U.S. SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR 12(g) OF THE SECURITIES ACT OF 1934
Commission File Number 000-28781
For the Period Ended December 31, 1999
Vibro-Tech Industries, Inc.
(Exact name of Registrant as specified in its charter)
Delaware, United States APPLIED FOR, BUT NOT ISSUED
(State or Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 Cathedral Place, 925 West Georgia Street
Vancouver, British Columbia, Canada, V6C 2C2
(Address of Principal Executive Offices) (Zip Code)
Telephone number, including area code: (604) 609-3770
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
All outstanding
Title of each class Name of each exchange on which registered
Common shares with a par value of OTC Bulletin Board-VBTH
$0.0001 each
The exhibit index commences on page 83 of this Statement.
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TABLE OF CONTENTS
Item and Description Page No.
1. Description of Business.................................................1
1A General Description of Business.......................................1
1B Glossary..............................................................1
1C Corporate Structure and History.......................................4
1D Development, Manufacture, Structure and Use of Bearings ..............8
1E Employees and Advisor.................................................11
1F Research, Development and Product Certification.......................13
1G Marketing and Sales...................................................15
1H Risk Factors..........................................................17
1I Doing Business in the PRC.............................................22
(i) General.......................................................22
(ii) Geography and Climate.........................................22
(iii History and Political System..................................23
(iv) Legal System, Contracts and Dispute Resolution ...............26
(v) Population, Social Patterns and Language......................27
(vi) Currency and Exchange.........................................28
(vii) Exchange Rates................................................28
(viii) Foreign Exchange Controls.....................................29
(ix) Banking.......................................................31
(x) Industrial Development and Areas Open for
Foreign Investment............................................32
(xi) Forms of Foreign Investment...................................34
(xii) Accounting....................................................40
(xiii) Patents.......................................................40
(xiv) Special Administrative Region of Hong Kong....................40
(xv) Taxation in the PRC...........................................41
(xvi) Shantou Special Economic Zone.................................43
2. Management's Discussion and Analysis or Plan of Operation ..............45
3. Description of Property ................................................48
4. Security Ownership of Certain Beneficial Owners
and Management ...................................................49
5. Directors, Executive Officers, Promoters
and Control Persons ..............................................50
6. Executive Compensation .................................................52
7. Certain Relationships and Related Transactions .........................55
8. Description of Securities ..............................................56
9. Market Price of and Dividends on the Registrant's
Common Equity ....................................................57
10. Legal Proceedings .....................................................57
11. Changes in, and Disagreements With, Accountants .......................57
12. Recent Sales of Unregistered Securities ...............................57
13. Indemnification of Directors and Officers .............................58
14. Financial Statements ..................................................59
15. Index to Exhibits .....................................................83
16. Signatures ............................................................85
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ITEM ONE - DESCRIPTION OF BUSINESS
The statements contained in this Form 10-SB that are not historical are
forward-looking statements within the meaning of section 27A of the Securities
Act of 1933 and section 21E of the Securities Exchange Act of 1934, including
statements regarding the Registrant's expectations, beliefs, intentions or
strategies regarding the future. Forward-looking statements in this Registration
Statement and risk factors in this Item One include, without limitation,
statements regarding the Registrant's industry, products, statements regarding
the extent and timing of product development, future revenues, customer demand,
competitive products, pricing pressure, future technological change and
statements regarding regulatory approvals and required governmental consents.
All forward-looking information in this statement is based on information
available to the Registrant at the date hereof and the Registrant assumes no
obligation to update any such forward-looking statements. It is important to
note that the Registrant's actual results could differ materially from those in
such forward-looking statements. Additional forward-looking statements and risk
factors include those discussed in Item 1H "Description of Business - Risk
Factors".
1A. General Description of Business
The Registrant is a Vancouver, British Columbia, Canada based corporation,
subsisting under the Delaware General Corporation Law, which manufactures,
through a partially-owned subsidiary, in the Shantou Special Economic Zone of
the People's Republic of China, and markets and sells in the People's Republic
of China, Japan and Russia basal laminated isolated seismic rubber bearings (the
"Bearings") for use in the construction of new structures and in retrofitting
existing structures.
The Bearings are a patented energy dissipation system that is used at the base,
or near the base, of a structure or, to a lesser extent, in the interior of a
structure to avoid completely, or to reduce substantially, the harmful effects
of ground movement caused by earthquakes, and the energy waves produced by
earthquakes, on the structure, attachments to the structure such as flooring,
walls, facing and windows and the contents of structures. Bearings may be
installed in buildings, bridges, water and electrical and water transport
systems, trains, subways and other structures.
Marketing of the Registrant's Bearings has begun in Turkey, Mexico, Korea and
Republic of China (Taiwan) but there have been no sales in these jurisdictions.
See Item 1G "Marketing and Sales", Item 1H "Risk Factors" and Item 3
"Description of Property". The Registrant has other offices in the HKSAR and in
Shantou City, Shantou Special Economic Zone, Guangdong Province, People's
Republic of China and a manufacturing plant in Shantou City.
1B. Glossary
In this Registration Statement, the following words and phrases are defined as
follows:
Bearings means the various models of basal laminated isolated seismic rubber
bearings manufactured by Shantou under license dated August 25, 1998 from the
Registrant to use the Patents as described under Item 3 "Description of
Property".
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B.C. means the province of British Columbia, Canada.
Cansun means Cansun Pacific International Investments Corp., a corporation
subsisting under the laws of B.C., with its registered and records offices at
Suite 600, 1090 West Pender Street, Vancouver, B.C. V6E 2N7 the majority
shareholders of which are Cheerlight (40%) and Vi-Tech (60%). See Item 1C
"Business of the Registrant - Corporate Structure and History".
Cheerlight means Cheerlight Development Ltd., a private corporation subsisting
under the laws of the HKSAR, owned by Mr. Peng Fee Cheng, HKSAR, which is a
minority shareholder of Cansun. See Item 1C "Business of the Registrant -
Corporate Structure and History".
Cimko means Cimko Technological Installations Engineering Consultancy Industry &
Trade Ltd., a corporation subsisting under the laws of Turkey, of Tophanelioglu
Cad. Petek Sit, No. 70A/4 Blok 4 Kosuyolu, Istanbul, Turkey 81190
(www.cimko.com.tr)
Enterprises means Vibro-Tech Enterprises Limited, a wholly-owned subsidiary of
the Registrant subsisting under the laws of the HKSAR with an office at Rooms
2001-4, Hang Seng Building, 77 Des Voeux Road Central, HKSAR. See Item 1C
"Business of the Registrant - Corporate Structure and History".
Fujita means Fujita Corp. of 4-6-15, Sendagaya, Shibuya-ku, Tokyo 151 Japan
(www.fujita.com).
GST means goods and services tax of seven percent of the value of the good sold
or service rendered, a value-added tax levied under the Excise Tax Act (Canada).
HKSAR means the Hong Kong Special Administrative Region of the PRC.
Industries means Vibro-Tech Industries Limited, a wholly-owned subsidiary of
Shantou subsisting under the laws of the HKSAR with an office at Rooms 2001-4,
Hang Seng Building, 77 Des Voeux Road Central, HKSAR. See Item 1C "Business of
the Registrant - Corporate Structure and History".
Nandou means Nandou Construction Development Company (Headquarters) of Shantou
Special Economic Zone owned in part by the People's Municipal Government of
Shantou . See Item 1C "Business of the Registrant - Corporate Structure and
History".
Patents means patent no. ZL 95 2 20019.8 issued to Dr. Fu Lin Zhou on August 20,
1995 for a liner rubber absorber cushion, application for patent no. 95 1
09348.7 accepted from Dr. Fu Lin Zhou on August 20, 1995 for a rubber shock
absorber cushion, application for patent no. 95 1 09347.8 accepted from Dr. Fu
Lin Zhou on August 20, 1995 for a liner rubber absorber cushion and application
for patent no. 95 2 20019.9 accepted from Dr. Fu Lin Zhou on August 20, 1995 for
a building addition shock reducing system, all under the Patent Law (PRC) and
all of which were sold to the Registrant by agreement dated August 25, 1998.
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PRC means the People's Republic of China, but does not include the HKSAR.
RMB means renminbi, a unit of currency in use in the PRC. See Item 1I
"Description of Business - Doing Business in the PRC - Currency and Foreign
Exchange".
Registrant means Vibro-Tech Industries, Inc., a corporation subsisting under the
General Corporate Law of Delaware with an office at 2000 Cathedral Place, 925
West Georgia Street, Vancouver, B.C. V6C 2C2 and its wholly-owned and
partially-owned subsidiaries. See Item 1C "Business of the Registrant -
Corporate Structure and History".
Royalty Agreements means the agreement dated August 25, 1998 between Shantou and
Dr. Fu Lin Zhou and the agreement dated January 1, 1999 between Industries and
Dr. Fu Lin Zhou, each providing for the payment of a royalty of five percent of
the gross sale price of Bearings sold by Shantou or Industries and the retainer
of Dr. Zhou as an adviser to each company. See Item 1E "Description of Business
- - Employees and Advisor".
Shantou means Shantou Vibro-Tech Industrial and Development Co Ltd., a joint
venture enterprise with limited liability formed on December 27, 1995 until
December 27, 2007 by issuance of a certificate under the Supplementary
Regulations of the Shantou Special Economic Zone for Encouragement of Foreign
Investment to Nandou (20%)and to Cansun (80%) with a place of business at Third
Floor, No. 11, Long Yan Nan Road, Shantou City, Guangdong Province, China
515041. See Item 1C "Business of the Registrant Corporate Structure and History"
and Item 1I - "Description of Business - Doing Business in the PRC."
Shantou Commission means the Shantou Commission for Foreign Economic Relations
and Trade established under the Supplementary Regulations of the Shantou Special
Economic Zone for Encouragement of Foreign Investment promulgated December 4,
1986 by the Shantou Municipal People's Government.
Shantou Wan Run means Shantou Wan Run Trade Development Ltd. a corporation
subsisting under the laws of the PRC owned by Mr. Zhen Ben Huei, the general
manager of Shantou.
Shareholders' Agreement means the agreement dated January 25, 1996 between
Cansun and Nandou providing, among other things, for the business of Shantou,
the total investment in Shantou, the distribution of profits, the constitution
of the board of directors of four representatives of Cansun, two of Nandou and
on technical representative, the appointment of the Chairman, who is Shantou's
legal representative, and the Deputy Chairman and the General Manager.
User Agreements means each of the three agreements between the Registrant and
Shantou dated August 25, 1997, between the Registrant and Industries dated
January 1, 1999 and between the Registrant and Enterprises dated December 15,
1999 granting to each the right use the Patents to manufacture, market and sell
the Bearings in the PRC, in the HKSAR and Japan and in all other jurisdictions
of the world respectively.
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Vi-Tech means Vi-Tech Holdings Ltd., a wholly-owned subsidiary of the Registrant
subsisting under the laws of B.C., with its registered and records offices at
Suite 600, 1090 West Pender Street, Vancouver, B.C. V6E 2N7. See Item 1C
"Business of the Registrant - Corporate Structure and History".
1C. Corporate Structure and History
The Registrant's operations are conducted by the Registrant and through wholly,
and partially, owned subsidiaries, as described below. The course of events
since 1989 leading to the corporate structure is described after the diagram. In
the table, the words in brackets following the name of a company indicate the
jurisdiction of incorporation.
Vibro-Tech Industries, Inc. (Delaware) (1)
100% 100%
Vi-Tech Holdings Ltd. (B.C.) (2) Vibro-Tech Enterprises
Limited (HKSAR)
60 shares=60% (3)
Cansun Pacific International
Investments Corp. (B.C.) (3)
80% (4)(5)(6) Nandou Shantou Wan Run
20% (4)(5)(6) 15% (4)(5)(6)
Shantou Vibro-Tech Industrial and Development Co Ltd. (PRC) (4)(5)(6)
100%
Vibro-Tech Industries Limited (HKSAR)
Notes to Corporate Structure Diagram:
(1) The Registrant has 5,723,000 shares outstanding and is quoted on the OTCBB
under the symbol VBTH. To date, there has been no market for the shares of the
Registrant. See Item 5 - "Directors, Senior Officers, Promoters and Control
Persons" and Item 9 - "Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters".
(2) On November 6, 1997 the shareholders of Vi-Tech exchanged all outstanding
shares of Vi-Tech for 1,200,000 shares of the Registrant as described below.
(3) The other 40 percent of Cansun is owned by Cheerlight. The Registrant is
negotiating to acquire this interest in Cansun from Cheerlight, but there is no
assurance such negotiations will result in the acquisition by the Registrant of
Cheerlight's interest in Cansun. See Item 1H "Description of Business - Risk
Factors".
(4) On December 27, 1995 Shantou was constituted as a joint venture enterprise
with limited liability until December 27, 2007 by issuance of a certificate
under the Supplementary Regulations of the Shantou Special Economic Zone for
Encouragement of Foreign Investment to Nandou (20%)and Cansun (80%). See
"Description of Business - Description of Doing Business in China".
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(5) On July 27, 1997 by agreement among Cansun, Nandou and Shantou Wan Run, the
equity interests in Shantou were agreed to be Cansun (60%), Nandou (25%) and
Shantou Wan Run (15%) subject to receipt of approval of the board of directors
of Shantou under the Shareholders' Agreement and the Shantou Commission for
Foreign Economic Relations and Trade. The registered and required
investment capital of Cansun (80%) and Nandou (20%) remained unchanged.
Application for the approval of the board of directors of Shantou was granted on
January 23, 2000 and application has been made for the approval of the Shanatou
Commission for Foreign Economic Relations and Trade.
(6) By an agreement dated June 8, 1999, subject to acceptance by the board of
directors of Shantou under the Shareholders' Agreement of the agreement
described in note (5), and the Shantou Commission for Foreign Economic Relations
and Trade, Shantou Wan Run agreed to sell the 15% of Shantou owned by Shantou
Wan Run to the Registrant for 300,000 shares of the Registrant at a deemed price
of $0.50 per share. This exchange will close after completion of the transaction
described in note (5) and on the receipt of the approval of the disposition of
such 15% from the board of directors of Shantou. Application for the approval of
the board of directors was granted on January 23, 2000 and application has been
made for the approval of the Shantou Commission for Foreign Economic Relations
and Trade.
The corporate structure of the Registrant evolved in a rather circuitous manner
from 1989. In about 1989, Dr. Fu Lin Zhou, vice-president and professor of civil
engineering and earthquake engineering at South China Construction University,
Guangzhou, Guangdong Province, PRC began work with the United Nations Industrial
Development Organization on ways to reduce or eliminate the destructive effects
of ground movement from earthquakes and the energy waves generated by
earthquakes on structures. Through the early 1990's Dr. Zhou made several
preliminary models of the Bearings now manufactured and sold by the Registrant
under the User Agreements. Dr. Zhou obtained the Patents in 1995 and on August
15, 1998 sold the Patents to the Registrant. See Item 1F "Description of
Business - Employees and Advisor", - Doing Business in China - Patents", Item 2
"Description of Property", Item 5 "Directors, Executive Officers, Promoters and
Control Persons" and Item 7 "Certain Relationships and Related Transactions" for
a description of the activities, qualifications, career and share ownership of
Dr. Fu Lin Zhou and matters relating top the Patents.
As work leading to the Patents progressed, Dr. Zhou commenced to discuss with
his brother, Mr. William Chow, Vancouver, B.C. how to finance, manufacture and
market the Bearings. In 1993, Cansun was incorporated as a private company to
raise money to form a foreign joint venture equity venture under the laws of the
PRC to pay for the work being conducted by Dr. Zhou. Cansun was at this time
owned by Messrs. William Chow and Rick Lui, both of whom are members of the
board of directors of the Registrant, and two other individuals.
The Patents were issued on August 20, 1995 to Dr. Zhou under the Patent Law
(PRC). To proceed further with funding from outside of the PRC, the formation of
a business entity under the Law of the PRC on Joint Ventures Using Chinese and
Foreign Investment, promulgated in 1973, as amended, that permitted foreign
investment was required. On December 27, 1995 Shantou was formed as an equity
joint venture with limited liability owned by Cansun (80%) and Nandou (20%). The
approval issued by the Shantou Commission permitted the formation of Shantou,
set the registered capital of Shantou at 8.4 million RMB (about $1,013,000) and
required Cansun to contribute 6.72 million RMB, and Nandou 1.68 million RMB, 15%
within three months of the issuance of a business license for Shantou and the
balance within a year and a half. A business license was issued December 29,
1995.
On January 25, 1996 Cansun and Nandou entered into the Shareholders' Agreement
which provides for the total investment in Shantou, the distribution of profits,
a board of directors of seven persons, a Chairman and a Deputy Chairman and the
General Manager. Transfers may be done with the approval of the board of
directors. The approval of the board of directors for the transfers noted above
is in progress.
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To meet the obligations of Cansun to fund Shantou, in August, 1996 Cansun was
reorganized. Cheerlight acquired 40% of Cansun and Mr. William Chow and others
incorporated and funded Vi-Tech., a private B.C. corporation. Vi-Tech (60%) and
Cheerlight (40%) contributed by way of loan to Cansun the capital required to be
advanced to Shantou by Cansun. Cansun and Nandou in turn made the required
capital contributions to Shantou. The capital contributions required to be made
as described above have been made.
The Registrant was incorporated on June 2, 1997 under the name Pacific Quilt
Design, Inc. by filing its Articles of Incorporation with the Secretary of State
(Delaware). By laws were adopted by the board of directors on June 2, 1997, and
amended October 6, 1999 and December 15, 1999. On November 6, 1997 control of
the Registrant was acquired by the shareholders of Vi-Tech by sale to the
Registrant of the outstanding shares of Vi-Tech for 1,200,000 shares of the
Registrant. The shareholders of Vi-Tech, and their respective holdings, at the
time of such acquisition of control of the Registrant were:
Name and Municipal Residence Number of Registrant's
Shares Acquired
William Chow 312,000
Richmond, B.C.
Rick Lui 240,000
Vancouver, B.C.
Ken Van 72,000
Vancouver, B.C.
David Lee 156,000
Quarry Bay, HKSAR
Ken Lee 72,000
Richmond, B.C.
Chu Siu Ling
New Territories, HKSAR 84,000
Dr. Fu Lin Zhou 108,000
Shantou City, PRC
David Shiuh-Lin Chou 156,000
Singapore
Total: 1,200,000
The Registrant changed its name to Vibro-Tech Industries, Inc. on November 14,
1997.
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The Registrant's shares became quoted through the facilities of the
Over-the-Counter Bulletin Board, United States under the symbol "VBTH" on April
15, 1998 but no market in the shares of the Registrant has been established.
By an agreement dated August 25, 1998 Dr. Fu Lin Zhou sold to the Registrant the
Patents for 2,000,0000 shares of the Registrant, directing that such shares be
registered in the name of Pioneer Wise Limited, a corporation subsisting under
the laws of the HKSAR owned by Dr. Zhou. This agreement provided for the further
issuance of 1,000,000 shares in each of 1999, 2000 and 2001. This obligation was
cancelled by agreement made between the Registrant and Dr. Zhou on September 3,
1999.
On July 1, 1999 the Registrant engaged its current president and chief executive
officer, Jock Chong, and began the organization necessary to prepare for the
filing of this Registration Statement and began marketing activities in Turkey,
the Republic of Mexico, Republic of China (Taiwan) and Korea.
At December 22, 1999 the authorized capital of the Registrant was 40,000,000
common shares with a par value of $0.0001 each of which 5,873,000 shares are
outstanding (undiluted).
As noted, the Registrant owns 60 percent of Cansun, which in turn effectively
owns 80% of the capital contributed to, and 60% of the equity, of Shantou,
subject to the receipt of board of directors of Shantou to the agreement of July
27, 1997 among Cansun, Nandou and Shan Wun Ran. The Registrant has been in
negotiations to purchase the 40 percent of Cansun that it does not own, but no
agreement has been reached. Also, although agreements relating to the ownership
of Shantou have been made. The consent of the board of directors of Shantou to
such transfers was granted January 23, 2000 and application for approval has
been made to the Shantou Commission for Foreign Economic Relations and Trade.
See Item 1H "Description of Business - Risk Factors".
The licence granted by the Shantou Commission to Shantou is until December 27,
2007. The Registrant has been advised that it may apply before 2007 to the
Shantou Commission for any number of renewals for 12 year periods of the license
to continue the joint venture equity. There is no assurance that such a renewal
will be given. See Item 1H - "Description of Business - Risk Factors" and Item
1I - "Description of Doing Business in China - Equity Joint Ventures".
The Registrant has financed the conduct of its business by the issuance of
common shares and other securities by way of private placement, from the sale of
Bearings in the PRC, Japan and Russia and, to a lesser extent, from the loan of
monies from members of the board of directors of the Registrant and others.
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1D. Development, Manufacture, Structure and Use of Bearings
Earthquakes, caused by movements in the earth's tectonic plates along fault
lines, have historically caused much property damage and loss of life. There has
also been consequent economic loss and the cost of replacement, both of which
are difficult to determine and rarely measured or estimated. In the course of
history, events such as the Lisbon earthquake of 1783, the San Francisco
earthquake of 1903 and the Tokyo earthquake of 1923 caused the complete
destruction of such cities and much loss of life.
More recently, the Northridge, California earthquake in 1994 of magnitude 6.7
caused 51 deaths, thousands of injuries and great loss to infrastructure,
buildings, business and institutions. In this earthquake alone, direct and
indirect costs were estimated to be between $20 and $50 billion dollars, with a
replacement value on taxable property of about $800 billion. The Kobe, Japan
earthquake in 1995 of magnitude 7.6 caused 6,000 deaths, countless injuries and
extensive damage. Japan has the misfortune to be at the intersection of four
tectonic plates. See Item 1F "Description of Business - Research, Development
and Product Certification, Fujita Corp." In 1999 alone, earthquakes in Turkey of
magnitude 71. and 7.3 resulted in the death of over 70,000 people, homelessness
for about 300,000 people and immense property and infrastructure damage and
earthquakes in Taiwan were accompanied by the loss of about 30,000 lives and
property and infrastructure damage.
Traditionally, the construction industry has dealt with the possibility of
damage to, or collapse of, a structure, non-structural components attached to a
structure such as flooring, walls, facing or windows and facilities within a
structure due to ground movement or energy waves travelling through the ground
caused by an earthquake in a number of ways:
(a) making the structure sufficiently rigid or stiff that its motion during an
earthquake approximates, as nearly as possible, that of the ground on which the
structure is built, an expensive process due to the degree of extra design
safety that is required and a process that is often very expensive and has no
assurance of success due to the possible magnitude and unpredictability of
earthquakes;
(b) making a structure more flexible, but movement of the structure that has an
in-built flexibility has resulted in damage to non-structural components
attached to a structure such as flooring, facing or windows and to facilities
within a structure;
(c) making the structural columns of the first story of a building very soft and
flexible so the energy transmitted from the ground to the structure during an
earthquake is dissipated and not transmitted to the upper floors of a building;
however, this system has led to unpredictable collapse of structures due to the
removal of first floor support and is not a feasible remedy to minimize or avoid
earthquake damage; and
(d) what is called the traditional anti-seismic system of increasing structural
ductility by designing the structure of a building or infrastructure to work in
the inelastic range to dissipate the energy transmitted by earthquakes and
thereby reducing the structural response; however, the system is not safe due to
the difficulty of controlling the structural damage level due to inelastic
deformation, the system may not work in an earthquake of higher magnitude, and
the system is expensive because columns, beams, shear walls and other structural
elements must be made bigger or stronger.
