". Any violation of the Investment Company Act would subject the Company to
material adverse consequences.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
The Company's officers and directors do not receive any compensation for
services rendered to the Company, have not received such compensation in the
past, and are not accruing any compensation pursuant to any agreement with the
Company.
The officers and directors of the Company will not receive any finder's
fee, either directly or indirectly, as a result of their efforts to implement
the Company's business plan outlined herein. However, the officers and directors
of the Company anticipate receiving benefits as beneficial shareholders of the
Company. See ITEM 4, "CONTROL OF REGISTRANT," and ITEM 13, "INTEREST OF
MANAGEMENT IN CERTAIN TRANSACTIONS".
No retirement, pension, profit sharing, stock option or insurance programs
or other similar programs have been adopted by the Company for the benefit of
its directors, officers or other employees.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
Mr. Kevin Sheung Wai Chan is the beneficial holder of the right to exercise
stock options for 7,500,000 Class B shares at an exercise price of US $0.0001
per share expiring September 14, 2009. It is anticipated that all such shares
would, if Mr. Kevin Sheung Wai Chan were to exercise such right, be held in
trust by a nominal shareholder, Beauty Wise Secretaries Limited, formerly Beauty
Wise Development Limited, a company organized and existing under the laws of
Hong Kong. Mr. Kevin Sheung Wai Chan is the Secretary, one of two Directors and
a 50% shareholder in Beauty Wise Secretaries Limited. Beauty Wise Secretaries
Limited would hold the above-mentioned shares of Mr. Kevin Sheung Wai Chan for
Mr. Kevin Sheung Wai Chan's sole benefit pursuant to a Nominee Shareholder
Agreement dated September 15, 1999 between Mr. Kevin Sheung Wai Chan and Beauty
Wise Secretaries Limited.
Mr. Silas Sheung Kwan Chan is the beneficial holder of the right to
exercise stock options for 2,500,000 Class B shares at an exercise price of
US$0.0001 per share expiring September 14, 2009. It is anticipated that all such
shares would, if Mr. Silas Sheung Kwan Chan were to exercise such right, be held
in trust by a nominal shareholder, Fortune Access Nominees Limited, formerly
Fortune Access Development Limited, a company organized and existing under the
laws of Hong Kong. Mr. Kevin Sheung Wai Chan is the Secretary, one of two
Directors and a 50% shareholder in Fortune Access Nominees Limited. Fortune
Access Nominees Limited would hold the above-mentioned shares of
Mr. Silas Sheung Kwan Chan for Silas Sheung Kwan Chan's sole benefit pursuant to
a Nominee Shareholder Agreement dated September 15, 1999 between
Mr. Silas Sheung Kwan Chan and Fortune Access Nominees Limited.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
The Company has issued a total of 2,000,000 shares of common stock to the
following persons for a total of US $20,000.00 in cash:
<TABLE>
<CAPTION>
Name Relationship to Issuer Number of Total Shares Consideration
---- ---------------------- ---------------------- -------------
<S> <C> <C> <C>
Kevin Sheung Wai Chan Director 1,500,000 15,000
Silas Sheung Kwan Chan Director and Secretary 500,000 5,000
</TABLE>
<PAGE> 26
The Company has also provided Kevin Sheung Wai Chan and Silas Sheung Kwan
Chan, through nominee shareholders Beauty Wise Secretaries Limited and Fortune
Access Nominees Limited, respectively, with the right to exercise stock options
for Class B shares as follows:
<TABLE>
<CAPTION>
Name Relationship to Issuer Number of Total Shares Consideration
---- ---------------------- ---------------------- -------------
<S> <C> <C> <C>
Kevin Sheung Wai Chan Director 7,500,000 750
Silas Sheung Kwan Chan Director and Secretary 2,500,000 250
</TABLE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
14A. GENERAL
The authorized capital stock of the Company consists of 400,000,000 shares
of Class A stock, par value $0.0001 per share, and 100,000,000 shares of Class B
stock, par value $0.0001 per share. To date, no Class B common stock or
preferred stock has been issued by the Company; however, Messrs. Chan and Chan
have been given the right to exercise, from September 15, 1999 until
September 14, 2009, the Class B stock in the amounts set forth in Item 12 above
from stock options. To date, Messrs. Chan and Chan have not exercised their
rights to purchase stock options. The following statements relating to the
capital stock are summaries and, as summaries, may not contain all information
of importance to investors and potential investors. Reference is made to the
more detailed provisions of, and such statements are qualified in their entirety
by reference to, the Certificate of Incorporation and the Memorandum and
Articles of Association, copies of which are filed as exhibits to this
Registration Statement.
14B. COMMON STOCK
Holders of shares of Class A common stock are entitled to one vote for each
share on all matters to be voted on by the stockholders. Holders of Class A
common stock do not have cumulative voting rights. Holders of Class A common
stock are entitled to share ratably in dividends, if any, as may be declared
from time to time by the Board of Directors in its discretion from funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
the Company, the holders of Class A common stock are entitled to share pro rata
all assets remaining after payment in full of all liabilities.
