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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission file number 0-30830
QUINTALINUX LIMITED
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(Exact name of Registrant as specified in its charter)
QUINTALINUX LIMITED
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(Translation of Registrant's name into English)
British Virgin Islands
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(Jurisdiction of incorporation or organization)
Suite 2209-2217, 22/F Metro Centre II
21 Lam Hing Street
Kowloon Bay, Hong Kong
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each Name of each exchange
class on which registered
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None N/A
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
$.01 Par Value Common Stock ("Common Stock")
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(Title of Class)
Warrants to Purchase Common Stock ("Warrants")
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of September 22, 2000:
9,500,000 Common Stock
1,500,000 Warrants
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
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Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 Item 18 X
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(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Not Applicable.
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EXCHANGE RATES
We have prepared our financial statements in accordance with U.S. generally
accepted accounting principles consistently applied and publish such statements
in Hong Kong dollars, which is the functional currency of our subsidiaries and
the legal tender currency of Hong Kong. All references to "Hong Kong dollars" or
"HK$" are to Hong Kong dollars. All references to "U.S. Dollars," "dollars" or
"$" are to United States dollars. Conversion of amounts from Hong Kong dollars
into United States dollars for the convenience of the reader has been made at
the exchange rate of US$1.00 = HK$7.75.
The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods indicated. It
represents the noon buying rate in New York for cable transfers payable in
foreign currencies as certified for customs purposes by the Federal Reserve Bank
of New York. The average noon buying rate is determined by averaging the rates
on the last business day of each month during the relevant period.
Calendar Year Period End Average High Low
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Noon Buying Rate
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(HK$per US$)
1995........................... 7.7323 7.7357 7.7665 7.7300
1996........................... 7.7347 7.7345 7.7440 7.7310
1997........................... 7.7495 7.7431 7.7550 7.7275
1998........................... 7.7476 7.7467 7.7595 7.7355
1999........................... 7.7740 7.7594 7.7814 7.7457
2000 (through March 31, 2000).. 7.7867 7.7818 7.7867 7.7765
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements that are
based on beliefs and assumptions of our management. Often, you can recognize
these statements because we use words such as "believe", "anticipate", "intend",
"estimate" and "expect" in the statements. Our actual performance after March
31, 2000 could differ materially from the forward-looking statements contained
in this annual report. However, we are not obligated to release publicly any
revisions to the forward-looking statements contained in this annual report
except as otherwise required by the securities laws of the United States.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
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We provide technological services designed to address broad technological
needs in Hong Kong and China. Currently, our focus is in three principal
businesses:
. We offer a wide variety of commercial construction products and services in
connection with electrical network, air-conditioning, flooring, lighting
and information display systems.
. We believe that we are also one of the leading construction and contracting
service companies in Hong Kong specialized in interior fitting out works
and other related contracting businesses, including:
. interior design;
. renovation and decoration;
. electrical engineering;
. fire control systems;
. carpentry; and
. installation of information and telecommunication network and
structured cabling for commercial and residential properties.
. Our information technology services business is operated through our 72.5%-
owned subsidiary, Linux System Solution Limited, which was established in
April 1999. Linux System Solution is a Linux specialist which offers
comprehensive professional consulting and support services, systems
integration and application development for Linux operating systems. We
also intend to develop Linux applications designed to improve our
businesses.
Background and Organization
We were incorporated as an international business company under the
International Business Companies Act of the British Virgin Islands on January 8,
1997. We own all of the issued share capital in each of the companies listed
below, but only 72.5% of the issued share capital in Linux System Solution.
The following diagram illustrates our corporate structure. The respective
country of organization/incorporation is shown in brackets.
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QUINTALINUX LIMITED
(B.V.I.)
________________________________________________________________________________
100% 72.5%
---- -----
- Interact Contracting Company Limited Linux System Solution
(H.K.) Limited
(H.K.)
- Interact (China) Design and Contracting Company Limited
(H.K.)
- Pado (Holdings) Limited
(H.K.)
- Pado Contracting Company Limited
(H.K.)
- Good Prominent Engineering Company Limited
(H.K.)
- Uni-Zone Holdings Limited
(H.K.)
- Good Prominent Technology Company Limited
(H.K.)
- Good Prominent Trading Limited
(H.K.)
Our Technological Products Marketing and Engineering, and Construction and
Contracting Services Businesses
Industry Overview
Despite the slow down of the economic development in Hong Kong and China,
we anticipate continuous growth for the construction-related services market. We
believe the future growth in this industry is being positively affected by the
following trends:
. Hong Kong--Large Projects to be Developed
The Hong Kong SAR Government has recently confirmed the development
and construction of the Cyber Port project in Hong Kong. This project
would include the development of 26 hectares of land into residential,
manufacturing, office and research facilities. It is anticipated that
about 5.78 million square feet of floor area will be built. In
addition, the development of the 126-hectare Disneyland in Hong Kong
will also create a large demand for contracting and engineering works
for both the theme park itself and its supporting infrastructure and
facilities.
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Moreover, along the route corridor of the West Railway, which is now under
construction, over 40,000 new flats of residential, retail, office and
hotel facilities will be built. These projects would create good
opportunities for construction and contracting companies in Hong Kong.
. Hong Kong and China--Demand for Quality Buildings
Due to various market and economic factors, the property market in Hong
Kong and China has slumped since the mid 1990's. There is keen competition
for property tenants and buyers. In order to strengthen their competitive
advantage, many real estate developers improve the quality of their
buildings by adding various high-technology features such as computerized
control systems, flexible floor configuration, interior and exterior
lighting system and information and telecommunication networks. Also, older
buildings need to be upgraded to maintain their existing tenants. This
creates a vast market potential for high-technology construction services
such as ours.
. Concern for Quality of Environment
In the Second Review of the 1989 White Paper on Pollution issued in
November 1993, the Hong Kong Government recognized the existence of
potential health risks and problems associated with indoor air pollution.
The Hong Kong Environmental Protection Department has launched an Indoor
Air Quality Program in Hong Kong, aiming at categorizing building indoor
air quality into three levels under a self-regulatory approach. There is a
possibility for more stringent regulation on monitoring indoor air quality
in commercial buildings after the review is completed in 2003. Maintaining
a good indoor air quality in buildings is an asset to a company since it
can improve the productivity of employees and build up a good image for the
company. Our subsidiary, Uni-ZoneHoldings, is currently working together
with Hong Kong University of Science and Technology on newly developed
advanced ventilation systems such as displacement type ventilation system
and integration of demand control algorithm, to improve indoor air quality
as well as save energy and running costs in the long run. We believe this
would be a good business opportunity for us as we have much experience in
supplying and installing under-floor air conditioning systems which improve
the air quality.
. Growing Market for Information Display Systems
There are a number of market factors which enhance the growth of the market
for LED displays. These factors include the increasing popularity of LED
display signage as a result of the advancement in information technology,
as well as the
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increasing availability of information and visual content of
electronic formats as advertising and informational purposes.
Particularly for the public transportation sector, the bus and mass
transportation operators are introducing new buses and trains with LED
signage boards which provide news or route information for the
passengers.
Strategy
We plan to continue to maintain our position as one of the leading
providers of high quality construction related services in Hong Kong and China.
The principal elements of our strategy are:
. Technology Leadership and Innovation--Linux based applications and
solutions
Our contracting services integrate contemporary interior design and
contracting services as well as advanced technology in flooring and
air-conditioning systems to maximize the capacity and flexibility of
property space. We seek to extend our technological leadership by
innovative deployment of Linux based applications and solutions. Using
Linux as the main technology platform, we seek to incorporate and
integrate information technology, automation technology and products
into the design processes. It will significantly enhance our portfolio
of product offerings and value-add our services to our clients. These
services will include design, integrate, install and maintain the
internal information system and telecommunication network for
commercial and residential buildings. These could assist the real
estate owners, managers and occupants in cost and energy savings.
. Comprehensive Product Offering
Unlike traditional contracting companies, we offer a wide range of
construction related services, including interior design, fitting out,
electrical engineering and installation, fire control systems,
cabling, and maintenance work.
We plan to continue to expand our services through both internal
development and possible future acquisitions of complimentary
businesses, products and technologies. Our comprehensive service
offering enables us to meet a broad range of customer needs and
provide an integrated source of contracting services for the
architects and project managers as they seek to consolidate their
contractor relationships to a smaller select group.
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. Close Working Relationship With Customers
Since our establishment, we have focused on satisfying the needs of real
estate developers and architects and have developed long-term relationships
with many of our customers. We work with our customers at the initial
design stage to identify and respond to their needs. These close working
relationships allow us to understand and address the cost and performance
expectations of our customers. We plan to enhance our relationships with
our major customers and to develop similar relationships with new customers
mainly through referral by our current customers and clients.
. Active Participation in Government Projects
We have been actively providing contracting services for small-scale
government projects since our establishment. In view of the vast potential
demand for contracting works in respect of the forthcoming Hong Kong
Government infrastructure projects for the Cyberport, Disneyland and West
Railway, we plan to participate more aggressively in the Government sector.
We intend to acquire a Class C Contractor License in order to bid for
large-scale government contracting and engineering projects in Hong Kong.
We believe that our ability, expertise and experience resulting from our
involvement in information technology will enhance our success rate in
bidding for these projects.
Products and Services
Technological Products Marketing and Engineering
We are specialized in a wide variety of state of the art high-technology
construction products and services in connection with electrical, air-
conditioning, flooring, lighting and information display systems. These services
generated 44% of our combined revenues for the fiscal year ended March 31, 1999
and approximately 22% of our proforma combined revenues for the fiscal year
ended March 31, 2000. Our major products and services include:
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. Raised floor system and under-floor air-conditioning systems
We are specialized in intelligent office design and installation
turnkey projects. This sector of our business is performed by one of
our subsidiaries, Uni-Zone Holdings Limited. We are the distributor of
various types of raised floor systems, under-floor air conditioning,
clean room systems, uninterruptible power systems, under-floor cable
management systems and computer related peripherals.
The under-floor air-conditioning system has revolutionized the concept of
ventilation in modern offices and commercial buildings. Raised modular flooring
allows greater flexibility in the installation of various electrical and
mechanical components, including different kinds of wiring and cable network.
This system can provide significant cost advantages to the user in the long run
and will become an important element of the so-called "intelligent building"
that stresses high flexibility in space and facility usage.
We believe that these systems can offer the following benefits:
. flexible, adaptable and re-usable
. maximize the capacity of the building
. low costs for maintaining and re-configuring
. easy relocation in a matter of minutes
. minimize total long term running costs
. reduce energy costs
. reduce construction time and material cost
. healthy working environment with cleaner air
. computerized temperature control
. computerized smart control system
. environmental protection
. freedom to move, design and integrate services
During the fiscal years ended March 31, 1999 and 2000, we completed
approximately HK$62 million (US$8 million) and HK$3 million (US$390,000) of
design and installation contracts for the under-floor air-conditioning systems.
One of the most important projects is the supply and installation of the raised
floor and under-floor air-conditioning system for "The Center", one of the
tallest buildings in Hong Kong. The contract value was HK$84 million (US$10.8
million) for this 77-story building and "practical completion" was received in
March 1999.
. Architectural Lighting Systems
This sector of our business is conducted by Good Prominent Engineering
Company Limited. We design, install and maintain various architectural
lighting
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systems which are commonly used for highlighting architectural
details, as well as advertising signage and outdoor decoration
application. Cold cathode and fibre-optics lighting systems are
innovative high-technology products for both interior and exterior
building decoration and are widely used in shopping malls and hotels.
At present, we are offering three main categories of architectural
lighting products: fibre optic lighting, light pipe systems and cold
cathode neon lighting systems. We have developed our proprietary fibre
optic lighting system named "Brite Lite." Cold cathode neon lighting
systems are mainly for architectural and signage applications. We have
developed our own "Elite" brand name of cold cathode lighting systems.
We believe that we are the market leader in this field, controlling
60% of the fibre-optics market and 30% of the cold cathode lighting
market in Hong Kong.
. Display System
Our subsidiary, Good Prominent Technology Company Limited, focuses
mainly on the design and installation of various light emitting diode
(LED) display, LCD display and multimedia information systems for the
government, commercial and industrial customers.
We are the exclusive distributor for the "Litedot" Display Systems
from Lite Vision. Lite Vision integrates modular technology with
advanced digital systems. The products are controlled by regular
computer terminals with video and graphic software which opens up a
vast spectrum of display possibilities.
LED and Litedot are two of our most important products, which
accounted for 17% and 13% of our total sales of high-technology
products during the fiscal years ended March 31, 1999 and 2000. The
LED and Litedot systems are widely used for advertising, stadium
displays and passenger information signage for airports, buses, trains
and highways, subway and train stations.
Our recent projects include design and supply for the Mass Transit
Railway Corporation of Hong Kong (MTRC) mid-life renovation for its
train fleet, which consists of 762 trains. Another major project is a
joint venture project with Lite Vision Corporation for the MTRC Phase
2B Electronic Display System for its 37 subway stations.
The total revenue for our architectural lighting systems and display
systems was approximately HK$28 million (US$3.6 million) and HK$16
million (US$2.1 million) for the fiscal years ended March 31, 1999 and
2000.
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Construction and Contracting Services
We are also specialized in the interior fitting out works and other related
contracting businesses, including:
. interior design;
. renovation and decoration;
. electrical engineering;
. fire control systems;
. carpentry; and
. installation of information systems and telecommunication networks and
cabling within commercial buildings.
We are mainly engaged in the interior design and contracting business with
special focus on offices, shopping malls, department stores, hotels, banks and
universities. A majority of our clients are blue-chip and multi-national
companies.
Three of our subsidiaries, Interact Contracting Company Limited, Interact
(China) Design and Contracting Company Limited and Pado Contracting Company
Limited, are specialized in providing a series of constructing and contracting
services. Interact Contracting Company Limited has been awarded ISO 9002
qualification in 1997 in respect of our quality assurance systems, reflecting
our reputation as a quality contracting service provider.
In 1996, we expanded into the China market. For the fiscal years ended
March 31, 1999 and 2000, approximately 36% and 56% of our gross revenue from
construction and contracting services was generated from our projects in China.
We completed the American Insurance Assurance Building located in the Bund, the
Huangpu rivershore in Shanghai. The total contract sum for this project was
HK$64 million (US$8.2 million) and the building is regarded as one of the most
artistic historic buildings in Shanghai. We were also the main contractor for
the HK$30 million (US$3.9 million) renovation project for the Hongkong Bank's
Head Office in Shanghai. We intend to use our experience and good relationship
with many Chinese government authorities to expand our client base in the China
market.
Customers
We have developed a diversified customer base for our high-technology
products and construction related business sectors:
. Technological products--Our customers include general contractors,
real estate developers, architects, government entities and public
transportation companies.
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. Construction and contracting services--Our customers include general
contractors, real estate developers, property managers, and owners and
operators of commercial and industrial properties in both Hong Kong
and China.
Sales and Marketing
For both of our technological products and contracting services sectors, we
have developed and maintained successful long-term relationships with our key
customers by focusing on customer satisfaction and high quality service and by
providing value-added services such as information technology services. Many of
our customers or prospective customers have a qualification procedure for
becoming an approved bidder or vendor based upon the satisfaction of particular
performance and safety standards set by the customer. These customers often
maintain a list of vendors or subcontractors meeting such standards and award
contracts for individual jobs only to such vendors. We strive to maintain our
status as a preferred or qualified vendor to such customers.
Furthermore, our sales and marketing personnel maintain a careful watch on
new developments, utilizing information from advertisements and attending
relevant exhibitions and events, in order to introduce us to any new prospective
customer. We also rely on both the written and verbal referrals of our satisfied
customers to help generate new business.
Competition
Technological Products
The technological products industry in Hong Kong and China is highly
fragmented and competitive. There are relatively few, if any, barriers to entry
into these markets in which we operate. As a result, any organization that has
adequate financial resources and access to the technological products and
expertise may become a competitor to us. Most of our competitors are small,
private-owned companies. We believe the major competitive factors in the
technological products sector include:
. the expertise in design and integration of the technological products;
. cost structure;
. relationship with customers;
. access to technology; and
. experience in specific markets.
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We own proprietary rights for some of the products that we are currently
distributing, and we intend to continue to develop our proprietary products.
Therefore, we believe that we have competitive advantages over our competitors.
Construction and Contracting Services
The market in which we operate is highly competitive, requiring substantial
resources as well as skilled and experienced personnel. We compete with other
independent contractors in most of the markets in which we operate, some of
which are large domestic companies that have greater financial, technical and
marketing resources. In addition, there are few barriers to entry into the
industry in which we operate. A significant portion of our revenues is currently
derived from contracts granted on a private bidding or public tender basis.
Price is often an important factor in the award of such contracts. Accordingly,
our competitors could underbid us in an effort to procure such business. On the
other hand, bidding for large scale projects may require a large amount of
working capital since most of these projects have progressive payment terms and
pay no or a small amount of deposit upfront. These projects always have higher
profit margins but will involve more cashflow for procuring material and paying
our subcontractors.
Our Software Support and System Integration Services
We are developing and expanding our operations in information technology,
software support and system integration business. Currently, our core services
cover technical support and system integration for Linux operating systems and
the application development of TurboLinux products. TurboLinux is one of the
leading Linux products that supports major Asian character sets. This part of
our business is operated through our subsidiary, Linux System Solution.
Internet and Open Source Software Industry Background
In the software industry, the internet has accelerated the development of
open source software, which has its origins in the academic and research
environments and is based on an open, collaborative approach to the development
and distribution of software.
The growth of the internet has greatly increased the scale and efficiency
of open source development through the availability of collaborative
technologies such as e-mail lists, news groups and web sites. These technologies
have enabled increasingly large communities of independent developers to
collaborate on more complex open source projects.
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Through free downloading from the internet, users are able to acquire the
open source software at little or no cost, install the software on as many
computers as they wish, and customize the software to suit their particular
needs.
Linux
Linux is one of the most popular open source softwares. Linux is a UNIX-
like operating system originally developed by a young Finnish, Linus Torvalds.
An operating system is the software that allows a computer and its various
hardware and software components to interact. The central nervous system of
Linux is the kernel, the operating system code that runs the whole computer. The
kernel is under constant development and is always available in both the latest
stable release and the latest experimental release.
The use of Linux-based operating systems has rapidly grown. According to
industry sources, we estimate that there are about 10 to 15 million Linux users
worldwide, of which several million are in Asia, including China. As compared
with other operating systems, we believe Linux-based operating systems have the
following competitive advantages:
. stability and high performance--The Linux operating system has long
been praised for its stability with little chance of crashing,
freezing or having to be rebooted.