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Given the failure of traditional construction methods to lessen or avoid
earthquake damage, academic and engineering attention has turned in the last 15
years to the concept of "seismic isolation", i.e., incorporating in a structure
or at, or near, the interface of a structure and the ground, which either moves
or transmits energy waves during an earthquake, a device which isolates and
dissipates the movement or energy transmission and does not permit the
transmission of the movement or energy to the structure which is resting on the
device. Devices developed incorporate sliding sand, layered graphite, and
layered rubber bearings. In the United States, firms such as Dynamic Isolation
Systems, Inc. (www.dis-inc.com) have developed in the United States market
systems which combine structural seismic isolation elements as steel beams and
concrete walls with basal seismic isolation bearings which are inserted between
the floor of a structure and the ground.
As described under Item 1C "Description of the Business - Corporate Structure
and History", Dr. Zhou developed through the use of computer design and stress
and endurance testing, and the Registrant purchased, the Patents. See Item 4
"Security Ownership of Certain Beneficial Owners and Management". The Registrant
has developed various models of Bearings. See Item 3 "Description of the
Property". The Registrant manufactures and sells, the Bearings. See Item 1G
"Description of Business - Marketing and Sales and Item 2 "Management's
Discussion and Analysis or Plan of Operations". Beginning in 1991 various model
types for the Bearings were tried. Dr. Zhou finally settled on a layered rubber
and steel bearing, using natural rubber, with a special adhesive between each
steel and rubber interface, and other patented components in the rubber layer,
with or without a lead core for additional ductility, for which the Patents were
obtained in 1995.
The use of basal laminated seismic isolation bearings to protect buildings,
infrastructure, non-structural elements such as flooring, walls, facing and
windows and contents has been proven by the Registrant and others. The
Registrant's laboratory and manufacturing building in Shantou City, PRC and
other structures in Shantou City, including the Shantou City Museum, which
houses numerous valuable pieces of Chinese art, are built on the Registrant's
Bearings. In September, 1994 Shantou City experienced an earthquake of 7.3
magnitude. The structures built with the Registrant's Bearings suffered little
or no damage and the persons in the structures were not aware that an earthquake
was occurring.
Similar anecdotes are recited from the Northridge, California earthquake. The
University of Southern California Hospital, supported by seismic isolators
manufactured by an American firm, suffered no physical damage or business
interruption while the Los Angeles County Medical Center, located about half a
mile away, suffered about $400 million in physical damage and the daily
functions of the Center were severely disrupted.
The use of basal laminated isolation seismic bearings has advantages in the
construction of structures other than avoiding or greatly diminishing damage
from earthquakes. If a basal seismic isolation device is used, consideration
does not have to be given to protecting a structure, non-structural components
and contents from the effects of earthquakes in a traditional manner. This
permits, depending on local building codes, use of less material to make a
structure hopefully withstand the stresses and strains imposed if an earthquake
should occur, lower construction costs, lower maintenance costs over the life of
a structure and greater design freedom for architects.
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One example of this is the construction in 1996 in Beijing, PRC of the teaching
laboratory in The Anti-Disaster College of the State Seismological Bureau which
used Bearings of the Registrant. The architects incorporated in the construction
of the five story, brick building of area 3,700 square meters 71 of the
Registrant's Bearings (model VP-300) under the building. The basic earthquake
intensity in the area is up to a magnitude of seven. Under local building codes,
it was not permitted for the distance between cross-walls of brick buildings to
exceed eleven meters. The use of the Registrant's Bearings permitted the
cross-wall distance to be increased to 13.5 meters, reducing the costs compared
to a frame structure without Bearings and increasing the safety of building,
contents and people should an earthquake occur.
The Bearings have been used in high-rise buildings of up to 20 stories in
height. A specific instance is the use in 1997 of 69 VP400, 31 VP500 and 10
VP600 Bearings in the construction of the No. 8 high-rise apartments in the
Yingzei residential district, Taiyuan City, PRC. The construction company was
the Taiyan Commercial Construction Development Company and architects were the
Shanxi Architectural Design Institute and South China Construction University.
With a floor area of 14,000 square meters, the Bearings were installed on the
top of the basement. Research is ongoing to permit the use of Bearings in taller
buildings.
Generally, basal laminated seismic isolation bearings of the types manufactured
by the Registrant have a layered rubber and steel structure and are manufactured
in generally the same way, although each firm has certain intellectual property
features which are unique to that firm. The Registrant begins by mixing natural
rubber, carbon black and other ingredients together to create the material for
the rubber layer. The mixture is made into sheets which are cut into the shape
of the bearing which is to be made. At the same time, circular steel sheeting is
acquired, inspected and surface treated by shot blasting to prepare it for the
application of a special coating adhesive. The rubber and steel are layered.
Depending on the specifications of an order, the bearing may or may not have a
lead core. A lead core contributes to the ductility of a bearing. See Item 3
"Description of Property". The bearing then goes through a curing process that
includes moulding, heat compression and vulcanization. In the case of the
Registrant, Bearings are trucked some 300 miles to South China Construction
University in Guangzhou for testing and certification. A certificate from the
South China Construction University with the results of the testing is issued
and accompanies the particular Bearing. After testing and certification, the
Bearings are returned to Shantou City where they are boxed for delivery. Local
delivery is by truck. Deliveries to Japan have been made by trucking Bearings to
the HKSAR and shipping by container. See Item 2 - "Management's Discussion and
Analysis or Plan of Operation".
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The capacity of the Registrant's plant in Shantou depends on the model type of
bearing being manufactured. Facilities are sufficient to produce up to 120 of
the 400 model type Bearing a day, but if a 1000 model type Bearing is required,
the plant can produce only one a day. See Item 2 - "Management's Discussion and
Analysis or Plan of Operation".
The Bearings are shipped with an installation and inspection manual in English.
Bearings are installed in most cases below, or near the bottom, of the elements
of a structure which bear the weight of the structure. Bearings are installed in
such a manner that they may over the years be inspected, and if faults are
found, removed and replaced. The Registrant warrants to purchasers that its
Bearings have a seventy year life. If an earthquake should occur, Bearings which
have experienced lateral movement due to the movement of ground or transmission
of energy waves through the ground may be removed and replaced with new Bearings
at a cost which is minimal when compared to the costs of structure and content
replacement, business interruption and loss of life.
In addition to sales in the PRC, the Registrant sells bearings to Fujita Corp.,
Tokyo, Japan (www.fujita.com). Fujita is a research, construction and consulting
firm founded in 1910 with over 6,000 employees in Japan and in its affiliates
around the world, including affiliates based in California. See Item 3
"Description of Property". In the course of determining whether or not the
Bearings of the Registrant were to be purchased over product available in Japan,
Fujita Corp. had the Registrant's Bearings tested by the Japan Seismic and
Structure Institute, Tokyo which determined that the Registrant's Bearings were
of "superior quality" and Fujita did extensive internal tests at its Tokyo
Technical Research Center. Fujita used the Registrant's Bearings in the
construction in 1996-7 of its new Technical Research Center building in Tokyo,
Japan. The agreement with Fujita terminates on March 18, 2000 and discussions
have commenced with a view to settling the conditions of a new contract. See
"Item 1F Description of Business - Research, Development and Product
Certification".
1E Employees and Advisor
See Item 5 Directors, Executive Officers, Promoters and Control Persons for a
discussion of the management of the Registrant.
The management of the Registrant is based primarily in Vancouver, B.C. and to a
lesser degree in the HKSAR and Shantou City, Guangdong Province, PRC. The
Registrant's has five persons employed or under contract in Vancouver, including
Mr. Boo Jock Chong, who is the president; Ms. Phaik Sim Tan, who is a board
member and treasurer; Mr. Gary MacDonald, who is secretary and regulatory and
contract consultant; a corporate communications person and a bookkeeper. Mr. Joe
Chung, vice-president and member of the board of directors, who supervises
production operations, is based in the HKSAR and in Shantou City.
In Shantou City, the Registrant has a 20,000 square foot manufacturing facility
and a 3,000 square foot administrative office. Under the supervision of Mr.
William Chow, chairman of the Registrant and Mr. Chung, the Shantou City plant
is managed by the general manager, Mr. Zhen Bin Huei. Under Mr. Zhen are three
assistant managers, one in charge of three persons in research, development and
product certification, another in charge of 45 people in all aspects of
production and a third in charge of five persons in marketing and sales. Some
marketing activities have begun to be conducted from Vancouver, B.C. See Item 1G
"Description of Business - Marketing and Sales".
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Dr. Fu Lin Zhou has by an agreement dated August 25, 1998 with Shantou, and by
an agreement dated January 1, 1999 with Industries been engaged as an advisor in
consideration that he is paid by Shantou a royalty of five percent of gross
sales before value added tax in the PRC and by Shantou a royalty of five percent
of gross sales made by Industries. Each agreement provides that Shantou or
Industries, as the case may be, has the right of first refusal to purchase the
royalty held by Zhou should Zhou wish to sell, or receives an offer from a third
party to purchase, either royalty. Each agreement terminates on the earlier of
December 31, 2050, if applicable, on the liquidation of Shantou or Industries
under the Foreign Investment Enterprises Liquidation Procedures of the PRC, six
months after delivery by DR. Zhou of a notice that the royalty payment has not
made, if Shantou or Industries should become insolvent, make under applicable
law an assignment for the benefit of creditors or petition a court in bankruptcy
for relief from creditors or the appointment of a receiver, trustee or other
such person to manage its affairs or liquidate its affairs for the benefit of
creditors or the time at which Shantou or Industries determines Dr. Zhou or his
legal representative is in breach of any condition in the particular agreement.
See Item 4 "Security Ownership of Certain Beneficial Owners and Management" and
see Item 7 "Certain Relationships and Related Transactions".
As an advisor, Dr. Zhou provides testing facilities for the Bearings until such
time as the Registrant is able to install its own testing facilities, assists
with the Registrant when determining technical specifications for sales, assists
in negotiating sales, establishes contact or association with third parties for
the marketing and sale of Bearings, continues research on the Bearings and
assists the Registrant in research programs with third parties. See Item 1G
"Description of Business - Marketing and Sales".
Dr. Zhou is an international expert in seismology. As vice-president and
professor of civil engineering and earthquake engineering at the South China
Construction University, Guangzhou, Guangdong Province, PRC, he is a member of
the International Association of Earthquake Engineering (IAEE) and the
International Association of Bridge Structure Engineering (IABSE). Moreover, Dr.
Zhou is a Senior Consultant to the China Association of Earthquake Engineering
and China Society of Seismic Control of Structure Association respectively. He
has published many articles about earthquakes and methods of their control.
Four-time winner of the PRC National Science and Technology Prize, Dr. Zhou is
also a consultant to the United Nations and is involved in international
research and design projects in earthquake engineering. In 1996, Dr. Zhou was
retained by the China Engineering Construction Standardization Association to
compile the technical regulations for laminated isolation bearings in the PRC,
effectively setting the standard for the country based on the work done by him
and utilized by the Registrant. Dr. Zhou is the brother of the chairman and
member of the board of directors of the Registrant, Mr. William Chow. Also see
Item 5 "Directors, Executive Officers, Promoters and Control Persons", Item 6
"Executive Compensation" and Item 7 "Certain Relationships and Related
Transactions".
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1F Research, Development and Product Certification
The Registrant employs in Shantou two rubber engineers, one structural engineer
and one assistant to deal with research, product development and product
certification. Their work has covered three main areas: (a) development of
different models of Bearing for production (see Item 3 - "Description of
Property"), (b) dealings with the application for ISO 9002 designation and (c)
dealing with Fujita under the research agreements with Fujita.
(a) The Registrant has developed and manufactures 14 different models of
Bearings, each model either with or without a lead core. For a description of
the types of models of Bearings developed and manufactured by the Registrant and
their specifications, see Item 3 - "Description of Property".
(b) Application for International Organization for Standardization Designation
for ISO 9002
The ISO 9000 family of standards was developed by quality experts around the
world, under the auspices of the International Organization for Standardization
("ISO") Technical Committee 176. The ISO is a world wide federation of national
standards bodies ("ISO member bodies"). The work of preparing International
Standards is normally carried out through ISO technical committees. Each member
body interested in a subject for which a technical committee has been
established has the right to be represented on that committee. International
organizations, both governmental and non-governmental, in liaison with ISO, also
take part in the work.
ISO 9000 consists of the following standards. All standards are subject to
revision, and parties to agreements based on ISO 9000 are encouraged to
investigate the possibility of applying the most recent editions of the
standards indicated below. Members of International Electrotechnical Commission
and ISO maintain registers of currently valid International Standards.
ISO 8402: 1994, Quality management and quality assurance - vocabulary.
ISO 9001: 1994, Quality systems - Model for quality assurance in design,
development, production, installation and servicing.
ISO 9002: 1994, Quality systems - Model for quality assurance in production,
installation and servicing.
ISO 9003: 1994, Quality systems - Model for quality assurance in final
inspection and test.
ISO 9002 registration applies when a proven design is provided and requires no
modification to meet specific customer requirements. There are approximately 200
requirements to be met to become ISO 9002 compliant. Because Shantou is not yet
certified by ISO 9002 and occasionally carries out design work, either original
design or modifications to existing designs, Shantou cannot declare that the
design work was carried out under the scope of this accredited certification.
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ISO 9001 differs from ISO 9002 only by the addition on an element on design
control.
On April 16, 1999 the Registrant entered into an agreement with the Quality
Standard Test Department of Guangdong Province, the governmental agency
responsible for ISO 9002 audit and certification. Under the agreement, the
business of the Registrant to be examined is the design and production of the
Bearings, sales and service.
The premises and operations of the Registrant in Shantou City were examined by
ISO officials from the Quality Standard Test Department in October, 1999. A
second examination is scheduled for January, 2000 and the Registrant has been
informed this examination may involve an official from the ISO office in
Beijing.
If Shantou is granted an ISO 9002 certification, there may be subsequent audits.
Subsequent audits may reveal non-conformities which, if not properly corrected,
will lead to the withdrawal of the certificate.
The certification body, the Quality Standard Test Department of Guangdong
Province, will conduct periodic audits to verify that Shantou remains compliant
with ISO 9002. These audits establish only that Shantou has retained the
capability of meeting its customers' requirements and that the quality system is
being implemented effectively. The audits are not intended to address standards
other than the one against which Shantou was certified. Auditors may search for
evidence of improvement action.
There is no assurance the Registrant will obtain IOS 9002 certification or, if
such certification is granted, will maintain such certification. See Item 1H
"Description of Business - Risk Factors".
(c) Fujita Corp.
Fujita was founded in 1910 and employs about 6,000 persons in Japan and its
world-wide affiliates engaged in research and technical development, civil
engineering research, architecture, construction and environmental matters. See
www.fujita.com. In Japan, Fujita ranks fifth in construction companies and
employs about 150 persons in its Tokyo-based Technical Research Institute.
Before 1995, there was little use of basal seismic isolation bearings in Japan.
During the Kobe earthquake in January, 1995 there were two buildings in Kobe
with basal seismic isolators which survived the earthquake relatively unscathed,
and attracting much attention by standing up in surrounding devastation. This
visual demonstration of the benefits of the use of basal seismic isolation
prompted Fujita to seek out firms that made basal seismic isolators.
On March 14, 1996 Fujita and Shantou entered into a joint research agreement to
determine the suitability of the Bearings for use in Japan, the result of which
was that Fujita concluded that the Bearings would satisfy the requirements in
Japan. In 1996, however, a design code for seismic isolation buildings in Japan
did not exist and each building had to be individually examined by the Japan
Construction Center, a governmental body. After several meetings and examination
of the Registrant's Bearings, in September, 1996 the Minister of Construction,
Japan issued an import license for the Registrant's Bearings. In 1996-7, Fujita
used Shantou's Bearings in the construction of its new Technical Research
Institute in Tokyo.
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In 1997 further tests were done by Fujita on the Bearings to determine if any
modifications were required which would make the Bearings better suited to the
Japanese market. The test results were submitted to the Japan Construction
Center, a governmental body, and accepted in March, 1997. Further testing was
done by the installation by Fujita of the Bearings in a 33 story office building
in Tohoku, Japan which was tested for forced displacement. Fujita began the
purchase of Bearings for use in construction in Japan in 1997 and has continued
to make purchases in 1998 and 1999.
On March 18, 1998 Fujita and Shantou entered into an agreement of basic research
for the examination of the Bearings to determine if there were any modifications
which should be made for the Japanese market and to provide that until March 19,
2000 Bearings would only be sold in Japan by Fujita. During the course of
inspection work under this agreement, the Japan Seismic & Structure Institute
certified the Bearings to be of "superior quality". Fujita had a recommendation
regarding the constitution of the rubber layers in the Bearings which the
Registrant is adopting for Bearings to be sold to Fujita.
Fujita and the Registrant have started discussion concerning the terms and
conditions of an agreement to replace the agreement of March 18, 1998 which
expires on March 19, 2000.
1G Marketing and Sales
The business of the Registrant is in the early stage of manufacturing, marketing
and selling of the Bearings. See Item 1H "Description of Business - Risk
Factors" and Item 2 "Management's Discussion and Analysis or Plan of
Operations". To date, the Registrant's Bearings have been used in about 250
projects in the PRC and Japan and in one project in Russia ranging from
residential homes, 20 story office buildings, municipal museums, libraries, the
Guangzhou Seismic Center, the Guaungzhou subway, the Fujita Technical Research
Center and other buildings. See www.vibro-tech.com for a complete list of
projects and specifications relating to the projects.
Other than (a) advertising through its web site www.vibro-tech.com, (b)
referrals in the PRC to Shantou due in large part to the reputation of Dr. Fu
Lin Zhou, (c) the agreements made with Fujita, (d) participation in a seminar
convened in 1997 by the China Petroleum & Natural Gas General Company ("CPNGGC")
called Workshop on Seismic Isolation and Reduction Technique in Petroleum Trade
attended by some 60 persons from the Programming and Planning Bureau of the
CPNGGC, the Construction Committee of Shantou City and local professors and
experts and (e) holding in November, 1999 a seminar under the sponsorship of
Cimko in Istanbul, Turkey attended by some 300 persons connected with the
Ministries of Highways and Construction, academia and the architectural
profession in Turkey, the Registrant has not advertised or promoted its
Bearings. One reason is that to increase the current production of Bearings, the
capacity of the manufacturing plant in Shantou must be increased or additional
manufacturing plants built to meet an increased demand for Bearings. See Item 1H
"Description of Business - Risk Factors".
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The Registrant has divided marketing and sales into geographic areas among its
various subsidiaries. By an agreement dated as of August 25, 1998 Shantou was
granted the rights to manufacture, market and sell in the PRC. By an agreement
dated as of January 1, 1999 Industries was granted the right to manufacture,
market and sell in the HKSAR and Japan. As noted, the agreement with Fujita
expires on March 19, 2000 and will require re-negotiation on conditions that
cannot be currently determined by the Registrant. Industries currently purchases
Bearings from Shantou. By an agreement dated as of December 15, 1999 Enterprises
was granted by Industries the right to manufacture, market and sell Bearings in
all jurisdictions of the world except the PRC, the HKSAR and Japan.
The Registrant is increasing its activities in advertising and marketing its
Bearings. First, the Registrant's web site is in the process of being upgraded
to make it more market oriented. The Registrant anticipates this work will be
finished towards the end of February, 2000. Secondly, in January, 2000 the
Registrant will have a show booth at the Twelfth World Conference on Earthquake
Engineering in Auckland, New Zealand. Thirdly, the Registrant has agreed by
letter of intent dated November 5, 1999 with Cimko (www.cimko.com.tr) to form a
common enterprise with Cimko or nominees of Cimko to market and sell Bearings in
Turkey. The finalization of the details of the agreement with Cimko are under
negotiation. In the meantime, the Registrant has, with Cimko, submitted a bid
for the use of 300 Bearings in the reconstruction of a hospital devastated in
one of the 1999 earthquakes in Turkey.
Fourthly, by agreement dated October 25, 1999 the Registrant granted to Dr.
Miles Price, Vancouver, B.C. the non-exclusive right to qualify, market and sell
Bearings in the Republic of Mexico for a commission of five per cent of sales
made by Dr. Price and three percent of sales referred to Dr. Price until
December 31, 2003. After such date, the agreement is automatically renewed for
another year if either party does not give notice of termination at least 90
days before the expiry date.
Dr. Miles Price, 51, was born in London England and is married with one child.
He graduated from St. Georges Boys' school in Vancouver, B.C., took a Bachelor
of Science, Honors, Botany (Physiology) at the University of British Columbia
,Canada and a Ph.D. in Ecology at King's College, London University, England.
Dr. Price has founded and run several Canadian consulting and service companies
over the past 16 years specializing in environmental consulting for the mining
and land development industries in British Columbia and Alberta
DR. Price has lived and worked in Australia, Malaysia, Japan, Iran, Britain,
Canada and Latin America. Over the last two years Dr. Price has done extensive
marketing in several Latin American countries, including Mexico, Brazil and
Chile.
Finally, the Registrant is engaged in discussions with four separate parties
regarding the marketing and sale of Bearings in the Republic of China (Taiwan).
No agreement has been made and there is no assurance an agreement with any of
the parties currently engaged in discussions with the Registrant will be made.
See Item 1H "Description of Business - Risk Factors".
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1H Risk Factors
While the Registrant has obtained a degree of success in operations and
manufacturing, the shares of the Registrant are a speculative investment due to
a number of factors. No market has been established in the shares of the
Registrant. The purchase of shares involves a number of significant risk
factors. Purchasers of shares should consider the following:
1. History of Operations and Reliance on Expertise of Certain Persons
The Registrant has only a five year history of operations and is dependent on
the management by its president, directors, persons employed in the
manufacturing plant in Shantou City and on the advice given from time to time by
Dr. Fu Lin Zhou in the development, modification, marketing and sales of
Bearings. Should certain persons leave the Registrant, such as the president,
the vice-president or Dr. Fu Lin Zhou, the Registrant may have difficulty in
finding persons of comparable education and experience to manage the business of
the Registrant.
2. Limited Financial Resources
The Registrant has limited financial resources and, if the business is not
profitable, may not be able to raise sufficient funds to sustain, continue or
expand its business. If the business of the Registrant is to expand, capital is
required to increase the production capacity of its manufacturing facility or to
establish other manufacturing facilities.
The Registrant currently has limited revenues and relies principally on revenues
received from the sale of Bearings, the issuance of shares and other securities
and, to a lesser extent, loans from members of the board of directors and others
to raise funds to finance the business of the Registrant. There is no assurance
that market conditions will continue to permit the Registrant to raise funds if
required or that sales of Bearings will be profitable.
3. Competition with Other Companies
Although the market for basal seismic isolation bearings is a recent
development, other companies with greater financial resources or expertise are
in competition with the Registrant. The Registrant must compete with such
companies in bidding for the sale of product. For example, in December, 1999 the
president of the United States announced a program of support of one billion
dollars for the purchase from American firms by firms for installation in Turkey
of basal seismic isolation bearings. In such circumstances, the Registrant may
have little or no success in marketing of Bearings for sale in Turkey. However,
the Registrant believes that the quality of the Bearings and the price
differential when compared to the prices published by American firms for similar
products will permit the Registrant to effect sales in Turkey in spite of the
announced support for American firms by the executive of the United States
government.