Holders of Class A and Class B common stock have no preemptive rights to
purchase the Company's common stock. Without prejudice to any special rights
previously conferred on the holders of any existing shares or class of shares,
any Class A or Class B share in the Company may be issued with such preferred,
deferred or other special rights, or such restrictions, whether in regard to
dividend, voting, return of capital or otherwise, as the Directors may from time
to time determine. Under British Virgin Islands law, nonresidents of the British
Virgin Islands may freely hold, vote and transfer shares of Class A or Class B
common stock in the same manner as British Virgin Islands residents.
Subject to the provisions of the IBC Act, Class A and Class B common stock
may be issued on the terms that they are redeemable, or, at the option of the
Company, liable to be redeemed on such terms and in such manner as the directors
before or at the time of the issue of Class A and/or Class B common shares may
determine. The Board of Directors may redeem any such Class A or Class B common
share at a premium. The Company's organizational documents contain no provisions
regarding sinking funds or liability to further calls or assessment by the
Company.
<PAGE> 27
Pursuant to the Articles of Association of the Company, holders of Class B
common shares are entitled to five votes for each share on all matters to be
voted on by the stockholders. Each Class B common share can be converted into
one Class A common share at the option of the holders of such shares. Conversion
shall be effected by written notice of such election by the holder to the
Secretary of the Company. Other than voting rights and conversion rights
mentioned above, the organizational documents of the Company do not provide
Class B common shareholders with any different rights than or any preference
over Class A common shareholders in terms of dividend rights, liquidation rights
(in the case of any liquidation, dissolution or winding-up of the Company),
pre-emptive rights, redemption provision, sinking fund provisions, and liability
to further calls or to assessment by the Company.
14C. PREFERRED STOCK
The Company has not issued any preferred stock to date nor is any preferred
stock of the Company being registered pursuant to this Registration Statement.
14D. DIVIDENDS
Dividends, if any, will be contingent upon the Company's revenues and
earnings, if any, and capital requirements and financial conditions. The payment
of dividends, if any, will be within the discretion of the Company's Board of
Directors. The Company presently intends to retain all earnings, if any, for use
in its business operations and accordingly, the Board of Directors does not
currently anticipate declaring any dividends prior to a business combination.
See ITEM 1(D)(19) "LACK OF DIVIDENDS" and ITEM 6 "EXCHANGE CONTROLS AND OTHER
LIMITATIONS AFFECTING SECURITY HOLDERS".
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS
None.
PART IV
ITEM 17. FINANCIAL STATEMENTS (Intentionally Omitted)
ITEM 18. FINANCIAL STATEMENTS
Please see the consolidated financial statements of the Company included in
this Registration Statement as prepared by Arthur Andersen & Co., independent
public accountants.
<PAGE> 28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant certifies that it meets all of the requirements for filing on Form
20-F and has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
DIGITAL STAR INC.
By: /s/ Kevin Sheung Wai Chan
------------------------------------
Name: Mr. Kevin Sheung Wai Chan
Title: Director
By: /s/ Silas Sheung Kwan Chan
------------------------------------
Name: Mr. Silas Sheung Kwan Chan
Title: Director and Secretary
Date: August 31, 2000
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Digital Star Inc.
We have audited the accompanying balance sheet of Digital Star Inc. as of
September 30, 1999 and the related statement of operations, cash flows, and
changes in shareholders' equity for the period from September 15, 1999 (date of
incorporation) to September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly,
in all material respects, the financial position of Digital Star Inc. as of
September 30, 1999, and the results of its operations and its cash flows for the
period from September 15, 1999 (date of incorporation) to September 30, 1999, in
conformity with generally accepted accounting principles in the United States of
America.
/s/ Arthur Andersen & Co.
----------------------------
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
October 25, 1999.