. hardware compatibility--Almost all major technology companies in the
world are supporting Linux, including IBM, Dell, Compaq, Hewlett
Packard, NEC and Computer Associates.
. reduced licensing costs--Nearly all development software for Linux is
free and the source code for nearly any Linux program is freely
available.
We believe that Linux System Solution has business opportunities in the
following aspects:
. offering technical support, training, custom development and related
services to customers
. development of custom applications of Linux for our other core
businesses
Linux System Solution was established in April 1999. Mr. and Mrs. Miller,
the founders of TurboLinux, Inc., have a 25% equity interest in Linux System
Solution and Mrs. Miller is a director of Linux System Solution. Linux System
Solution resells, services and supports Linux products, such as TurboLinux, in
Hong Kong and Asia.
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Strategy
Our objective is to become a leading Linux total solution provider and
system integrator in Hong Kong, China and other ASEAN countries. We intend to
continue to deliver the best business solutions on Linux to warrant the adoption
of Linux for our corporate and enterprise customers. We also intend to develop
and design custom applications of Linux for use in our other core businesses.
Our infrastructure and technical expertise will enable us to:
. Expand Our Strategic Alliances
We are actively seeking new strategic alliances with other major Linux
companies to improve our access to new customers and geographic
markets.
. Expand Our Core Competence Relating to Linux Technologies and
Applications
We are expanding our professional teams to enhance our ability and
better serve our clients by offering them the most cost-effective
internet, intranet and E-commerce solutions based on Linux.
. Expand Our Domestic and International Market
We intend to continue to focus on expanding our sales effort by
establishing resource and support service centres in Hong Kong, China
and other ASEAN countries.
. Develop and Design Custom Applications for Our Other Core Businesses
We intend to develop Linux applications for our use by our subsidiaries in
the development of their businesses, such as:
. construction technology
- design and installation of intelligent buildings
- office and residential automation
- telecommunication infrastructure
. architectural lighting, electrical and electronics system integration
- process control
- process monitoring and automation
- animation
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. visual and information display systems
- process control
- animation
- database technology
. raised floor systems and under-floor air-conditioning systems
- process control
- environment monitoring
- process monitoring and automation
- control and distributed systems
Products and Services
We specialize in offering Linux products and related services, which can be
broadly categorized into two main focuses:
. Trading and re-selling of Linux based products such as TurboLinux, and
providing the necessary services to fully support and maintain these
products; and
. Linux application solutions and the related services, including:
- internet and E-commerce solutions
- network management services
- turnkey or existing hardware solutions
- service and consulting, such as technical support and on-going
maintenance
- on-site Linux installation and training
- application development
- system integration services
- project management
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We expect to derive our revenue from our information technology services
business mainly from:
. system integration services--System integration services are usually
charged on a project basis. The scale of a project varies
considerably, usually with a gross margin of 35%. We estimate an
average project size of HK$35,000 (US$4,500) to HK$45,000 (US$5,800)
for small to medium enterprises.
. consulting services--Consulting services on computer and software
application are charged on a man-day basis, currently at HK$3,500--
HK$4,500 (US$450--US$580) per man-day
. application development--The development is charged on a man-day
basis, currently at HK$3,500 (US$450) to HK$4,000 (US$510) per man-
day. There will be a premium charged per project in the range of 20%
to 60% of the project cost to cover potential project risks and
proprietary technology.
. training courses--According to our arrangements with Kenfil Training
Centre, Welkin Computer Training and Mango Training Centre, we are
entitled to a 30% share of the course fee received. Currently, each
course is charged at prices ranging from HK$2,400 (US$310) to HK$3,440
(US$444) per student, depending on market demand.
. direct sales of Linux products such as TurboLinux--Our package of
TurboLinux products sells for about HK$350 per box, yielding gross
margins of up to 35%.
. major government and educational institution projects--We intend to
actively bid for major government and educational institution projects
for computer network, internet services and other software
applications.
Customers
With our wide range of professional products and well-designed services, we
target customers ranging from individuals to large corporate users in Hong Kong,
China and other ASEAN countries.
<TABLE>
<CAPTION>
Services Customer Base
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<S> <C>
Internet and Internet solution using Linux as a Individual users and enterprises
launching platform
Support and maintenance services of Linux system Enterprises
Training Small to medium enterprises Individual users
Enterprise Solution Medium to large enterprises Oracle customer
base
IBM DB2
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Sales and distribution of TurboLinux based products Enterprises and individual users
Publication of Linux material Individual users
</TABLE>
We market our products and services through direct sales personnel and
retail distributors. We operate a head office in Hong Kong and we intend to
expand our activities into China and other ASEAN countries.
We actively participate in large-scale marketing programs, such as Linux
exhibitions and conferences. We also maintain marketing programs to support the
sales and distribution of our products and services to communicate corporate
direction. Our marketing programs include public relations campaigns, seminars,
industry conferences and trade shows.
Competition
In the market for computer operating systems, Linux competes with a limited
number of large and well-established companies that have significantly greater
financial resources, larger development staffs and more extensive marketing and
distribution capabilities. These competitors include Microsoft, Novell, IBM, Sun
Microsystems and The Santa Cruz Operation, all of which offer hardware-
independent multi-user operating systems for Intel platforms, and AT&T, Compaq,
Hewlett-Packard, Olivetti and Unisys, each of which, together with IBM and Sun
Microsystems, offers its own version of the UNIX operating system. Many of these
competitors bundle competitive operating systems with their own hardware
offerings, making it more difficult for us to penetrate their customer bases.
The Linux-based operating systems market is not characterized by the
traditional barriers to entry that are found in most other markets, due to the
open source nature of the products. For example, anyone can download, copy,
modify and redistribute Linux. Consequently, it is possible that new competitors
or alliances among competitors may emerge and rapidly acquire significant market
share.
Linux System Solution also competes with a number of companies that provide
technical support and other professional services to users of Linux-based
operating systems.
Despite the existing and potential competition, we believe that we will
benefit from several competitive advantages:
. having a strategic relationship with leading Asian Linux vendors such
as TurboLinux, Inc.;
. being the first company in Hong Kong offering a full range of
supporting and technical services for Linux-based products; and
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. having the technical capabilities of integrating Linux products to
provide various system support and internet services for our clients.
An integral part of our strategy to develop a leading position in Hong
Kong, China and other ASEAN countries is to:
. build up our brand name by investing in marketing and promotional
efforts; and
. build up and expand our asset base of talented scientists and
engineers.
Employees
As of March 31, 2000, we had a total of 67 full time employees, as well as
a network of consultants and hourly workers available on an as-required basis.
Of the 67 full time employee, ten are key management staff, 31 are engaged in
project management, six in sales and marketing and 20 in finance and
administration. None of our employees is represented by a labor union and we
believe that our employees' relations are good.
Enforceability of Civil Liabilities and Certain Foreign Issuer Considerations
We are a British Virgin Islands holding company, and all of our assets are
located in Hong Kong. In addition, all of our directors and officers are non-
residents of the United States, and all or a substantial portion of their assets
are located outside the United States. As a result, investors may be unable to
effect service of process within the United States upon these non-residents or
to enforce against them judgments obtained in United States courts, including
judgments based upon the civil liability provisions of the securities laws of
the United States or any state. There is uncertainty as to whether the courts of
the British Virgin Islands or Hong Kong would enforce:
. judgments of United States courts obtained against us or these non-
residents based on the civil liability provisions of the securities
laws of the United States or any state; or
. in original actions brought in the British Virgin Islands or Hong
Kong, liabilities against us or these non-residents based on the
securities laws of the United States or any state.
We have designated CT Corporation, 111 Eighth Avenue, New York, New York
10011 as our agent for service of process in the United States with respect to
this offering.
There are no treaties between the British Virgin Islands and the United
States nor between Hong Kong and the United States providing for the reciprocal
enforcement of foreign judgments. However, the courts of the British Virgin
Islands and Hong Kong may accept a foreign judgment
-19-
<PAGE>
as evidence of a debt due. An action may be commenced in the British Virgin
Islands or Hong Kong for recovery of this debt. However, a British Virgin
Islands or Hong Kong court will only accept a foreign judgment as evidence of a
debt due, if:
. the judgment is for a liquidated amount in a civil matter;
. the judgment is final and conclusive and has not been stayed or
satisfied in full;
. the judgment is not directly or indirectly for the payment of foreign
taxes, penalties, fines or charges of a like nature. In this regard, a
British Virgin Islands or Hong Kong court is unlikely to accept a
judgment of an amount obtained by doubling, trebling or otherwise
multiplying a sum assessed as compensation for the loss or damages
sustained by the person in whose favor the judgment is given;
. the judgment was not obtained by actual or constructive fraud or
duress;
. the foreign court has taken jurisdiction on grounds that are
recognized by the common law rules as to conflict of laws in the
British Virgin Islands or Hong Kong;
. the proceedings in which the judgment was obtained were not contrary
to the concept of fair adjudication;
. the proceedings in which the judgment was obtained, the judgment
itself and the enforcement of the judgment are not contrary to the
public policy of the British Virgin Islands or Hong Kong;
. the person against whom the judgment is given is subject to the
jurisdiction of the British Virgin Islands or the Hong Kong courts;
and
. the judgment is not on a claim for contribution in respect of damages
awarded by a judgment that does not satisfy the above requirements.
Enforcement of a foreign judgment in the British Virgin Islands or Hong
Kong also may be limited or otherwise affected by applicable bankruptcy,
insolvency, liquidation, arrangement, moratorium or similar laws relating to or
affecting creditors' rights generally and will be subject to a statutory
limitation of time within which proceedings may be brought.
Under United States law, majority and controlling shareholders generally
have certain fiduciary responsibilities to minority shareholders. Shareholder
action must be taken in good faith and actions by controlling shareholders that
are obviously unreasonable may be declared null and void. While we believe there
are no material differences between the protection afforded to minority
shareholders of a company organized as an international business company under
the law of the British Virgin Islands from those generally available to
shareholders of corporations organized in the United States, there may be
circumstances where the British Virgin Islands law protecting the interests of
minority shareholders may not be as protective as the law protecting minority
shareholders in United States jurisdictions. Under British Virgin Islands law, a
shareholder of a company organized as an international business company under
the laws of the British Virgin Islands may bring an action against a company,
even if other shareholders do not wish to bring an action and even though no
wrong has been done to the shareholder personally.
-20-
<PAGE>
This is a representative action, that is, an action on the shareholder's own
behalf and on behalf of other persons in his class, or similarly situated.
Instances where representative actions may be brought include to:
. compel a company to act in a manner consistent with its Memorandum of
Association and Articles of Association;
. restrain directors from acting on resolutions, where notice of a
shareholders' meeting failed adequately to inform shareholders of a
resolution proposed at the meeting;
. restrain a company, where it proposes to perform an act not authorized
by the Memorandum of Association and the Articles of Association or to
seek damages from a director to compensate a company from the
consequences of such an unauthorized act, or to recover property of a
company disposed of due to such unauthorized act;
. restrain a company from acting upon a resolution that was not made in
good faith and for the benefit of shareholders as a whole;
. redress where a resolution passed at a shareholders' meeting was not
properly passed, for instance, if it was not passed with the necessary
majority;
. restrain a company from performing an act which is contrary to law;
and
. restrain a company from taking any action in the name and for the
benefit of a company.
Such an action also may be brought against directors and promoters who have
breached their fiduciary duties to a company, although acts amounting to a
breach of a fiduciary duty can be ratified by a general meeting of shareholders,
in the absence of fraud. Such actions against directors and promoters only may
be taken, however, if such directors and promoters have power to influence the
action taken by a general meeting by means of, for instance, their votes as
shareholders, which would prevent a company from suing them in the company's
name. Although British Virgin Islands law does permit a shareholder of a British
Virgin Islands company to sue its directors representatively or derivatively,
the circumstances in which any such action may be brought as set forth above may
result in the rights of shareholders of a British Virgin Islands company being
more limited than those of shareholders in a United States company.
-21-
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
---------------------------------
Our principal executive offices are located at Suite 2209-2217, 22/F Metro
Centre II, 21 Lam Hing Street, Kowloon Bay, Hong Kong. We lease approximately
5,000 square feet of office space at this location. We also lease an additional
3,000 square feet on the same floor of that building and 1,400 square feet at
Unit A, 21/F, Pico Tower, 64-66 Gloucester Road, Wanchai, Hong Kong as
additional offices for Li Group and Linux System Solution.
We own two commercial and one industrial units in Hong Kong. The two
commercial units are leased to non-affiliated third parties, and the industrial
unit is currently used as our warehouse. We also own a Class A residential
property of 1,962 square feet in Hong Kong which is occupied by the Chairman as
director's quarters. Our banking facilities are collateralized by all of these
properties.
ITEM 3. LEGAL PROCEEDINGS.
---------------------------
On April 29, 1999, an action was brought against the Tat Group in the PRC
by an entity claimant which performed certain construction works for our
subcontractor for HK$14,019,000 (US$1,809,000). In the initial litigation filed
in a provincial court in the PRC, the court ruled that the claimant has no merit
to the case and accordingly, the claimant withdrew its legal proceeding on June
18, 1999. The claimant subsequently pursued the claim in another litigation and,
on October 20, 1999, received a favorable trial ruling against the Tat Group,
resulting in a judgment of HK$15,731,000 (US$2,030,000). On December 23, 1999,
the Tat Group appealed against this latest ruling and judgment. The Tat Group's
attorney, The Shenzhen Yatai Law Office, Shenzhen, PRC, having perused and
considered all the legal documents and the evidence used at the trial, has
advised the Tat Group that there has not been any legal binding
subcontracting/sub-subcontracting obligations between the claimant and Tat Group
and, accordingly, the Tat Group could never be a defendant.
On January 15, 1999, the Tat Group received a claim for liquidated damages
amounting to HK$21,832,000 (US$2,817,000) regarding a delay in completion of a
PRC contract. As of the date of this annual report, no formal court action has
been filed nor has any further demand or notice been made by the claimant. Our
work on the contract has been completed and the developer took possession of the
property. Since the delay in completion was caused by changes in job
specifications, the Tat Group would be entitled to an extension of time for
completion. Accordingly, we believe that the Tat Group will not suffer any
losses in respect of this claim.
Except as described above, we are not a party to any material legal
proceedings and there are no material legal proceedings pending with respect to
our property. We are not aware of any legal proceedings contemplated by any
governmental authorities involving either us or our property. None of our
directors, officers or affiliates is an adverse party in any legal proceedings
-22-
<PAGE>
involving us or our subsidiaries, or has an interest in any proceeding which is
adverse to us or our subsidiaries.
ITEM 4. CONTROL OF REGISTRANT.
-------------------------------
(a) Except as set forth in (b) below, as far as is known to our
management, we are not directly or indirectly owned or controlled by another
corporation or by any foreign government.
(b) The following table sets forth certain information regarding the
beneficial ownership of shares of our common stock as of September 1, 2000 by:
. each person who is known by us to own beneficially more than 10% of
the outstanding common stock,
. each of our executive officers and directors, and
. all directors and executive officers as a group.
Except as set forth below, to our knowledge, we are not directly or indirectly
owned or controlled by any other corporation or by any foreign government.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
-------------------
Name of Shareholder Number Percent
------------------- ---------- -------
<S> <C> <C>
CHU Tat ......................................................... 4,824,000 50.8
Perick LI Wai Ho ................................................ 3,054,000 32.1
David LEE Chai Ve ............................................... 0 0
CHIU Wai Ching .................................................. 0 0
CHAN Kin Hang ................................................... 60,000 *
Frank BLEACKLEY ................................................. 0 0
CHEUNG Kwok Ho, Richard ......................................... 0 0
Ryoji SHIKIBA ................................................... 0 0
CHAN Sai Keung .................................................. 0 0
Samuel YUNG Wing Ki ............................................. 0 0
Fernando MARCHITELLI ............................................ 0 0
All directors and executive officers as a group (11 persons) .... 7,938,000 83.6
</TABLE>
_________
* Represents less than 1% of the outstanding common stock
-23-
<PAGE>
Mr. Chu's 4,824,000 shares are held as follows: 2,000,000 shares are owned
of record by Asian Progress Holdings Limited, a British Virgin Islands
corporation which is solely owned by Mr. Chu. Mr. Chu is also deemed to own
2,824,000 shares of the 3,878,000 shares owned of record by Muehl Products &
Service Asia Limited, a British Virgin Islands corporation which is 73% owned by
Mr. Chu.
Mr. Li's 3,054,000 shares are held as follows: 2,000,000 shares are owned
of record by Oceanic Land Holdings Limited, a British Virgin Islands corporation
which is solely owned by Mr. Li. Mr. Li is also deemed to own 1,054,000 shares
of the 3,878,000 shares owned of record by Muehl Products & Service Asia
Limited, a British Virgin Islands corporation which is 27% owned by Mr. Li.
(c) To our knowledge, there are no arrangements known to us which may at a
subsequent date result in a change of our control.
-24-
<PAGE>
ITEM 5. NATURE OF TRADING MARKET.
----------------------------------
Our common stock is traded in the over-the-counter market and is quoted on
The Nasdaq National Market under the symbol "QLNX." The following table sets
forth, on a quarterly basis, the high and low sales prices for the common stock
since its listing on The Nasdaq National Market on August 10, 2000:
<TABLE>
<CAPTION>
Quarter ended: High Low
-------------- ----- ------
<S> <C> <C>
September 30, 2000................. $8.00 $6.125
</TABLE>
The warrants are traded in the over-the-counter market and are quoted on
The Nasdaq National Market under the symbol "QLNXW". The following table sets
forth, on a quarterly basis, the high and low sales prices for the warrants
since their listing on The Nasdaq National Market on August 10, 2000:
<TABLE>
<CAPTION>
Quarter ended: High Low
-------------- ----- ------
<S> <C> <C>
September 30, 2000................. $1.50 $ 0.50
</TABLE>
We do not believe that there is any principal non-United States trading
market for the common stock or the warrants. We believe that Cede & Co. holds a
substantial majority of the outstanding common stock and warrants in the United
States as record holder.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
----------------------------------------------------------
SECURITY HOLDERS.
-----------------
There are no material British Virgin Islands laws that impose foreign
exchange controls on us or that affect our payment of dividends, interest or
other payments to nonresident holders of our capital stock. British Virgin
Islands law and our Memorandum of Association and Articles of Association impose
no limitations on the right of nonresident or foreign owners to hold or vote the
common stock.
-25-
<PAGE>
ITEM 7. TAXATION.
------------------
The following is a summary of anticipated material U.S. federal income and
British Virgin Islands tax consequences of an investment in the common stock.