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4. Qualification of Bearings Under Local Laws and Price Competition
There is no assurance that the Bearings will receive ISO 9002 certification or
be qualified under local laws in jurisdictions where the Bearings are to be
marketed as of sufficient quality to be suitable for sale. Further, many
countries do not have established standards for the required quality of basal
seismic isolation bearings making the sale of Bearings difficult if not
impossible. For example, the PRC had no local standards until 1996 when Dr. Fu
Lin Zhou was commissioned by the China Engineering Construction Standardization
Association to compile the technical regulations for laminated isolation rubber
bearings in the PRC. In 1996, Japan had no published standards and currently
there are no governmental standards in Mexico, Turkey or Taiwan, countries where
the Registrant is making efforts to market Bearings. This may delay, or make
impossible, the sale of Bearings in such jurisdictions.
Prices for Bearings are a matter of negotiation and are subject to competition
from other manufacturers, interference by action of governments and general
economic conditions. For example, the Japanese economy has for several years
been in recession. The Registrant believes that sales to Fujita would have been
higher if general Japanese economic conditions were more favorable. There is no
assurance that economic conditions will not vary in countries where the
Registrant wishes to sell its Bearings to such an extent that sales are impaired
or completely reduced.
5. Governmental Laws and Local Conditions
There is no assurance that governmental regulation will not vary, including
regulations relating to prices, tariffs, building codes, import and export
prohibitions and other factors. The Registrant is subject to numerous foreign
governmental regulations that relate directly and indirectly to its operations
including title to the Patents, production, marketing and sale of Bearings,
taxation, engineering and building code standards and other factors. There is no
assurance that the laws relating to the ownership or use of the Patents and the
operation of the business of the Registrant in the jurisdiction in which it
currently operates will not change in a manner that may materially and adversely
affect the business of the Registrant. There is, however, no assurance that the
laws of any jurisdiction in which the Registrant carries on business may not
change in a manner that materially and adversely affects the business of the
Registrant.
The PRC is a socialist market economy evolving in a manner not previously
experienced in history. Although laws have been put in place protecting property
and the PRC is a party to most international conventions, there is no assurance
that internal changes in the PRC will not materially and adversely affect the
business of the Registrant.
6. Renewal of Corporate Existence of Shantou
The Registrant is currently dependent on the manufacturing capability of
Shantou. The certificate issued by the Shantou Commission that constituted
Shantou expires on December 27, 2007. The Registrant has been advised that such
certificate may, on application, be renewed for any number of twelve year
periods but there is no assurance that such a renewal will be issued. The
Registrant may be required to establish manufacturing facilities in another
jurisdiction to ensure the availability of Bearings for sale. There is no
assurance that the Registrant will be able to effect such a change due to lack
of financial resources or lack of adequately trained personnel.
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7. Possible Change of Governmental Laws and Policies
The establishment and growth to date of the Registrant's business has been due,
in part, to changes in governmental laws and policy in the PRC which have
permitted private ownership and foreign ownership and investment. There is no
assurance that these laws or policies will continue or be materially and
adversely changed. See Item 1I "Description of Business - Doing Business in the
PRC".
8. Possible Liability for Product Defects
The Bearings of the Registrant are tested before sale and the installation and
maintenance manual which accompanies the Bearings sets out procedures for
inspection and maintenance. The Registrant warrants that Bearings will perform
as warranted for 70 years. There is no assurance, however, that defects in
Bearings will not be detected. It is also possible that an earthquake of such
severity may occur or a displacement of the ground of such a degree occurs
during an earthquake that the Bearings do not function as intended. In such
instances, the Registrant may be subject to legal claims that, if successful,
exceed its ability to satisfy resulting in the insolvency of the Registrant.
The Bearings are not the subject of any policy of insurance. Even if the
Bearings were the subject of a policy of insurance, there is no assurance that
the terms and conditions of such a policy would permit recovery if a claim were
made under such policy.
9. Currency and Foreign Exchange Controls
Currently, most of the revenues of the Registrant are earned in the PRC. To the
extent that cash of the Registrant is held in RMB, RMB is not a freely
convertible currency. Also, regardless of the existence of tax treaties with the
PRC with each of the HKSAR, Canada and the United States regarding the avoidance
of double taxation of enterprises carrying on business in such jurisdictions,
there are restrictions on the conversion of RMB to a foreign currency and its
withdrawal from the PRC. To the extent that the Registrant has cash reserves in
the PRC, such cash reserves may not be able to be utilized for other aspects of
its business due to such restrictions. See Item 1I "Description of Business -
Doing Business in the PRC".
10. No Assurance of Earnings or Dividends and Taxation of Dividends
The Registrant has no history of earnings and there is no assurance that the
business of the Registrant will be profitable and, even if the business of the
Registrant is profitable, there is no assurance the board of directors will
declare dividends on shares.
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The register of members of the Registrant discloses that the majority of the
shares of the Registrant are held of record first by persons resident in the
HKSAR and secondly in Canada. If the Registrant should declare a dividend in the
PRC or the HKSAR to Canada or the United States there is no withholding tax
payable in the HKSAR or the Shantou Special Economic Zone of the PRC. There is
no assurance that laws relating to the payment of withholding taxes will not be
adversely changed. See Item 1I " Description of Business - Doing Business in the
PRC".
11. Manufacturing and Marketing of Bearings
The availability of products sold, or to be sold, by the Registrant may be
restricted or rendered unavailable due to factors beyond the control of the
Registrant, such as change in laws in the jurisdiction in which the property of
the Registrant is located, changes in the source of supply in foreign countries,
prohibition on use due to testing and licensing requirements, capacity of the
manufacturing plant in Shantou to produce Bearings and in certain areas of the
world civil disorder or governmental confiscation without compensation.
The Registrant is in the early stages of its business and does not yet have
developed, secure and established markets in which to sell Bearings. Sales to
date in Japan have been to Fujita which will be renegotiating its contract with
the Registrant in 2000 and there is no assurance such a contract will be made,
or, if made, result in a profit being made by the Registrant. The development of
markets in the PRC, Japan, Turkey, Russia, Mexico and Taiwan is in all case at
an early stage and there is no assurance the Registrant, although it has to date
achieved some success in the PRC and Japan, will continue to sell profitably
Bearings in such jurisdictions and to be able to establish and maintain markets
in such jurisdictions.
12. Activities of Management
The management of the Registrant and the growth of the Registrant's business
depends on certain key individuals who may not be easily replaced if they should
leave the Registrant, and persons in management have other business interests
which may result in them devoting, from time to time, some or all of their time
to such other interests.
13. Inadequacy of Public Market
Although the Registrant's shares became quoted on the Over-the-Counter Bulletin
Board, United States under the symbol "VBTH" on April 15, 1998, no market in the
shares of the Registrant has been established. There is no assurance that the
public market for the shares of the Registrant will be developed or, if
developed, maintained or that the holder of shares will be able in all
circumstances to sell such shares at all or in the quantity and at the price
desired by such holder.
14. Restrictions in Applicable Securities Laws
Applicable securities laws may restrict the transfer of shares and if an
exemption is not available to a holder wishing to sell, the shares may not be
transferred.
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14. Dilution
The Registrant may issue more shares at prices determined by the board of
directors, possibly resulting in dilution of the value of issued shares. Given
there is no preemptive right to purchase shares, if a shareholder does not
purchase additional shares, the percentage share ownership of the member in the
Registrant will be reduced or the amount paid for the purchase of such shares
may be diluted.
15. Loss of Investment
The business of the Registrant is at an early stage in the manufacturing,
marketing and selling of its Bearings. An investment in shares of the Registrant
should only be made by persons who can afford a complete loss of their
investment and there is no assurance that the shares of the Registrant will
increase in value from the amount at which a member acquired shares of the
Registrant or that a dividend or dividends will be paid on the shares of the
Registrant.
16. Infringement of Intellectual Property Rights
It is possible that third parties may infringe the intellectual property rights
of the Registrant and the Registrant may not have sufficient resources to
prevent or stop such infringement. In addition, the patent held by the
Registrant expires in August, 2006. After such time, the Registrant will have to
rely on its trade reputation and secrets to market and sell Bearings or obtain
other patents for the manufacture of Bearings. There is no assurance this will
occur.
17. Defeasance of Title
The possibility exists that title to one or more Patents of the Registrant may
be lost due to an omission in the claim of title or infringement of the
intellectual property rights of a third party. The Registrant is not aware of
any such infringement and no notice has been given to the Registrant of any such
infringement. The Registrant does not maintain title insurance.
18. Doing Business in the PRC
The PRC is establishing a socialist market economy and is currently undergoing
extensive social, economic and legal change, in some instances to a degree not
experienced before in history. For example, the current five year plan calls for
40 million farming jobs to be transferred to the industrial sector. Whether such
changes will continue in a manner favorable to the conduct of the business of
the Registrant is not possible to determine. The laws of the PRC, which is a
Communist style state, may adversely and materially change without notice and
without any recourse for compensation for loss, if any, suffered by the
Registrant.
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1I - Doing Business in the PRC
(i) General
As noted, the PRC is a socialist market economy. Many of the concepts which
underlie customs, laws and the manner of doing business in the PRC are not
familiar to those who carry on business in a Western fashion. In addition, the
PRC maintains foreign exchange and currency restrictions which make the conduct
of business less facile than in Western cultures. The following is a summary of
the salient features of carrying on business in the PRC and the manner in which
the Registrant is affected. In compiling this summary, thanks is given to
materials available from The Economist Intelligence Network, from
PricewaterhouseCoopers and from PeatMarwickThorne.
(ii) Geography and Climate
The Asia land mass of the PRC is as large as the whole continent of Europe. With
an area of 3,745,190 square miles (9,700,000 square kilometers), it is the
largest country in Asia and the third largest country on earth. The distance
from north to south is 3,400 miles (5,500 kilometers) and from east to west
3,100 miles (5,000 kilometers). Geographically, China can be classified into
five regions:
1. Western China
This area includes the Tibetan Highlands and the Xinjiang-Mongolia region. These
two areas make up almost 41 percent of China-s land mass and consist largely of
deserts and mountains. The area contains only about one percent of the
population, with nomadic subsistence farming of importance. Important oil
discoveries have been reported in this region.
2. Northeast China
This area contains most of the important industrial centers. Shenyang is a
center of heavy industry, drawing on the region's reserves of coal and iron
ores. In China over 70% of energy is generated by coal consumption. The Daqing
oil field and refinery are in this region, which also has important power
stations on the Yalu and Songhua Rivers. The area also has considerable forestry
resources and its agricultural areas produce soybeans and cereals.
3. North China
North China consists of the great loess plains that are intensively cultivated
to produce wheat, millet and other corps. The main industrial centers in this
region are Beijing, Tangshan and Tianjin. This region has coal, iron ore and
ample power supplies. Agricultural machinery, textiles and steel are among the
important products of the industrial cities.
4. South China
This area includes the basins of the Yang'tze River and of the West River in
Guangdong and Guangxi Provinces and the mountainous coastal provinces of Fujian
and Zhejiang. The river plain is intensively cultivated and has the highest
population density in the country. Wuhan, located on the middle reaches of the
Yang'tze, is an important industrial center, producing steel, engineering
products and light industrial goods. Further downstream at the coast is
Shanghai, China's largest commercial center, producer of its most sophisticated
light industrial products, and its most important port. South of the Yang'tze
River, three rivers merge to form the Canton Delta. This is a very densely
populated area, with Guangzhou as its main urban center. Shantou City, which is
the location of the Registrant's manufacturing facilities, is located about 300
miles (450 kilometers) from Guangzhou. Shantou City is a coastal city of some
3,000,000 persons, with a Westernized infrastructure and a sea port. See
"Special Economic Zones - Shantou City".
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5. Southwest China
This regions contains the Sichaun Basin, one of the most fertile areas of China.
Chongqing is the main city in the area. Coal and iron ore deposits have formed
the basis of some industrialization, but the fact that the region is separated
from the rest of China by difficult terrain has hindered its development.
The southern areas have a hot, wet monsoon climate and are subject to typhoons
when seasons change. The interior has very little rainfall and the north
relatively little. In winter, the Siberian anticyclone brings cold weather to
all of north and west China. In summer this anticyclone gives way to a low
pressure system centered on Lake Baikal to the north of Mongolia. Tropical air
reaches and covers the whole country Summer is the wettest season, but rain,
which is plentiful in the south, diminishes toward the north and inland.
Rainfall varies considerably from year to year. It may reach four time the
average figure in Beijing, for example. This causes enormous difficulties for
agriculture, which is at the mercy of fluctuation rainfall, typhoons in the
southeastern areas when seasons change and flood and erosion. One of the objects
of the construction of the massive Three Gorges Dam on the Yang'tze River is to
regulate the flow of water in the Yang'tze Basin where floods have with
regularity caused much loss of life and property damage.
There are 23 provinces, five autonomous regions and four municipalities in
China. The municipalities are Beijing, Shanghai, Tianjin and Chongqing. The
central government grant provincial governments the right to approve the
establishment of foreign-invested enterprises the investment of which is within
certain limits. If the total investment exceed the limit, approval must be
granted by the central government. The business of the Registrant was permitted
to be established in the Shantou Special Economic Zone on December 27, 1995 by
the Shantou Commission for Foreign Economic Relations and Trade as a joint
venture between Cansun International Pacific Investments Corp. and Nandou
Construction Development Company. See Item 1 "Description of Business".
(iii) History and Political System
Since the first Quin empire was formed in 221 B.C., China has had a series of
brilliant and technologically advanced periods of culture interspersed by
periods of civil disorder and warfare. Unlike Japan, which from the entry of
Colonel Perry's black ships into Tokyo Harbor in 1853 embraced Western culture
and changed during the ensuing Meiji Period from a feudal to an industrialized
society, the Ch'ing (Manchu) emperors of China tried to exclude, or limit the
incursions of, various Western nations. With the fall of the Ch'ing dynasty in
1911 and the establishment of the Chinese Republic, China entered a period of
civil disorder and internal and external warfare that ended in October, 1949
with the victory of the Chinese Communist Party and the establishment of the
PRC. Political issues relating to Hong Kong, which was returned as a Special
Administrative Region on July 1, 1997, and Macau, which will revert to China in
1999, have been resolved, but areas of contention remain regarding the status of
Taiwan to which the defeated Koumingtang government fled in 1949 and the extent
of Chinese jurisdiction in areas as the South China Sea.
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Until the early 1970's there was little contact with other countries. The first
actions taken by the government of the PRC were directed to founding new
institutions and restoring the economy, which had suffered terribly during the
period of internal and external strife. Agrarian reform in 1950 made possible a
better distribution of land and encouraged a revolutionary spirit in the
countryside. Various mass campaigns were carried out to change the structure of
Chinese society and the mentality of the Chinese people. In September, 1954 a
new Constitution was adopted, and the State Council, composed of the Premier,
the vice-premiers and the heads of ministries, commissions and the People's
Liberation Army, was established. Thus body is the supreme administrative body
for the day-to-day administration of the country. See "China-Political System".
Since 1953, China has set economic development goals for each five year period.
From 1953 to 1957 the PRC launched its first five-year plan, designed to build
up basic heavy industry. At the same time agriculture, industry and trade were
organized on a collective basis in socialist cooperatives. In 1958, the second
five-year plan, known as the "Great Leap Forward", was marked by a speeding up
of production and by the creation of People's Production Communes. The Great
Leap Forward continued into 1959 but through the misuse of resources, the
withdrawal of assistance by the Union of Soviet Socialist Republics and a
succession of natural disasters from 1959 to 1961, it culminated in
administrative confusion, extensive closure of factories and the collapse of
agricultural organization.
Fundamental changes of policy were introduced in 1960 to improve agriculture,
including radical changes in the communes. From 1962 to 1964, the economy slowly
improved. Central control was reasserted in many spheres, planning was cautious,
output rose, trade was restored and the standard of living began to regain the
level reached at the end of the first five-year plan. A third five-year plan was
launched in January, 1966. The revival of the economy led to the Cultural
Revolution, which was mainly a political and ideological struggle, without
risking disastrous economic consequences. It led, however, to some decline in
industrial output and halted a previous tentative revival of foreign trade.
In the early 1970's the Chinese economy revived after ten years of isolation. A
fourth five-year plan ran from 1971 to 1975. As with the third plan, no details
were published, but a successful completion was announced.
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In January, 1975 a new Constitution was adopted by the Fourth National People's
Congress, which established the leading role of the Chinese Communist Party in
all spheres of national life. Such institutions as the National People's
Congress, the State Council and the system of People's Congresses remain, but
their powers are less clearly defined or are curtailed under the new
Constitution. The post of State Chairman was abolished. National People's
Congresses are elected for periods of five years and meet once a year. The
Standing Committee of the National People's Congress appears to act as a
collective head of state. The functions of the National People's Congress are to
amend the Constitution, enact decrees, interpret laws, appoint ambassadors,
ratify treaties, approve economic plans and approve state budgets. The Standing
Committee is also empowered to appoint and remove the Premier, vice-premiers and
other members of the State Council on the recommendation of the Communist Party
Central Committee.
In effect, the State Council is the highest organ of state administration and
carries out its work through various ministries, commissions and other
governmental bureaus responsible for work in specialized fields. It is
responsible for drawing up and putting into effect the national economic plan
and the state budget. There are Local People's Congresses with standing
committees which assist with the implementation of policies at provincial,
regional and municipal levels.
The Communist Party of China is the key policy-making body in China and is run
by a Central Committee. The politburo of this Central Committee is the most
powerful political body in the country. One of its functions is to give advice
to the National People's Congress and its Standing Committee concerning the
appointment and removal of the country's Premier and vice-premiers.
In March, 1978 China announced a ten-year plan (1976 to 1985) for modernization
in agriculture, industry, national defense, science and technology designed to
propel China into the front rank of the industrialized countries of the world.
The drive towards modernization and reform led to the implementation of the
"open door" policy, an important result of which has been that foreign companies
were invited to participate in China's investment and trading opportunities.
Since the early 1980's, the creation of Special Economic Zones with considerable
autonomy have facilitated the process of further economic development. See
"Shantou Special Economic Zone". To meet the targets of its seventh five-year
plan (1986 to 1990) China focussed attention on accelerating activities in
certain areas. These included expanding the production of consumer goods and
housing construction, developing energy, transport and telecommunications and
expanding the raw and semi-finished goods industries. Existing enterprises were
to be renovated through the introduction of advanced technology. To aid the
modernization process, the plan called for the introduction of more foreign
investment and advanced technology and the generation of foreign exchange
earnings through exports.
After experiencing a period of national economic retrenchment, the major
objectives of the eighth five-year plan (1991 to 1995) were sustained and
balanced growth and continued improvement in living conditions. Priority sectors
for development included agriculture, technology, energy and transport. During
the eighth five-year plan, the average annual growth of the gross domestic
product was twelve percent. This five year period had the fastest growth and
least fluctuation since the founding of the PRC.
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China's ninth five-year plan (1996 to 2000) places sustained and stable growth
in agriculture and the rural economy at the top of the agenda. Significant
breakthroughs have been made in reform and the opening of China to the outside
world. China has taken major strides in reforming finance, taxation, banking,
foreign trade, foreign exchange, planning, investment, pricing, mobility,
housing and social security. Chinese government trade laws may be found at
www.moftec.com.
In 1998, China shipped $184 billion of goods and imported over $140 billion
dollars of goods. To the United States alone, it will ship in 1999 over $70
billion dollars of goods, up from just $324 million in 1978.
In November, 1999 the United States of America and China entered into an
agreement on the conditions agreed to by the United States under which China may
join the World Trade Organization. Congress must endorse the agreement. In later
November, 1999 such an agreement was made between China and Canada. At least 24
of the other 135 members of the World Trade Organization, most notably the
European Union, must agree to entry terms before admission of China, but the
execution of the agreement with the United States of America is a major step
toward World Trade Organization membership. Membership in the World Trade
Organization is expected to bring greater change to China. China has joined most
other international organizations.
(iv) Legal System, Contracts and Dispute Resolution
The National People's Congress and its Standing Committee are empowered to
exercise legislative power. The State Council is also authorized to adopt
administrative regulations and measures in accordance with the Constitution and
the statutes. At the local level the People's Congresses of the provinces and
municipalities directly under the control of the central government may also
adopt local regulations.
The People's Courts are the judicial organs of the State, and the judiciary is
able to exercise independent power in accordance with the law. The Supreme Court
is the highest court in the land and is responsible to the National People's
Congress and its Standing Committee. It supervises the administration of justice
by the local people's courts, which are established at different levels and are
responsible to the organ of state power that created them. There are also
special courts, such as those dealing with military and maritime matters.
Foreign economic contracts are mainly governed by the Foreign Economic Contract
Law published in 1985 and the Foreign Trade Law published in 1994. Chinese
business practice is to keep contractual documentation to a minimum and that all
business matters can be resolved if both parties adhere to the basic concepts of
equality and mutual benefit.
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A further generally held business view in the PRC is that all business decisions
should be the subject of prior discussion and agreement by both parties and that
all differences should be settled by a process of conciliation without recourse
to third party arbitration or to the courts of law.
Arbitration may be held in the PRC by the China International Economic and Trade
Arbitration Commission. Under the Arbitration Law, which became effective in
September, 1995, foreigners are allowed to act as arbitrators. The arbitration
provisions must provide that with the consent of the contracting parties, the
arbitration may take place in a third country. The Supplementary Regulations of
the Shantou Special Economic Zone for Encouragement of Foreign Investment
contain provisions for the resolution of disputes for enterprises in the Shantou
Special Economic Zone.
The PRC has made a determined effort over the last ten years to introduce a
framework of commercial law suitable to the conduct of business, the ownership
of private property and to encourage foreign investment. At provincial, regional
and municipal levels, regulations have also been introduced to meet the same
objectives. These laws are still evolving in line with the fundamental objective
that foreign is to be encouraged. The degree of change in the PRC is such that
uncertainty may be expected to be encountered in the application of law.
Special provisions apply to the Shantou Special Economic Zone. See Below.
(v) Population, Social Patterns and Language
At the end of 1997, the population of China was 1.236 billion, the most
populated country in the world. The dominant ethnic group is Han (91.9%),
although 55 ethnic minority groups are growing rapidly. Due to complex
geographic factors, the population is unevenly distributed. Virtually the whole
of the western half of the country is lightly populated. The main population
concentrations are on the central plains, in southern China and on the eastern
seaboard. Of the total population, 369.89 million lived in urban areas,
accounting for some 30% of the total. Population and age structure projections
show that the age of the working population (15 to 64) will continue to exceed
50 percent of the total population until at least 2010. During the ninth
five-year plan, 40 million new jobs are to be created in urban areas and 40
million individuals in the employed agricultural labor force will be transferred
to nonagricultural industries before 2000. This represents the greatest
relocation of human beings in history.
Family planning is a basic national policy of the central government. The
government's goal is one child per family, with exceptions in rural areas and
for ethnic minorities. The aim is to maintain a natural population growth rate
of 1.083 percent.
Written Chinese consists of ideographic (as opposed to phonetic) characters.
Knowledge of several thousand characters is required to communicate effectively.
Spoken Chinese varies in dialect throughout the country. Puthonghua, or
Mandarin, based on the Beijing dialect, is the national language, spoken by 70
percent of the population. It is taught in all schools and is the medium of
government, although there are numerous other dialects. Other major dialects are
Cantonese (commonly used in Hong Kong and parts of Southern China),
Shanghainese, Fukinese and Hakka. Non-Chinese languages spoken widely by ethnic
minorities include Mongolian, Tibetan, Uighar and other Turkic languages in
Xinjiang.
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There are several alternate spellings for place names in China. In 1958, the
State Council adopted the Chinese Phonetic Alphabet system (pinyin) for
romanizing Chinese places and names. Since January 1, 1979 all translated texts
of Chinese diplomatic documents and Chinese magazines published in foreign
languages have used the Pinyin system. This is intended to end the confusion in
romanizing Chinese that has existed for centuries.