<PAGE> 30
DIGITAL STAR INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
AS OF SEPTEMBER 30, 1999
(Amounts expressed in United States dollars)
<TABLE>
<S> <C>
ASSET
Cash $20,000
-------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued liabilities $ 5,000
-------
Stockholders' equity:
Common Stock -- Class A, $0.0001 par value; 400,000,000 shares authorized; 2,000,000
shares issued and outstanding 200
Common Stock -- Class B, $0.0001 par value; 100,000,000 shares authorized; Nil issued
and outstanding --
Additional paid-in capital 19,800
Accumulated deficit (5,000)
-------
Total stockholders' equity 15,000
-------
Total liabilities and stockholders' equity $20,000
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 31
DIGITAL STAR INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM SEPTEMBER 15, 1999 (DATE OF INCORPORATION)
TO SEPTEMBER 30, 1999
(Amounts expressed in United States dollars except for per share data)
<TABLE>
<S> <C>
Selling, general and administrative expenses $(5,000)
-------
Provision for income taxes --
-------
Net loss $(5,000)
=======
Loss per common share -- Basic 0.25
cents
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 32
DIGITAL STAR INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 15, 1999 (DATE OF INCORPORATION)
TO SEPTEMBER 30, 1999
(Amounts expressed in United States dollars)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $(5,000)
Increase in accrued liabilities 5,000
-------
Net cash flows from operating activities --
Cash flows from financing activities:
Net proceeds from issuance of common stock -- Class A 20,000
-------
Net increase in cash and balance as of end of period $20,000
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 33
DIGITAL STAR INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 15, 1999 (DATE OF INCORPORATION)
TO SEPTEMBER 30, 1999
(Amounts expressed in United States dollars)
<TABLE>
<CAPTION>
Common stock -- Class A Common stock -- Class B
----------------------- ----------------------- Additional
Number of Number of Paid-in Accumulated
shares Amount shares Amount capital deficit
--------- ------ --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of September 15, 1999 -- $ -- -- $ -- $ -- $ --
Issuance of common stock 2,000,000 200 -- -- 19,800 --
Net loss for the period -- -- -- -- -- (5,000)
--------- ------ --------- ------ ---------- -----------
Balance as of September 30, 1999 2,000,000 $ 200 -- $ -- $ 19,800 $ (5,000)
========= ====== ========= ====== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 34
DIGITAL STAR INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
(Amounts expressed in United States dollars)
1. ORGANIZATION AND BUSINESS OPERATIONS
Digital Star Inc. (a development stage company) (the "Company") was
incorporated in the British Virgin Islands on September 15, 1999 to serve as a
vehicle to effect a merger, exchange of capital stock, asset acquisition, or
other business combination with a domestic or foreign private business. As of
September 30, 1999 the Company had not yet commenced any formal business
operations, and all activity to date relates to the Company's formation and
proposed fund raising. The Company's fiscal year end is September 30.
The Company's ability to commence operations is contingent upon its ability
to identify a prospective target business and raise the capital it will require
through the issuance of equity securities, debt securities, bank borrowings, or
a combination thereof.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Income taxes
The Company accounts for income tax under the provisions of Statement
of Financial Accounting Standards No. 109, which requires recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Deferred income taxes are provided using the
liability method. Under the liability method, deferred income taxes are
recognized for all significant temporary differences between the tax
and financial statement bases of assets and liabilities.
b. Loss per common share
Basic loss per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128 by dividing net loss for each
year/period by the weighted average number of shares of common stock
outstanding during the year/period. The weighted average number of
shares used to compute basic loss per common share is 2,000,000 shares
for the period from September 15, 1999 (date of incorporation) to
September 30, 1999.
<PAGE> 35
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
b. Loss per common share (Cont'd)
The computation of diluted loss per common share is similar to basic
loss per common share, except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if all dilutive securities outstanding during the
year/period are exercised. The weighted average number of shares used
to compute diluted loss per common share is approximately 12,000,000
shares for the period from September 15, 1999 (date of incorporation)
to September 30, 1999.
No diluted loss per common share for the period from September 15, 1999
(date of incorporation) to September 30, 1999 is presented as the
Company had not loss for the period. Accordingly, the inclusion of
stock options in the computation of diluted loss per common share will
result in anti-dilutive per-share amount.
c. Use of estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those
estimates.
d. Fair value of financial instruments
All financial instruments of the Company are carried at cost, which
approximate their fair values.
3. COMMON STOCK AND STOCK OPTIONS
a. Common stock
The Company is authorized to issue 400,000,000 shares of common stock --
Class A with a par value of $0.0001 each and 100,000,000 shares of
common stock -- Class B with a par value of $0.0001 each. Upon
incorporation, 2,000,000 shares of common stock -- Class A were issued
at $0.01 each to provide the Company with working capital.
The shareholders of common stock -- Class A have one vote per share
while the shareholders of common stock -- Class B have five votes per
share on any matter submitted to the shareholders. The shareholders of
common stock -- Class A shall rank equally with the shareholders of
common stock -- Class B in all other aspects.
<PAGE> 36
3. COMMON STOCK AND STOCK OPTIONS (Cont'd)
b. Stock options
On September 15, 1999, the Company granted stock options to existing
shareholders to subscribe for 10,000,000 Class B shares of common
stock. The share options are exercisable at par value of $0.0001 each
during the period from September 15, 1999 to September 14, 2009. No
stock option was exercised subsequent to their issuance.
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
<S> <C>
1.1* Memorandum of Association
1.2* Articles of Association
2.1* Relevant Board Resolutions
2.2* Nominee Shareholder Agreements
3.1* Letter of Agreement to Use Offices of Champ Pacific Capital Limited
10.1* Consent of Champ Pacific Capital Limited
10.2 Consent of Accountants
* Previously Filed
</TABLE>