The summary does not deal with all possible tax consequences relating to an
investment in the common stock and does not purport to deal with the tax
consequences applicable to all categories of investors, some of which, such as
dealers in securities, insurance companies and tax-exempt entities, may be
subject to special rules. In particular, the discussion does not address the tax
consequences under state, local and other non-U.S. and non-British Virgin
Islands tax laws. Accordingly, each prospective investor should consult its own
tax advisor regarding the particular tax consequences to it of an investment in
the common stock. The discussion below is based upon laws and relevant
interpretations in effect as of the date of this annual report, all of which are
subject to change.
United States Federal Income Taxation
The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person, defined as a U.S. citizen or resident, a U.S.
corporation, or an estate or trust subject to U.S. federal income tax on all of
its income regardless of source, making an investment in the common stock. For
taxable years beginning after December 31, 1996, a trust will be a U.S. person
only if:
. a court within the United States is able to exercise primary supervision
over its administration; and
. one or more United States persons have the authority to control all of its
substantial decisions.
In addition, the following discussion does not address the tax consequences
to a person who holds or will hold, directly or indirectly, 10% or more of the
common stock, which we refer to as a "10% Shareholder". Non-U.S. persons and 10%
Shareholders are advised to consult their own tax advisors regarding the tax
considerations incident to an investment in the common stock.
A U.S. investor receiving a distribution of the common stock will be
required to include such distribution in gross income as a taxable dividend, to
the extent of our current or accumulated earnings and profits as determined
under U.S. federal income tax principles. Any distributions in excess of our
earnings and profits will first be treated, for U.S. federal income tax
purposes, as a nontaxable return of capital, to the extent of the U.S.
investor's adjusted tax basis in the common stock, and then as gain from the
sale or exchange of a capital asset, provided that the common stock constitutes
a capital asset in the hands of the
-26-
<PAGE>
U.S. investor. U.S. corporate shareholders will not be entitled to any deduction
for distributions received as dividends on the common stock.
Gain or loss on the sale or exchange of the common stock will be treated as
capital gain or loss if the common stock is held as a capital asset by the U.S.
investor. Such capital gain or loss will be long-term capital gain or loss if
the U.S. investor has held the common stock for more than one year at the time
of the sale or exchange.
A holder of common stock may be subject to "backup withholding" at the rate
of 31% with respect to dividends paid on our common stock if the dividends are
paid by a paying agent, broker or other intermediary in the United States or by
a U.S. broker or certain United States-related brokers to the holder outside the
United States. In addition, the proceeds of the sale, exchange or redemption of
common stock may be subject to backup withholding, if such proceeds are paid by
a paying agent, broker or other intermediary in the United States.
Backup withholding may be avoided by the holder of common stock if such
holder:
. is a corporation or comes within other exempt categories; or
. provides a correct taxpayer identification number, certifies that such
holder is not subject to backup withholding and otherwise complies with the
backup withholding rules.
In addition, holders of common stock who are not U.S. persons are generally
exempt from backup withholding, although they may be required to comply with
certification and identification procedures in order to prove their exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded or credited against the holder's U.S. federal income tax
liability, if any, provided that amount withheld is claimed as federal taxes
withheld on the holder's U.S. federal income tax return relating to the year in
which the backup withholding occurred. A holder who is not otherwise required to
file a U.S. income tax return must generally file a claim for refund or, in the
case of non-U.S. holders, an income tax return in order to claim refunds of
withheld amounts.
-27-
<PAGE>
British Virgin Islands Taxation
Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of common stock who is not a resident
of BVI is exempt from BVI income tax on dividends paid with respect to the
common stock and all holders of common stock are not liable for BVI income tax
on gains realized during that year on sale or disposal of such shares; BVI does
not impose a withholding tax on dividends paid by a company incorporated under
the International Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by BVI on
companies incorporated under the International Business Companies Act. In
addition, the common stock is not subject to transfer taxes, stamp duties or
similar charges.
There is no income tax treaty or convention currently in effect between the
United States and the British Virgin Islands.
-28-
<PAGE>
ITEM 8. SELECTED FINANCIAL DATA.
---------------------------------
SELECTED CONSOLIDATED/COMBINED AND UNAUDITED
PRO FORMA FINANCIAL DATA
(Dollars in thousands, except per share amounts)
The following selected consolidated/combined financial data with respect to
each of the years in periods ended March 31, 2000 have been derived from our
audited financial statements. The following selected consolidated/combined
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated/Combined Financial Statements and Notes included elsewhere in this
annual report.
The following selected unaudited pro forma consolidated financial data have
been derived from the application of pro forma adjustments to the historical
audited financial statements of Tat and Li Group and Linux System Solution which
are included elsewhere in this annual report. The unaudited pro forma
consolidated statement of operations financial data reflects the acquisitions as
if it had occurred on April 1, 1999. These unaudited pro form consolidated
financial data have been prepared for comparative purposes only and do not
purport to be indicative of what the operating results would have been had the
acquisition of the Tat and Li Group and Linux System Solution actually taken
place as of and for the period indicated, nor does it purport to be indicative
of results of operations that may be achieved in the future.
Quintalinux Limited
<TABLE>
<CAPTION>
Actual Pro Forma (1)
------ -------------
Years ended March 31,
---------------------
1997 1998 1999 2000 2000 2000 2000
------ --------- --------- --------- --------- --------- ---------
HK$ HK$ HK$ HK$ US$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Operating revenues............. -- 208,679 171,495 188,103 24,271 201,343 25,980
------ --------- --------- --------- --------- --------- ---------
Operating income before
interest and income taxes .... -- 13,979 19,025 24,321 3,138 25,681 3,314
------
Net interest expense .......... -- (1,185) (798) (1,388) (179) (2,143) (277)
------ --------- --------- --------- --------- --------- ---------
Income before income taxes .... -- 12,794 18,227 22,933 2,959 23,538 3,037
------
Income taxes .................. -- -- (1,200) (893) (115) (893) (115)
------ --------- --------- --------- --------- --------- ---------
Net income .................... -- 12,794 17,027 22,040 2,844 22,645 2,922
------ --------- --------- --------- --------- --------- ---------
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Dividends per share ............ -- -- -- -- -- -- --
Net income per share ........... -- 2.65 3.52 3.68 0.48 2.83 0.37
Weighted average number of
shares outstanding ............ 10,000 4,825,000 4,831,932 5,985,808 5,985,808 8,000,000 8,000,000
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
---------------
1997 1998 1999 2000 2000
------ --------- --------- --------- ---------
HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital .................... 1 6,367 20,248 9,625 1,243
Total assets ....................... 1 77,368 78,362 188,123 24,274
Long-term obligations .............. -- 21 38 6,084 785
Total stockholders' equity ......... 1 7,206 24,234 63,185 8,153
</TABLE>
____________
(1) The Company has entered into an employment contract with each of Mr. Chu,
Mr. Li and Mr. David Lee effective upon the closing of this offering,
pursuant to which each of Mr. Chu, Mr. Li and Mr. David Lee serves as
Chairman, Vice-Chairman and Chief Executive Officer respectively of the
Company for a period of three years at an annual salary of HK$2,730
(US$350), HK$2,730 (US$350) and HK$1,080 (US$139) respectively and together
with an annual bonus at the discretion of Board of directors, based on
their performances.
In respect of Mr. David Lee, his new employment contract will supersede his
existing employment contract paying him an annual salary of HK$715 (US$92).
No such salaries were paid in any of the prior periods to Mr. Chu and Mr.
Li.
Accordingly, the supplemental pro forma presentation below is shown solely
as a result of changed circumstances that will exist following the
offering.
<TABLE>
<CAPTION>
Unaudited Pro Forma
----------------------
Year ended
March 31, 2000
----------------------
HK$ US$
---------- ----------
<S> <C> <C>
Pro forma net income before contractual increase ...... 22,645 2,922
Adjustment to compensation expenses:
Contractual increase to be made in officer salary ..... (5,825) (752)
Related income taxes .................................. 893 115
--------- ---------
Pro forma net income after contractual increase ....... 17,713 2,285
========= =========
Net income per share .................................. HK$2.21 US$0.29
========= =========
Shares used in computing net income per share ......... 8,000,000 8,000,000
</TABLE>
-30-
<PAGE>
Tat Group
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2000
------- ------ ------- ------- ------- ------- ------
HK$ HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C> <C>
Combined Statements of Operations Data:
Operating revenues ................................. 141,599 59,919 173,281 208,679 171,495 171,197 22,090
------- ------ ------- ------- ------- ------- ------
Operating income before interest and income taxes .. 3,102 (9,531) (1,161) 13,979 19,178 19,248 2,483
Net interest expense ............................... (28) (368) (668) (1,185) (798) (924) (119)
------- ------ ------- ------- ------- ------- ------
Income (loss) before income taxes .................. 3,074 (9,899) (1,829) 12,794 18,380 18,324 2,364
Income taxes ....................................... (490) - 2 - (1,200) - -
------- ------ ------- ------- ------- ------- ------
Net income (loss) .................................. 2,584 (9,899) (1,827) 12,794 17,180 18,324 2,364
======= ====== ======= ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
As of March 31
-----------------------------------------------------------------
1995 1996 1997 1998 1999 2000 2000
------- ------ ------- ------- ------- ------- ------
HK$ HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C> <C>
Combined Balance Sheet data:
Working capital ..................................... 5,894 (4,682) (6,467) 6,366 21,864 16,786 2,164
Total assets ........................................ 48,158 86,630 62,207 77,367 76,816 137,437 17,734
Long-term obligations ............................... - 76 104 21 38 4,317 557
Total stockholders' equity .......................... 6,137 (3,762) (5,589) 7,205 24,385 42,709 5,510
</TABLE>
-31-
<PAGE>
Li Group
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999 2000 2000
------ ------ ------ ------ ------ ------ -----
HK$ HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C> <C>
Combined Statements of Operations Data:
Operating revenues ................................. 64,976 35,276 33,331 59,147 44,064 69,363 8,950
------ ------ ------ ------ ------ ------ -----
Operating income before interest and income taxes .. 2,002 1,104 2,719 895 2,691 7,859 1,014
Net interest expense ............................... (852) (423) (596) (1,179) (1,913) (1,219) (157)
------ ------ ------ ------ ------ ------ -----
Income (loss) before income taxes .................. 1,150 681 2,123 (284) 778 6,640 857
Income taxes ....................................... - (119) (152) (261) (350) (893) (115)
------ ------ ------ ------ ------ ------ -----
Net income (loss) .................................. 1,150 562 1,971 (545) 428 5,747 742
====== ====== ====== ====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
-----------------------------------------------------------
1995 1996 1997 1998 1999 2000 2000
------ ------ ------ ------ ------ ------ -----
HK$ HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C> <C>
Combined Balance Sheet Data:
Working capital .................................... 4,479 2,819 5,352 4,924 5,340 11,491 1,482
Total assets ....................................... 59,018 42,385 41,380 45,192 45,670 65,069 8,396
Long-term obligations .............................. 2,704 2,510 2,016 2,137 1,755 1,767 228
Total stockholders' equity ......................... 10,640 11,202 13,173 12,628 13,056 18,803 2,426
</TABLE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS.
--------------
The following discussion should be read in conjunction with the
consolidated financial statements of Quintalinux and its subsidiaries and the
related notes and the other financial information included elsewhere in this
annual report. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results might differ materially from those
anticipated in these forward-looking statements as a result of any number of
factors, including those set forth under "Risk Factors" and elsewhere in this
annual report. This Management's Discussion and Analysis of Financial Condition
and Results of Operations Sections also describes separately the operations of
Tat Group and Li Group. Figures are expressed in Hong Kong dollars and
translated into United States dollar at an exchange rate of HK$7.75 = US$1.
-32-
<PAGE>
Results of Operations
QUINTALINUX LIMITED
Quintalinux Limited, a company incorporated in the British Virgin Islands
on January 8, 1997 has been an investment holding company since incorporation
until we entered into Share Exchange Agreements with the stockholders of Tat
Group and Li Group on November 5, 1999, to acquire 100% of the stock of these
two groups of companies. The acquisitions were completed on November 19, 1999.
Prior to the acquisition, we had not generated any revenue and only incurred
certain expenses in relation to incorporation, company secretarial services and
general office expenses. On November 11, 1999, we entered into a Share Exchange
Agreement to acquire 72.5% equity interest in Linux System Solution Limited,
which had substantially no operations prior to March 31, 2000. The acquisitions
were completed on November 24, 1999.
Pursuant to the Share Exchange Agreement between our Company and the
stockholders of Linux System Solution Limited, our Company has issued 180,000
shares, representing 2.25% of the enlarged outstanding shares of common stock of
our Company, to certain shareholders of Linux System Solution Limited. We expect
to allocate approximately US$3.5 million of the proceeds from this offering to
develop the business of Linux System Solution Limited, including recruitment and
training of Linux specialists, marketing expenses, and set up costs for an
office in China. As Linux System Solution Limited is a development stage
company, we anticipate that it may incur operating losses and negative cash
flows from operations for the next two or three years. We believe that the
operating profit and cash flows from our other subsidiaries would be sufficient
to cover the operating loss and negative cash flows of Linux System Solution
Limited.
For fiscal 2000, we have a consolidated net income of HK$22,040,000
(US$2,844,000).
Quintalinux Limited--Unaudited Pro Forma Condensed Consolidated
Statement Of Operations
The following discussion is based on our unaudited pro forma condensed
consolidated statements of operations for the year ended March 31, 2000 as if we
had acquired the Tat Group, Li Group and Linux System Solution Limited on April
1, 1999.
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<PAGE>
Fiscal Year Ended March 31, 2000
For the year ended March 31, 2000, pro forma consolidated total revenue
were HK$201,343,000 (US$25,980,000) while pro forma consolidated gross profit
for the period was HK$53,973,000 (US$6,965,000), or a gross profit margin of
26.8%. Pro forma consolidated selling and administrative expenses for the period
were HK$28,967,000 (US$3,738,000), or 14.4% of consolidated total revenue. As a
consequence, pro forma consolidated net income for fiscal 2000 was HK$22,645,000
(US$2,922,000), or 11.2% of consolidated total revenue.
We have entered into employment agreements with Mr. Chu Tat, Mr. Perick Li
and Mr. David Lee, who are key management of our Company, effective upon the
closing of this offering for a period of three years at annual salaries of
HK$2,730,000 (US$350,000), HK$2,730,000 (US$350,000) and HK$1,080,000
(US$139,000) respectively. Should the effects of these employment agreements be
included in the proforma consolidated statement of operations, our consolidated
pro forma net income will become US$17,713,000 (US$2,285,000) for fiscal year
ended March 31, 2000.
TAT GROUP
Overview
Mr. CHU Tat owns 100% of the equity interest of Interact Contracting
Company Limited, Interact (China) Design & Contracting Company Limited and Uni-
Zone Holdings Limited. Collectively, these entities are referred to as the "Tat
Group". On November 19, 1999, Mr. Chu completed the transaction to transfer all
the equity of Tat Group to us.
The Tat Group derives most of its revenue from various professional
construction contracting services, including interior design, alternations and
additions, fit-outs, project design and management, and trading of high-
technology building materials.
Costs of revenue include labor, non-reimbursable subcontract costs,
materials and various direct and indirect overhead costs. Direct labor employees
basically work at our offices, and in some cases at the clients' job site. The
number of direct labor employees assigned to a contract will vary according to
the size, complexity, duration and demands of the project. Depending on the
nature of the projects, gross profit margins may vary significantly.
Selling, general, and administrative expenses consist primarily of
corporate costs related to finance and accounting, information technology,
contract proposal, executive salaries, rent, utilities and other indirect
overhead costs.
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<PAGE>
Results of Operation
The following table presents, for the periods indicated, selected items in
the combined statements of operations as a percentage of total revenue.
<TABLE>
<CAPTION>
Year Ended March 31
--------------------------------------
1997 1998 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Contract Revenue ................................ 100.00% 100.00% 100.00% 100.00%
Contract Costs .................................. 89.26% 80.30% 74.58% 76.55%
------ ------ ------ ------
Gross Profit .................................... 10.74% 19.70% 25.42% 23.45%
------ ------ ------ ------
Depreciation .................................... 0.15% 0.11% 0.38% 0.32%
Selling, general and Administrative expenses .... 11.41% 12.99% 13.99% 11.99%
------ ------ ------ ------
11.56% 13.10% 14.37% 12.31%
Other operating income .......................... 0.03% 0.04% 0.03% 0.00%
------ ------ ------ ------
Operating income (loss) ......................... (0.79%) 6.64% 11.08% 11.14%
Non-operating income, net ....................... (0.26%) (0.51%) (0.37%) (0.44%)
------ ------ ------ ------
Income before tax ............................... (1.05%) 6.13% 10.71% 10.70%
Tax expenses .................................... 0.00% 0.00% (0.70%) (0.00%)
------ ------ ------ ------
Net income (loss after tax) ..................... (1.05%) 6.13% 10.01% 10.70%
====== ====== ====== ======
</TABLE>
Fiscal Years Ended March 31, 1999 and 2000
Total Revenue
For fiscal 2000, the Tat Group had total revenue of HK$171,197,000
(US$22,090,000), a slight decrease of HK$298,000 (US$38,000), or 0.2%, compared
to HK$171,495,000 (US$22,128,000) for fiscal 1999.
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<PAGE>
The following table illustrates the geographical and sector breakdown of
operating revenue:
<TABLE>
<CAPTION>
For years ended March 31,
---------------------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hong Kong ............................. 68% 40% 55% 51%
China ................................. 32% 60% 45% 49%
Contracting business .................. 92% 85% 61% 97%
High-technology products and systems .. 8% 15% 39% 3%
</TABLE>
Revenues from contracting business in fiscal 2000 were HK$166,576,000
(US$21,494,000), an increase of HK$61,242,000 (US$7,903,000), or 58%, compared
to HK$105,334,000 (US$13,591,000) for fiscal 1999. The increase in revenues from
contracting business is mainly due to the design and fitting out contract for
the Maxdo Center in Shanghai, China. This US$16 million project is expected to
be completed in November 2000.
Revenue from the supply and installation of high-technology products and
systems for fiscal 2000 were HK$4,621,000 (US$596,000), a decrease of
HK$61,540,000 (US$7,941,000), or 93%, for fiscal 1999. This substantial decrease
was mainly attributable to the completion of the raised floor and under floor
air-conditioning system for the "Center", one of the tallest buildings in Hong
Kong. This HK$84 million project received "practical completion" in March 1999.