(vi) Currency and Exchange
The official currency of the PRC is the renminbi ("RMB"). The basic unit is the
yuan (Y), which is divided into ten jiao. The smallest subdivision is the fen,
or cent. One jiao equals ten fen and one yuan equals 100 fen.
The RMB is a nonconvertible currency and there is a limit on the amount of
currency that may be carried in and out of the PRC. The People's Bank of China
announces daily exchange rates between the RMB and other major currencies.
However, to obtain foreign currency, foreign invested enterprises can open one
current account and one or more capital accounts. The current account is used to
conduct foreign exchange transactions related to day-to-day operations. However,
there is a ceiling on the foreign currency that can be kept in this account.
Capital account transactions relate primarily to balance sheet activities such
as foreign loans and capital contributions and require government approval. No
maximum limit is set on the amount of foreign exchange that can be retained in
capital accounts. Foreign-invested enterprises are normally required to balance
foreign exchange.
Rates of exchange for United States dollars, renminbi, HKSAR dollars and
Canadian dollars are as follows:
(vii) Exchange Rates
Renminbi
On December 31, 1998 the buying rate as set by the Bank of China for renminbi,
which is not a freely convertible currency, was US$1.00: RMB 8.2789. See "Doing
Business in China, Currency and, Foreign Exchange Controls". The following table
sets out the buying rate for United States dollars for the period indicated.
Rates of exchange are obtained from the Bank of China.
1994 1995 1996 1997 1998
Year End 8.4462 8.3174 8.2982 8.2796 8.2789
Average 8.5651 8.3505 8.3142 8.2898 8.2789
High (1) 8.7100 8.44620 8.3355 8.2983 8.2801
Low (1) 5.7855 8.2716 8.2966 8.2700 8.2740
Note (1): The high and low buying rate figures are selected from daily high and
low figures.
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HKSAR Dollars
The dollar of the HKSAR is pegged to the United States dollar. HKSAR$7.80:
US$1.00.
Canadian Dollars
On December 31, 1998 the buying rate for Canadian dollars was US$1.00:
Cdn$l.5333. The following table sets out the buying rate for Canadian dollars
for the period indicated. Rates of exchange are obtained from the Bank of Canada
and believed by the Registrant to approximate closely the rates certified for
customs purposes by the Federal Reserve Bank in New York.
1994 1995 1996 1997 1998
Year End 1.4018 1.3640 1.3706 1.4305 1.5333
Average 1.3659 1.3726 1.3636 1.3844 1.4836
High (1) 1.4065 1.4243 1.3855 1.4393 1.5795
Low (1) 1.3109 1.3303 1.3295 1.3365 1.4082
Note (1): The high and low buying rate figures are selected from daily high and
low figures.
(viii) Foreign Exchange Controls
The official body charged with the management and control of foreign exchange is
the State Administration of Foreign Exchange ("SAFE") under the People's Bank of
China. All foreign exchange transactions must be cleared through approved
People's Republic of China banks. Since January 1, 1994 the People's Bank of
China has published a unified exchange rate on a daily basis based on market
supply and demand.
All enterprises with foreign investments operating in the PRC are required to
open foreign exchange accounts with approved banks. All receipts of foreign
currencies are required to be deposited in the foreign exchange accounts and
disbursements in foreign currencies can only be made from these accounts. In
general, foreign currency remittances out of the PRC for international current
account transactions do not require the approval of SAFE. However, remittances
for capital account transactions are subject to the approval of SAFE.
Foreign investments are translated into renminbi at the exchange rate prevailing
at the time the investment is made. Investments can be made in either cash or in
kind. The value of the investment must be certified by a certified Chinese
public accountant who issues a capital verification report relating to the
contribution. Cash contributions will be held in the capital accounts in foreign
currency and the conversion from foreign currency to renminbi is subject to SAFE
approval.
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Foreign capital and technology must be registered. Capital contributed to an
equity joint venture by a foreign investor is required to be at least 25 percent
of the total investment. All capital contributions to foreign-invested
enterprises must be registered with the appropriate authorities. Any increases,
assignment or other disposal of the registered capital of the foreign-invested
enterprise must be approved by the original examination and approval authority.
In March, 1987 rules were introduced on the ratios of registered capital to
total investment for equity joint ventures, cooperative ventures and wholly
foreign-owned enterprises. Registered capital represents the capital
contributions of the foreign and Chinese parties, while total amount of
investment includes the registered capital and loans borrowed by the enterprise.
In practice, these rules are strictly applied to equity joint ventures but used
only as guidelines for cooperative joint ventures and wholly foreign-owned
enterprises. The ratios are
Total Investment Ratios Minimum Registered Capital
Under US$3 million 0.7 - 1 70% of total investment
From US$3 million to 10 million 1:2 US$2.1 million
From US$10 million to 30 million 2:5 US$5 million
Over US$30 million 1:3 US$12 million
Loans may be applied for by foreign investment enterprises from designated
foreign exchange banks to borrow both foreign currency and renminbi. The bank
will require relevant documentation to substantiate the need for the loan.
Foreign investment enterprises are also permitted to take out foreign currency
loans with overseas banks. Foreign currency loans must be registered with SAFE
within a certain period of time after execution of the loan document to enable
the later loan repayment. Penalty provisions apply for failing to comply with
the debt registration requirements.
Technology agreements which cover the licensing of the use of patents and trade
marks and the provision of technical consulting services and technical know-how
require prior approval form MOFTEC. Limitations are placed on the amount of
technology that the foreign partner may contribute as part of the joint
venture's capital. The Registrant has not made such a contribution.
One of the major differences between an equity joint venture and a cooperative
joint venture relates to the repatriation of registered capital. In the case of
a cooperative venture, the foreign partners may recover and repatriate their
invested capital during the operating period of the venture if they have
obtained the agreement of all parties concerned and the approval of the relevant
authorities. In addition, it must be agreed in the joint venture contract that
the fixed assets of the venture will revert to the ownership of the Chinese
party after the venture's operating period has expired. The partners in an
equity joint venture, however, cannot obtain repayment of their registered
capital until the end of the venture period. This restriction also applies to
wholly foreign-owned enterprises. In all cases, the foreign investors must have
sufficient foreign capital exchange in the PRC to enable them to repatriate
their capital.
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Earnings of foreign investment enterprises may be repatriated from profits form
the PRC if: (i) profits may be repatriated through designated foreign exchange
banks only if they are in a foreign currency, (ii) all prior years' losses must
have been paid up, (iii) all relevant taxes must be paid, and (iv) the required
contributions must have been made to the "three funds", namely the staff bonus
and welfare fund, the enterprise expansion fund and the general reserve fund.
Profits earned by a foreign enterprise with a permanent establishment in the PRC
are subject to income tax. However, they will not be subject to withholding tax
when the profits are repatriated. While the withholding tax on profits remitted
abroad by foreign investment enterprises has been waived, foreign companies
without permanent establishments in the PRC are subject to a withholding tax of
20 percent on interest, rental, royalty and other income sources in the PRC
unless the rate of tax is reduced by a double taxation treaty. The United States
signed a tax treaty with the PRC on April 30, 1984 and it came into force on
January 1, 1987. Canada signed a tax treaty with the PRC on May 12, 1986 and it
came into force on January 1, 1987. The HKSAR signed a tax treaty with the PRC
on November 2, 1998 which came into force on July 1, 1998 in the PRC and on
April 1, 1998 in Hong Kong.
Withholding taxes on remittances from the PRC to corporations resident in the
United States are ten percent on dividends, ten percent on interest and
generally ten percent on royalties. Withholding taxes on remittances from the
PRC to corporations resident in Canada are fifteen percent on dividends (ten
percent if the beneficial owner of the dividend is a company that owns at least
ten percent of the voting stock of the payer company), ten percent on interest
and ten percent on royalties
(ix) Banking
The People's Bank of China has been the central bank of the PRC since 1983 and
reports directly to the State Council. It has ministry-level status and oversees
China's specialized banks and other domestic and foreign financial institutions.
Its main responsibilities include formulating national financial policies and
regulations, controlling the money supply, regulating interest and exchange
rates, handling foreign exchange reserves and overseeing the establishment and
operation of the specialized banks, financial institutions and financial
markets.
The role of specialized, domestic banks has changed and become more
commercialized because of the reforms introduced in 1993, which called for the
establishment of three policy lending banks-the State Development Bank, the
Import and Export Credit Bank and the Agriculture Development Bank-to take over
the policy lending operations from the specialized banks. Although the
specialized banks have become more commercialized, there continues to be a
distinct concentration of business activity as follows:
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1. The Bank of China is the country's largest foreign exchange bank and deals
with international transactions. Its functions are wide-ranging and include
commercial banking, settlement of accounts and deposits, extending loans to
foreign investment enterprises, dealing in foreign exchange and gold, loan
syndications, issuing foreign currency bonds, providing consulting services to
trusts and establishing overseas branches.
2. The Industrial and Commercial Bank of China issues industrial and commercial
loans and handles savings and deposits in urban areas.
3. The Agricultural Bank of China deals with banking matters in the rural areas.
4. The China Construction Bank deals mainly with investments for capital
construction projects. It is the first bank to grant individual mortgage loans
in the PRC.
The banking sector in the PRC is in a state of change as the economy evolves
from a communist, state-owned system to a system of private enterprise.
(x) Industrial Development and Areas Open for Foreign Investment
Industrial development in the PRC currently encompasses two main initiatives:
improving efficiency in state-owned industries, including corporisation and
privatisation proposals and developing new industries principally in the
country's five Special Economic Zones, the 14 Open Coastal Cities and other
Special Zones such as the Economic and Technological Development Zones, the High
and New Technology Development Zones, the Pudong New Area and the Bonded Zones.
1. Special Economic Zones
Since 1979, five Special Economic Zones have been established, all of which are
in southern China: Shenzen, Zhuhai, Xiamen, Shantou and Hainan. The Registrant's
facilities are in Shantou City.
Shenzen and Zhuhai, which border on Hong Kong and Macau respectively, are
designated multi-purpose zones, engaging in industry, farming animals,
agriculture, commerce, housing and tourism. Also in close proximity to Hong Kong
(300 miles, 450 kilometers), Xiamen's and Shantou's main industries are
processing for export and tourism. See "Shantou Special Economic Zone" below.
Hainan, an island of the south coast of China, is planned as an agricultural and
industrial base with an export orientation.
2. Open Coastal Cities
In 1984, the PRC designated 14 cities as Open Coastal Cities and allowed them
more autonomy in approving foreign investment projects and offering various
investment incentives to attract foreign business.
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The 14 cities are: Dalian, Qinhuangdao, Tianjin, Yantai, Qunigdao, Lianyunggang,
Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Beihai and Zhanjiang.
Most of these are on the eastern coast.
These cities have a wide range of discretionary powers, but they do not, as yet,
enjoy the autonomy or degree of preferential treatment granted to Special
Economic Zones.
3. Open Economic Zones
In 1985, the PRC classified the Yang'tze and Pearl River delta areas and
southern Fujian as Open Economic Zones. Similar status was later granted to
Shandong and the Liaoning peninsula. In 1992, five inland cities and all capital
cities of the provinces, except Lhasa, Tibet, were granted similar status.
The incentives granted to foreign investors in these Open Economic Zones
resemble those of the Open Coastal Cities. The primary objectives are to
encourage technology transfer, management reforms and production inputs between
the coastal and interior regions.
4. Economic and Technological Development Zones
At the end of 1994, the central government permitted more than 30 cities to set
up Economic and Technological Development Zones to encourage advanced industry
through foreign participation. The cities concerned are able to offer a range of
incentives aimed at attracting foreign investments. Production enterprises
established in the zones have an income tax rate of 15 percent and other
favorable operating conditions.
5. Pudong New Area
In 1990, preferential incentives similar to those offered by the Special
Economic Zones, were granted to the Pudong New Area in Shanghai. The New Area
covers 350 square kilometers across the Huangpu River across from the Bund. A
customs bonded zone, the Wai Gao Bonded Zone, was also established in the New
Area in 1990. There are a number of free trade zones in the New Area. These
zones aim to encourage foreign trade, high technology and export oriented
industries. As well as the favorable tax incentives, foreign investments in the
New Area are allowed to be involved in tertiary businesses such as banking,
insurance and retailing. Recently, foreign bank branches established in the
Pudong New Area have been permitted to conduct Renminbi business in certain
selected service categories.
6. New and High Technology Development Zones
Currently, there are over 50 New and High Technology Development Zones which
offer preferential incentives to foreign investment enterprises engaged in high
technology industry. The zones offer a reduced income tax rate of 15 percent.
Subject to approval, hi-tech industries established within the zones are allowed
tax holidays of three to six years. One of the aims for establishing the Zones
is to promote the industrialization of technologies owned by regional
universities and research institutes.
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(xi) Forms of Foreign Investment
The PRC has established a number of ways to facilitate foreign investment. The
eight principal types are described below. The Registrant is a joint venture
enterprise established by certificate issued by the Shantou Commission for
Foreign Economic Relations and Trade on December 27, 1995 between its 60% owned
subsidiary, Cansun, and Nandou effective until December 27, 2007. The Registrant
has been advised that the term of the certificate may be extended on application
to the Shantou Commission.
1. Processing and Assembly Agreements
The simplest form of arrangement is a processing and assembly agreement where
the foreign company concerned supplies raw materials or parts on a consignment
basis to a local entity in the PRC to process. A processing fee is paid to the
PRC entity for its work and the processed goods are returned to the foreign
company. In almost all cases, the foreign company will have to supply the
necessary production technology, equipment and supervision. A large proportion
of the Hong Kong business interests in southern China operate under such
agreements. The principal advantage to the foreign company is the comparatively
low processing cost in the PRC.
2. Compensation Trade Agreements
Compensation trade agreements enable a foreign company to provide a local entity
in the PRC with the entire plant, equipment, technology and training required
for successful operation. Orders are placed on the PRC entity by the foreign
company and the PRC is responsible for production. Finished products are shipped
to the foreign company on normal commercial terms but an amount is deducted from
the payment for each shipment to compensate the foreign company for its
investment in the plant, equipment, technology and training costs. The principal
benefit to the foreign company is the comparatively low production cost,
including, on occasion, lower costs for raw materials originating in the PRC.
Processing and assembly agreements and compensation trade agreements have lost
popularity with the PRC authorities who are now encouraging foreign investors to
make direct investments in such vehicles as equity owned ventures and
wholly-owned companies.
3. Equity Joint Ventures
Equity joint ventures are governed by the Law of the PRC on Joint Ventures Using
Chinese and Foreign Investment promulgated in 1973, as amended and are limited
liability companies with joint People's Republic of China and foreign ownership
set up for specific purposes, usually to establish a new manufacturing plant or
a new service organization such as a hotel or shopping complex. The foreign
company is typically required to provide the entire capital investment,
technical expertise and management skills and to arrange for technology
transfer. The PRC entity typically provides land and buildings and facilitates
the smooth operation of the joint venture. The local MOFTEC authorities
generally undertake the examination and approval procedures.
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The parties' equity contributions to the joint venture determine their share of
the results. Both parties benefit from the exploitation of new business
opportunities. The equity joint venture law requires the foreign partner to the
venture to contribute at least 25 percent of the registered capital. There is no
upper limit on the foreign partner's contribution. Provisions promulgated in
1998 require that all joint venture contracts contain a schedule for capital
contributions. During the life of an equity joint venture, the foreign partner's
equity contribution cannot be repaid. However, once the venture has been
liquidated, the assets are distributed according to the partners' shareholdings.
The Registrant has been advised that the term permitted for an equity joint
venture may on application be extended. The Registrant must make such an
application before December 27, 2007.
The partners to an equity joint venture have joint management of the venture.
The board of directors, which must have at least three members, has the
authority to make all major decisions concerning the financial position of the
venture. Although the joint venture law originally required that the chairman of
the board be appointed by the Chinese partner and the vice-chairman by the
foreign partner, an April, 1990 amendment provides that the chairman may be
elected by either party. If one side assumes the office of chairman, the other
will assume the office of vice-chairman. Board members are appointed for a
period of four years and their appointments can be extended with the agreement
of all parties to the venture.
A meeting of the board is required at least once a year. At the request of a
director, the chairman can call an interim meeting. A board meeting requires a
quorum of more than two-thirds of the directors. The board of directors is
required to engage a general manager and deputy managers. The general manager is
responsible for carrying out board decisions and is in charge of the daily
management of the venture.
The profits and losses of an equity joint venture are distributed according to
the ratio of each partner's investment. After the payment of taxes and before
the distribution of profits, the joint venture is required to make allocations
to three funds, a staff bonus and welfare fund, an enterprise expansion fund and
a general reserve fund. The amount contributed to the three funds by the venture
may be designated in the joint venture contract or decided by the board of
directors. All previous years' losses must be cleared before the current year's
profits can be distributed.
Books and records are to be maintained and there are requirements for audits.
Equity joint ventures were originally allowed to operate for a maximum of 30
years. A 1986 amendment to the law allows for an extension of the duration of
certain joint ventures to 50 years or longer with special approval of the
government. Since 1990, joint ventures engaged in certain lines of business may
choose whether the venture's term of operation is to be limited, subject to
examination and approval of the relevant authorities. However, ventures engaged
in certain trades or businesses are excluded from this option and are still
required to specify the term of operation in the joint venture contract. The
Registrant has been advised that the term permitted for an equity joint venture
may on application be extended. The Registrant must make such an application
before December 27, 2007. As of July, 1996 liquidation of an equity joint
venture must be conducted pursuant to the Foreign Investment Enterprises
Liquidation Procedures. Once dissolution has occurred, the board of directors
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must establish the liquidation procedures and principles and appoint a
liquidation committee. This is usually the directors, but local accountants and
lawyers may be invited to carry out the liquidation procedures. If the
examination and approval authority deems it necessary, it may appoint its own
personnel to supervise the process. The joint venture must settle all its debts,
including the cost of liquidation, before the remaining assets can be
distributed among the joint venture partners. These will be distributed
according to the investment ratio, unless other provisions are contained in the
contract and articles of association. If the foreign partner's remaining net
assets exceed its investment contribution, the foreign partner will be required
to pay income tax on the remaining portion.
4. Contractual Joint Ventures
Contractual joint ventures are similar in concept to equity joint ventures. The
relevant laws are the Law of the PRC on Chinese-Foreign Cooperative Joint
Ventures, promulgated in April, 1988 and the PRC Sino-Foreign Cooperation Joint
Venture Law Implementing Rules promulgated in September, 1995. However, their
form is different from an equity joint venture as the obligations of each party
are spelled out in the form of a contract.. These contracts typically specify
the minimum registered capital and capital contributions of each party at
various levels of investment and their respective share of the results of the
enterprise. Contractual joint ventures can be formed as limited liability
companies. As with equity joint ventures, the foreign company is typically
required to provide the entire capital investment, technical expertise and
management skills and to arrange for technology transfer while the PRC entity
typically provides land and buildings and facilitates the smooth operation of
the joint venture.
As with an equity joint venture, a cooperative joint venture operating as a
limited liability company is required to appoint a board of directors or a joint
managerial committee. Again, if the chairman of the board is from the Chinese
party, the foreign side would generally appoint the vice-chairman.
Books and records are to be maintained and there are requirements for audits.
Also, as with an equity joint venture, liquidation of a cooperative joint
venture must be conducted pursuant to the Foreign Investment Enterprises
Liquidation Procedures. If it agreed in the cooperative joint venture contract
that all of the venture's fixed assets will belong to the Chinese party after
the venture's operating period has expired, then the parties to the venture may
also state in the contract that the foreign party can recover its investment
during the contract period. Subject to examination and approval, the foreign
party may then recover its investment before the payment of income tax. Both the
Chinese and foreign parties are liable for the venture's debts.
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5. Wholly Foreign-Owned Enterprises
Similar to equity joint ventures, wholly foreign-owned enterprises are limited
liability companies governed by the Law of the PRC on Enterprises Operating
Exclusively with Foreign Capital.. The foreign investors provide the entire
capital investment and technical expertise. Approval to establish a wholly
foreign-owned enterprise is controlled by the authorities and normally the
enterprise must satisfy at least one of the following conditions:
(a) adopt advanced technology and equipment in developing of new products,
economize on the use of energy and raw materials, achieve product upgrading and
replace or produce import substitutes; or
(b) have a sufficiently high export of the value of its annual production (in
many cases, not less than 50 percent) and achieve a foreign exchange balance or
surplus.
The greatest advantage of a wholly-owned enterprise is that the foreign investor
will be able to enjoy full autonomy in managing the company. MOFTEC is
responsible for the examination and approval of wholly foreign-owned
enterprises. Local governments are also authorized to approve these enterprises
if certain conditions are met. The investor must apply for registration and
obtain a business license within 30 days of receiving approval, or the approval
certificate will become void. The date the business license is issued will be
the date of the establishment of the enterprise. Tax Registration must be
performed within 30 days of establishment.
The amount of registered capital off wholly foreign-owned enterprises must be
consistent with the scale of intended operations. The registered capital cannot
be reduced during the term of operation, and increases of transfers must receive
prior approval from the authorities.
Foreign investors may contribute capital in the form of freely convertible
foreign currencies or certified RMB profits from other foreign investment
enterprises. Subject to certain requirements set out in the regulations, such
items as machinery, equipment, industrial property and proprietary knowledge may
be capitalized according to their monetary value. The time lime for capital
contribution must be specified in the application and the articles of
association. Contributions may be made in installments, with the first being
within 90 days, and the last within three years of, the issuance of the business
licence.
Wholly Foreign-Owned enterprises are required to make allocations to a reserve
fund and a bonus and welfare fund for its employees from its after-tax profits.
The reserve fund allocations cannot be less than ten percent of the after-tax
profits. Profits may not be distributed until the prior years' losses have been
cleared.
Although the Chinese wholly foreign-owned enterprise and the United States
corporation are similar in many respects, the wholly foreign-owned enterprise
has a limited operating life. An enterprise engaging in a high technology
industry will have a life of around 20 years, although it may be extended to 50
years or more with the approval of MOFTEC. As with joint ventures, liquidation
must be conducted under the Foreign Investment Enterprises Liquidation
Procedures. See above.
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6. Entities Formed Under the Company Law
The Company Law of the PRC was promulgated on December 29, 1993 and became
effective July 1, 1994. It provides for the establishment of "limited liability
companies" and "companies limited by shares". However, if the laws relating to
foreign-invested enterprises have different provisions, these prevail. The
effect of the Company Law on foreign investment enterprises requires
clarification which may occur on the implementation regulations of the Company
Act, once issued.
The main requirements for a "limited liability company" are: (i) at least two
and not more than 50 shareholders, (ii) minimum registered capital from
RMB100,000 to RMB500,000, depending on the industry, (iii) capital contributions
may be in the form of cash, tangible assets, industrial property, nonpatented
technology or land-use rights, but industrial property and nonpatented
technology cannot exceed 20 percent of the registered capital unless permitted
by the State, (iv) consent of a majority of shareholders is required for
transfers to nonshareholders, (v) the board of directors is to be between three
and 13 persons, but in a small company the executive director may serve in place
of a board of directors, and (vi) reviews of the financial affairs and the
actions of directors must be made by a supervisory committee.
The main requirements for a "company limited by shares" are: (i) there must be
five promoters (initial shareholders) the majority of which are domiciled in
China. If the company is established by means of a share offer, the promoters
must subscribe for at least 35 percent of the shares with the remaining shares
offered to the public after approval from the securities administration
authorities of the State Council. (ii) the minimum registered capital is RMB10
million with any higher requirement to be provided for separately in legislation
or administrative regulations, (iii) capital contributions may be in the form of
cash, tangible assets, industrial property, nonpatented technology or land-use
rights, but industrial property and nonpatented technology cannot exceed 20
percent of the registered capital, (iv) the board of directors is to be five to
19 persons, and (v) reviews of the financial affairs and the actions of
directors must be made by a supervisory committee of not less than three
members.