Gross Profit
Gross profit for the Tat Group amounted to HK$40,148,000 (US$5,180,000) for
fiscal 2000, a decrease of HK$3,442,000 (US$445,000), or 7.9%, compared to
HK$43,590,000 (US$5,625,000) for fiscal 1999. Gross profit margin, as a
percentage of total revenue, decreased from 25.4% to 23.5%. The decrease is
principally a result of increased revenue from contracting services which
normally has a lower gross profit margin than high-technology business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were HK$20,520,000
(US$2,648,000) for fiscal 2000, decreased by HK$3,477,000 (US$448,000) or 14.5%,
as compared with HK$23,997,000 (US$3,096,000) for fiscal 1999. As a percentage
of total revenues, selling, general and administrative expenses decreased from
14% to 12%. The decrease is primarily due to the reduction in overhead expenses
caused by the restructuring of the our Company that has merged certain
administrative functions of the Li Group and Tat Group.
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<PAGE>
Net Income
As a result of the forgoing, the Tat Group had net income of HK$18,324,000
(US$2,364,000) for fiscal 2000, an increase of HK$1,144,000 (US$148,000), or
6.7% as compared to HK$17,180,000 (US$2,216,000) for fiscal 1999.
Net income from contracting business in fiscal 2000 was HK$19,193,000
(US$2,477,000), an increase of HK$9,112,000 (US$1,176,000) or 90.4% as compared
to HK$10,081,000 (US$1,301,000) for fiscal 1999. This is mainly due to the
profit attributable to the Maxdo Center project.
For fiscal 2000, the net loss from the sales and installation of high-
technology products and systems was HK$869,000 (US$112,000) compared to a net
profit of HK$7,099,000 (US$916,000) for fiscal 1999. The loss was because no
large projects which normally yield higher profit margins were entered during
the period.
Fiscal Years Ended March 31, 1999 and March 31, 1998
Total Revenue
Total revenue for the Tat Group in fiscal 1999 was HK$171,495,000
(US$22,128,000), compared to HK$208,679,000 (US$26,926,000) in fiscal 1998, a
decrease of HK$37,184,000 (US$4,798,000) or 17.8%.
Revenue from contracting business in fiscal 1999 was HK$105,334,000
(US$13,591,000) decreased by HK$71,732,000 (US$9,256,000), or 40.5% from
HK$177,066,000 (US$22,847,000) in fiscal 1998. The decrease was mainly due to
the Asian financial crisis in October 1997 which has adversely affected both
residential and commercial property markets in Hong Kong and China.
Revenue from high-technology products and systems in fiscal 1999 was
HK$66,161,000 (US$8,537,000), increased by HK$34,548,000 (US$4,458,000), or 109%
as compared to HK$31,613,000 (US$4,079,000) in fiscal 1998. The increase is
primarily because of the revenue recognized for the "Center" project during the
year.
Gross Profit
Gross profit of the Tat Group increased by HK$2,468,000 (US$319,000), or 6%
from HK$41,122,000 (US$5,306,000) in fiscal 1998 to HK$43,590,000 (US$5,625,000)
in fiscal 1999. Gross profit margin, as a percentage of revenue, increased from
19.7% in fiscal 1998 to
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<PAGE>
25.4% in fiscal 1999. The increase in gross profit margin is mainly because of
the increased revenue from high-technology products and systems that have higher
profit margins than contracting.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by HK$3,115,000
(US$402,000) to HK$23,997,000 (US$3,096,000) in fiscal 1999 from HK$27,112,000
(US$3,498,000) in fiscal 1998. As a percentage of contract revenue, selling,
general and administrative expenses increased from 13% in fiscal 1998 to 14% in
fiscal 1999.
Net Income
For fiscal 1999, the Tat Group had net income of HK$17,180,000
(US$2,216,000), an increase of HK$4,386,000 (US$565,000), or 34.3%, as compared
to HK$12,794,000 (US$1,651,000) for fiscal 1998.
Net income from contracting business increased slightly from HK$9,932,000
(US$1,282,000) in fiscal 1998 to HK$10,081,000 (US$1,301,000) in fiscal 1999,
with net profit margin increased from 5.6% to 9.6%; whereas net income from
high-technology business increased from HK$2,862,000 (US$369,000) in fiscal 1998
to HK$7,099,000 (US$916,000) in fiscal 1999, with net income margin increased
from 9% to 10.7%.
Fiscal Years Ended March 31, 1998 and March 31, 1997
The Tat Group had a total revenue of HK$208,679,000 (US$26,926,000) for
fiscal 1998, an increase of HK$35,398,000 (US$4,567,000), or 20.4%, as compared
with HK$173,281,000 (US$22,359,000) for fiscal 1997.
Revenue from contracting business in fiscal 1998 was HK$177,066,000
(US$22,847,000), an increase of HK$17,359,000 (US$2,240,000) as compared to
HK$159,707,000 (US$20,607,000) in fiscal 1997. The 10.9% increase in revenue
from contracting business is mainly because of the Changchun Times Square
project starting in September 1997.
Revenue from high-technology business in fiscal 1998 was HK$31,613,000
(US$4,079,000), an increase of HK$18,039,000 (US$2,328,000) as compared to
HK$13,574,000 (US$1,751,000) in fiscal 1997. The 132.9% increase in revenue from
high-technology business is principally resulted from the contract revenue
recognized for the "Center" project during the year.
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<PAGE>
Gross profit
Gross profit increased by HK$22,537,000 (US$2,908,000), or 121.3% from
HK$18,585,000 (US$2,398,000) for fiscal 1997 to HK$41,122,000 (US$5,306,000) for
fiscal 1998. Gross profit margin, as a percentage of revenue, increased from
10.7% for fiscal 1997 to 19.7% for fiscal 1998. The increase in gross profit
margin is primarily due to a contract in 1997 performed in Vietnam that resulted
in a gross loss of HK$12 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from HK$19,757,000
(US$2,549,000) in fiscal 1997 to HK$27,112,000 (US$3,498,000) in fiscal 1998. As
a percentage of total revenues, selling, general and administrative expenses
increased from 11.4% to 13%.
Net Income
For fiscal 1998, the Tat Group had net income of HK$12,794,000
(US$1,651,000), as compared with a net loss of HK$1,827,000 (US$236,000) for
fiscal 1997.
During fiscal 1998, net income from contracting business was HK$9,932,000
(US$1,282,000) as compared with a loss of HK$280,000 (US$36,000) in fiscal 1997
whereas net income from high-technology business in fiscal 1998 was HK$2,862,000
(US$369,000), as compared with a loss of HK$1,547,000 (US$200,000) in fiscal
1997. The improvement on the net income on both businesses is basically due to
the loss on a contract performed in Vietnam in 1997 and from increased revenue
from high-technology products and systems in 1998.
LI GROUP
Overview
Mr. Perick LI owns 100% of the equity of Pado (Holdings) Limited, Good
Prominent Technology Company Limited and Good Prominent Trading Limited. Pado
Contracting Company Limited and Good Prominent Engineering Company Limited are
the wholly owned subsidiaries of Pado (Holdings) Limited (collectively referred
to as "Li Group"). On November 19, 1999, Mr Li completed the transaction to
transfer all of the equity of the Li Group to us.
Li Group derives its revenue mainly from interior contracting business and
installation and engineering of high-technology lighting systems and LED display
board systems. It is the
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<PAGE>
exclusive agent in Hong Kong for the "Litedot" Display Systems from Lite Vision.
These systems are mainly sold to public transport companies such as the MTRC,
KCRC and City Bus. All of its revenue was derived from Hong Kong, except for the
fiscal year 2000 where 46.4% of revenue was derived from outside Hong Kong,
mainly from the PRC.
Results of Operations
The following table presents, for the periods indicated, selected items in
the combined statements of operations as a percentage of total revenue for the
Li Group.
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------
<S> <C> <C> <C> <C>
1997 1998 1999 2000
------ ------ ------ ------
Contract Revenue ................................. 100.00% 100.00% 100.00% 100.00%
Contract Costs ................................... 59.84% 79.57% 74.43% 80.45%
------ ------ ------ ------
Gross Profit ..................................... 40.16% 20.43% 25.57% 19.55%
------ ------ ------ ------
Depreciation ..................................... 1.65% 1.05% 1.18% 0.60%
Selling, general and administrative expenses ..... 33.46% 22.55% 21.31% 9.81%
------ ------ ------ ------
35.11% 23.60% 22.49% 10.41%
Other operating income ........................... 1.83% 3.70% 2.40% 1.80%
------ ------ ------ ------
Operating income (loss) .......................... 6.88% 0.53% 5.48% 10.94%
Non-operating income, net ........................ (0.51%) (1.01%) (3.71%) (1.37%)
------ ------ ------ ------
Income before tax ................................ 6.37% (0.48%) 1.77% 9.57%
Tax expenses ..................................... 0.46% (0.44%) (0.79%) (1.29%)
------ ------ ------ ------
Net income (loss after tax) ...................... 5.91% (0.92%) 0.98% 8.28%
====== ====== ====== ======
</TABLE>
Fiscal Years Ended March 31, 1999 and 2000
For fiscal 2000, total revenue for the Li Group increased by 57.4% to
HK$69,363,000 (US$8,950,000) from HK$44,064,000 (US$5,686,000) in fiscal 1999.
The following table illustrates the sector breakdown of operating revenue
for the Li Group.
For years ended March 31
--------------------------
1997 1998 1999 2000
---- ---- ---- ----
Design and contracting ....................... 60% 52% 36% 30%
High-technology Products ..................... 40% 48% 64% 70%
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<PAGE>
Revenue from design and contracting business for the Li Group during fiscal
2000 were HK$20,921,000 (US$2,699,000), an increase of HK$5,215,000
(US$672,000), or 33.2%, compared to HK$15,706,000 (US$2,027,000) for fiscal
1999. The increase resulted primarily from certain fitting-out projects
subcontracted by the Tat Group.
Revenue from high-technology products business during fiscal 2000 were
HK$48,442,000 (US$6,251,000), an increase of HK$20,084,000 (US$2,592,000) or
70.8%, from HK$28,358,000 (US$3,659,000) in fiscal 1999. The increase is
principally because of a lighting system project for the Maxdo Center in
Shanghai which was subcontracted by the Tat Group.
Gross Profit
Gross profit for the Li Group during fiscal 2000 was HK$13,560,000
(US$1,750,000), an increase of HK$2,295,000 (US$296,000), or 20.4% as compared
with HK$11,265,000 (US$1,454,000) for fiscal 1999. Gross profit margin, as a
percentage of total revenue, decreased from 25.6% to 19.6%. The decrease in
gross profit margin was mainly because certain lighting installation projects
had lower gross profit margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased from HK$9,390,000
(US$1,212,000) for fiscal 1999 to HK$6,804,000 (US$878,000) for fiscal 2000. As
a percentage of total revenue, selling, general and administrative expenses
decreased from 21.3% to 9.8%. This reflected the reduction in overhead expenses
due to the restructuring of our Company that has merged certain administrative
functions of the Li Group and Tat Group.
Net Income
The combined net income for the Li Group was HK$5,747,000 (US$742,000) for
fiscal 2000, compared with a net income of HK$428,000 (US$55,000) for fiscal
1999. Net income from contracting business was HK$152,000 (US$20,000), as
compared with a net loss of HK$1,172,000 (US$151,000) for fiscal 1999. Net
income from high-technology business was HK$5,595,000 (US$722,000) for fiscal
2000, a 250% increase as compared with a net income of HK$1,600,000 (US$206,000)
for fiscal 1999.
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<PAGE>
Fiscal Years Ended March 31, 1999 and March 31, 1998
Revenue
Total revenue for fiscal 1999 was HK$44,064,000 (US$5,686,000) compared to
HK$59,147,000 (US$7,632,000) for fiscal 1998, a decrease of HK$15,083,000
(US$1,946,000), or 25.5%.
Revenue from design and contracting business decreased by HK$14,867,000
(US$1,918,000), or 48.6% from HK$30,573,000 (US$3,945,000) in fiscal 1998 to
HK$15,706,000 (US$2,027,000) in fiscal 1999. The decrease of revenue in interior
contracting business is due to adverse effects of the Asian financial crisis.
Revenue from high-technology products slightly decreased from HK$28,574,000
(US$3,687,000) in fiscal 1998 to HK$28,358,000 (US$3,659,000) in fiscal 1999.
Despite the unfavourable economic conditions, the Li Group was able to secure a
large project providing LED display units for a major Hong Kong public transport
operator amounting to HK$9 million (US$1.2 million).
Gross Profit
Gross profit for the year ended March 31, 1999 decreased by HK$820,000
(US$105,000) to HK$11,265,000 (US$1,454,000) from HK$12,085,000 (US$1,559,000)
for the year ended March 31, 1998. As a percentage of net revenue, gross profit
increased to 25.6% in fiscal 1999 from 20.4% in fiscal 1998. The increase in the
gross profit margin was due to a higher proportion of total revenue being
derived from high-technology and lighting products that have a higher gross
profit margin than interior contracting.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal 1999 were
HK$9,390,000 (US$1,212,000) compared to HK$13,335,000 (US$1,721,000) for fiscal
1998, a decrease of HK$3,945,000 (US$509,000), or 29.6%. As a percentage of net
revenue, selling, general and administrative expenses decreased to 21.3% for
fiscal 1999 from 22.6% for fiscal 1998.
Net Income
The combined net profit for the Li Group was HK$428,000 (US$55,000) for
fiscal 1999, as compared with a net loss of HK$545,000 (US$70,000) in fiscal
1998, as a result of a profit of
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<PAGE>
HK$1,600,000 (US$206,000) from high-technology products, offset by a net loss of
HK$1,172,000 (US$151,000) from design and contracting business.
Fiscal Years Ended March 31, 1998 and March 31, 1997
Revenue
Revenue increased by HK$25,816,000 (US$3,331,000) or 77.5% from
HK$33,331,000 (US$4,301,000) for the year ended March 31, 1997 to HK$59,147,000
(US$7,632,000) for the year ended March 31, 1998, primarily as a result of
increased business activity in both high-technology products and contracting
business.
Revenue from design and contracting business increased by HK$10,632,000
(US$1,372,000), or 53.3%, from HK$19,941,000 (US$2,573,000) in fiscal 1997 to
HK30,573,000 (US$3,945,000) in fiscal 1998. The increase is principally because
of large projects for fitting out Hong Kong Shanghai Banking Corporation
branches and Kowloon Canton Railway Corporation train stations.
Revenue from high-technology business increased by HK$15,184,000
(US$1,959,000), or 113% from HK$13,390,000 (US$1,728,000) for fiscal 1997 to
HK$28,574,000 (US$3,687,000) for fiscal 1998. The increase mainly resulted from
the Group's expansion in LED and lighting system market.
Gross Profit
Gross Profit decreased by HK$1,302,000 (US$168,000), or 9.7%, from
HK$13,387,000 (US$1,727,000) for the year ended March 31, 1997 to HK$12,085,000
(US$1,559,000) for the year ended March 31, 1998. As a percentage of revenue,
gross profit margin has decreased from 40.2% to 20.4%. In order to increase
revenue and attract new projects lower contract prices were charged, thus
lowering gross profit margin.
Selling General and Administrative Expenses
Selling, general and administrative expenses increased by HK$2,181,000
(US$282,000), or 19.6% from HK$11,154,000 (US$1,439,000) in fiscal 1997 to
HK$13,335,000 (US$1,721,000) in fiscal 1998. As a percentage of revenue,
selling, general and administrative expenses to revenue decreased from 33.5% in
fiscal 1997 to 22.6% in fiscal 1998. The increase in expenses were due to
increase business activity. However, as many expenses were shared between the
subsidiaries, as a percentage of revenue there was an actual decrease.
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<PAGE>
Net Income
The combined net loss for the Li Group was HK$545,000 (US$70,000) for
fiscal 1998, compared with a net income of HK$1,971,000 (US$254,000) in fiscal
1997, as a result of a profit of HK$125,000 (US$16,000) from design and
contracting business, offset by a net loss of HK$670,000 (US$86,000) from the
high-technology business. The loss in 1998 was due to lower profit margins and
higher expenses incurred to attract new customers.
Liquidity and Capital Resources
QUINTALINUX LIMITED
As at March 31, 2000, we had a consolidated working capital of HK$9,625,000
(US$1,243,000). Consolidated accounts receivable for our Company was
HK$76,026,000 (US$9,810,000) and amount due from customers for contract work was
HK$24,219,000 (US$3,125,000) as at March 31, 2000, reflecting increased contract
revenue for the year. A portion of the net proceeds of this offering will be
used for expanding Linux System Solution Limited's operations and as working
capital for our existing business. We anticipate that we will be able to meet
our ongoing cash requirements with cash generated from operations, proceeds from
this offering and borrowings, as required, from existing banking relationship.
TAT GROUP
The sources of the Tat Group's cash for working capital and capital
expenditure has been net positive cash flows from operating activities, capital
lease financing and bank borrowings. Seasonal working capital needs have been
met through short-term borrowing under a revolving line of credit.
The present practice of the Tat Group for both Hong Kong and PRC projects
is to finance the projects in preliminary stages. Payments to the Group are made
according to payment schedules from the relevant architects and approved by
clients and are usually based upon certification by the architects of the
contracting work done. A sum of approximately 5% to 15% of the total contract
sum is normally retained by clients, which will be released when all defects
have been rectified and completion confirmed by the architects. The duration of
this defect liability period is usually between 6 to 12 months.
For trading of the building material, the Group will usually request
clients to pay an initial deposit of 50% upon confirmation; 30% second payment
upon materials delivered on site; remaining balance of 20% to be released upon
completion of installation.
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<PAGE>
Pursuant to a guarantee provided by Mr. Chu and the Group to Hong Kong
Bank, Belgian Bank, Nanyang Commercial Bank and Bank of America for granting of
banking facilities to Tat Group, Tat Group has been granted a banking facility
of HK$31 million, including a HK$18 million facility for letters of credit and
trust receipt, of which HK$18.3 million was utilized as of March 31, 2000.
All sub-contractors and suppliers are paid in accordance with the credit
terms, ensuring a good working relationship with reliable sub-contractors and
suppliers.
As at March 31, 2000, Tat Group had combined cash and cash equivalents of
approximately HK$4,976,000 (US$642,000), working capital of HK$16,786,000
(US$2,165,000) and HK$4,317,000 (US$557,000) of non-current portion of long-term
debt.
There was a positive net cash flow of HK$13,740,000 (US$1,772,000) consumed
by operations in fiscal 2000. This mainly reflects the increase in net income
during the year.
The net positive cash flow from operating activities for fiscal 1999 was
HK$1,237,000 (US$160,000). This reflects the increase in net income and proceeds
being received from completion of projects awarded in 1998.