7. PRC Holding Companies
Foreign investors have been recently permitted to establish holding companies in
the PRC on approval from the Ministry of Foreign Trade and Economic Cooperation
("MOFTEC"). The PRC holding company may be in the form of a joint venture or a
wholly foreign-owned enterprise. Approval to establish a holding company is
strictly controlled by the authorities. In addition to the minimum registered
capital requirement of US$30 million for the PRC holding company, the investors
must satisfy the following conditions:
(a) the foreign investor must (i) have total assets in excess of US$400 million,
(ii) have established foreign investment enterprises, including equity joint
ventures, contractual joint ventures and wholly foreign-owned enterprises, in
the PRC with paid-up capital of more than US$10 million, and (iii) have at least
three projects approved, or (iv) have already set up more than ten foreign
investment enterprises engaging in production or infrastructure construction,
with the foreign investor's capital contribution in these enterprises exceeding
US$30 million; and
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(b) if the holding company is a joint venture, the Chinese investor must have
total assets of not less than RMB100 million.
The holding company is allowed to carry on the following activities: act as
agent for the subsidiary companies on sales and purchases, balance the foreign
exchange surpluses and deficits between its subsidiary companies with the
authorities' approval, assist in training of personnel and marketing, assist in
obtaining loans and providing guarantees, provide financial support to its
subsidiary companies with the authorities' approval and provide consulting
services to its investors. The PRC holding company and its subsidiary companies
are taxed as separate entities and do not file a consolidated tax return.
8. Foreign Trade Joint Ventures
Since October, 1996 foreign investors have been allowed, in certain designated
cities and zones, and upon MOFTEC approval, to establish foreign trade companies
specializing in import and export trade in the PRC. The foreign trade company
must be a joint venture company with the Chinese partner holding 51 percent or
more of the equity interest. The minimum registered capital requirement of the
foreign trade company is RMB100 million. The investors in the foreign trade
company must satisfy the following conditions:
(a) thee foreign investor must (i) have an annual turnover of more than US$5
billion, (ii) have annual trade with the PRC of more than US$30 million in the
three preceding years, and (iii) have established a representative office in the
PRC for three years of have invested in the PRC more than US$30 million; and
(b) the Chinese partner must (i) already have the right to conduct foreign
trade, (ii) have an annual foreign trade volume of more than US$200 million of
which the export volume was more than US$100 million in the preceding three
years, and (iii) have established more than three branches and joint ventures
overseas with an average annual business volume of more than US$10 million in
the preceding three years.
Foreign trade ventures are currently restricted to the Pudong New Area in
Shanghai and the Shenzhen Special Economic Zone.
9. Corporisation of State-Owned Enterprises
Under the "socialist market economy" system, the PRC has implemented plans to
corporatise gradually China's better run, large and medium size state-owned
entities into companies with limited liabilities. In all cases, the State
remains the dominant shareholder in these companies. Large scale privatisation
is made possible through the sale of shares in these companies.
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Currently, the Shanghai Stock Exchange and the Shenzhen Stock Exchange are the
only stock exchanges in the PRC. The Shanghai Stock Exchange was opened in
December, 1990 and in 1997 about 350 companies had "A" shares and about 48
companies had "B" shares listed. The Shenzhen Stock Exchange was opened in July,
1991 and in 1997 about 330 companies had "A" shares and about 50 companies had
"B" shares listed. "A" shares are issued to, and traded by Chinese nationals in
Renminbi. "B" shares are issued to, and traded by, foreign investors in a
foreign currency denominated in Renminbi. Since 1992, the PRC selected and
approved over 70 state-owned enterprises for corporisation and the issue of "H"
shares to be listed on the Hong Kong Stock Exchange and other overseas stock
exchanges. In 1997, 34 companies had "H" shares listed on the Hong Kong Stock
Exchange. The PRC has indicated the process of corporisation will continue.
(xii) Accounting
The methods of accounting to be adopted by joint venture enterprises involving
foreign investors are specified in the Accounting Rules for Foreign Investment
Enterprises issued by the Ministry of Finance. Updated in 1992, the accounting
standards are similar to generally accepted accounting practices of western
countries. The PRC is in the process of drafting about 30 statements of standard
accounting practices which are applicable to all enterprises in the PRC. It is
expected that these new accounting standards will further reduce the number of
differences from the generally accepted accounting practices of western
countries. The financial statements of the Registrant are prepared in accordance
with United States generally accepted accounting principles.
(xiii) Patents
The PRC is a member of the main international intellectual property conventions,
including the World Intellectual Property Convention, the Paris Convention for
the Protection of Intellectual Property and the Berne Convention. The PRC Patent
Law came into effect in 1985 with amendments in 1993. Legislation identifies
three types of patents: inventions, utility models and designs. The period of
validity for inventions is 20 years and for utility models and designs 10 years.
The 1993 amendment extended patent rights to certain items and products that
were not afforded protection under the original patent law. The PRC became a
signatory to the Patent Cooperation Treaty on January 1, 1994.
Under Article 12 of the Patent Law (PRC) a foreigner may own a patent with
consent form the appropriate body of the State Council. The Registrant is in the
process of obtaining such consent.
(xiv) Special Administrative Region of Hong Kong
On July 1, 1997 the PRC resumed sovereignty over Hong Kong. It became a Special
Administrative Region of the PRC and was officially renamed Hong Kong, Special
Administrative Region.("HKSAR").
The basic principles underlying the existence and operation of HKSAR are set out
in the Sino-British Joint Declaration, an international treaty registered with
the United Nations, and in the Basic Law, which is the mini-constitution of the
HKSAR. The Joint Declaration, which was ratified in 1984, sets out the basic
rules relating to the existence and operation of HKSAR after the assumption of
Chinese sovereignty. A 13 year transition period was contemplated for
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establishing the way forward and during this period the more detailed provisions
of the Basic Law were compiled. The central concept of the Joint Declaration was
the principle of "one country, two systems". Even though the HKSAR is an
integral part of the PRC, the PRC's socialist system is not practiced and the
HKSAR's capitalist system and autonomy as an international business center and
open culture would remain unchanged for 50 years.
Specifically, this means: (i) the HKSAR maintains its free trade policy with an
open economy, independent finances and its own legal system and laws, (ii) the
HKSAR remains a separate customs territory with separate membership in trade
associations and is governed by the rules of international trade, (iii) there
are free flows of capital and no foreign exchange controls. The corporate rate
of income tax in the HKSAR is 16.5 percent on income earned in the HKSAR.
The Basic Law continues to be interpreted by the courts of the HKSAR, but
generally Hong Kong remains the window to the world for the PRC. Two
subsidiaries of the Registrant, Vibro-Tech Industries Limited and Vibro-Tech
Enterprises Limited, are based in the HKSAR and responsible for marketing. sales
and service of product in all jurisdictions of the world except the mainland of
the PRC. For example, the sales of the Registrant to Fujita Corp. of Tokyo,
Japan are through Vibro-Tech Industries Limited in the HKSAR. The Registrant is
developing markets other than the PRC and Japan through Enterprises.
The PRC holds a major stake in the HKSAR as its third largest investor after
Japan and the United Kingdom. An increasing number of mainland-backed
enterprises are registered in the HKSAR, including several state trading
companies, mainland provinces and mainland cities, which have an estimated
combined asset value in excess of US$40 billion.
The HKSAR is ranked as the second largest trading partner of the PRC and it is
estimated that about half of mainland China's exports are handled through the
HKSAR.
(xv) Taxation in the PRC
This discussion is confined to the tax laws which apply to the Registrant's
subsidiary, Shantou, an equity joint venture enterprise. Taxation of foreign
individuals, other forms of other foreign investment enterprises, foreign
corporations and local Chinese and domestic enterprises is not disclosed and is
not material. The discussion is only a summary of the material provisions
relating to the taxation of Shantou and is not intended to be a complete
exposition.. The PRC Income Tax Law for Foreign Investment Enterprises and
Foreign Enterprises came into effect July 1, 1991. Interpretation is the
responsibility of taxation authorities who have the power to require the
recalculation of taxable income on the basis of substance.
Foreign investment enterprises with their head offices in China are taxed on
their worldwide income. Others are subject to enterprise income tax only on
China-source income. The taxable income of an enterprise is the amount remaining
from the gross income in a tax year (January 1 to December 31) after the
deduction of costs, expenses and losses that year. Special tax incentives and
tax holidays are offered to enterprises operating in Special Economic Zones,
Economic and Technological Development Zones, the Old Urban Districts of the
Open Coastal Cities and other special open zones. Income tax returns and final
financial statements are required to be filed by April 30 in each year, together
with an audit certificate from a Chinese-registered CPA firm.
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The tax year is the calendar year. The accrual method of accounting is required
for all foreign investment enterprises. The enterprise's income may be stated in
renminbi or United States dollars. All accounting books, records and supporting
documents must be kept in China for at least 15 years.
Income tax is assessed on taxable income, which is defined in the tax law as the
amount remaining from an enterprise's gross income in a tax year after deduction
of costs, expenses and losses in that year. Losses may be carried forward for
five years. Business transactions between foreign investment enterprises and
their affiliated companies must be conducted at fair market prices. In 1998, the
State Administration of Taxation issued "Regulations and Procedures on Tax
Administration of Transaction Between Associated Enterprises". The Regulations
set out a comprehensive set of transfer pricing guidelines and administrative
procedures.
Withholding taxes are discussed under "Foreign Exchange Controls".
The tax rate is a 33 percent flat rate on all foreign investment enterprises
except as modified by the rules relating to a special economic zone.
Affiliated enterprises are not permitted to file consolidated tax returns
without the approval of local authorities. The Shantou Special Economic Zone has
special rules which apply to enterprises, including the Registrant, operating in
the Zone. See below. The income tax rate on Shantou was zero for its first two
years of operation ending December 31, 1998, 7.5 percent for the next three
years ending December 31, 2001 and 15 percent thereafter.
Foreign investment enterprises of a production nature that are scheduled to
operate for a period of more than ten years are entitled to tax exemption for
the first two profit-making years and to 50 percent reduction for the next three
years.
Dividends and capital gains received by Chinese shareholders of an enterprise
are taxed in accordance with the applicable domestic laws. Dividends paid by a
foreign investment enterprise to foreign shareholders, corporate or individual,
are specifically exempt from income tax in China.
There are a number of indirect taxes in the PRC. On January 1, 1994 the PRC
introduced a turnover tax system consisting of value added tax ("VAT"), business
tax and consumption tax (also known as excise tax). The sale of taxable goods
and the provision of labor services are subject to VAT. VAT is also levied on
the import of taxable goods unless specifically exempt. In general, exports are
generally exempt from VAT and related input VAT can be partially refunded.
Registration for VAT is required with the local authorities. VAT varies from
zero to 17 percent. The standard rate is 17 percent and it applies to most goods
and services.
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Business tax and VAT are mutually exclusive. Business tax applies to the
provision of services, excluding processing services and repair and replacement
services, which are taxed under VAT. It also applies to the transfer of
intangible assets such as goodwill, patents and the sale of real estate
properties in the PRC. The tax rates from three to 20 percent.
Consumption tax is levied on the importation, production and processing of
eleven categories of consumable goods at various rates.
Finally, stamp tax is levied on all taxable documents listed in the Stamp Tax
Regulations. Stamp tax is levied on the execution or receipt in the PRC of
certain documents, including contracts for the sale of goods, the undertaking of
processing work, the contracting of construction and engineering contracts,
leases, loans and agency and other nontrade contracts. Stamp tax is also levied
on documentation effecting the transfer of property, business account books and
certification in evidence of rights and licences. The rates of stamp tax vary.
The maximum rate is o.1 percent.
(xvi) Shantou Special Economic Zone
The manufacturing operations, and marketing and sales operations in the PRC, of
the Registrant in the PRC are located in the Shantou Special Economic Zone,
centered on the port city of Shantou some 300 miles east of the HKSAR.
Supplementary Regulations of the Shantou Special Economic Zone for Encouragement
of Foreign Investment were promulgated December 4, 1986 by the Shantou Municipal
People's Government. The following is a summary of the Regulations.
A foreign investment enterprise must implement a labor contract system for
employment with priority given to persons in the Special Zone or persons within
the Shantou household registration. Persons may be employed from outside the
urban area, but details must be filed with the Special Zone Labor Service
Company. Preferential treatment in the form of reduction of the labor service
fee is granted to exporting enterprises and technologically advance enterprises.
The monthly payment of the employee social labor insurance premium is reduced
from 25 percent of the employee labor service fee to 20 percent.
Land use fees range from RMB 0.10 yuan to RMB 14 yuan per square meter per year.
Shantou was exempt during its investment and construction period. Preferential
treatment in the form of payment of land use fees at one half the prevailing
rate is granted to exporting enterprises and technologically advance
enterprises. Shantou is also exempt from certain administrative and public
utility charges.
A Special Zone Service Center is established to provide services to foreign
investment services. The Center performs a number of tasks, including consulting
services on the feasibility of an investment project, handling the necessary
procedures for investment in, and establishment of, a factory, including the
drafting of a contract and articles of association, the submission of
applications for approval, applying for the supply of water and electricity, the
use of land and the leasing of factory buildings, assistance in the forming of a
labor applying for industrial and commercial registration, tax registration,
opening of a bank account and in matters concerning capital construction, fire
protection, customs, commodity inspection, patents and trademarks, assisting in
the expansion of supply and marketing channels, handling import and export
application procedures on behalf of an enterprise, assisting a foreign investor
or an enterprise to apply for an import or export licence and quota, assisting
an enterprise to conduct procedures for staff training and recruitment and other
services. A small fee may be charged.
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Shantou is subject to an income tax rate of 15 percent and is exempt from the
Enterprise Income Tax for its first two profit making years and payment at
one-half the prevailing rate for the next three years. After the expiry of these
periods, Shantou, as a technologically advanced enterprise, may, subject to
approval, extend for three years the period in which it pays Enterprise Income
Tax at one-half the prevailing rate. Equipment, raw materials, construction
materials, fuel and other capital goods imported by Shantou are exempt from
customs import duty. Shantou is also exempt from the Consolidated Industrial and
Commercial tax when exporting bearings.
Foreign investors investing in the Zone are exempt from paying local income tax.
Shantou also has various privileges regarding the use of foreign exchange. The
post-tax profits of foreign investors and the post-tax wages and other legal
income of foreign national personnel may be freely remitted abroad through the
Bank of China.
Shantou is accorded full right of autonomy over its business operations. it has
the right to administer its enterprise according to internationally practiced
advanced scientific management measures and to act of its own accord within its
approved scope of operations when deciding its production and operation plans,
arranging production and sales, raising and using capital, purchasing production
materials and determining its organizational structure and staffing
arrangements. The property, personal safety and investment-related legal rights
and interests of foreigners receive the protection of China's laws. If a dispute
cannot be resolved through discussion pursuant to the spirit of equality and
mutual benefit, a Chinese arbitral body may mediate or an international arbitral
body agreed on by the two parties to the dispute may arbitrate.
Shantou has the right of autonomy in choosing persons to work in factories and
it may itself determine the number of employees, wage standards, wage formats
and bonus, penalty, allowance, examination and verification systems, in line
with production requirements. Labor service fees are set at between HK$400
(US$80) and HK$600 (US$120) per month. The normal working period is an
eight-hour day and overtime is not permitted to exceed 48 hours a month.
Local autonomy is given over exit from, and entry to, Shantou and special
provisions may be granted for passing customs. The regulations also provide for
other items such as customs clearance, importation of goods, exemption of raw
materials from customs duty, exemption from export duty, vehicle ownership,
travel and the administration of investment funds. The Shantou Branch of the
People's Bank of China is the authority in charge of all investment funds in the
Zone. Finally, the procedures for dealing with funds are set out.
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Item 2. Management's Discussion and Analysis or Plan of Operation
The business of the Registrant is in the early stage of the manufacture,
marketing and selling of Bearings. A purchase of the shares of the Registrant is
speculative. The assessment of the potential of the business of the Registrant
to be successful and achieve profitability involves, among other things, the
availability of capital to the Registrant to increase its production capacity,
the continuing development of markets and sales in the PRC and Japan, the start
of marketing in Mexico, Turkey, Republic of China (Taiwan) and other
jurisdictions, competition from established manufacturers and a number of other
factors. See Item 1H "Description of Business - Risk Factors".
The Registrant owns 60 percent of Cansun, which in turn effectively owns 80% of
the requirement to contribute capital, and 60% of the equity of, Shantou and
Industries. The Registrant has been in negotiations to purchase the 40 percent
of Cansun that it does not own, but no agreement has been reached. Also,
although agreements relating to the ownership of Shantou have been made, parties
have not made application for the consent of the board of directors of Shantou
to such transfers. Applications for such consents to be in progress. The
Registrant is confident such consents will be obtained as four of the seven
members of the board of directors of Shantou are representatives of Cansun under
the Shareholders' Agreeement.
The figures discussed below reflect the percentage equity interest of the
Registrant in Shantou and Industries.
1997
In 1997, the Registrant had gross sales of Bearings of $1,052,081 before giving
effect to non-controlling interests and net income of $14,183 after giving
effect to non-controlling interests. An unrealized foreign currency gain gave
total income for the year of $29,660 to the Registrant's interest. Sales were
principally in the PRC and to Fujita. There were 3,055,000 shares outstanding at
December 31, 1997. The diluted income per share was $0.01.
In 1997, research work with Fujita continued. Fujita used the Bearings in the
construction of its Technical Research Center in Tokyo, Japan. Vi-Tech acquired
control of the Registrant.
1998
In 1998, the Registrant had gross sales of Bearings of $853,192 before giving
effect to non-controlling interests and a net loss of $60,142 after giving
effect to non-controlling interests. An unrealized foreign currency gain reduced
the loss to $44,847 to the Registrant's interest. Sales were principally in the
PRC and to Fujita. There were 5,255,000 shares outstanding at December 31, 1998.
The diluted loss per share was $(0.02).
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<PAGE>
On April 15, 1998 the shares of the Registrant became quoted on the
Over-the-Counter Bulletin Board, United States but there was not, and has not to
date been, a market in the Registrant's shares. Research work continued with
Fujita, with the execution of the agreement of basic research on March 18, 1998.
On August 25, 1998 Dr. Fu Lin Zhou sold the Patents to the Registrant for
2,000,000 shares and 1,000,000 shares to be issued in each of 1999,2000 and
2001. The obligation to issue shares in 1999, 2000 and 2001 was cancelled by
agreement dated September 3, 1999.
The Registrant entered into a User Agreement with Shantou and Shantou entered
into a Royalty Agreement with Dr. Zhou.
1999
To September 30, 1999, the Registrant had sales of Bearings of $1,854,924 before
giving effect to non-controlling interests and, after giving effect to
non-controlling interests, net income of $150,171. After giving effect to
non-controlling interests, an unrealized foreign currency loss reduced income to
September 30, 1999 to $135,756 to the Registrant's interest. Sales were
principally in the PRC and to Fujita. There was one sale to Russia. There were
at the end of the period 5,723,000 shares outstanding. The diluted income per
share was $0.03.
The other major events to occur to December 15, 1999 are summarized.
On January 1, 1999 the Registrant entered into a User Agreement with Industries
and Industries entered into a Royalty Agreement with Dr. Zhou.
On March 1, 1999 Fujita informed the Registrant that the Japan Seismic &
Structure Institute had found the Registrant's Bearings to be of "superior
quality" and stated Fujita was prepared to purchase more of the Registrant's
Bearings.
The management structure of the Registrant changed in August, 1999. By agreement
dated July 1, 1999 Mr. Boo Jock Chong became on August 12, 1999 president, chief
executive officer and, until December 15, 1999, treasurer with execution a
management agreement dated July 1, 1999 to June 30, 20003, renewable annually
thereafter and with the grant of an option to purchase before June 30, 2003
500,000 shares for $0.15 per share. The former president, Mr. William Chow,
became chairman of the board. On August 26, 1999 the Registrant executed a
management agreement with Mr. Joe Chung to June 30, 2003, renewable annually
thereafter, and granted Mr. Chung an option to purchase 250,000 shares for 0.15
per share before June 30, 2003. See Item 6 "Executive Compensation".
By an agreement dated July 23, 1999, amended October 20, 1999 Gary MacDonald was
retained as regulatory consultant at Cdn$120 per hour and on August 12, 1999
became secretary of the Registrant. The amendment provided that cash
compensation was limited to Cdn$7,000 each four weeks and any further time
accrued is allocated to a share purchase account for the purchase of shares at
$0.40 share. The agreement may be terminated on notice. See Item 6 "Executive
Compensation".
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<PAGE>
On August 16, 1999 two private placements, the first to Ms. Phaik Sim Tan for
175,000 shares at $0.40 per share with 175,000 class 1 warrants, each warrant
entitling the holder to purchase an additional share for $0.40 a share before
August 16, 2000, and the second to Mrs. Puan Sri Chang Nga for 125,000 shares at
$0.40 per share with 125,000 class 1 warrants, each warrant entitling the holder
to purchase an additional share for $0.40 a share before August 16, 2000, were
completed. Ms. Tan became a member of the board of directors. See Item 7
"Certain Relationships and Related Transactions".
By agreement dated October 25, 1999 Dr. Miles Price was retained as a consultant
until December 31, 2003, renewable annually thereafter, on a non-exclusive basis
to qualify, market and sell Bearings in the Republic of Mexico.
A private placement was done on November 3, 1999 to Dr. Miles Price for 70,000
shares at $0.40 per share. Dr. Price was granted an option to purchase 30,000
shares for $0.15 per share before June 30, 2003 which was exercised forthwith.
In November, 1999 discussions began with Cimko regarding the qualification,
marketing and sale in Turkey and other countries of Central Asia of Bearings by
the Registrant directly or in some form of association with Cimko. A letter of
intent dated November 5, 1999 was signed, but negotiations for a final agreement
continue.
In November, 1999 options to acquire shares for $0.15 per share were granted to
three directors (80,000 shares each), to Dr. Fu Lin Zhou (80,000 shares) and to
Gary MacDonald (50,000 shares) before December 31, 2003 in each case. See Item 6
"Executive Compensation".
By agreement dated December 2, 1999 Ms. Kim Suksun was retained as a consultant
to advise on marketing of Bearings for Korea and Japan and granted an option to
acquire before December 31, 2003 25,000 shares for $0.15 per share.
The annual general meeting of the Registrant was held December 15, 1999 in
Vancouver, B.C. The board of directors was reelected and the shareholders
approved the reservation for the grant of incentive options of up to 20 percent
of the outstanding shares of the Registrant from time to time.
On December 15, 1999 the Registrant entered into a User Agreement with
Enterprises.
See Item 5 "Directors, Executive Officers, Promoters and Control Persons", Item
6 "Executive Compensation" and Item 7 "Certain Relationships and Related
Transactions".
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<PAGE>
Plan of Operations
The Registrant has several objectives in 2000:
(a) attend in the week of January 31, 2000 the Twelfth World Conference on
Earthquake Engineering in Auckland, New Zealand with a booth advertising the
Bearings at an estimated cost of $15,000.
(a) negotiate and complete an agreement with Cheerlight to purchase the minority
interest of Cheerlight in Cansun at an estimated cost of $240,000.
(b) obtain the consent of the Shantou Commission to complete the transactions
with Nandou and Shantou Wan Run described under Item 1B "Description of Business
- - Corporate Structure and History".
(c) obtain financing to advance, with the approval of the Shantou Commission, to
Shantou funds to purchase testing equipment at an estimated cost of $400,000
and, if financing is available, expand or relocate the manufacturing plant to
increase production capacity by a factor of three.
(d) negotiate a new contract with Fujita for the marketing, distribution and
sale of Bearings in Japan.
(e) market the Bearings in the PRC by directing advertising to architectural
firms, construction companies and governmental offices at an estimated cost of
$50,000.
(f) conclude with Cimko or representatives of Cimko an agreement for the
qualification, marketing and sale of Bearings in Turkey at an estimated cost of
$70,000 and commence the marketing of Bearings in Turkey at an estimated cost of
$20,000.
(g) with Dr. Miles Price and possibly a third party, qualify, market and begin
the sale of Bearings in the Republic of Mexico at an estimated cost of $30,000.
(h) qualify, market and begin the sale of Bearings in Republic of China (Taiwan)
at an estimated cost of $30,000.
ITEM 3. Description of Property
The property of the Registrant is essentially comprised of the Patents and the
various models of Bearings designed on application of the Patents. The
Registrant currently produces 14 models of bearings, each model with or without
a lead core. The following table summarizes the physical characteristics of the
different models of Bearings, with the designation "L" referring to Bearings
with a lead core:
Model Diameter (mm) Core Diameter (mm) Height (mm) Weight (kg)
VP 200 205 N/A 83.8 10
VP 200-L 205 40 83.8 11
VB 250 261 N/A 83.8 16
VB 250-L 261 50 83.8 18
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<PAGE>
Model Diameter (mm) Core Diameter (mm) Height (mm) Weight (kg)
VP 300 316 N/A 106.5 28
VP 300-L 316 60 106.5 32
VP 300J 316 N/A 159.7 58
VP 300J-L 316 60 159.7 63
VB 300 316 N/A 83.8 24
VB 300-L 316 60 83.8 27
VP 400 420 N/A 132.5 62
VP 400-L 420 80 132.5 70
VP 400J 420 N/A 132.5 81
VP 400J-L 420 80 132.5 89
VP 500 510 N/A 164.0 111
VP 500-L 510 100 164.0 125
VP 600 620 N/A 216.2 226
VP 600-L 620 120 216.2 254
VP 600J 620 N/A 340.0 363
VP 600J-L 620 120 340.0 407
VP 700J 720 N/A 363.5 563
VP 700J-L 720 140 363.5 627
VP 800J 820 N/A 393.2 856-848
VP 800J-L 820 140.0 - 160.0 393.2 925-938
VP 900J 920 N/A 376.4 983-974
VP 900J-L 920 160.0 - 180.0 376.4 1069-1083
VP 1000J 1020 N/A 392.3 1306-1285
VP 1000J-L 1020 200.0 - 220.0 392.3 1419-1454
Notes:
1. one kilogram (kg) = 2.2 pounds
2. one centimeter = 2.52 inches = 10 millimeters (mm)
3. The dimensions and weight of the connecting plate which encloses at both ends
a bearing are not included.
See Item 1H "Description of Business - Risk Factors".
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following entities are known to the Registrant to beneficially own more than
five percent of the outstanding shares at December 15, 1999:
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<PAGE>
Name and Address of Amount and Nature Percentage of
Registered Holder of Beneficial Ownership Class (undiluted)
Pioneer Wise Ltd. 2,000,000 (1) 34.35%
HKSAR
Note:
(1) Pioneer Wise Limited is beneficially owned by Dr. Fu Lin Zhou. Dr. Zhou also
owns 108,000 registered in his personal name, making the beneficial percentage
ownership of Dr. Zhou 36.20% of outstanding shares.
The members of the board of directors of the Registrant as a group hold at
December 15, 1999 1,130,000 shares beneficially and senior officers, excluding
the holdings of directors who are also senior officers, hold at December 15,
1999 no shares beneficially but have, in the case of Gary MacDonald, a right to
purchase shares. By agreement dated December 21, 1999 Mr. Rick Lui has agreed to
sell 30,000 shares to a third party after termination of the restrictions on
transfer of shares under Rule 144 arising on filing of this Registration
Statement. See Item 6 "Executive Compensation".
Item Five - Directors, Executive Officers, Promoters and Control Persons
The names, municipality of residence, age and position held of the directors and
executive officers of the Registrant are as follows:
<TABLE>
<CAPTION>
Name and Municipality of Age Position Held No. of Shares
Residence
<S> <C> <C> <C>
Boo Jock Chong 56 Director, President & 200,000
Burnaby, B.C. Canada Chief Executive Officer
William Chow (1) 54 Director, Chairman of the 312,000
Richmond, B.C., Canada Board
Joe Chung 49 Director, Vice-President 230,000
Hong Kong Special
Administrative Region, PRC
Rick Lui (1) 44 Director 250,000
Vancouver, B.C., Canada
Phaik Sim Tan (1) 37 Director, Treasurer 175,000
Burnaby, B.C., Canada
Gary MacDonald 47 Secretary Nil
Vancouver, B.C., Canada
</TABLE>
Note:
(1) Member of audit committee.
(2) See Item 6 - "Executive Compensation"
Mr. Chong, 55, came to Canada in 1989 from Malaysia and established Continental
Home Health Care Ltd., a medical equipment supply company. Mr. Chong had been a
successful businessman in Malaysia in areas ranging from rice milling, oil palm
plantation and real estate development to construction. Continental Home went
public in 1993. By 1998 it had 80 employees and revenues of Cdn$14,000,000.
Continental Home was voted one of the 100 fastest growing companies in Canada by
Profit Magazine from 1994 to 1996. Mr. Chong retired from the company as its CEO
in 1997. In joining, his goals are to use his wide experience to expand the
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<PAGE>
company's operations globally and to develop core competences with other
companies in the area of seismic engineering to mitigate the effects of
earthquakes. Mr. Chong has entered into a management agreement providing for him
to stay with the company as president and chief executive officer until at least
2003. Mr. Chong became a member of the Registrant's board of directors and
president and chief executive officer on August 12, 1999.
Mr. Joe Chung was born in 1950 in Hong Kong and graduated from the Hong Kong
Polytechnic University (formerly Hong Kong Technical College) in 1973. He worked
for an architectural/design firm, construction company and furniture factory
respectively until 1988 when he immigrated to Canada. Mr. Chung started his own
project management company in Vancouver, British Columbia. He is very
experienced in product design and construction management. Mr. Chung is
currently based in Hong Kong where he manages the marketing of the Registrant's
products outside of China.
Mr. William Chow was born and raised in China. He moved to the United Kingdom in
1969 and was educated at the London University as an automotive engineer. He
immigrated to Canada in 1981 where he was employed as a Service Department
Manager for Hyundai and Honda respectively. In 1991, Mr. Chow started his own
business, Cambie Auto Centre Inc. In 1994, Mr. Chow began a joint venture with
Dr. Zhou for the development, manufacture and marketing of anti-seismic
technologies, and in 1995, with Nandou, they established Shantou Vibro-Tech
Industrial & Development Co. Ltd. in Shantou, China. Mr. Chow has a strong
business sense and has gained much invaluable experience and business
connections in China. Mr. Chow is the founder and has been instrumental in the
formation and continued success of the Registrant. Mr. Chow is the brother of
Dr. Fu Lin Zhou.
Mr. Rick Lui was born in Hong Kong and immigrated to Canada in 1973. He
graduated with a Bachelor of Business Administration in 1979 from the Simon
Fraser University in British Columbia. He was employed as an Assistant Manager
at a major Canadian financial institution until 1985, when he changed his career
focus to real estate development and marketing. In the 1990's Mr. Lui was
instrumental in marketing several real estate development projects. Mr. Lui has
been a director of a real estate company, a real estate development company and
is chief executive officer of a synthetic marble manufacturer in British
Columbia, which specializes in building supplies and bath products.
Ms. Tan was born in Malaysia and immigrated to Canada in 1994. Ms. Tan has
graduated with a Bachelor of Science in Electrical Engineering in 1984 and a
Masters of Business Administration in 1987, both from the University of
Wisconsin (Madison). Since that time, Ms. Tan has worked in Tennessee for Nissan
Motors Ltd., in Singapore marketing computer networks and in Canada running a
printing a company. Ms. Tan is responsible for monitoring the financial matters
for the Company.
A graduate of the University of British Columbia in mineral engineering (1975)
and law (1978) and holder of a degree in music (1969), Mr. MacDonald, age 48,
practiced securities, corporate and resource law in Vancouver, British Columbia
until October, 1996. As an associate at Lang Michener Lawrence and Shaw, Toronto
and Vancouver, from 1979 to 1985 and as a partner at the Vancouver law firm of
Ferguson Gifford from January 1985 to October 1992, Mr. MacDonald was involved
in tax-assisted financing and reorganizations in the forestry, oil & gas and
mining sectors and has been involved in Canadian national offerings, mining
51
<PAGE>
finance funds, various stock exchange and inter-exchange listings, including a
Vancouver/Hong Kong inter-listing, resource expropriation compensation claims,
partnership reorganizations, resource developments and sales and Canada - United
States cross-border transactions. In the United States, Mr. MacDonald has worked
in the regulatory securities, corporate and partnership areas. Mr. MacDonald is
responsible for overseeing legal and regulatory matters for the Registrant.
Dr. Fu Lin Zhou is not a member of the board of directors of the Registrant but
is the principal shareholder of the Registrant and controls 36.20% of the
outstanding shares and is an advisor to the Registrant's subsidiaries, Shantou
and Industries. Dr. Fu Lin Zhou is an international expert in seismology. As
vice-president and professor of civil engineering and earthquake engineering at
the South China Construction University (PRC), he is also a member of the
International Association of Earthquake Engineering (IAEE) and the International
Association of Bridge Structure Engineering (IABSE). Moreover, Dr. Zhou is a
Senior Consultant to the China Association of Earthquake Engineering and China
Society of Seismic Control of Structure Association respectively. He has
published several articles about earthquakes and methods of their control. In
1996, Dr. Zhou was retained by the China Engineering Construction
Standardization Association to compile the technical regulations for laminated
isolation bearings in the PRC, effectively setting the standard for the country
based on the work done by him and utilized by the Registrant. Four-time winner
of the National Science and Technology Prize, Dr. Zhou is also a consultant to
the United Nations and is involved in international research and design projects
in earthquake engineering. Dr. Zhou is the brother of the chairman and member of
the board of directors of the Registrant, Mr. William Chow.
All directors were elected at the annual general meeting of the Registrant held
December 15, 1999 and have a term of office expiring at the next annual general
meeting of the Registrant to be scheduled in June, 2000 unless re-elected or
unless a director's office is earlier vacated in accordance with the by-laws of
the Registrant or the provisions of the General Corporation Law (Delaware). All
officers have a term of office lasting until their removal or replacement by the
board of directors.
The business of the Registrant is managed and directed by the members of the
board of directors. There is not a single individual who can be said to be the
promoter of the Registrant.
Item 6. Executive Compensation
During the nine month period ending September 30, 1999 the Registrant had three
executive officers. Boo Jock Chong, who is a director and the president and
chief executive officer of the Registrant, Joe Chung, who is a director and
vice-president of the Registrant and Gary MacDonald, who is secretary of the
Registrant.
52
<PAGE>
The Registrant has entered into two management agreements. The first dated July
1, 1999 is with Boo Jock Chong. The agreement provides for the engagement of Mr.
Chong as the president and chief executive officer of the Registrant and the
payment of a monthly fee of $3,500 to December 31, 1999, of a monthly fee of
$4,000 to June 30, 2000 and thereafter, what was paid in the previous period
plus ten percent, adjusted each June 30. Mr. Chong is also provided a car
allowance of $150 per month and medical and dental benefits. The agreement
provides for the grant of an option to acquire 500,000 shares for US$0.15 per
share before June 30, 2003. This option has been granted. The agreement does not
provide for a vacation. The agreement automatically renews each June 30 if a
party has not given notice of termination. Mr. Chong may engage in other
business activities. Mr. Chong joined the Registrant in July, 1999 and became
president on August 12, 1999. Mr. Chong was paid $21,900 in the fiscal period
ending December 31, 1999.
The second management agreement dated August 26, 1999 is with Mr. Joe Chung. The
agreement provides for the engagement of Mr. Chung as vice-president of the
China subsidiaries of the Registrant at a monthly fee of $2,500 to December 31,
1999, of $3,000 to June 30, 2000 and increasing by ten percent in each annual
period thereafter. The term of the Agreement is to July 31, 2003 and is
automatically renewed for another year if neither party gives notice of
termination. The agreement provides for the grant of an option to acquire
250,000 shares for US$0.15 per share before June 30, 2003. This option has been
granted. The agreement provides for paid two week vacation in Canada with
airfare from China. Mr. Chung may not engage in other business activities. Mr.
Chung also receives 5,000 RMB per month from, and his accommodation is paid for
by, Shantou. Mr. Chung was paid $12,137 in the fiscal period ending December 31,
1998.
Mr. Gary MacDonald entered into an agreement with the Registrant dated July 23,
1999, amended October 20, 1999 engaging Mr. MacDonald in the capacity of
regulatory and business consultant in connection with the organization,
financing and operation of the business of the Registrant. Mr. MacDonald was
appointed secretary of the Registrant on August 12, 1999. The initial
remuneration for services was a fee of Cdn$120 per hour plus GST, limited by
amendment to a cash payment of Cdn$7,000 in each four week period with any
additional fee allocated to a share purchase account with shares to be purchased
at $0.40 per share on a private placement basis. On November 10, 1999 granted an
option to acquire 50,000 shares for $0.15 per share before December 31, 2003
which may be paid for from the share purchase account. To December 31, 1999 Mr.
MacDonald has been paid fees and GST of Cdn$35,400 and had accrued Cdn$20,621.40
in the share purchase account.
No long-term incentive plan awards have been made to the directors and officers
for the Registrant's most recently completed financial year or in 1999.
No other cash compensation, including salaries, fees, commissions, and bonuses,
was paid or is to be paid to the directors and officers of the Registrant for
services rendered for the financial year ended December 31, 1998 or in the
period ending December 15, 1999, nor was any remuneration paid to the
Registrant's directors in their capacity as such.
53
<PAGE>
No profit sharing, pension or retirement benefit plans have been instituted by
the Registrant and none are proposed at this time. There are no arrangements for
payments on termination of any member of management in the event of a change of
control.
By an agreement dated August 16, 1999 Ms. Phaik Sim Tan, a director and
treasurer of the Registrant, purchased 175,000 shares of the Registrant for
$0.40 per share and was granted 175,000 share purchase warrants, each warrant
entitling the holder to acquire a share for $0.40 per share before August 16,
2000. Also, by an agreement dated August 16, 1999 Puan Sri Chang Nga purchased
125,000 shares of the Registrant for $0.40 per share and was granted 125,000
share purchase warrants, each warrant entitling the holder to acquire a share
for $0.40 per share before August 16, 2000. Mrs. Nga is the mother of Ms. Tan,
treasurer and a member of the board of directors.
No member of the board of directors or senior officer exercised an option to
purchase shares of the Registrant in the fiscal year ended December 31, 1998 or
in the period ending December 15, 1999.
The following options held by former directors were cancelled and the following
options were granted to members of the board of directors and senior officers:
Name Exercise Price No. of Options Expiry Date
Boo Jock Chong 0.15 500,000 June 30,2003
Joe Chung 0.10 436,000 Aug. 16, 1999 (1)
0.15 250,000 June 30, 2003
William Chow 0.10 438,000 Aug. 16, 1999 (1)
0.15 80,000 Dec. 31, 2003
Rick Lui 0.10 500,000 Aug. 16, 1999 (1)
0.15 80,000 Dec. 31, 2003
Fu Lin Zhou 0.10 442,000 Aug. 16, 1999 (1)
0.15 80,000 Dec. 31, 2003
Shi Kit Cheung 0.10 750,000 June 8, 1999 (2)
Wilson Tam 0.10 550,000 June 5, 1999 (2)
Cecilia Yee 0.10 750,000 June 30, 1999 (2)
Phaik Sim Tan 0.15 80,000 Dec. 31, 2003
Gary MacDonald 0.15 50,000 Dec. 31, 2003
Notes:
(1) Cancelled by agreements dated August 16, 1999.
(2) Cancelled by passage of time after resignation from board of directors.
An option to acquire 30,000 shares for $0.15 per share was granted on October
25,1999 to Dr. Miles Price, the consultant for the Registrant in the Republic of
Mexico. This option was exercised in November, 1999.
An option to acquire 25,000 shares for $0.15 per share before December 31, 2003
was granted on December 15, 1999 to Ms. Kim Suksun, a consultant for the
Registrant in Japan and Korea.
For further details regarding Mr. MacDonald, Item 6 "Executive Compensation".
54
<PAGE>
Item 7. Certain Relationships and Related Transactions
None of the directors or officers of the Registrant nor any person who
beneficially owns, directly or indirectly, shares carrying more than ten percent
of outstanding shares of the Registrant, has any material interest, direct or
indirect, in any transaction since the commencement of the Registrant's last
completed financial year or in any proposed transaction which, in either case,
has or will materially affect the Registrant, or any subsidiaries, except as
follows:
(a) by an agreement dated August 25, 1998 Shantou retained Dr. Fu Lin Zhou as an
adviser and agreed to pay to Dr. Zhou a royalty of five percent of gross sales
of Bearings in the PRC. Dr. Zhou granted to Shantou a right of first refusal to
purchase the royalty. Shantou and Industries incurred royalty expenses to Dr.
Zhou in the eight month period ended August 31, 1999 of $92,806 of which $61,836
was unpaid at August 31, 1999.
(b) by an agreement dated January 1, 1999 Industries retained Dr. Fu Lin Zhou as
an adviser and agreed to pay to Dr. Zhou a royalty of five percent of gross
sales of Bearings by Industries outside the PRC. Dr. Zhou granted to Shantou a
right of first refusal to purchase the royalty. Shantou and Industries incurred
royalty expenses to Dr. Zhou in the eight month period ended August 31, 1999 of
$92,806 of which $61,836 was unpaid at August 31, 1999.
(c) Boo Jock Chong entered into a management agreement dated July 1, 1999 with
the Registrant as described in Item 6;
(d) Joe Chung entered into a management agreement dated August 26, 1999 with the
Registrant as described in Item 6;
(e) Gary MacDonald entered into the engagement agreement dated July 23, 1999,
amended October 20, 1999 as described in Item 6;
(f) various share purchase options were granted to members of the board of
directors and a senior officer as described in Item 6;
(g) the Registrant entered into an agreement dated January 1, 1999 under which
the Registrant provides management services to Industries for a fee of ten
percent of the difference between (a) the gross sales of Bearings and (b) the
Royalty any cost of insurance, shipping, freight or installation paid by
Industries in connection with the sale of the Bearings;
(h) by an agreement dated January 1, 1999 Shantou agreed to supply to Industries
from time to time Bearings at the cost of production of Shantou and any value
added tax levied in the PRC;
(i) by an agreement dated December 15, 1999 Industries agreed to supply to
Enterprises from time to time Bearings at the cost of production of Shantou and
any value added tax levied in the PRC;
(j) by an agreement dated August 16, 1999 Ms. Phaik Sim Tan, a director and
treasurer of the Registrant, purchased 175,000 shares of the Registrant for
$0.40 per share and was granted 175,000 share purchase warrants, each warrant
entitling the holder to acquire a share for $0.40 per share before August 16,
2000. Also, by an agreement dated August 16, 1999 Puan Sri Chang Nga purchased
125,000 shares of the Registrant for $0.40 per share and was granted 125,000
share purchase warrants, each warrant entitling the holder to acquire a share
for $0.40 per share before August 16, 2000. Mrs. Nga is the mother of Ms. Tan,
treasurer and a member of the board of directors.
55
<PAGE>
Item 8. Description of Securities
The authorized capital of the Company consists of 40,000,000 shares of $0.00001
par value per share. There are 5,723,000 shares outstanding (undiluted).
By an agreement dated October 3, 1997 the registrar and transfer agent of the
Registrant's shares is Interwest Transfer Co., Inc., 1918 East 4800 Street,
Suite 100, Salt Lake City, Utah 84117 (Tel: 801-272-9294, Fax: 801-277-3147,
Email: [email protected]), CUSIP No: 925591 10 9.
All shares have equal voting rights and are not assessable. Voting rights are
not cumulative and, therefore, the holders of more than 50% of the shares could,
if they chose to do so, elect all of the members of the board of directors of
the Registrant.
Upon liquidation, dissolution or winding up of the Registrant, the assets of the
Registrant, after the payment of liabilities, will be distributed pro rata to
the holders of the shares. The holders of the shares do not have preemptive
rights to subscribe for any securities of the Company and have no right to
require the Registrant to redeem or purchase their shares. The shares currently
outstanding are fully paid and non-assessable.
Holders of shares are entitled to participate equally in dividends when, as and
if declared by the board of directors, out of funds legally available therefore.
No dividend has been paid on the shares since inception, and none is
contemplated in the foreseeable future.
Shareholders of the Registrant have no preemptive rights to acquire additional
shares or other securities. The shares are not subject to redemption and carries
no subscription or conversion rights. In the event of liquidation of the
Company, the shares are entitled to share equally in corporate assets after
satisfaction of all liabilities. The shares, when issued, will be fully paid and
non-assessable.
The Registrant's shares became quoted through the facilities of the
Over-the-Counter Bulletin Board, United States under the symbol "VBTH" on April
15, 1998 but no market in the shares of the Registrant has been established.
There is no assurance that a public market will ever develop.
In general, under Reg. 144, an affiliate of the Registrant (officers, directors,
and owners of more than ten percent of the outstanding shares are affiliates of
the Registrant) may sell in ordinary market transactions through a broker or
with a market maker, within any three month period, a number of shares which
does not exceed the greater of one percent of the number of outstanding shares
or the average of the weekly trading volume of the shares during the four
calendar weeks before such sale. Sales under Reg. 144 require the filing of Form
144 with the Securities and Exchange Commission. If the shares have been held
for more than two years by a person who is not an affiliate, there is no
limitation on the manner of sale or the volume of shares that may be sold and no
Form 144 is required. Sales under Reg. 144 may have a depressive effect on the
market price of the Registrant's shares.
56
<PAGE>
Item 9. Market Price of, and Dividends on, the Registrant's Common Equity
The Registrant's shares became quoted through the facilities of the
Over-the-Counter Bulletin Board, United States under the symbol "VBTH" on April
15, 1998 but no market in the shares of the Registrant has been established.
There is no assurance that a public market will develop.
No dividends have been declared on the shares of the Registrant and the
Registrant does not anticipate declaring any dividends. The shares and business
of the Registrant are speculative in nature and there is no assurance of a
return on investment. See Item 1H "Description of Business - Risk Factors".
OTC BB quotations may reflect interdealer prices, without retail markup,
markdown or commission and may not necessarily reflect actual transactions.
Item 10. Legal Proceedings
The Registrant is a defendant in a law suit brought by Cecelia Yee, a former
director and officer, claiming about Cdn$40,000 for alleged wages and office
rent. The Registrant is defending the action and does not believe Ms. Yee will
be successful.
Item 11. Changes in, and Disagreements with, Accountants.
Telford Sadovnick, P.L.L.C., Bellingham, Washington became the auditors of the
Registrant on August 12, 1999. Before that the auditor was Mr. Keith Margetson,
C.A., Sechelt, British Columbia.