The accounts receivable as at March 31, 2000 was HK$61,289,000
(US$7,908,000). It included receivable of about HK$40 million due April 2000 for
the Maxdo Center project. This amount has been paid by the client on schedule.
The amount due from customer for contracting work as at March 31, 2000 was
HK$24,184,000 (US$3,121,000). This reflects a significant proportion of
contracting projects awarded to the Company during the period that would be
completed in the next fiscal year.
Accounts payable as at March 31, 2000 was HK$61,509,000 (US$7,937,000),
reflecting the subcontracting works and materials purchased for our increased
activities in contracting business during the period.
The level of the amount due from customers for contract work and advance
contract receipts carried in the balance sheet at any one point in time will
often reflect the stage of completion of certain contracts at that time rather
the amount of contracts on hand.
It is a common practice of most of the clients in Hong Kong to withhold the
last payment which is normally 5% to 15% of the total contract sum, to the main
contractor until the final accounts have been finalized and agreed. The Tat
Group will also withhold the final payment to the subcontractors of the related
projects.
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<PAGE>
As at March 31, 2000, the Tat Group has nil amount due from related
parties, as compared with HK$33,245,000 (US$4,290,000) as at March 31, 1999. The
decrease is due to the repayment from Mr Chu by means of transferring legal
title of certain properties to the Tat Group.
Amount due to related parties as at March 31, 2000 was HK$21,384,000
(US$2,759,000), representing certain inter-company transactions among the
Quintalinux Group.
Net cash used in operating activities decreased by HK$3,579,000
(US$462,000) from HK$4,807,000 (US$620,000) in fiscal 1997 to HK$1,228,000
(US$158,000) in fiscal 1998. It is mainly because of the increase of the profit
of Tat Group, offset by an increase in the amount advanced to Mr. Chu. The
advances have been repaid in fiscal 2000.
For fiscal 2000, net cash used in investing and financing activities for
the Tat Group was HK$1,247,000 (US$161,000) and HK$7,953,000 (US$1,025,000)
respectively. The negative cash flow from financing activities was mainly due to
a decrease in bank overdraft utilized, partly offset by a new Small and Medium
Enterprises Loan offered by the Hong Kong Government.
Tat Group's net cash used in investing activities was HK$2,640,000
(US$341,000) for fiscal 1999, which is mainly due to complete renovation of its
new office. Net cash used for investing activities for fiscal 1998 and 1997 was
HK$110,000 (US$14,000) and HK$89,000 (US$11,000) respectively.
Net cash provided by financing activities was HK$1,033,000 (US$133,000) in
fiscal 1999, as compared with net cash used in financing activities of
HK$701,000 (US$90,000) in fiscal 1998, reflecting an increase in bank overdraft
financing. Net cash provided by financing activities was HK$3,930,000
(US$507,000) in fiscal 1997, mainly because of an increase of HK$2,895,000
(US$374,000) in bank overdraft financing.
LI GROUP
Since inception, the Li Group have financed its operations primarily
through net cash flows from operating activities and bank borrowings.
Net cash provided by operating activities for fiscal 2000 was HK$165,000
(US$21,000) as compared with net cash of HK$480,000 (US$62,000) provided by
operating activities for fiscal 1999.
As at March 31, 2000, the Li Group had working capital of approximately
HK$11,491,000 (US$1,482,000) as compared to approximately HK$5,340,000
(US$689,000) at March 31, 1999. Net accounts receivable increased from
HK$10,048,000 (US$1,296,000) as at
-46-
<PAGE>
March 31, 1999 to HK$14,682,000 (US$1,894,000) as at March 31, 2000. This 46%
increase was primarily due to the increase in revenue from both interior
decoration contracting and high-technology business.
Consistent with practice, the Li Group requests initial deposits upon the
signing of contracts with our clients. The remaining balance will be payable in
progress payments. When the projects commence, we have to order materials and
make payment to sub-contractors and this amount usually exceeds the initial
deposits we received. We will have to finance the projects in the preliminary
stage and we will be paid in installments subject to evidence of completion
progress documents. We pay for our subcontractors and suppliers according to 30
to 90 days credit terms. Also, it is a common practice of this business that the
clients will withhold the last payment until all the works and documents are
finalized and verified. Accordingly, we will also withhold the final payment to
the subcontractors. The practice has created working capital requirements that
we generally have financed with a combination of internally generated cash flow
and short-term borrowings under bank overdraft facilities.
Collateralized by personal guarantee provided by the Li Group's directors
and its properties, the Li Group has been granted a banking facility of HK$13.1
million, including a HK$4.6 million facility for letters of credit and trust
receipt, about HK$12.1 million of which was used as of March 31, 2000.
As at March 31, 2000, the Li Group has an amount due from related parties
of HK$35,037,000 (US$4,521,000), of which HK$20,557,000 (US$2,653,000) was
inter-company transactions among companies in the Quintalinux Group. The
HK$14,480,000 (US$1,868,000) due from Mr Perick Li was fully eliminated in our
Company's consolidated financial statements as Mr Li has transferred to our
Company good title of 400,000 shares in Intermost Corporation, a U.S. company
listed on the Nasdaq OTC Bulletin Board.
The net cash provided by operating activities was HK$480,000 (US$62,000)
for fiscal 1999. It was primarily due to a decrease of accounts receivable
resulted from the relatively shorter credit term offered to certain projects
during the year.
The net cash used in operating activities was HK$1,668,000 (US$215,000) in
fiscal 1998, as compared with net cash provided by operating activities of
HK$895,000 (US$115,000) in fiscal 1997. The negative cash flow from operating
activities in fiscal 1998 was mainly due to the loss incurred in the year.
For fiscal 2000, net cash used in investing activities for the Li Group was
HK$52,000 (US$7,000) while net cash provided by financing activities was
HK$44,000 (US$6,000).
Li Group's net cash used in investing activities was HK$140,000 (US$18,000)
and HK$172,000 (US$22,000) for fiscal 1999 and 1998 respectively. Net cash
provided by investing
-47-
<PAGE>
activities for fiscal 1997 was HK$567,000 (US$68,000), reflecting the sale of a
commercial property during the year.
Net cash used in financing activities was HK$378,000 (US$49,000) for fiscal
1999. Because of an increase of bank overdraft of HK$2,022,000 (US$261,000) to
finance the growth of its business activities, net cash provided by financing
activities was HK$1,752,000 (US$226,000) in fiscal 1998. Net cash used in
financing activities was HK$1,791,000 (US$216,000) in fiscal 1997, reflecting a
decrease in bank overdraft financing.
Inflation
Based on historical experience, the duration of our alternations and
additions contracts as well as high-technology products and services, from
commencement to completion, has varied between two and eleven months, with the
majority of projects being approximately four months. Thus, it has not been
necessary to provide for inflation in contracts entered into by the Company.
The inflation rate in Hong Kong was -4% in 1999 and 2.8% in 1998 and in the
PRC was -1.4% in 1999 and -0.8% in 1998. However, we will continue to avoid
problems resulting from inflation by ensuring our works are kept to schedule. We
have always been able to purchase supplies and materials once a project is
signed, thus minimizing the effect of inflation.
New works projects that may be awarded to us could extend for up to two
years, in which case we intend to include cost escalation clauses in such
contracts.
Currency Risks
We expect to continue our present practice of entering into contracts under
which contract sums are payable in Hong Kong or United States dollars. Expenses
for PRC projects will be paid in Renminbi (Rmb) or Hong Kong dollars. The
Company will gain on foreign exchange if the Rmb depreciates against the Hong
Kong or United States dollar. Conversely, the Company will incur foreign
exchange losses if the Rmb appreciated against the Hong Kong or United States
dollar.
Due to the recent shortage of Rmb within the PRC, we have been
experimenting, in relation to PRC projects, accepting part of the contract sum
in Rmb in such amounts as may be required to meet Rmb expenditure in relation to
these projects. This reduces our requirement to manage actively our foreign
exchange exposure under these contracts. Under these arrangements, we are not
exposed to the risk of the non-convertibility of Rmb into foreign exchange, as
the project element under these contracts remains payable in freely convertible
foreign currencies.
-48-
<PAGE>
Year 2000 Issue
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries (including technology, transportation, utilities,
finance and telecommunications) will produce erroneous results or fail unless
they have been modified or upgraded to process date information correctly.
Significant uncertainty exists in the software industry and other industries
concerning the scope and magnitude of problems associated with the century and
other industries concerning the scope and magnitude of problems associated with
the century change. We recognize the need to ensure our operations will not be
adversely affected by Year 2000 software failures.
Internal operations. We believe that we have identified substantially all
of the major computers, software applications, and related equipment used in
connection with our internal operations that must be modified, upgraded or
replaced to minimize the possibility of a material disruption to our business.
In addition, we are also continuously assessing the operation of office and
facilities equipment, such as fax machines, photocopies, telephone switches,
security systems, elevators, and other common devices which may be affected by
the Year 2000 problem. We have appointed an agent as the Y2K Project Manager to
oversee all our Y2K issues.
Suppliers. We have communicated with the external vendors that supplied us
with material software and information systems and with our significant
suppliers to determine their Year 2000 readiness. In the course of these
investigations, we have not encountered any material Year 2000 problems with
these third-party products. However, we have neglected the likely effects on our
non-computerized systems.
To date, we have not incurred any material costs directly associated with
our Year 2000 compliance efforts, except for compensation expense associated
with our salaried employees who have devoted some of their time to our Year 2000
assessment and remediation efforts. As discussed above, we do not expect the
total cost of Year 2000 problems to be material to our business, financial
condition and operating results. However, during the months prior to the century
change, we will continue to evaluate new versions of our software products, new
software and information systems provided to us by third parties and any new
infrastructure systems that we acquire to determine whether they are Year 2000
compliant. Despite our current assessment, we may not identity and correct all
significant Year 2000 problems on a timely basis. Year 2000 compliance efforts
may involve significant time and expense and unremediated problems could
materially adversely affect our business, financial condition and operating
results. We currently have no contingency plans to address the risks associated
with unremediated Year 2000 problems.
-49-
<PAGE>
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
---------------------------------------------------------------------
Not applicable.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
-----------------------------------------------
Our executive officers and directors are as follows:
Name Age Position
---- --- --------
CHU Tat ..................... 43 Chairman
Perick LI Wai Ho ............ 44 Vice-Chairman
David LEE Chai Ve ........... 52 Chief Executive Officer and
CHIU Wai Ching .............. 37 Chief Financial Officer and
CHAN Kin Hang ............... 37 Director
Frank BLEACKLEY ............. 63 Director
CHEUNG Kwok Ho, Richard ..... 47 Director
Ryoji SHIKIBA ............... 36 Director
CHAN Sai Keung .............. 45 Non-executive Director
Samuel YUNG Wing Ki ......... 42 Non-executive Director
Fernando MARCHITELLI ........ 60 Non-executive Director
None of our directors and officers was selected pursuant to any agreement
or understanding with any other person. There is no family relationship between
any of our directors or executive officers and any other director or executive
officer.
Mr. CHU Tat is our chairman. He is one of our founders and has over 15
years of experience in interior design and contracting business. He is mainly
responsible for our strategic planning and business development of contracting
projects in Hong Kong and China. Mr. Chu holds a Diploma in Architecture Studies
from the Hong Kong Polytechnic University.
Mr. Perick LI Wai Ho is our vice-chairman and one of our founders. He has
over 16 years of experience in the field of interior contracting works. He is
mainly responsible for our business development and strategic planning. Mr. Li
also serves as a director of Intermost Corporation (OTC BB: IMOT).
Mr. David LEE Chai Ve has served as our chief executive officer since April
1999 and as a director since August 28, 2000. He joined us in 1998. Mr. Lee is
mainly responsible for our strategic management as well as our design and
engineering team for the electronic display system. From 1996 to 1998, Mr. Lee
was deputy managing director of MetalWall Co., Ltd., a designer and manufacturer
of metal wall cladding and metal ceiling systems. From 1994 to 1995,
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<PAGE>
he served as deputy-managing director of Good Prominent Engineering Company
Limited, in charge of the supply and installation of lighting systems and
advertising display boards. Mr. Lee received a Bachelor of Architecture from
Kent State University in 1977 and is a member of the California State Board of
Architectural Examiners and American Institute of Architecture--LA Chapter and
Washington Chapter.
Ms. CHIU Wai Ching has served as our accountant since 1986 and was
appointed as a director and our chief financial officer in June 1999. She is
mainly responsible for our financial planning and management.
Mr. CHAN Kin Hang has served as a director since June 1999. Mr. Chan has
worked for a systems integrator as a senior manager from June 1996 to June 1998
and is now a director of BA Consulting (Hong Kong) Limited and the Managing
Director of Linux System Solution Limited. Mr. Chan earned a bachelor of
engineering degree in civil engineering and a masters of science degree in
computer data processing from the University of Ulster, U.K. and a masters of
business administration from the University of South Australia. Mr. Chan directs
our information technology division and is mainly responsible for the business
development and strategic management of Linux System Solution Limited.
Mr. Frank BLEACKLEY has served as a director since August 28, 2000. He
worked for the Chubb Group, a leading security and fire protection company
headquartered in the United Kingdom, from October 1972 until his retirement in
January 2000. Mr. Bleackley was appointed managing director of Chubb Hong Kong
Limited in 1986 and managing director of Chubb China Holdings Limited in 1993.
Mr. Bleackley directs our systems technology division, which includes our Uni-
Zone Holdings Limited and Good Prominent Technology Company Limited
subsidiaries.
Mr. CHEUNG Kwok Ho, Richard has served as a director since August 28, 2000.
He had worked for Samson Wong & Associates Property Consultancy Limited since
1998 as an associate director. Mr. Cheung is a chartered building surveyor.
Prior to 1998, he was a director and partner of Prudential Surveyors
International Limited for seven years with responsibilities including town
planning, interior design, project management, interior decoration, licensing
and condition surveys. Mr. Cheung directs our construction technology division,
which consists of our three construction contracting subsidiaries: Interact
Contracting Company Limited, Interact (China) Design and Contracting Company
Limited, and Pado Contracting Company Limited. He received a B.Sc. degree in
building surveying from Leicester Polytechnic.
Mr. Ryoji SHIKIBA has served as a director since August 28, 2000. He has
worked for Uchida Yoko Co., Ltd., a company involved in the sales and marketing
of office furniture, since 1988 as sales executive (1988 - 1992), sales manager
(1992 - 1995) and managing director (1995 - present). Mr. Shikiba directs our
business development efforts in Japan, including evaluating and forming
strategic alliances with Japanese companies whose products and/or services offer
us
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<PAGE>
an opportunity to further strengthen our business lines. He received a Bachelors
degree in applied physics from Tokai University.
Mr. CHAN Sai Keung has served as a non-executive director since June 1999.
Mr. Chan received a law degree from the University of Southampton, U.K. in 1978
and is a practicing attorney and partner in Liau, Ho & Chan, Hong Kong, and an
appointed Attesting Officer of the People's Republic of China. Mr. Chan also
serves as a director of Intermost Corporation (OTC BB: IMOT).
Mr. Samuel YUNG Wing Ki has served as a non-executive director since June
1999. Mr. Yung is a district director of American International Assurance Co.
(Bermuda) Ltd. since 1989. He has over 17 years of experience in the insurance
industry. He received "The Outstanding Young Persons Award" of Hong Kong in
November 1994 and sits on a number of fund raising committees for several major
charitable organizations. He is also an independent non-executive director of
Group Sense (International) Ltd., a listed company in Hong Kong.
Mr. Fernando MARCHITELLI has served as a non-executive director since June
1999. Mr. Marchitelli has been the chairman of Arotex Far East Ltd. since 1973
and has over 29 years of experience in manufacturing and trading in Asia. Mr.
Marchitelli received a bachelor of arts degree in economics from the City
College of the City University of New York in 1968.
Audit Committee
We have established an audit committee, which consists of Messrs. Chan,
Yung and Marchitelli. Its functions are to:
. recommend annually to the board of directors the appointment of our
independent public accountants;
. discuss and review the scope and the fees of the prospective annual
audit and review the results with the independent public accountants;
. review and approve non-audit services of the independent public
accountants;
. review compliance with our existing accounting and financial policies;
. review the adequacy of our financial organization; and
. review our management's procedures and policies relative to the
adequacy of our internal accounting controls and compliance with
federal and state laws relating to financial reporting.
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<PAGE>
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
-------------------------------------------------
The aggregate compensation paid by us to all of our directors and executive
officers as a group for the fiscal years ended March 31, 1999 and 2000, for
services in all capacities, was HK$1,205,000 (US$155,484) and HK$1,174,000
(US$151,484). During the fiscal years ended March 31, 1999 and 2000, we did not
contribute any amount toward the pension plans of our directors and executive
officers.
Executive Service Contract
We have entered into employment agreements with Mr. Chu, Mr. Li and Mr. Lee
for a period of three years at annual salaries of HK$2,730,000 (US$352,258),
HK$2,730,000 (US$352,258) and HK$1,080,000 (US$139,355). Their remuneration
packages include benefits with respect to a motor car. In addition, they are
entitled to an annual management bonus of a sum to be determined by the board at
its absolute discretion having regard for our operating results and their
performance during the relevant financial year. The amount payable to them will
be decided by majority decision of the members of the board present in the
meeting called for that purpose, provided that each of them will abstain from
voting and not be counted in the quorum in respect of the resolution regarding
the amount payable to them.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
-------------------------------------------------------------------------
As of September 1, 2000, the following options and warrants to purchase
shares of our common stock were outstanding:
. 1,500,000 common stock purchase warrants which are publicly traded and
which we issued in our August 2000 initial public offering to purchase
1,500,000 shares of common stock at $10.88 per share through August 9, 2005
. 150,000 stock purchase options to purchase 150,000 shares of common stock
at $13.20 per share through August 9, 2005 which we sold to the IPO
underwriter and/or persons related to the underwriter
. 150,000 warrant purchase options to purchase 150,000 warrants at $0.20625
per warrant to purchase shares of common stock at $17.952 per share through
August 9, 2005 which we sold to the IPO underwriter and/or persons related
to the underwriter
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
---------------------------------------------------------
We were incorporated in the British Virgin Islands on January 8, 1997 as a
limited liability company under the name Quinta Development Limited. On February
3, 2000, pursuant
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<PAGE>
to a resolution of our board of directors, we changed our name to Quintalinux
Limited. The name change was approved by the Registrar of Companies of the
British Virgin Islands on February 17, 2000.
On July 3, 1998, we split our outstanding 100 shares of common stock on a
100 for one basis and reduced the par value from US$1 to US$0.01. On July 22,
1998, we issued an additional 10,000 shares to our current shareholders at $0.01
per share in the same proportion as their existing shareholdings.
Mr. Chu was the sole shareholder of each of Interact Contracting Company
Limited; Interact (China) Design and Contracting Company Limited; and Uni-Zone
Holdings Limited, which are all referred to as the Tat Group. On November 5,
1999, we entered into a share exchange agreement with Mr. Chu, the sole
shareholder of the Tat Group. On November 19, 1999, we issued to Mr. Chu a total
of 4,815,000 of our shares as follows: 1,991,000 shares to Asian Progress
Holdings Limited and 2,824,000 shares to Muehl Products & Service Asia Limited,
in exchange for all of the outstanding common stock of each of the companies
comprising the Tat Group.
Mr. Li was the sole shareholder of each of Pado (Holdings) Limited, which
owns all of the outstanding shares of its two subsidiaries, Pado Contracting
Company Limited and Good Prominent Engineering Company Limited; Good Prominent
Technology Company Limited; and Good Prominent Trading Limited, which are all
referred to as the Li Group. On November 5, 1999, we entered into a share
exchange agreement with Mr. Li, the sole shareholder of the Li Group. On
November 19, 1999, we issued to Mr. Li a total of 2,985,000 of our shares as
follows: 1,931,000 shares to Oceanic Land Holdings Limited and 1,054,000 shares
to Muehl Products & Service Asia Limited, in exchange for all of the outstanding
common stock of each of the companies comprising the Li Group.
Asian Progress Holdings Limited is a limited liability company incorporated
in the British Virgin Islands and is wholly owned by Mr. Chu. Oceanic Land
Holdings Limited is a limited liability company incorporated in the British
Virgin Islands and is wholly owned by Mr. Li. Muehl Products & Service Asia
Limited is a limited liability company incorporated in the British Virgin
Islands whose issued and outstanding shares are owned 73% by Mr. Chu and 27% by
Mr. Li.
On November 11, 1999, we entered into share exchange agreements with three
of the shareholders of Linux System Solution Limited, including two of our
directors, Mr. Li and Mr. Kin Chan. On November 24, 1999, we issued to each of
Mr. Chan, Oceanic Land Holdings Limited on behalf of Mr. Li, and Liu Chuk Wang,
Ray 60,000 shares of our common stock, totaling 180,000 shares, in exchange for
their combined 72.5% equity interest in Linux System Solution Limited.
-54-
<PAGE>
On March 6, 2000, the amount owing to the Tat Group from Mr. Chu and his
related companies amounted to HK$25,487,000 (US$3,289,000) and was fully repaid
by transferring legal title of a Class A residential property and a commercial
property located in Hong Kong to the Tat Group. The parties agreed that the fair
market value of these properties at August 19, 1999 as valued by an independent
professional valuer was HK$27,000,000 (US$3,484,000) and being used to record as
the consideration for the transfer.
On December 28, 1999, Mr. Li reduced the amount owing from him to the Li
Group by HK$11,625,000 (US$1,500,000) to HK$3,060,000 (US$395,000) by
transferring good title to us of 400,000 shares of Intermost Corporation (OTC
BB: IMOT) valued by an independent valuer at US$3.75 per share. In addition, on
January 26, 2000, one of Mr. Li's related companies repaid an aggregate of
HK$12,000,000 (US$1,549,000) to us as a settlement of debt owing to the Li
Group.
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<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
-----------------------------------------------------
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
------------------------------------------
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
------------------------------------------------------------------------------
AND USE OF PROCEEDS.
--------------------
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Use of Proceeds
(1) The effective date of the Securities Act registration statement
for which the use of proceeds is being disclosed is August 9,
2000, Commission file number 333-11750.
(2) The date of commencement of the offering was August 10, 2000.
(3) The offering did not terminate before any securities were sold.
(4) (i) The offering has terminated and did not terminate before the
sale of all securities registered.
(ii) The managing underwriter was Barron Chase Securities, Inc.
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<PAGE>
(iii) The title of each class of securities registered is $.01 par value
common stock ("Common Stock") and warrants to purchase Common Stock
("Warrants").
(iv) The Company registered 1,500,000 shares of Common Stock and
1,500,000 Warrants for its account; the aggregate offering price of
the Common Stock was $12,000,000 and the aggregate offering price of
the Warrants was $187,500. All of the foregoing shares of Common
Stock and Warrants were sold as of the date hereof, aggregating
$12,187,500.
(v) Since the effective date of the Securities Act registration
statement (August 9, 2000) is after the ending date of the reporting
period (fiscal year ended March 31, 2000), the actual amount of
expenses incurred for the Company's account in connection with the
issuance and distribution of the securities registered for
underwriting discounts and commissions, finder's fees, expenses paid
to or for underwriters, and other expenses will be reported in the
Annual Report on Form 20-F for the fiscal year ending March 31,
2001.
(vi) The net offering proceeds to the Company after deducting the total
expenses described in (v) above will be reported in the Annual
Report on Form 20-F for the fiscal year ending March 31, 2001.
(vii) Since the effective date of the Securities Act registration
statement (August 9, 2000) is after the ending date of the reporting
period (fiscal year ended March 31, 2000), the actual amount of net
offering proceeds to the Company for which at least $100,000 has
been used will be reported in the Annual Report on Form 20-F for the
fiscal year ending March 31, 2001.
(viii) Not applicable.
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<PAGE>
PART IV
ITEM 17. FINANCIAL STATEMENTS.
-------------------------------
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
-------------------------------
See the Consolidated Financial Statements listed in Item 19 hereof and
filed as a part of this Annual Report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
--------------------------------------------
(a) The following financial statements are being filed as part of this
Annual Report on Form 20-F:
Report of Independent Auditors
Consolidated statements of operations for the years ended March 31, 1998,
1999 and 2000
Consolidated balance sheets at March 31, 1999 and 2000
Consolidated statements of shareholders' equity for the years ended March
31, 1998, 1999 and 2000
Consolidated statements of cash flows for the years ended March, 1998, 1999
and 2000
Notes to and forming part of the financial statements
(b) The following exhibits are being filed as part of this Annual Report
on Form 20-F:
none.
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<PAGE>
Index to Financial Statements
--------------------------------------------------------------------------------
QUINTALINUX LIMITED
(Formerly Known As Quinta Development Limited)
Report of Independent Certified Public Accountants F2
Consolidated Statements of Operations for the for the years ended
March 31, 1998, 1999 and 2000 F3
Consolidated Balance Sheets as of March 31, 1999 and 2000 F4
Consolidated Statements of Changes in Stockholders' Equity and for
the years ended March 31, 1998, 1999 and 2000 F5
Consolidated Statements of Cash Flows for the years ended March 31,
1998, 1999 and 2000 F6
Notes to and Forming Part of the Consolidated Financial Statements F7 - F28
<PAGE>
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors of
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
(incorporated in British Virgin Islands with limited liability)
We have audited the accompanying consolidated balance sheets of Quintalinux
Limited (formerly known as Quinta Development Limited) and its subsidiaries
("the Group") as of March 31, 1999 and 2000, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three year period ended March 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements, prepared on the basis
of presentation as set out in notes 1 and 2 to the consolidated financial
statements, present fairly, in all material respects, the consolidated financial
position of the Group as of March 31, 1999 and 2000, and the consolidated
results of its operations and cash flows for each of the years in the three year
period ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Moores Rowland
------------------
Moores Rowland
Chartered Accountants
Certified Public Accountants
Hong Kong
Dated : July 28, 2000
F-2
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Consolidated Statements of Operations
--------------------------------------------------------------------------------
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Contract revenue 208,679 171,495 188,103 24,271
Contract costs (167,557) (127,905) (139,639) (18,018)
-------- -------- -------- -------
Gross profit 41,122 43,590 48,464 6,253
-------- -------- -------- -------
Expenses
Selling, general and administrative (27,112) (24,150) (24,171) (3,119)
Depreciation and amortization (230) (649) (784) (101)
-------- -------- -------- -------
(27,342) (24,799) (24,955) (3,220)
-------- -------- -------- -------
Other operating income
Management fee income 84 57 53 7
Rental income - - 258 33
Project handling income - - 93 12
-------- -------- -------- -------
84 57 404 52
-------- -------- -------- -------
Operating income 13,864 18,848 23,913 3,085
-------- -------- -------- -------
Interest income 122 192 128 17
Interest expense (1,307) (990) (1,516) (196)
-------- -------- -------- -------
(1,185) (798) (1,388) (179)
-------- -------- -------- -------
Other income
Exchange gain 108 - 57 7
Debt forgiveness from suppliers - 144 3 1
Minority interest - - 92 12
Others 7 33 256 33
-------- -------- -------- -------
115 177 408 53
-------- -------- -------- -------
Income before income taxes 12,794 18,227 22,933 2,959
Income tax expense - (1,200) (893) (115)
-------- -------- -------- -------
Net income 12,794 17,027 22,040 2,844
Other comprehensive income - gross unrealized - - 969 125
gain on marketable equity securities
-------- -------- -------- -------
Comprehensive income 12,794 17,027 23,009 2,969
======== ======== ======== =======
Net income per share
Weighted average number of shares outstanding
Basic 4,825,000 4,831,932 5,985,808 5,985,808
========= ========= ========= =========
Net income per share of common stock HK$2.65 HK$3.52 HK$3.68 US$0.48
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Consolidated Balance Sheets
-------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
As of March 31,
----------------------------------------------
<S> <C> <C> <C> <C>
1999 2000 2000
------ ------- ------
Notes HK$ HK$ US$
ASSETS
Current assets
Cash and cash equivalents 438 5,421 699
Restricted cash 6 1,819 11,150 1,439
Accounts receivable, net of allowance for doubtful accounts 11d 15,074 76,026 9,810
HK$5,762 in 1998 and HK$6,006 in 1999 and HK$7,049 in 2000
Due from customers for contract work 4 16,802 24,219 3,125
Retention money receivable 2,914 5,816 751
Inventories 875 2,018 260
Due from related parties 11 33,297 - -
Deposit outward 710 581 75
Prepayments and other current assets 2,409 3,348 432
Prepaid taxes - 50 7
----------- ----------- -----------
Total current assets 74,338 128,629 16,598
Property, plant and equipment, net 5 2,559 40,520 5,228
Marketable equity securities 9 - 12,594 1,625
Deferred offering costs 2b 1,465 5,355 691
Goodwill - 1,025 132
----------- ----------- -----------
Total assets 78,362 188,123 24,274
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft 6 9,910 9,589 1,237
Bank loans, current 7 - 4,197 542
Accounts and bills payable - trade 38,109 90,530 11,681
Capital lease obligations, current 8 40 75 10
Accrued expenses and other payable 1,239 5,434 701
Contract work deposit from customers 4 1,587 1,819 235
Other deposits received - 176 23
Retention money payable 171 306 39
Due to related parties 11 416 3,076 397
Income taxes payable 1,120 1,560 201
Accrued deferred offering costs 1,040 1,784 230
Loan payable 458 458 59
----------- ----------- -----------
Total current liabilities 54,090 119,004 15,355
Bank loans, non-current 7 - 6,030 778
Capital lease obligations, non-current 8 38 17 2
Deferred taxation - 37 5
----------- ----------- -----------
Total liabilities 54,128 125,088 16,140
----------- ----------- ------------
Minority interest - (150) (19)
----------- ----------- ------------
Commitments and contingencies 12, 13
Stockholders' equity
Common stock 1, 10 375 620 80
Additional paid-in capital 2,627 18,324 2,364
Accumulated other comprehensive income - 969 125
Retained earnings 21,232 43,272 5,584
----------- ----------- -----------
Total stockholders' equity 24,234 63,185 8,153
----------- ----------- ------------
Total liabilities and stockholders' equity 78,362 188,123 24,274
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Consolidated Statements of Changes in Stockholders' Equity
-------------------------------------------------------------------------------
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Common Stock
--------------------------
Accumulated
Additional other
Number paid-in comprehensive Retained
of shares Amount capital income earnings Total
---------- ---------- ---------- ------------- -------- -----------------------
HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Balance as of March
31, 1997 (Note (1)) 10,000 1 - - - 1 1
Issue of shares (Note
(2)) 4,815,000 373 2,627 - (8,589) (5,589) (722)
Net income - - - - 12,794 12,794 1,651
---------- ---------- ---------- ------------- -------- ---------- ----------
Balance as of March
31, 1998 4,825,000 374 2,627 - 4,205 7,206 930
Issue of shares at par
value 10,000 1 - - - 1 -
Net income - - - - 17,027 17,027 2,197
---------- ---------- ---------- ------------- -------- ---------- ----------
Balance as of March
31, 1999 4,835,000 375 2,627 - 21,232 24,234 3,127
Issue of shares
(Note (3)) 2,985,000 231 14,784 - - 15,015 1,937
Issue of shares
(Note (4)) 180,000 14 913 - - 927 120
Gross unrealized gain
on marketable equity
securities - - - 969 - 969 125
Net income - - - - 22,040 22,040 2,844
---------- ---------- ---------- ------------- -------- ---------- ----------
Balance as of March
31, 2000 8,000,000 620 18,324 969 43,272 63,185 8,153
========== ========== ========== ============= ======== ========== ==========
</TABLE>
Note:
-----
(1) Share amount has been adjusted to reflect the share split of 100 for 1 and
the reduction in par value from US$1 to US$0.01 per share effected on July
3, 1998.
(2) Adjusted to reflect issuance of 4,815,000 shares of common stock of the
Company in exchange for the outstanding common stock of Tat Group effected
on November 19, 1999.
(3) Issuance of 2,985,000 shares of common stock of the Company in exchange for
the outstanding common stock of Li Group effected on November 19, 1999.
(4) Issuance of 180,000 shares of common stock of the Company in exchange for
72.5% equity interest in LSSL effected on November 24, 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Consolidated Statements of Cash Flows
-------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1999 2000 2000
------- ------- ------- ------
HK$ HK$ HK$ US$
Cash flows from operating activities
Net income 12,794 17,027 22,040 2,844
Adjustment to reconcile net income to net cash
provided by (used in) operating activities
Depreciation of property, plant and equipment 230 649 729 94
Amortization - - 55 7
Allowance for doubtful accounts 5,762 244 9 1
Loss on disposal of property, plant and equipment 2 369 44 6
Minority interest - - (92) (12)
Changes in operating assets and liabilities:
Accounts receivable (1,013) 3,979 (51,301) (6,619)
Due from customers for contract work (8,399) (1,915) (7,189) (928)
Retention money receivable 194 1,135 (2,082) (269)
Inventories 788 8 (452) (58)
Due from related parties (17,170) (1,587) 16,660 2,150
Deposit outward 919 364 129 17
Prepayments and other current assets 1,647 (382) 155 20
Accounts and bills payable - trade 14,641 (13,669) 35,511 4,582
Accrued expenses and other payable 2,067 (1,735) (4,164) (537)
Contract work deposit from customers and other
deposits received (6,796) (4,691) (5,287) (682)
Retention money payable 60 111 135 17
Due to related parties (6,954) 167 12,661 1,633
Taxation - 1,120 121 16
--------- ---------- ----------- ----------
Net cash provided by (used in) operating activities (1,228) 1,194 17,682 2,282
--------- ---------- ----------- ----------
Cash flows from investing activities
Purchase of property, plant and equipment (112) (2,705) (1,266) (163)
Proceeds on disposal of property, plant and equipment 2 65 - -
Acquisitions, net of cash acquired 2,845 - 79 10
--------- ---------- ----------- ----------
Net cash provided by (used in) investing activities 2,735 (2,640) (1,187) (153)
--------- ---------- ----------- ----------
Cash flows from financing activities
Common stock issued - 1 - -
Loan acquired - - 7,700 994
Repayment of amounts borrowed - - (191) (25)
Repayment of capital lease obligations (96) (105) (66) (9)
Restricted cash (51) (45) (7,031) (907)
Bank overdraft (554) 1,193 (8,778) (1,133)
Deferred offering costs - (425) (3,146) (406)
Increase in loan payable - 458 - -
--------- ---------- ----------- ----------
Net cash provided by (used in) financing activities (701) 1,077 (11,512) (1,486)
--------- ---------- ----------- ----------
Net (decrease) increase in cash and cash equivalents 806 (369) 4,983 643
Cash and cash equivalents, as of beginning of period 1 807 438 56
--------- ---------- ----------- ----------
Cash and cash equivalents, as of end of period 807 438 5,421 699
========= ========== =========== ==========
Supplemental disclosure of cash flow information
Cash paid for interest 1,307 990 1,516 196
========= ========== =========== ==========
Cash paid for taxes - 80 726 94
========= ========== =========== ==========
Non-cash transaction
Common stock issued for acquisitions 373 - 245 31
Purchase of equipment under capital lease - 77 - -
Accrual of deferred offering costs - 1,040 744 96
Transfer-in of property from stockholder - - 27,000 3,484
Transfer-in of marketable equity securities from
stockholder - - 11,625 1,500
========= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
--------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATION
The Company was incorporated in the British Virgin Islands on January 8,
1997 as a limited liability company and was known as Quinta Development
Limited. On February 3, 2000, pursuant to a resolution passed by the
Board of Directors, the Company changed its name to Quintalinux Limited.
The change of name was approved by the Registrar of Companies of the
British Virgin Islands on February 17, 2000. As of March 31, 1999, the
Company has authorized and outstanding common stock of 100,000,000 shares
and 20,000 shares of US$0.01 each respectively (see note 10 for further
details). 9,000 outstanding shares, representing 45% of the Company's
issued common stock, are issued to each of Mr. CHU Tat ("Mr. Chu") and
Mr. Perick LI Wai Ho ("Mr. Li"). Another 2,000 outstanding shares
representing the remaining 10% of the Company's issued common stock are
issued to other third parties.
Mr. Chu is the principal stockholder of Interact Contracting Company
Limited; Interact (China) Design & Contracting Company Limited and Uni-
Zone Holdings Limited, hereinafter collectively referred to as (the "Tat
Group").
Mr. Li is the principal stockholder of Pado (Holdings) Limited and its
subsidiary companies, namely Pado Contracting Company Limited and Good
Prominent Engineering Company Limited, Good Prominent Technology Company
Limited and Good Prominent Trading Limited, hereinafter collectively
referred to as (the "Li Group").
Pursuant to the Share Exchange Agreements entered into between the
Company and the stockholders of Tat Group and Li Group on November 5,
1999, each of the stockholders of the Tat Group and Li Group transferred
his controlling interest in the outstanding common stock of each of the
companies comprising the Tat Group and the Li Group respectively in
exchange for 61.57% and 38.17% of the enlarged outstanding shares of
common stock of the Company. The transaction was completed on November
19, 1999 when the Company became the holding company of all companies
comprising the Tat Group and the Li Group.