The change was effected on the assumption by Mr. Jock Chong of the office of
president and the determination that the current auditor was not qualified to
satisfy the requirement of the Registrant that financial statements be prepared
in accordance with United States generally accepted accounting principles. The
change did not arise from any disagreement on any accounting matter.
Item 12. Recent Sales of Unregistered Securities
The Registrant has issued the following number of shares for the following
prices:
57
<PAGE>
Date Number of Shares Issued Allotment Price Exemptions
June/97 2,000,000 (3) 0.0001 Section 3
Nov/97 255,000 0.10 Reg D, 504
Nov/97 1,200,000 Cdn$0.457 Reg.D, 504
Aug 25/98 2,000,000 0.0001 Reg D, 504
Aug 25/98 200,000 0.0001 Reg D, 504
Jan/99 168,000 0.50 Reg D, 504
Aug 12/99 175,000 0.40 Reg D, 504 (1)
Aug 12/99 125,000 0.40 Reg D, 504 (2)
Oct 25/99 30,000 0.15 Reg D, 504
Nov 3/99 70,000 0.40 Reg D, 504
Notes:
(1) Includes a Class 1 warrant to purchase 175,000 shares for 0.40 per share
before August 16, 2000.
(2) Includes a Class 1 warrant to purchase 125,000 shares for 0.40 per share
before August 16, 2000.
(3) Does not reflect return to treasury of 400,000 shares that were issued for
no consideration.
The grant of various options is noted in Item 6.
Item 13. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides the Registrant may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the Registrant, or is or was serving at
the request of the Registrant as a director, officer, employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suits or proceedings if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The by-laws of the
Registrant reflect this provision.
58
<PAGE>
Item 14. Financial Statements
In this Item are included:
(a) consent of auditors dated December 29, 1999 (b) report of auditors dated
October 10, 1999
(b) Audited Consolidated Balance Sheet as of December 31, 1998 and 1997
(c) Audited Consolidated Statements of Loss and Comprehensive Loss for the years
ended 1998 and 1997
(d) Audited Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998 and 1997
(e) Audited Consolidated Statements of Cash Flow for the years ended December
31, 1998 and 1997
(f) Notes to the Consolidated Financial Statements
(g) consent of accountants dated February 2, 2000
(h) compilation report of accountants dated February 2, 2000
(i) Unaudited Consolidated Interim Balance Sheets as of September 30, 1999 and
1998
(j) Unaudited Consolidated Interim Statements of Income and Comprehensive Income
for the nine month periods ended September 30, 1999 and 1998
(k) Unaudited Consolidated Interim Statements of Changes in Stockholders' Equity
for the for the nine month periods ended September 30, 1999 and 1998
(l) Unaudited Consolidated Interim Statements of Cash Flows for the nine month
periods ended September 30, 1999 and 1998
(m) Notes to the Consolidated Interim Financial Statements
(n) Consent of Auditors
We hereby consent to the use in this registration statement on Form 10-SB of our
independent auditors' report dated October 10, 1999 relating to the consolidated
financial statements of Vibro-Tech Industries, Inc. as of December 31, 1998 and
1997 containing the consolidated balance sheets as of December 31, 1998 and
1997, and the related consolidated statements of loss and comprehensive loss,
changes in stockholders' equity for the years ended December 31, 1998 and 1997,
statements of cash flows for the years ended December 31, 1998 and 1997 and the
notes to the consolidated financial statements which appear in such registration
statement.
/s/ Telford Sadovnick, P.L.L.C.
Bellingham, Washington 98225
December 30, 1999
(o) Consent of Accountants
We hereby consent to the use in this registration statement on Form 10-SB of our
accountant's compilation report dated February 2, 2000 relating to the
consolidated interim financial statements of Vibro-Tech Industries, Inc. as of
September 30, 1999 and 1998 containing the consolidated interim balance sheets
as of September 30, 1999 and 1998, and the consolidated interim statements of
income and comprehensive income for the nine month period ended September 30,
1999 and 1998, of changes in stockholders' equity for the nine month period
ended september 30, 1999 and 1998, of statements of cash flows for the nine
month period ended September 30, 1999 and 1998 and the notes to the consolidated
interim financial statements which appear in such registration statement.
/s/ Telford Sadovnick, P.L.L.C.
Bellingham, Washington 98225
February 2, 2000
59
<PAGE>
================================================================================
VIBRO-TECH INDUSTRIES, INC.
Consolidated Financial Statements
================================================================================
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Vibro-Tech Industries, Inc.
We have audited the accompanying consolidated balance sheets of Vibro-Tech
Industries, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of loss and comprehensive loss, changes in stockholders' equity and
cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
Except as discussed in the following paragraph, we conducted our audits in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
We were appointed auditors after the year end and were unable to verify the
inventory. In addition, the Company did not make a count of its physical
inventory as at December 31, 1998. The Company's records do not permit the
application of other auditing procedures to inventories and we were unable to
satisfy ourselves as to the fairness of the inventory by other means. Since
opening and closing inventories enter into the determination of the results of
operations and cash flows, we were unable to determine whether adjustments to
cost of sales, net (loss) income for the years, opening and closing deficits and
cash provided from operations may be necessary for the years ended December 31,
1998 and 1997.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to verify the inventory,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Vibro-Tech Industries, Inc. as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for the years ended December 31, 1998 and 1997 in conformity with generally
accepted accounting principles.
CERTIFIED PUBLIC ACCOUNTANTS
/s/ Telford Sadovnick, P.L.L.C.
Bellingham, Washington
October 10, 1999
60
<PAGE>
================================================================================
VIBRO-TECH INDUSTRIES, INC.
Consolidated Balance Sheets
================================================================================
As of December 31, 1998 1997
- --------------------------------------------------------------------------------
Assets
Current
Cash and short-term deposits $ 105,180 $ 33,175
Accounts receivable 236,830 115,314
Inventory 112,402 196,149
Prepaid expenses 18,011 24,131
Loan receivable 26,530 --
Deferred Income Taxes 13,627 --
- --------------------------------------------------------------------------------
Total Current Assets 512,580 368,769
Fixed Assets 396,748 314,558
- --------------------------------------------------------------------------------
Total Assets $ 909,328 $ 683,327
================================================================================
Liabilities
Current
Accounts payable and accrued liabilities $ 251,500 $ 63,992
Loans payable 118,880 115,848
- --------------------------------------------------------------------------------
Total Current Liabilities 370,380 179,840
- --------------------------------------------------------------------------------
Non-Controlling Interest 299,824 273,736
- --------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity
Common stock, $0.0001 par value;
40,000,000 shares authorized
(1998: 5,255,000 shares issued and outstanding)
(1997: 3,055,000 shares issued and outstanding) 526 306
Additional paid-in capital 415,256 415,256
Proceeds for shares to be issued 54,000 --
Accumulated Deficit (261,410) (201,288)
Accumulated other comprehensive income 30,752 15,477
- --------------------------------------------------------------------------------
Total Stockholders' Equity 239,124 229,751
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 909,328 $ 683,327
================================================================================
see accompanying notes to consolidated financial statements
61
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================
VIBRO-TECH INDUSTRIES, INC.
Consolidated Statements of Loss and Comprehensive Loss
=========================================================================================
For the years ended December 31, 1998 1997
- -----------------------------------------------------------------------------------------
Revenues
<S> <C> <C>
Sales $ 853,192 $1,052,081
Cost of sales 476,026 512,226
- -----------------------------------------------------------------------------------------
Gross Margin 377,166 539,855
- -----------------------------------------------------------------------------------------
Expenses
Selling 113,592 86,224
General and administrative 337,830 328,548
- -----------------------------------------------------------------------------------------
451,422 414,772
- -----------------------------------------------------------------------------------------
(Loss) Income before Income Taxes and Non-controlling Interest (74,256) 125,083
Deferred Income Taxes 13,654 --
- -----------------------------------------------------------------------------------------
(Loss) Income before Non-controlling Interest (60,602) 125,083
Non-controlling Interest (480) 110,900
- -----------------------------------------------------------------------------------------
Net (loss) income for the year (60,122) 14,183
Other Comprehensive income
Unrealized gain on foreign currency translation 15,275 15,477
=========================================================================================
Comprehensive (loss) income for the year $ (44,847) $ 29,660
=========================================================================================
Primary and diluted (loss) income per share $ (0.02) $ 0.01
=========================================================================================
see accompanying notes to consolidated financial statements
62
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
======================================================================================
VIBRO-TECH INDUSTRIES, INC.
Consolidated Statements of Cash Flows
======================================================================================
For the years ended December 31, 1998 1997
- --------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C>
Net (loss) income for the year $ (60,122) $ 14,183
Items not affecting cash
Amortization 46,698 32,780
Deferred Income Taxes (13,654) --
Non-Controlling Interest (480) 110,900
- --------------------------------------------------------------------------------------
(27,558) 157,863
Net Changes in non-cash balances related to operations 154,671 (284,361)
- --------------------------------------------------------------------------------------
Net cash from (used in) operating activities 127,113 (126,498)
- --------------------------------------------------------------------------------------
Financing Activities
Increase in loans payable 3,032 115,848
Increase in loan receivable (26,530) --
Common shares issued for cash -- 55,324
Proceeds for shares to be issued 54,000 --
Proceeds from non-controlling shareholders of subsidiaries 43,416 --
- --------------------------------------------------------------------------------------
Net cash provided by financing activities 73,918 171,172
- --------------------------------------------------------------------------------------
Investing Activities
Purchase of equipment (129,026) (52,437)
- --------------------------------------------------------------------------------------
Net cash used in investing activities (129,026) (52,437)
- --------------------------------------------------------------------------------------
Net increase (decrease) in cash 72,005 (7,763)
Cash position - Beginning of year 33,175 40,938
- --------------------------------------------------------------------------------------
Cash position - End of year $ 105,180 $ 33,175
======================================================================================
No income taxes or interest, other than interest accrued on directors' loans
totaling $1,837, have been paid in either 1998 or 1997.
see accompanying notes to consolidated financial statements.
63
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
VIBRO-TECH INDUSTRIES, INC.
Consolidated Statements of Changes in Stockholders' Equity
==================================================================================================================
For the years ended December 31, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Common Stock Other Total
Common Stock Paid-in Subscribed Accumulated Comprehensive Stockholders'
Shares Amount Capital but Unissued Deficit Income Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception
June 2, 1997 -- $ -- $ -- $ -- $ (215,471) $ -- $ (215,471)
Common stock
Issued for services 1,600,000 160 160
Common stock issued
for cash at $0.10
per share 255,000 26 25,474 25,500
Common stock issued
for acquisition 1,200,000 120 389,782 389,902
Net income during
the year
14,183 14,183
Unrealized gain on
foreign currency
translation 15,477 15,477
- ------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 3,055,000 306 415,256 -- (201,288) 15,477 229,751
Common stock issued
for technology 2,000,000 200 200
Common stock issued
for services 200,000 20 20
Proceeds for shares
to be issued 54,000 54,000
Net loss during the
year (60,122) (60,122)
Unrealized gain on
foreign currency
translation 15,275 15,275
- ------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 5,255,000 $ 526 $ 415,256 $ 54,000 $ (261,410) $ 30,752 $ 239,124
==================================================================================================================
see accompanying notes to consolidated financial statements.
64
</TABLE>
<PAGE>
================================================================================
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
================================================================================
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The Company was incorporated under the laws of the State of Delaware on June 2,
1997 as Pacific Quilt Design, Inc. On November 6, 1997 the Company was acquired
by the shareholders of Vi-Tech Holdings Ltd. in a share exchange and changed its
name to Vibro-Tech Industries, Inc.
The Company's business consists of the manufacture and sale of rubber bearings
as anti-seismic devices to protect structures from earthquake damage.
Manufacturing facilities are located in China and sales are made within China,
with export sales to Japan and Russia.
The financial statements are consolidated using the pooling-of-interests method
and include Vi-Tech Holdings Ltd., owned 100%, Cansun Pacific International
Investments Corp. ("Cansun") owned 60%; Shantou Vibro-Tech Industrial
Development Co., Ltd.("Shantou"), owned as to 60% by Cansun; Vibro-Tech
Industries Limited, owned 100% by Shantou; and Vibro-Tech Holdings Limited,
owned 100%. All material inter-corporate transactions have been eliminated.
On December 27, 1995 the Shantou Commission for Foreign Economic Relations and
Trade, a Chinese government agency, approved the formation of Shantou to be
owned as to 80% by Cansun and 20% by Nandou Construction Development Company of
the Shantou Special Economic Zone. By agreement between the shareholders in
1997, it was agreed to change the shareholdings of Shantou to 60% by Cansun, 25%
by Nandou and 15% by the general manager. Although this change has not been
formally recognized by the Chinese authorities and the shareholdings of Shantou
have not been altered, the financial statements have been prepared as though
Cansun only owns 60% of Shantou.
The total approved investment is 12 million RMB (approximately US$1,447,000) and
the registered capital is 8.4 million RMB (approximately US$1,013,000). The
Company's portion is 5.04 million RMB (approximately US$608,000). As at December
31, 1998 the Company had invested US$413,762 towards its share of the registered
capital. The balance of US$195,000 was paid in July,1999. The minority
shareholders had also fully paid their share (40%) of the registered capital as
of July,1999 such that the required capital as required by the Shantou
Commission is fully paid.
The approval granted by the Shantou Commission for Foreign Economic Relations
and Trade is for a period of twelve years from December 27, 1995. This approval
also permits Shantou to have a reduced income tax rate of no corporate income
taxes payable during the first two years of profitable operations and one-half
the regular corporate rate (normal corporate rate is 15%) for the next three
years.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Accounting Principles and Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the fiscal year. Actual
results may differ from those estimates.
65
<PAGE>
================================================================================
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
================================================================================
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
b) Translation of Foreign Currencies
Revenues and expenses arising from foreign currency transactions are translated
into United States dollars at the average rate for the period. Monetary assets
and liabilities are translated into United States dollars at the rates
prevailing at the balance sheet date. Other assets and liabilities are
translated into United States dollars at the rates prevailing on the transaction
dates. Exchange gains and losses are recorded as income or expense in the period
in which they occur.
c) Financial Instruments and Financial Risk
i) Fair value of financial instruments
The Company's financial instruments consist of cash, accounts receivable, loan
receivable and current liabilities. The fair values of the current assets and
liabilities approximate the carrying amounts due to the short-term nature of
these instruments.
ii) Credit Risk
Financial instruments which potentially subject the Company to credit risk
are accounts receivable. Sales of the Company's products in China have
individual credit evaluation as appropriate and allowances are provided for
estimated credit losses. Sales outside of China are only made upon receipt
of letters of credit. Significant cash balances maintained at banks in
China are used primarily to finance the China operations.
d) Cash and Short-term Deposits
Cash and short-term deposits include government treasury bills and bankers'
acceptances with maturities no longer than 90 days, together with accrued
interest.
e) Inventory
Inventory includes raw materials, work in progress and finished goods. Inventory
is valued at the lower of cost and market value using the first-in, first-out
method of accounting.
f) Amortization
Fixed assets are amortized using the straight-line basis over the estimated
useful lives of the assets, after providing for residual values, as follows:
Plant and machinery 6 to 10 years
Office equipment and furniture 6 to 10 years
Automobiles 6 to 10 years
Leasehold improvements 5 years
Only one-half year's amortization is recorded in the year of acquisition.
66
<PAGE>
================================================================================
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
================================================================================
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
g) Income Taxes
The Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, all
expected future events other than enactments of changes in the tax laws or rates
are considered.
NOTE 3 - INVENTORY
Inventory comprises the following:
1998 1997
---- ----
Raw material $ 27,059 $ 35,604
Work in process 16,767 23,592
Finished goods 68,576 136,953
-------- --------
$112,402 $196,149
======== ========
NOTE 4 - FIXED ASSETS
Fixed assets comprise the following:
Accumulated Total
Cost Amortization 1998 1997
---- ------------ ---- ----
Plant and machinery $331,094 $ 47,996 $283,098 $184,997
Office equipment and furniture 33,265 8,779 24,486 20,588
Automobiles 35,558 5,017 30,541 33,850
Leasehold Improvements 83,639 25,016 58,623 75,123
-------- -------- -------- --------
$483,556 $ 86,808 $396,748 $314,558
======== ======== ======== ========
NOTE 5 - LOANS PAYABLE
Loans payable comprise the following:
1997
Nandou Construction Development Company
280,000 RMB (1997 - 280,000 RMB) -
unsecured, non-interest bearing with
no set repayment terms $ 33,784 $ 33,784
Nandou Construction Development Company
140,000 RMB (1997 - 560,000 RMB) -
unsecured, non-interest bearing with
no set terms of repayment 16,884 67,592
67
<PAGE>
================================================================================
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
================================================================================
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 5 - LOANS PAYABLE (continued)
Prof. Zhou
120,000 RMB (1997 - 120,000 RMB) -
unsecured, non-interest beaing,
with no set terms of repayment 14,472 14,472
Loans from various Directors and former Directors
A total of $84,000 Cdn - unsecured,
interest of 10.25%, due September 9,1999 53,740 --
--------- ---------
$ 118,880 $ 115,848
========= =========
NOTE 6 - COMMON STOCK
a) Common Stock
During 1998, the Company acquired a patent and three applications for patents
from a shareholder in consideration of:
2,000,000 Common shares issued in August,1998
1,000,000 Common shares to be issued September 1, 1999
1,000,000 Common shares to be issued September 1, 2000
1,000,000 Common shares to be issued September 1, 2001
By an agreement dated September 3, 1999, the obligation of the Company to
issue the three million shares in 1999, 2000 and 2001 was cancelled and voided.
The value of these patents and patent applications have been recorded at the par
value of the share, which management considers to be fair value.
During 1998, the Company issued 200,000 common shares to a director in lieu of
payment of salary. The value of the services has been recorded at the par value
of the stock, which management considers to be fair value.
b) Stock Options
As at December 31, 1998 the Company had outstanding stock options
aggregating 3,866,000 entitling the holders to purchase one common share per
stock option at $0.10 per share until October 15, 2008. Of these options,
2,050,000 expired by June 30, 1999 due to the resignation of three directors.
The remaining 1,816,000 stock options were cancelled by agreement with the
holders on August 16, 1999.
NOTE 7 - INCOME (LOSS) PER SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and common share equivalents outstanding. There were no
dilutive securities outstanding for the periods presented. No differences
existed between primary and diluted loss per share for the periods presented.
The weighted-average number of shares outstanding after giving retroactive
effect to share transactions are 3,755,000 for the 1998 fiscal year and
3,055,000 for the 1997 fiscal year.
68
<PAGE>
================================================================================
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
================================================================================
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - RELATED PARTY TRANSACTIONS
During the years the Company incurred royalty expenses to the principal
shareholder in the amount of $50,812 (1997 - $54,787). Included in accounts
payable are unpaid royalties of $18,357 (1997 - $6,686).
The Company accrued interest on directors' loans of $1,837 (1997 - nil)
The Company paid management fees of $12,137 (1997 - nil) to a director.
Loan receivable is from an employee, without interest, unsecured and due
November,1999.
NOTE 9 - UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use only two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date.
The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure, which
could affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
As at December 31, 1998 the Company had commitments for rental of factory and
office space. The minimum payments for the next five years are:
1999 $57,000
2000 57,000
2001 19,900
2002 Nil
2003 Nil
Contingency
Subsequent to December 31, 1998 a former director and officer sued the Company
for unpaid remuneration and accrued interest on a loan. Management believes that
this action is without merit and will not be successful.
69
<PAGE>
================================================================================
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Financial Statements
================================================================================
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - NET CHANGES IN NON-CASH BALANCES RELATED TO OPERATIONS
1998 1997
---- ----
Accounts receivable $(121,516) $(107,337)
Inventory 83,747 (66,127)
Prepaid expenses 6,120 (5,435)
Accounts payable and accrued liabilities 186,320 (105,462)
--------- ---------
$ 154,671 $(284,361)
========= =========
NOTE 12 - SUBSEQUENT EVENTS
The following material events have occurred subsequent to the year-end:
The Company issued 168,000 common shares for $0.50 per share in January 1999.
$54,000 of the proceeds was received prior to December 31, 1998.
The Company entered into an agreement, dated June 8, 1999, with a Minority
Shareholder of Shantou to acquire his 15% interest of Shantou in exchange for
300,000 shares of the Company. The value of this minority interest was agreed at
$150,000. The exchange is subject to the approval of the Shantou Commission for
Foreign Economic Relations and Trade.
c) The Company entered into a management agreement, effective July 1, 1999,
with its chief executive officer for remuneration of $3,500 per month until
December 1999, $4,000 per month to June 30, 2000 then increasing by ten percent
in each annual period thereafter. The agreement automatically renews each June
30 if neither party has given notice of termination. The agreement also provides
for an option to purchase 500,000 shares up to June 30, 2003 at $0.15 per share.
d) The Company entered into a management agreement with its executive
vice-president of the China subsidiaries for remuneration of $2,500 per month
until July 31, 2000, increasing by ten percent in each annual period thereafter.
The term of the agreement is until July 31, 2003 and is automatically renewed if
neither party gives notice. The agreement also provides for an option of 250,000
shares up to June 30, 2003 at $0.15 per share.
e) The Company sold 300,000 units, comprising of one common share for $0.40
per share and a share purchase warrant to purchase, before August 16, 2000, one
common share for $0.40 per share, for total proceeds of $120,000.
The Company settled a lawsuit with its former chief executive officer and
director calling for the payment to the Company of $25,000, forgiveness of all
amounts owing by the Company and the return of 400,000 shares to treasury. Since
this transaction of returning the shares affects the Company's permanent
capital, the financial statements have been prepared giving retroactive effect
to the transaction. The 400,000 shares issued in the 1997 fiscal year and
cancelled subsequent to the 1998 fiscal year are not shown as issued.
The Company settled a lawsuit with a former director for the repayment of a loan
payable, accrued interest and costs of $1,000.
On June 15,1999 the Company and Guangzhou Subway commodities Ltd. signed a
letter of intent to develop and sell rubber bearings in southern China.
70
<PAGE>
ACCOUNTANTS' COMPILATION REPORT
We have compiled the accompanying consolidated interim balance sheets of
Vibro-Tech Industries, Inc. as at September 30, 1999 and 1998 and the related
consolidated interim statements of income and comprehensive income, changes in
stockholders' equity and cash flows for the interim nine months then ended, in
accordance with Statements on Standards for Accounting and Review services
issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
CERTIFIED PUBLIC ACCOUNTANTS
/s/ Telford Sadovnick, P.L.L.C.
Bellingham, Washington
February 2, 2000
71
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Consolidated Interim Balance Sheets
(Unaudited - See Accountants' Compilation Report)
- --------------------------------------------------------------------------------
As of September 30, 1999 1998
- --------------------------------------------------------------------------------
Assets
Current
Cash and short-term deposits $ 371,608 $ 60,110
Accounts receivable 509,495 126,895
Inventory 292,064 122,853
Prepaid expenses 16,778 --
Loan receivable 26,716 26,576
- --------------------------------------------------------------------------------
Total Current Assets 1,216,661 336,434
Fixed Assets 438,552 380,016
- --------------------------------------------------------------------------------
Total Assets $ 1,655,213 $ 716,450
================================================================================
Liabilities
Current
Accounts payable and accrued liabilities $ 375,215 $ 228,964
Income taxes payable 12,684 --
Loans payable 100,978 65,180
- --------------------------------------------------------------------------------
Total Current Liabilities 488,877 294,144
- --------------------------------------------------------------------------------
Non-Controlling Interest 641,456 241,193
- --------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity
Common stock, $0.0001 par value;
40,000,000 shares authorized
(1999: 5,723,000 shares issued and outstanding)
(1998: 5,055,000 shares issued and outstanding) 573 506
Additional paid-in capital 619,209 415,256
Accumulated Deficit (111,239) (249,105)
Accumulated other comprehensive income 16,337 14,456
- --------------------------------------------------------------------------------
Total Stockholders' Equity 524,880 181,113
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,655,213 $ 716,450
================================================================================
see accompanying notes to consolidated interim financial statements.