Pursuant to the Share Exchange Agreement entered into between the Company
and the stockholders of Linux System Solution Limited ("LSSL") on
November 11, 1999, the Company issued a further 180,000 shares,
representing 2.25% of the enlarged outstanding shares of common stock of
the Company, to certain LSSL's stockholders, one of whom is Mr. Li in
exchange for their 72.5% equity interest in LSSL. The transaction was
completed on November 24, 1999.
Upon completion of the above acquisitions, the Company has outstanding
8,000,000 shares of common stock of which 60.3% and 38.2% are owned by
Mr. Chu and Mr. Li respectively.
As of March 31, 2000, authorized common stock amounted to 100,000,000
shares at par value of US$0.01 each, issued and outstanding amounted to
8,000,000 shares at par value of US$0.01.
Acquisition of the Tat Group, for accounting purposes, has been treated
as the acquisition of the Company by the Tat Group with the Tat Group as
the accounting acquirer ("reverse acquisition"). On this basis, the
historical stockholders' equity amounts since April 1, 1997 has been
retroactively restated to reflect the equivalent number of shares of
common stock of the Company issued for acquisition with the difference
between par value of the Company's and Tat Group's common stock reported
in additional paid-in capital. The historical financial statements prior
to November 19, 1999, are those of the Tat Group.
F-7
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands except share amounts)
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATION
(Continued)
Acquisitions of the Li Group and LSSL have been accounted for using the
purchase method of accounting. The purchase method of accounting allocates
the aggregate purchase price to the assets acquired and liabilities assumed
based upon their respective fair value.
The following supplementary unaudited pro forma condensed consolidated
statement of operations information for the years ended March 31, 1999 and
2000 give effect to the acquisitions of Li Group and LSSL as if such
acquisitions had occurred at the beginning of each period. All significant
inter-company transactions have been eliminated.
The supplemental unaudited pro form presentation does not purport to be
indicative of what the Group's actual results would have been assuming the
acquisitions mentioned above had been completed at the beginning of each
period, nor does it purport to be indicative of results of operations that
may be achieved in the future.
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------------
<S> <C> <C> <C>
1999 2000 2000
HK$ HK$ US$
Operating revenue 215,559 201,343 25,980
============= ============== ==============
Operating income before interest and income tax 21,716 25,681 3,314
Net interest expenses (2,711) (2,143) (277)
------------- -------------- --------------
Income before income taxes 19,005 23,538 3,037
Income tax expense (1,550) (893) (115)
------------- -------------- --------------
Net income 17,455 22,645 2,922
Other comprehensive income - 969 125
------------- -------------- --------------
Comprehensive income 17,455 23,614 3,047
============= ============== ==============
Net income per share HK$2.18 HK$2.83 US$0.37
============= ============== ==============
Shares used in computing net income per share 8,000,000 8,000,000 8,000,000
============= ============== ==============
</TABLE>
F-8
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands except share amounts)
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATION
(Continued)
The Company has had no operation since its incorporation and is used as an
investment holding company. The Company had entered into a letter of
intent for the proposed public offerings and has incurred certain deferred
offering costs that are being deferred until the consummation of the
offering, at which time they will be charged against the additional paid-in
capital. If the offering is not consummated, the deferred offering costs
will be expensed.
Details of each of the companies comprising the Tat and Li Groups and their
principal activities as of March 31, 1999 and 2000 are summarized below:
<TABLE>
<CAPTION>
Equity interest
Date of Place of owned by Principal
Name of company incorporation incorporation the Company activities
--------------- ------------- ------------- ------------------- ----------
Direct Indirect
<S> <C> <C> <C> <C> <C>
Interact Contracting Company Limited January 21, 1992 Hong Kong 100% construction,
engineering,
decoration and
designs works
Interact (China) Design & Contracting December 20, 1994 Hong Kong 100% general
Company Limited contracting and
the provision of
decoration work
in the PRC
Uni-Zone Holdings Limited May 19, 1994 Hong Kong 100% design, supply and
installation of
carpet and raised
floor system
Pado Contracting Company Limited December 16, 1983 Hong Kong 100% renovation work
Pado (Holdings) Limited March 11, 1993 Hong Kong 100% investment holding
Good Prominent Technology Company April 18, 1990 Hong Kong 100% construction and
Limited installation of
light emitting
diode
Good Prominent Engineering Company October 1, 1992 Hong Kong 100% trading and
Limited installation of
lighting materials
Good Prominent Trading Limited December 28, 1987 Hong Kong 100% trading of
building materials
</TABLE>
As of March 31, 2000, the Company also held an 72.5% interest in the issued
ordinary share capital of LSSL, a company incorporated in Hong Kong on
April 23, 1999 and is engaged in the provision of professional consulting
and support services, systems integration and application development for
Linux operating systems.
F-9
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting
The consolidated financial statements are presented in Hong Kong
dollars and have been prepared in accordance with accounting
principles generally accepted in United States of America.
(b) Deferred offering costs
In connection with the proposed public offerings, the Company has and
will continue to incur certain costs associated with these offerings.
These costs will be deferred and offset against the proceeds from the
sale of the securities, if the offering is successful, or expensed in
operations, if the offering is unsuccessful.
(c) Principles of consolidation
The consolidated financial statements include the financial statements
of the Company and all of its subsidiaries.
The acquisition of Tat Group has been accounted for on a "reverse
acquisition" basis with the Tat Group as the accounting acquirer. The
acquisition was treated as if it was consummated on April 1, 1997.
The acquisitions of Li Group and LSSL have been dealt with using the
purchase method of accounting.
All material intercompany balances and transactions have been
eliminated on consolidation.
(d) Cash and cash equivalents
Cash and cash equivalents include cash on hand, demand deposits with
banks and highly liquid debt instruments with an original maturity of
three months or less.
(e) Inventories
Inventories are stated at the lower of cost or net realizable value.
Cost comprises purchase cost of building materials and is calculated
using the first-in, first-out method.
(f) Marketable equity securities
Investments in marketable equity securities represents available-for-
sale securities and are stated at fair value, with unrealised gains
and losses reported as a component of accumulated other comprehensive
income.
(g) Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost less accumulated
depreciation. The cost of an asset comprises of its purchase price and
any directly attributable costs of bringing the asset to its present
working condition and location for its intended use. Expenditure
incurred after the property, plant and equipment have been put into
operation, such as repairs and maintenance, is charged to the
statement of operations in the period in which it is incurred. In
situations where it can be clearly demonstrated that the expenditure
has resulted in an increase in the future economic benefits expected
to be obtained from the use of the property, plant and equipment, the
expenditure is capitalized, as an additional cost of property, plant
and equipment.
When assets are sold or retired, their costs and accumulated
depreciation are eliminated from the accounts and any gain or loss
resulting from their disposal is included in statement of operations.
F-10
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Property, plant and equipment and depreciation (Continued)
Depreciation is provided to write off the cost of property, plant and
equipment, over their estimated useful lives and after taking into
account their estimated residual value, using the reducing balance
method, at the following rates per annum:
Yacht 20%
Leasehold and buildings 0.75% or over the remaining term
of relevant leases, if shorter
Furniture and fixtures 20%
Motor vehicles 30%
Plant and machinery 20%
Others and computer equipment 20%
Assets held under capital lease contracts are depreciated over their
expected useful lives on the same basis as owned assets.
(h) Goodwill
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at dates of acquisition and is
amortized on a straight-line method over 7 years.
(i) Income taxes
The Group accounts for income tax under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, which requires
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Deferred income taxes are provided
using the liability method. Under the liability method, deferred income
taxes are recognized for all significant temporary differences between
the tax and financial statements based of assets and liabilities.
(j) Operating leases
Leases where substantially all the rewards and risks of ownership of
assets remain with the leasing company are accounted for as operating
leases. Rentals payable under operating leases are charged to statement
of operations on a straight-line basis over the lease terms.
(k) Capital lease obligations
Where assets are acquired under capital lease, the amounts representing
the outright purchase price of such assets are included in property,
plant and equipment and the corresponding liabilities, net of finance
charges, are recorded as capital lease obligations. Depreciation is
provided on the cost of the assets on a reducing balance method over
their estimated useful lives and after taking into account their
estimated residual value as set out in note 2(g) above. Finance charges
implicit in the purchase payments are charged to statement of
operations over the periods of the contracts so as to produce an
approximately constant periodic rate of charge on the remaining
balances of the obligations for each accounting period.
(l) Related parties
Parties are considered to be related if one party has the ability to
control the other party or exercise significant influence over the
other party in making financial and operating decisions.
F-11
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m) Revenue recognition
Revenue is recognized when it is probable that the economic benefits
will flow to the Group and when the revenue can be measured reliably.
Revenue from contract works is recognized on the percentage of
completion method and in situations where the outcome of the contract
works cannot be estimated reliably, revenue from such contract works
is recognized only to the extent of the contract costs incurred that
it is probable will be recoverable.
Sale of goods is recognized when goods are delivered and title has
passed.
Management and design fees received are recognized in the period when
services are rendered.
(n) Foreign currencies
The books and records of the Group are maintained in Hong Kong
dollars. Monetary assets and liabilities denominated in foreign
currencies have been translated to Hong Kong dollars using the
approximate rates prevailing at the balance sheet dates. Transactions
in foreign currencies have been converted at the approximate rates
prevailing at the dates of transactions. The exchange gains or losses
have been credited or charged to the statement of operations.
For the convenience of the readers of these consolidated financial
statements, translation of amounts from Hong Kong dollars (HK$) into
United States dollars (US$) has been made at the exchange rate of
US$1.00 = HK$7.75 on March 31, 2000. No representation is made that
the Hong Kong dollars amounts could have been or could be, converted
into the United States dollars at that rate on March 31, 2000 or at
any other rates.
(o) Construction contracts
When the outcome of a construction contract can be estimated reliably,
contract costs and revenue are recognized as expenses and income by
reference to the stage of completion of the contract activity at the
balance sheet date. When it is probable that total contract costs will
exceed total contract revenue, the expected loss is recognized as an
expense immediately. Whilst most of the contracts undertaken follow
the percentage of completion method, in rare cases where lack of
dependable estimates or inherent hazards cause forecasts to be
doubtful, the completed contract method is adopted.
Construction contracts in progress at the balance sheet date are
recorded in the consolidated balance sheet at the net amount of costs
incurred plus attributable profits less foreseeable losses and
progress billings, and represented in the consolidated balance sheet
as due from customers for contract work (as an asset) or contract work
deposit from customers (as a liability), as applicable.
(p) Use of estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual
amounts could differ from those estimates.
F-12
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(q) Fair value of consolidated financial statements
The carrying amounts of the Group's cash, accounts receivable,
accounts payable and accrued expenses approximate their fair values
because of the short term maturity of those instruments.
(r) Comprehensive income
The Group adopted SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements.
(s) Earnings per share (Net income per share)
According to the requirements of SFAS No. 128, "Earnings Per Share,"
basic earnings per share are computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding. The computation of diluted earnings per share is similar
to the computation of basic earnings per share except that the
weighted-average number of shares outstanding is adjusted to include
estimates of additional shares that would be issued if potentially
dilutive common shares had been issued. In addition, income available
to common stockholders is adjusted to include any changes in income or
loss that would result from the assumed issuance of the dilutive
common shares. There were no diluted securities outstanding during any
of the periods.
(t) Accounting pronouncements
Segment information
On April 1, 1999, the Group adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which supersedes
SFAS No. 14, "Financial Reporting Segments of a Business Enterprise",
and establishes standards for the way that public enterprises report
information about operating segments in financial statements. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance.
Costs of start-up activities
As of April 1, 1999, the Group adopted Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-up Activities", which requires
costs of start-up activities to be expensed as incurred. This
statement is effective for fiscal years beginning after December 15,
1998. The statement requires previously capitalized costs related to
start-up activities to be expensed as a cumulative effect of a change
in accounting principle when the statement is adopted. The adoption of
this new standard did not have a significant effect on the Group's
financial position or results of operations.
F-13
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(t) Accounting pronouncements (Continued)
Costs of computer software
As of April 1, 1999, the Group adopted SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use",
which establishes new accounting and reporting standards for the costs
of computer software developed or obtained for internal use. This
statement will be applied prospectively and is effective for fiscal
years beginning after December 15, 1998. The impact of this new
standard did not have a significant effect on the Group's financial
position or results of operations.
New accounting standards not yet adopted
In February 1998, SFAS No. 132, "Employer's Disclosures about Pensions
and Other Postretirement Benefits" amended the disclosure requirements
for pensions and other postretirement benefits. The Group does not
expect the adoption to have significant change on the Group's
financial statement disclosures.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities"
which delayed the effective date of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" for one year. SFAS No.
133 provides guidance for the recognition and measurement of
derivatives and hedging activities. It requires an entity to record,
at fair value, all derivatives as either assets or liabilities in the
balance sheet, and it establishes specific accounting rules for
certain types of hedges. SFAS No. 133 is now effective for fiscal
years beginning after June 15, 2000 and will be adopted by the Group
when required, if not earlier. The adoption of this new standard did
not have a significant impact on the Group's financial position or
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue recognition in financial
statements", which provides guidance on applying generally accepted
accounting principles for recognizing revenue. SAB 101 is effective
for fiscal years beginning after December 15, 1999. The impact, if
any, of adopting SAB 101 on the Group's consolidated financial
position, results of operations and cash flows, has not been
determined.
F-14
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
3. OPERATING RISKS
(a) Concentration of major customers and suppliers
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1999 2000 2000
------- ------- ------- ------
HK$ HK$ HK$ US$
Major customers with revenues of more than 10% of
contract revenue
Sales to major customers 128,566 168,104 111,365 14,370
Percentage of contract revenue 62% 98% 59% 59%
Number 3 2 2 2
Major suppliers with purchases of more than 10% of
contract cost
Purchases from major suppliers 35,474 99,643 - -
Percentage of contract cost 21% 78% - -
Number 2 2 - -
</TABLE>
Accounts receivable related to the Group's major customers was 55% and
66% of all accounts receivable as of March 31, 1999 and 2000
respectively. In addition, the Group has another customer whose
accounts receivable represents approximately 14% and nil of accounts
receivable as of March 31, 1999 and 2000 respectively.
Credit risk represents the accounting loss that would be recognized at
the reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of
customers or counterparties when there are similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions. The major concentration of credit risk arises from the
Group's receivables. Even though the Group does have a major customer,
it does not consider itself exposed to significant credit risk with
regards to collection of the related receivable.
F-15
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
3. OPERATING RISKS (Continued)
(b) Country risks
The Group may also be exposed to the risks as a result of its
contracting and decoration operation being located in the People's
Republic of China ("PRC"). This includes risks associated with, among
others, the political, economic and legal environments and foreign
currency exchange. The Group's results may be adversely affected by
changes in the political and social conditions in the PRC, and by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad,
and rates and methods of taxation, among other things. The Group's
management does not believe these risks to be significant. There can
be no assurance, however, that changes in political, social and other
conditions will not result in any adverse impact.
(c) Cash and time deposits
The Group maintains its cash balances and investments in time deposits
with various banks and financial institutions located in Hong Kong. In
common with local practice, such amounts are not insured or otherwise
protected should the financial institutions be unable to meet their
liabilities. There has been no history of credit losses.
4. CONSTRUCTION CONTRACTS
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------
<S> <C> <C> <C>
1999 2000 2000
-------- -------- -------
HK$ HK$ US$
Accumulated contract costs incurred 151,633 265,842 34,302
Add : Attributable profits 45,555 56,246 7,257
-------- -------- -------
Less: Progress payments 197,188 322,088 41,559
received/receivable (181,973) (299,688) (38,669)
-------- -------- -------
15,215 22,400 2,890
======== ======== =======
Amounts disclosed as:
Due from customers for contract work 16,802 24,219 3,125
Contract work deposit from customers (1,587) (1,819) (235)
-------- -------- -------
15,215 22,400 2,890
======== ======== =======
</TABLE>
F-16
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
5. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------
<S> <C> <C> <C>
1999 2000 2000
------ ------ -----
HK$ HK$ US$
Yacht - 1,301 168
Leasehold land and buildings - 37,632 4,856
Furniture and fixtures 2,545 4,618 596
Motor vehicles 230 745 96
Plant and machinery - 234 30
Others and computer equipment 886 1,910 246
----------- ------------- -----------
3,661 46,440 5,992
Accumulated depreciation (1,102) (5,920) (764)
----------- ------------- -----------
2,559 40,520 5,228
=========== ============= ===========
</TABLE>
6. BANKING FACILITIES
The Group had various letters of credit and overdraft under banking
facilities as of March 31, 1999 and 2000 as follows:
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
<S> <C> <C> <C>
1999 2000 2000
------ ------ -----
HK$ HK$ US$
Facilities granted
Letter of credit and import loans 17,800 22,600 2,917
Overdrafts 10,200 21,500 2,774
=========== ============= ===========
Utilized
Letter of credit and import loans 9,289 20,757 2,678
Overdrafts 9,910 9,589 1,237
=========== ============= ===========
Unutilized facilities
Letter of credit and import loans 8,511 1,843 239
Overdrafts 290 11,911 1,537
=========== ============= ===========
</TABLE>
The bank overdrafts are denominated in Hong Kong dollars, bear interest at
the floating commercial bank lending rates in Hong Kong, which ranged from
10.25% to 11.75% per annum as of March 31, 1999 and 2000 and are renewable
annually with the consent of the relevant banks.
F-17
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
6. BANKING FACILITIES (Continued)
Under the banking facilities arrangements, the Group's banking facilities
are collateralized by unlimited personal guarantee of the directors and
leasehold land and buildings owned by the Group. In addition, the Group is
required to maintain certain cash balances based on the amount of
facilities granted. These balances are reflected as restricted cash in the
consolidated financial statements.
Key financial covenant provide that facilities granted to the Group must
not exceed a certain percentage of the market value of leasehold land and
buildings collateralized. As of March 31, 1999 and 2000, the Group was not
in violation of the key financial covenant.