72
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Consolidated Interim Statements of Income and Comprehensive Income
(Unaudited - See Accountants' Compilation Report)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 1998
- --------------------------------------------------------------------------------
Revenues
Sales $ 1,854,924 $ 548,569
Cost of sales 698,089 340,880
- --------------------------------------------------------------------------------
Gross Margin 1,156,835 207,689
- --------------------------------------------------------------------------------
Expenses
Selling 139,589 79,981
General and administrative 512,757 229,236
- --------------------------------------------------------------------------------
652,346 309,217
- --------------------------------------------------------------------------------
Income (Loss) before Income Taxes
and Non-Controlling Interest (101,528) 504,489
Income Taxes -- 26,334
- --------------------------------------------------------------------------------
Income (Loss) before Non-Controlling Interest 478,155 (101,528)
Non-Controlling Interest 53,711 (327,984)
- --------------------------------------------------------------------------------
Net income (loss) for the period 150,171 (47,817)
Other Comprehensive Income
Unrealized loss on foreign
currency translation (1,021) (14,415)
================================================================================
Comprehensive income (loss) for the period $ (48,838) $ 135,756
================================================================================
Earnings (loss) per share
Primary $ 0.03 $ (0.01)
Fully Diluted $ 0.03 $ (0.01)
================================================================================
see accompanying notes to consolidated interim financial statements.
73
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Consolidated Interim Statements of Cash Flows
(Unaudited - See Accountants' Compilation Report)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 1998
- --------------------------------------------------------------------------------
Operating Activities
Net (loss) income for the period $ 150,171 $ (47,817)
Items not affecting cash
Amortization 55,366 30,610
Non-Controlling Interest 327,984 (53,711)
- --------------------------------------------------------------------------------
533,521 (70,918)
Net changes in non-cash balances
related to operations (303,423) 250,818
- --------------------------------------------------------------------------------
Net cash from operating activities 230,098 179,900
- --------------------------------------------------------------------------------
Financing Activities
Increase in loans receivable (3,189) (26,576)
Repayment of loans payable (17,902) (50,668)
Common shares issued for cash 150,000 --
Proceeds from non-controlling
shareholders of subsidiaries -- 21,168
- --------------------------------------------------------------------------------
Net cash provided (used) by financing activities 128,909 (56,076)
- --------------------------------------------------------------------------------
Investing Activities
Purchase of equipment (92,579) (96,889)
- --------------------------------------------------------------------------------
Net cash used in investing activities (92,579) (96,889)
- --------------------------------------------------------------------------------
Net increase in cash 266,428 26,935
Cash position - Beginning of period 105,180 33,175
- --------------------------------------------------------------------------------
Cash position - End of period $ 371,608 $ 60,110
================================================================================
No income taxes or interest, other than interest accrued on directors' loans
totaling $3,379, have been paid in either interim period.
see accompanying notes to consolidated interim financial statements.
74
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Consolidated Interim Statements of Changes in Stockholders' Equity
(Unaudited - See Accountants' Compilation Report)
- -----------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 and 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Subscribed Other
Common Stock Paid-in but Accumulated Comprehensive Stockholders'
# Amount Capital Unissued Deficit Income Equity
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 3,055,000 $ 306 $ 415,256 $ -- $ (201,288) $ 15,477 $ 229,751
Common stock
issued for technology 2,000,000 200 200
Net loss for the (47,817) (47,817)
period
Unrealized loss on
foreign currency translation (1,021) (1,021)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1998 5,055,000 $ 506 $ 415,256 $ -- $ (249,105) $ 14,456 $ 181,113
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 5,255,000 $ 526 $ 415,256 $ 54,000 $ (261,410) $ 30,752 $ 239,124
Common stock issued
for cash at $0.50
per share 168,000 17 83,983 (54,000) 30,000
Common stock issued
for cash at $0.40
per share 300,000 30 119,970 120,000
Net income for the
period 150,171 150,171
Unrealized gain on
foreign currency (14,415) (14,415)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1999 5,723,000 $ 573 $ 619,209 $ -- $ (111,239) $ 16,337 $ 524,880
- -----------------------------------------------------------------------------------------------------------------------------------
see accompanying notes to consolidated interim financial statements.
</TABLE>
75
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Interim Financial Statements
(Unaudited - See Accountants' Compilation Report)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The Company was incorporated under the laws of the State of Delaware on June 2,
1997 as Pacific Quilt Design, Inc. On November 6, 1997 the Company was acquired
by the shareholders of Vi-Tech Holdings Ltd. in a share exchange and changed its
name to Vibro-Tech Industries, Inc.
The Company's business consists of the manufacture and sale of rubber bearings
as anti-seismic devices to protect structures from earthquake damage.
Manufacturing facilities are located in China and sales are made within China,
with export sales to Japan and Russia.
The interim financial statements are consolidated using the pooling-of-interests
method and includes Vi-Tech Holdings Ltd., owned 100%, Cansun Pacific
International Investments Corp. ("Cansun") owned 60%; Shantou Vibro-Tech
Industrial Development Co., Ltd.("Shantou"), owned as to 60% by Cansun;
Vibro-Tech Industries Limited, owned 100% by Shantou; and Vibro-Tech Holdings
Limited, owned 100%. All material inter-corporate transactions have been
eliminated.
On December 27, 1995 the Shantou Commission for Foreign Economic Relations and
Trade, a Chinese government agency, approved the formation of Shantou to be
owned as to 80% by Cansun and 20% by Nandou Construction Development Company of
the Shantou Special Economic Zone. By agreement between the shareholders in
1997, it was agreed to change the shareholdings of Shantou to 60% by Cansun, 25%
by Nandou and 15% by the general manager. Although this change has not been
formally recognized by the Chinese authorities and the shareholdings of Shantou
have not been altered, the financial statements have been prepared as though
Cansun only owns 60% of Shantou.
The total approved investment is 12 million RMB (approximately US$1,447,000) and
the registered capital is 8.4 million RMB (approximately US$1,013,000). The
Company's portion is 5.04 million RMB (approximately US$608,000). The approval
granted by the Shantou Commission for Foreign Economic Relations and Trade is
for a period of twelve years from December 27, 1995. This approval also permits
Shantou to have a reduced income tax rate of no corporate income taxes payable
during the first two years of profitable operations and one-half the regular
corporate rate (normal corporate rate is 15%) for the next three years.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Accounting Principles and Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the fiscal period. Actual results may differ from those estimates.
b) Translation of Foreign Currencies
Revenues and expenses arising from foreign currency transactions are
translated into United States dollars at the average rate for the period.
Monetary assets and liabilities are translated into United States dollars
at the rates prevailing at the balance sheet date. Other assets and
liabilities are
76
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Interim Financial Statements
(Unaudited - See Accountants' Interim Compilation Report)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
translated into United States dollars at the rates prevailing on the
transaction dates. Exchange gains and losses are recorded as income or
expense in the period in which they occur.
c) Financial Instruments and Financial Risk
i) Fair value of financial instruments
The Company's financial instruments consist of current assets and current
liabilities. The fair values of the current assets and liabilities
approximate the carrying amounts due to the short-term nature of these
instruments.
ii) Credit Risk
Financial instruments which potentially subject the Company to credit risk
are accounts receivable. Sales of the Company's products in China have
individual credit evaluation as appropriate and allowances are provided for
estimated credit losses. Sales outside of China are only made upon receipt
of letters of credit.
d) Cash and Short-term Deposits
Cash and short-term deposits include government treasury bills and bankers'
acceptances with maturities no longer than 90 days, together with accrued
interest.
e) Inventory
Inventory includes raw materials, work in progress and finished goods.
Inventory is valued at the lower of cost and market value using the
first-in, first-out method of accounting.
f) Amortization
Fixed assets are amortized using the straight-line basis over the estimated
useful lives of the assets, after providing for residual values, as
follows:
Plant and machinery 6 to 10 years
Office equipment and furniture 6 to 10 years
Automobiles 6 to 10 years
Leasehold improvements 5 years
Only one-half year's amortization is recorded in the year of acquisition.
g) Income Taxes
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, all expected future events other than enactment's of changes
in the tax laws or rates are considered.
77
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Interim Financial Statements
(Unaudited - See Accountants' Compilation Report)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 3 - INVENTORY
Inventory comprises the following:
1999 1998
Raw material $ 14,416 $ 39,320
Work in process 44,037 34,020
Finished goods 233,611 49,513
-------- --------
$292,064 $122,853
======== ========
NOTE 4 - FIXED ASSETS
Fixed assets comprise the following:
<TABLE>
<CAPTION>
Accumulated Total
Cost Amortization 1999 1998
<S> <C> <C> <C> <C>
Plant and machinery $ 373,236 $ 68,871 $ 304,365 $ 261,562
Office equipment and furniture 36,462 12,794 23,668 25,128
Automobiles 35,558 7,445 28,113 31,451
Leasehold Improvements 135,000 52,594 82,406 61,875
--------- --------- --------- ---------
$ 580,256 $ 141,704 $ 438,552 $ 380,016
========= ========= ========= =========
NOTE 5 - LOANS PAYABLE
Loans payable comprise the following:
1999 1998
Nandou Construction Development Company
280,000 RMB (1998 - 280,000 RMB) - unsecured,
non-interest bearing with no set repayment terms $ 33,900 $ 33,824
Nandou Construction Development Company
140,000 RMB (1998 - 140,000 RMB) - unsecured,
non-interest bearing with no set terms of repayment 16,884 16,884
</TABLE>
78
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Interim Financial Statements
(Unaudited - See Accountants' Compilation Report)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 5 - LOANS PAYABLE (continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Prof. Zhou
120,000 RMB (1998 - 120,000 RMB) - unsecured
non-interest bearing with no set terms of repayment 14,472 14,472
Loans from various Directors and former Directors
unsecured, interest of 10.25%, due September 9, 1999 35,722 --
-------- --------
$ 100,978 $ 65,180
========= ========
</TABLE>
NOTE 6 - COMMON STOCK
a) Common Stock
i) During 1998, the Company acquired additional patents and improved
technology from a director and shareholder in consideration of:
2,000,000 Common shares issued in August,1998
1,000,000 Common shares to be issued September 1, 1999
1,000,000 Common shares to be issued September 1, 2000
1,000,000 Common shares to be issued September 1, 2001
By a mutual agreement, dated September 3, 1999, it was agreed that the
obligation of the Company to issue the 3 million shares in 1999, 2000
and 2001 was cancelled and voided.
ii) The Company sold 300,000 units, comprising of one common share for $0.40
per share and a share purchase warrant to purchase, before August 16, 2000,
one common share for $0.40 per share, for total proceeds of $120,000.
b) Stock Options
The following incentive stock options are outstanding at September 30, 1999:
Number of Shares Price Per Share Expiry Date
750,000 $ 0.15 June 30, 2003
c) Share Purchase Warrants
The following share purchase warrants are outstanding at September 30, 1999:
Number of Shares Price Per Share Expiry Date
300,000 $ 0.40 August 16, 2000
79
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Interim Financial Statements
(Unaudited - See Accountants' Compilation Report)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 7 - INCOME (LOSS) PER SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and common share equivalents outstanding.
The weighted-average number of shares outstanding after giving retroactive
effect to share transactions for the 1999 and 1998 interim periods are:
1999 1998
Primary 5,460,500 3,305,000
Fully Diluted 5,685,500 3,305,000
NOTE 8 - RELATED PARTY TRANSACTIONS
a) The Company incurred royalty expenses to the principal shareholder in the
amount of $92,806 (1998 - $24,725). Included in accounts payable are unpaid
royalties of $61,836 (1998 - $6,686).
b) The Company accrued interest on director's loans of $3,379 (1998 - nil)
c) The Company paid management fees of $22,500 (1998 - nil) to a director.
d) The company paid consulting fees of $8,400 (1998 - nil) to an officer.
e) The Company entered into an agreement, dated June 8, 1999, with a Minority
Shareholder of Shantou to acquire his 15% interest of Shantou in exchange
for 300,000 shares of the Company. The value of this minority interest was
agreed at $150,000. The exchange is subject to the approval of the board of
directors of Shantou.
f) The Company entered into a management agreement, effective July 1, 1999,
with its chief executive officer for remuneration of $3,500 per month until
December 1999, $4,000 per month to June 30, 2000 then increasing by ten
percent in each annual period thereafter. The agreement automatically
renews each June 30 if neither party has given notice of termination. The
agreement also provides for an option to purchase 500,000 shares up to June
30, 2003 at $0.15 per share.
g) The Company entered into a management agreement with its executive
vice-president of the China subsidiaries for remuneration of $2,500 per
month until July 31, 2000, increasing by ten percent in each annual period
thereafter. The term of the agreement is until July 31, 2003 and is
automatically renewed if neither party gives notice. The agreement also
provides for an option of 250,000 shares up to June 30, 2003 at $0.15 per
share.
h) Loan receivable is from an employee, without interest, unsecured and due
November 1999.
80
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Interim Financial Statements
(Unaudited - See Accountants' Compilation Report)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 9 - UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use only two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date.
The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure, which
could affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
a) Lease Commitments
As at September 30, 1999 the Company had commitments for rental of factory and
office space. The minimum payments for the next five years are:
1999 $14,300
2000 57,000
2001 19,900
2002 Nil
2003 Nil
b) Contingency
A former director and officer has sued the Company for unpaid remuneration and
accrued interest on a loan. Management believes that this action is without
merit and will not be successful.
NOTE 11 - NET CHANGES IN NON-CASH BALANCES RELATED TO OPERATIONS
1999 1998
Accounts receivable $(272,665) $( 11,581)
Inventory (179,662) 73,296
Prepaid expenses 1,233 24,131
Accounts payable and accrued liabilities 121,337 164,972
Income taxes payable 26,334 --
--------- ---------
$(303,423) $ 250,818
========= =========
81
<PAGE>
- --------------------------------------------------------------------------------
VIBRO-TECH INDUSTRIES, INC.
Notes to the Consolidated Interim Financial Statements
(Unaudited - See Accountants' Compilation Report)
- --------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE 12 - SUBSEQUENT EVENTS
The following material events have occurred subsequent to the period-end:
a) The Company settled a lawsuit with its former chief executive officer and
director calling for the payment to the Company of $25,000, forgiveness of
all amounts owing by the Company and the return of 400,000 shares to
treasury. Since this transaction of returning the shares affects the
Company's permanent capital, the financial statements have been prepared
giving retroactive effect to the transaction. The 400,000 shares issued in
the 1997 fiscal year and cancelled subsequent to the 1998 fiscal year are
not shown as issued.
b) The Company settled a lawsuit with a former director for the repayment of a
loan payable, accrued interest and costs of $1,000.
c) The Company entered into an agreement with a consultant for an option to
purchase up to 30,000 shares at $0.15 per share. The option was exercised
for total proceeds of $4,500.
d) The Company sold 70,000 shares at $0.40 per share for total proceeds of
$28,000.
e) The Company entered into six option agreements with directors and
consultants to purchase up to 395,000 shares at $0.15 per share until
December 31, 2003.
82
<PAGE>
8888888888888888888888888888888888888
Item 15. Index to Exhibits
EXHIBITS
A. Agreements to which directors, officers, promoters, voting trustees or
security holders or their affiliates named in the Registration Statement are
parties other than contracts involving only the purchase or sale of current
assets having a determinable market price, at such price.
B. Material contracts not made in the ordinary course of business or which are
to be performed in whole or in part at or after the filing of the Registration
Statement or which was entered into not more than two years before filing.
The Exhibits attached to this Form 10-SB are:
EXHIBIT 3 DELAWARE CONSTATING DOCUMENTS AND BY-LAWS
EXHIBIT 10 STOCK OPTION MATERIALS
EXHIBIT 10 PRIVATE PLACEMENT MATERIALS
EXHIBIT 10 OTHER MATERIAL CONTRACTS
EXHIBIT 19 COMMUNICATIONS TO SECURITIES HOLDERS
EXHIBIT 21 MATERIAL DOCUMENTS RELATING TO SUBSIDIARIES
EXHIBIT 27 FINANCIAL DATA SCHEDULE
ALL EXHIBITS EXCEPT EXHIBIT 27 HAVE BEEN PREVIOUSLY FILED WITH THE INITIAL
FILING OF THIS FORM 10-SB.
3.1 Certificate of Incorporation of Registrant dated June 2, 1997.
3.2 Certificate of Change of Name dated November 14, 1997.
3.3 By-laws of Registrant adopted December 15, 1999.
3.4 Warrant Indenture dated August 12, 1999.
10.1 Option agreement dated July 1, 1999 with Jock Chong for 500,000 shares
10.2 Option agreement dated Aug. 26, 1999 with Joe Chung for 250,000 shares
10.3 Option agreement dated Nov. 10, 1999 with William Chow for 80,000 shares
10.4 Option agreement dated Nov. 10, 1999 with Rick Lui for 80,000 shares
10.5 Option agreement dated Nov. 10, 1999 with Fu Lin Zhou for 80,000 shares
10.6 Option agreement dated Nov. 10, 1999 with Phaik Tan for 80,000 shares
10.7 Option agreement dated Nov. 10, 1999 with Gary MacDonald for 50,000 shares
10.8 Option agreement dated Oct. 25, 1999 with Miles Price for 30,000 shares
10.9 Option and consulting agreement dated Dec. 2, 1999 with Kim Suksun
10.10 Agreement dated August 16, 1999 for sale of 175,000 units to Phaik Tan
10.11 Agreement dated August 16, 1999 for sale of 125,000 units to Puan Sri Nga
10.12 Agreement dated Nov. 3, 1999 for sale of 70,000 shares to Dr. Miles Price
10.13 Registrar and Transfer Agent agreement dated Oct. 3, 1997 with Interwest
10.14 Agreement dated August 25, 1998 with Dr. Fu Lin Zhou for 5,000,000 shares
for purchase of Patents.
10.15 Agreement dated September 3, 1999 with Dr. Fu Lin Zhou canceling
obligation to issue 3,000,000 shares.
10.16 Translation of patent application for 95 1 09348.7, August 20, 1995
10.17 Translation of patent application for 95 1 09347.8, August 20, 1995
10.18 Translation of patent application for 95 2 20019.9, August 20, 1995
10.19 Translation of issue of patent ZL 95 2 20019.8, August 20, 1995
83
<PAGE>
10.20 Management agreement dated July 1, 1999 with Boo Jock Chong
10.21 Management agreement dated August 26, 1999 with Joe Chung
10.22 Agreements with Gary MacDonald of July 23, 1999 and October 20, 1999
10.23 Consulting agreement with Dr. Miles Price of October 25, 1999 re Mexico
10.24 User agreement dated August 25, 1998 between Registrant and Shantou
10.25 User agreement dated January 1, 1999 between Registrant and Industries
10.26 User agreement dated December 15, 1999 between Registrant and Enterprises
10.27 Management agreement dated Jan. 1, 1999 between Registrant and Industries
10.28 Letter of Intent dated November 5, 1999 with Cimko
10.29 Letter of Intent dated September 20, 1999 with Taemyung Corp., Korea
10.30 Letter of Intent with Professor I. Aizenberg and Dr. V. Smirnov, Russia
19.1 Notice to shareholders of Dec. 15, 1999 annual general meeting
19.2 Proxy form for 1999 annual general meeting.
19.3 Proxy circular for Dec. 15, 1999 annual general meeting
21.1 Shantou approval for formation, December 27, 1995
21.2 Shantou shareholders' agreement dated January 26, 1996
21.3 Shantou certificate of name reservation
21.4 Shantou foreign merchant investment enterprise approval certificate
21.5 ISO 9002 Quality recognition and approval consultation agreement, Apr 16,
1999
21.6 Cansun/Nandou/Shantou Wan Run modification agreement of July 27, 1997
21.7 Registrant/Shantou Wan Run agreement of June 8, 1999 for purchase of 15%
21.8 Royalty and advisor agreement of Shantou and Dr. Zhou dated Aug. 25, 1998
21.9 Royalty and advisor agreement of Industries and Dr. Zhou dated Jan. 1, 1999
21.10 Shantou agreement dated January 1, 1999 with Industries re Bearing
21.11 Industries agreement dated December 15, 1999 with Enterprises re Bearings
21.12 Fujita certification of March1, 1999
21.13 Fujita agreement of joint research of March 14, 1996
21.14 Fujita basic agreement of joint research of March 18, 1998
21.15 Sample Fujita order of Bearings dated March 20, 1999
21.16 Fujita supplemental agreement of October 11, 1999
27 Financial Data Schedule at December 31, 1998 and September 30, 1999.
84
<PAGE>
SIGNATURES
Pursuant to the requirements of section 12 of the Securities Exchange Act of
1934, the Registrant has caused this signature page to amend no one to this Form
10-SB Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in Vancouver, British on February 7, 2000.
VIBRO-TECH INDUSTRIES, INC.
By: /s/ Boo Jock Chong
Boo Jock Chong, President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Boo Jock Chong as true and lawful attorney, with full
power of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this registration statement, and
to file the same, therewith, with the Securities and Exchange Commission, and to
make any and all state securities law or blue sky filings, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in or about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or any
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to Form 10-SB Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Boo Jock Chong President, Chief Feb. 7, 2000
Boo Jock Chong Executive Officer and
member of the Board of
Directors
/s/ William Chow Chairman of the Board Feb. 7, 2000
William Chow of Directors
/s/ Joe Chung Vice-president and Feb. 7, 2000
Joe Chung member of the Board of
Directors
/s/ Rick Lui Member of the Board of Feb. 7, 2000
Rick Lui Directors
/s/ Phaik Sim Tan Treasurer and member Feb. 7, 2000
Phaik Sim Tan of the Board of Directors
/s/ Gary MacDonald Secretary Feb. 7, 2000
Gary MacDonald
85
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial information extracted from the Consolidated Statements of Financial
Condition as at December 31, 1998 (audited) and for the nine months ended
September 30, 1999 (unaudited) and the Consolidated Statements of Income as at
December 31, 1998 (audited) and for the nine months ended September 30, 1999
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 105,180 371,608
<SECURITIES> 0 0
<RECEIVABLES> 236,830 509,394
<ALLOWANCES> 0 0
<INVENTORY> 112,402 292,064
<CURRENT-ASSETS> 512,530 1,216,661
<PP&E> 483,556 438,502
<DEPRECIATION> 86,808 141,704
<TOTAL-ASSETS> 909,328 1,655,213
<CURRENT-LIABILITIES> 370,380 505,974
<BONDS> 0 0
0 0
0 0
<COMMON> 5,260,000 5,730,000
<OTHER-SE> 238,598 594,990
<TOTAL-LIABILITY-AND-EQUITY> 909,328 1,655,213
<SALES> 853,192 1,854,924
<TOTAL-REVENUES> 853,192 1,156,835
<CGS> 476,026 698,089
<TOTAL-COSTS> 476,026 698,089
<OTHER-EXPENSES> 451,422 652,346
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (359,702) (327,984)
<INCOME-PRETAX> (74,256) 504,489
<INCOME-TAX> 13,654 29,078
<INCOME-CONTINUING> (60,602) 150,171
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (60,122) 135,756
<EPS-BASIC> (0.02) 0.03
<EPS-DILUTED> (0.02) 0.03
</TABLE>