7. BANK LOANS
<TABLE>
<CAPTION>
March 31,
------------------------------------
<S> <C> <C> <C>
1999 2000 2000
------- ------ -----
HK$ HK$ US$
Bank loans, bear interest ranging from 1.75% to 3% over
the prime rate (8.75% as of March 31, 2000) and matures
on June, August and December 2001, January 2002 and May
2004 - 10,227 1,320
Less: Amount due within one year
included under current liabilities - (4,197) (542)
--------- ---------- ---------
- 6,030 778
========= ========== =========
</TABLE>
Expected maturities of bank loans are as follows:
<TABLE>
<CAPTION>
March 31, 2000
--------------------------
HK$ US$
<S> <C> <C>
2001 4,197 542
2002 5,068 654
2003 406 52
2004 451 58
Thereafter 105 14
----------- ---------
Total 10,227 1,320
=========== =========
</TABLE>
F-18
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
8. CAPITAL LEASE OBLIGATIONS
The Group leased certain equipment under agreements classified as capital
lease. Equipment under these leases has a cost of HK$256 and accumulated
depreciation of approximately HK$117 as of March 31, 1999. The following is
a schedule of future minimum lease payments under capital lease as of March
31, 1999 and 2000.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
<S> <C> <C> <C>
1999 2000 2000
HK$ HK$ US$
Future minimum lease payments 97 123 16
Less: Amount representing interest (19) (31) (4)
--------- ----------- ---------
Present value of net minimum lease payments 78 92 12
Less: Current portion (40) (75) (10)
--------- ----------- ---------
38 17 2
========= =========== =========
</TABLE>
Expected maturities of capital lease are as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
<S> <C> <C> <C>
1999 2000 2000
HK$ HK$ US$
2000 40 - -
2001 21 75 10
2002 17 17 2
--------- ----------- ---------
78 92 12
========= =========== =========
</TABLE>
9. MARKETABLE EQUITY SECURITIES
Investment in marketable equity securities as of March 31, 2000 is as
follows:
<TABLE>
<CAPTION>
Gross
unrealized
gain Fair value
--------------- --------------------------
<S> <C> <C> <C>
HK$ HK$ US$
Available-for-sale securities - common stock 969 12,594 1,625
=============== =========== ===========
</TABLE>
F-19
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands except share amounts)
10. COMMON STOCK
The Company was originally incorporated with authorized and outstanding
shares of common stock of 50,000 shares and 100 shares respectively, at par
value of US$1 each. On July 3, 1998, the Board of Directors of the Company
approved a 100 for 1 share split (the "Share Split") and as a result, the
Company's then authorized and outstanding shares of common stock was
changed from 50,000 shares and 100 shares with a par value of US$1 each to
5,000,000 shares and 10,000 shares with a par value of US$0.01 each
respectively.
On the same date, the Board of Directors of the Company had also approved
that the authorized common stock of the Company be increased from US$50 to
US$1,000 by the creation of additional 95,000,000 shares of US$0.01 each
and such shares shall rank pari passu in all respects with the existing
shares.
On July 22, 1998, the Company issued another 10,000 shares of par value of
US$0.01 each at par consideration to the then existing shareholders in same
proportion as to their existing shareholdings.
Pursuant to the Share Exchange Agreements entered into between the Company
and the Stockholders of Tat Group and Li Group on November 5, 1999, the
Company issued 1,991,000 and 2,824,000 shares to Asian Progress Holdings
Limited and Muehl Product and Service Asia Limited respectively in exchange
for Mr. Chu's entire interest in the outstanding common stock of each of
the companies comprising the Tat Group and 1,931,000 and 1,054,000 shares
to Oceanic Land Holdings Limited and Muehl Product and Service Asia Limited
respectively in exchange for Mr. Li's entire interest in the outstanding
common stock of each of the companies comprising the Li Group.
Pursuant to the Share Exchange Agreements entered into between the Company
and certain stockholders of LSSL on November 11, 1999, the Company issued
to them on aggregate 180,000 shares in exchange for their 72.5% equity
interest in LSSL.
As of March 31, 2000, authorized common stock amounted to 100,000,000
shares at par value of US$0.01 each, issued and outstanding amounted to
8,000,000 shares at par value of US$0.01.
11. RELATED PARTY TRANSACTIONS
a. Name and relationship of related parties
<TABLE>
<CAPTION>
Existing relationships with the Company
------------------------------------------
<S> <C>
Mr. Chu Director and stockholder of the Company
Genuine Interior Design & Associates Limited ("GIDAL") Common director and a company owned by
Mr. Chu, major stockholder of the Company
Prographic Productions Company ("PPC") - ditto -
Ba Wah Design & Construction Company Limited ("BWDCCL") - ditto -
T & T (HK) Investment Limited ("TTHKIL") - ditto -
</TABLE>
F-20
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
a. Name and relationship of related parties
<TABLE>
<CAPTION>
Existing relationships with the
Company
--------------------------------------
<S> <C>
Interact (Guangzhou) Design and Contracting - ditto -
Company Limited ("IGDCCL")
Mr. Chan Kin Hang ("Mr. Chan") Director and stockholder of the Company
Mr. Liu Chuk Wang ("Mr. Liu") Stockholder of the Company
Mr. Li Director and stockholder of the Company
Good Prominent Fire Safety Company Limited ("GPFSCL") Common director and a company owned by Mr.
Li, major stockholder of the Company
Pado (China) Design and Contracting Company
Limited ("PCDCL") - ditto -
Good Prominent Media Advertising Company - ditto -
Limited ("GPMACL")
Pado Contracting Company Limited ("PCCL") Common director and a company owned by Mr.
Li, major stockholder of the Company.
Became a subsidiary of the Company,
following the reorganization effected on
November 19, 1999
</TABLE>
b. Summary of related party transactions
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 1999 2000 2000
------ ------ ----- ----
HK$ HK$ HK$ US$
Due from related parties (Note (i))
Mr. Chu 30,111 31,245 - -
BWDCCL 1,385 1,887 - -
PPC 214 104 - -
TTHKIL - 1 - -
Mr. Li - 60 - -
------------ ------------ ------------ ------------
31,710 33,297 - -
============ ============ ============ ============
Due to related parties (Note (ii))
PCCL - 186 - -
GIDAL 249 230 - -
Mr. Chan - - 97 13
Mr. Liu - - 27 3
Mr. Chu - - 887 114
Mr. Li - - 2,065 267
------------ ------------ ------------ ------------
249 416 3,076 397
============ ============ ============ ============
</TABLE>
F-21
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions (Continued)
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------
<S> <C> <C> <C> <C>
1998 1999 2000 2000
----- ----- ------ -----
HK$ HK$ HK$ US$
General expenses (Note (iii))
PPC 147 242 - -
========== ========== ========== ==========
Rental expenses (Note (iv))
BWDCCL 600 150 - -
GIDAL - 1,114 960 124
---------- ---------- ---------- ----------
600 1,264 960 124
========== ========== ========== ==========
Management fee income (Note (v))
PPC 60 45 - -
GPMACL - - 144 19
---------- ---------- ---------- ----------
60 45 144 19
========== ========== ========== ==========
Management fee expenses (Note (iii))
GIDAL 588 - - -
========== ========== ========== ==========
Subcontracting cost (Note (iii))
IGDCCL 5,109 - - -
========== ========== ========== ==========
Property, plant and equipment
Mr. Chu (Note (vi)) - - 27,000 3,484
GIDAL (Note (iii)) - 2,405 - -
---------- ---------- ---------- ----------
- 2,405 27,000 3,484
========== ========== ========== ==========
Marketable equity securities (Note (vii))
Mr. Li - - 11,625 1,500
========== ========== ========== ==========
Rental income (Note (v))
GPFSCL - - 140 18
========== ========== ========== ==========
</TABLE>
(i) The amounts due from related parties represent unsecured advances
made to those parties from time to time. These amounts are interest
free and repayable on demand.
(ii) The amounts due to related parties represent unsecured advances
made from those parties from time to time. These amounts are
interest free and repayable on demand.
F-22
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions (Continued)
(iii) The Group made payments to PPC, IGDCCL and GIDAL for various
general, management, subcontracting expenses and property, plant
and equipment. The amounts were determined between the respective
parties.
(iv) The Group made rental expenses to BWDCCL and GIDAL for leasing of
office premises at approximately market rates.
(v) The Group received management fee income from PPC and GPMACL for
management services provided and rental income from GPFSCL for
properties let out at approximately market rates. The management
fee income was determined between the two respective parties.
(vi) Pursuant to an arrangement with Mr. Chu, the amounts owing from
Mr. Chu and companies owned and controlled by him as of March 6,
2000 amounted to HK$25,487 was fully repaid by means of
transferring legal title of a class A residential property and a
commercial property located in Hong Kong to the Tat Group. The
fair market value of these properties as valued by independent
professional valuer as of August 19, 1999 was HK$27,000. This
amount has been used to record the value of the properties and
the amount repaid by Mr. Chu. The excess of payment of
approximately HK$1,513 has been accounted for as due to related
parties.
(vii) Pursuant to an arrangement made with Mr. Li, the amount owing
from Mr. Li and companies owned and controlled by him as of
December 28, 1999 amounted to HK$22,443 was partially repaid by
means of transferring good title of 400,000 shares in Intermost
Corporation, a company listed on NASDAQ OTC Bulletin Board to the
Company. The shares were valued at US$3.75 per share by a third
party as of December 3, 1999 and the transfer was completed on
December 28, 1999. Consequently, HK$11.6 million was repaid. The
market value as of March 31, 2000 was US$4.0625 per share.
In addition, HK$12 million was paid to the Company by PCDCL, a
company owned and controlled by Mr. Li on January 26, 2000 as
final settlement of a debt to the Li Group.
c. The stockholders have undertaken to indemnify the Group against any
contingent liabilities including tax liabilities and claims that may
result from the operating activities of the Group in Hong Kong, the PRC
and elsewhere occurring before March 31, 1999. Any such payments by the
stockholders will be recorded as expenses by the Group with the
corresponding credit to the equity.
d. Included in accounts receivable is an amount of HK$5,416 as of
March 31, 1999 and 2000, due from a debtor of the Tat Group which has
been outstanding for approximately two and a half years and three and a
half years respectively. The director of the Tat Group is, however,
confident that this debt would be recovered in full eventually.
Accordingly, there was no provision made against this amount in the
consolidated statements of operations. The director, who is also the
stockholder, has further given an undertaking to the Tat Group that he
would make good of any losses suffered by the Tat Group had such debtor
been default in repayment. Any such payments by the stockholder will be
recorded as expenses by the Tat Group with the corresponding credit to
the equity.
F-23
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
12. OPERATING LEASES
As of March 31, 1999 and 2000, the Group had commitments under non-
cancelable operating lease payments in respect of land and buildings as
follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
<S> <C> <C> <C>
1999 2000 2000
---- ----- ----
HK$ HK$ US$
2000 276 - -
2001 42 1,729 223
2002 - 354 46
-------- --------- --------
Total 318 2,083 269
======== ========= ========
</TABLE>
Total lease expense for the years ended March 31, 1998, 1999 and 2000 was
HK$2,090, HK$1,682 and HK$1,505 respectively.
As of March 31, 1999 and 2000, the Group had commitments under non-
cancelable operating lease rentals to be received in respect of land and
buildings as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
<S> <C> <C> <C>
1999 2000 2000
------- ---- ----
HK$ HK$ US$
2000 - - -
2001 - 482 62
--------- ---------- ----------
Total - 482 62
========= ========== ==========
</TABLE>
13. PERFORMANCE BONDS
There were contingent liabilities as of March 31, 1999 and 2000 in respect
of performance bonds issued by third parties which are inherent in the
nature of the business in which the Group operates. The directors do not
anticipate material losses to crystallize.
14. PENSION COSTS
The Group operates a defined contribution retirement plan ("Plan") which is
optional for all qualified employees. The assets of the Plan are held
separately from those of the Group in a provident fund managed by an
independent trustee. The pension cost charge represents contributions
payable to the fund by the Group at rates specified in the rules of the
Plan. Where employees leave the Plan prior to vesting fully in the
contributions, the contribution payable by the Group is reduced by the
amount of forfeited contribution.
The pension expense for the years ended March 31, 1998, 1999 and 2000 was
HK$350, HK$80 and HK$177 respectively.
F-24
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
15. INCOME TAXES
In the opinion of management, the Company is not subject to any tax in the
British Virgin Islands ("BVI") or in Hong Kong. Under current BVI and Hong
Kong laws, dividends and capital gains arising from the investment are not
subject to income taxes. No withholding tax is imposed on payments of
dividends.
Companies comprising the Tat and Li Groups and LSSL are subject to income
taxes on an entity basis on income arising in or derived from the tax
jurisdiction in which each of the companies is domiciled and operates.
Companies with income arising in or derived from Hong Kong are subject to
Hong Kong Profits Tax at a rate of 16.5% for 1998 and 16% for 1999 and
2000.
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
March 31,
------------------------------------------------
<S> <C> <C> <C> <C>
1998 1999 2000 2000
------- ----- ---- ----
HK$ HK$ HK$ US$
Current tax - 1,200 893 115
Deferred tax - - - -
--------- --------- --------- --------
Income tax expense - 1,200 893 115
========= ========= ========= ========
</TABLE>
Reconciliation to the expected statutory tax rate in Hong Kong is as
follows:
<TABLE>
<S> <C> <C> <C>
1998 1999 2000
----- ---- -----
% % %
Statutory rate 16.5 16.0 16.0
Non-taxable income (24.4) (8.8) (0.7)
Tax effect on net operating loss 7.6 (0.9) (12.0)
Others 0.3 0.2 0.6
---------- ---------- ------------
Effective tax rate - 6.5 3.9
========== ========== ============
</TABLE>
F-25
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
16. REPORT ON SEGMENT INFORMATION
The Group adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", in respect of its operating segments. The Group
reportable segments are design and contracting section and high-technology
products section. They are managed separately because each business requires
different technology and marketing strategies. The accounting policies of
the segments are the same as those described in the summary of significant
accounting policies. The Group evaluates performance based on operating
earnings of the respective business units.
Segment information for the years 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
Design and Contracting Section High-Technology Products Section
------------------------------ --------------------------------
Years ended March 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1999 2000 1998 1999 2000
------- ------- ------- ------ ------ --------
HK$ HK$ HK$ HK$ HK$ HK$
Segment revenue 177,066 105,334 177,729 31,613 66,161 10,374
Segment profits 9,932 9,928 19,322 2,862 7,099 2,718
Included in segment profits:
Depreciation and amortization (170) (617) (619) (60) (32) (165)
Interest income 122 104 127 - 88 1
Interest expense (688) (810) (1,297) (619) (180) (219)
Segment assets 71,809 67,509 111,912 5,559 10,853 76,211
======= ======= ======= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total
------------------------------------------
1998 1999 2000 2000
------- ------- ------- ------
HK$ HK$ HK$ US$
Segment revenue 208,679 171,495 188,103 24,271
Segment profits 12,794 17,027 22,040 2,844
Included in segment profits:
Depreciation and amortization (230) (649) (784) (101)
Interest income 122 192 128 17
Interest expense (1,307) (990) (1,516) (196)
Segment assets 77,368 78,362 188,123 24,274
======= ======= ======= ======
</TABLE>
F-26
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
16. REPORT ON SEGMENT INFORMATION (Continued)
Segment information for the years 1998, 1999 and 2000 relating to the
Group's operations by geographic areas are as follows:
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------------------------
1998 1999 2000 2000
------------ ------------ ------------ -----------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Segment revenue
Hong Kong 84,468 94,500 104,441 13,476
PRC 124,211 76,995 83,662 10,795
------------ ------------ ------------ -----------
208,679 171,495 188,103 24,271
============ ============ ============ ===========
</TABLE>
All long-lived assets are situated in Hong Kong for the years 1998, 1999,
and 2000.
17. FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other
hedging activities. The Group currently does not hold or issue derivative
financial instruments in the normal course of business. Accordingly,
adoption of SFAS No. 133 is not expected to affect the Group's financial
statements.
18. CONTINGENCIES
(a) The Tat Group received on January 5, 1999 a claim for liquidated
damages amounting to HK$21,832 in respect of the delay in completion
of a PRC contract. No formal court action has been filed in connection
with this claim, nor has the Tat Group received any further notice
from the claimant. Work on the contract has been completed and the
developer took possession of the property. The delay in completion was
caused by changes in job specifications, which under normal practice,
the Tat Group would be given an extension of time for completion.
Accordingly, management is of the opinion that the Tat Group will not
suffer any losses in respect of this claim. The Tat Group's attorney
meanwhile having reviewed the facts and evidence, has advised that the
Tat Group has a genuine defense and a good arguable case to answer
such dispute. If such claim is formally asserted, management intends
to vigorously contest such claim.
F-27
<PAGE>
Quintalinux Limited
(Formerly Known As Quinta Development Limited)
Notes to and Forming Part of the Consolidated Financial Statements
-------------------------------------------------------------------------------
(Dollars in thousands)
18. CONTINGENCIES (Continued)
(b) On April 29, 1999, an action has been brought against the Tat Group in
the PRC by an entity ("claimant") which performed certain construction
works for our subcontractor for HK$14,019 (US$1,809). In the initial
litigation filed in a provincial court in the PRC, the court ruled
that the claimant has no merit to the case, and accordingly, the
claimant withdrew its legal proceeding on June 18, 1999.
The claimant subsequently pursued the claim in another litigation
("trial") and, on October 20, 1999, received a favorable ruling
against the Tat Group, resulting in a judgement of HK$15,731
(US$2,030).
The legal environment in the PRC is still not well defined and the Tat
Group has appealed against the latest ruling on December 23, 1999. The
Tat Group's legal counsel advised that having perused and considered
all the legal documents and the evidence, there has not been any legal
binding subcontracting or sub-subcontracting obligations between the
claimant and Tat Group. Accordingly, the Tat Group could never be a
Defendant. As such the Tat Group has not recorded any provision for
loss in connection with this claim. Management intends to continue to
vigorously contest this action.
(c) Except as described above, the Group has not been a party to any
material legal proceedings and there has been no material legal
proceedings pending with respect to the Group's property.
19. SUBSEQUENT EVENTS (Unaudited)
In August 2000 initial public offering, the Company had sold 1,500,000
shares of common stock priced at US$8.00 per share and 1,500,000 warrants
priced at US$0.125 per warrant to purchase 1,500,000 shares of common
stock. Each warrant entitles the holder to purchase one share of common
stock at US$10.88 per share through August 9, 2005. As a result, the
Company raised US$10,847,000 net of underwriting commission but before
other expenses.
The Company's common stock and warrants commenced trading on The Nasdaq
National Market under the symbols "QLNX" and "QLNXW" on August 10, 2000.
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
QUINTALINUX LIMITED
(Registrant)
Date: September 28, 2000 By: /s/ TAT CHU
---------------------- ------------------------
Tat Chu
Chairman
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description of Exhibit Number
None.
