<PAGE>
As filed with the Securities and Exchange Commission on September 29, 2000
Registration No. 333-11750
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
POST EFFECTIVE AMENDMENT NO. 1 TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________
QUINTALINUX LIMITED
(Exact name of Registrant as specified in its charter)
_____________
<TABLE>
<S> <C> <C>
British Virgin Islands 7375 Not Applicable
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization Classification Code No.) Identification Number)
</TABLE>
Suite 2209-2217, 22/F Metro Centre II
21 Lam Hing Street
Kowloon Bay, Hong Kong
011-852-2893-2682
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
Andrew N. Bernstein, P.C.
5445 DTC Parkway, Suite 520
Greenwood Village, Colorado 80111
(303) 770-7131
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications to:
Andrew N. Bernstein, Esq.
Andrew N. Bernstein, P.C.
5445 DTC Parkway, Suite 520
Greenwood Village, Colorado 80111
Telephone: 303-770-7131
Facsimile: 303-770-7332
(Counsel for the Company)
_____________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
_____________
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
_____________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Amount Proposed Maximum Proposed Maximum Amount of
Title of each Class of to be Offering Price per Aggregate Registration
Securities to be Registered Registered Share (1) Offering Price(1) Fee
<S> <C> <C> <C> <C>
Common Stock................................................. 1,725,000(2) $ 8.00 $13,800,000
------------------------------------------------------------------------------------------------------------------------------------
Redeemable Common Stock Purchase Warrants.................... 1,725,000(3) $ 0.125 $ 215,625
------------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying Redeemable Common Stock Warrants.... 1,725,000(4) $ 10.88 $18,768,000
------------------------------------------------------------------------------------------------------------------------------------
Common Stock Underwriter Warrants............................ 150,000(5) $0.0000333 $ 5
------------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying Common Stock Underwriter Warrants.... 150,000(6) $ 13.20 $ 1,980,000
------------------------------------------------------------------------------------------------------------------------------------
Warrant Underwriter Warrants................................. 150,000(7) $0.0000333 $ 5
------------------------------------------------------------------------------------------------------------------------------------
Underwriter Underlying Warrants.............................. 150,000(8) $ 0.20625 $ 30,938
------------------------------------------------------------------------------------------------------------------------------------
Common Stock underlying Underwriter Underlying Warrants...... 150,000(9) $ 17.952 $ 2,692,800
------------------------------------------------------------------------------------------------------------------------------------
Total Fee.................................................... $37,487,373 $9,897(10)
====================================================================================================================================
</TABLE>
(footnotes on next page)
<PAGE>
(continued from previous page)
________
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933, as amended (the "Securities Act").
(2) Includes 450,000 shares of common stock (the "Common Stock" or the
"Shares") reserved for the option, exercisable within 45 days after the
date on which the Securities and Exchange Commission (the "Commission")
declares this Registration Statement effective, to cover over-allotments,
if any (the "Over-Allotment Option"), granted by the Company to Barron
Chase Securities, Inc., the Managing Underwriter (the "Underwriter").
(3) Includes 450,000 Redeemable Common Stock Purchase Warrants (the "Purchase
Warrants" or the "Warrants") reserved for the Over-Allotment Option. The
Purchase Warrants (a) may be purchased separately from the Common Stock in
the Offering, (b) are exercisable during a five-year period commencing on
the effective date of this Registration Statement, and (c) shall be
redeemable, at the option of the Company, at $0.25 per Purchase Warrant
upon 30 days' prior written notice, (i) if the closing bid price, as
reported on The Nasdaq National Market, or the closing sale price, as
reported on a national or regional securities exchange, as applicable, of
the shares of the Registrant's Common Stock for 30 consecutive trading days
ending within ten days of the notice of redemption of the Purchase Warrants
averages in excess of $16.00 per share, subject to adjustment, and (ii)
after a then current registration statement has been declared effective by
the Commission with regard to the shares of Common Stock to be received by
the holder upon exercise, but (iii) during the one-year period after the
effective date of this Registration Statement, only with the written
consent of the Underwriter. Pursuant to Rule 416 under the Securities Act,
such additional number of these securities are also being registered to
cover any adjustment resulting from the operation of the anti-dilution
provisions relating to the Purchase Warrants.
(4) Reserved for issuance upon exercise of the Purchase Warrants. Pursuant to
Rule 416 under the Securities Act, such additional number of shares of
Common Stock subject to the Purchase Warrants are also being registered to
cover any adjustment resulting from the operation of the anti-dilution
provisions relating to the Purchase Warrants.
(5) To be issued to the Underwriter and/or persons related to the Underwriter.
Pursuant to Rule 416 under the Securities Act, such additional number of
Underwriter stock purchase options (the "Common Stock Underwriter
Warrants") are also being registered to cover any adjustment resulting from
the operation of the anti-dilution provisions relating to the Common Stock
Underwriter Warrants.
(6) Reserved for issuance upon exercise of the Common Stock Underwriter
Warrants. Pursuant to Rule 416 under the Securities Act, such additional
number of shares of Common Stock subject to the Common Stock Underwriter
Warrants are also being registered to cover any adjustment resulting from
the operation of the anti-dilution provisions relating to the Common Stock
Underwriter Warrants.
(7) To be issued to the Underwriter and/or persons related to the Underwriter.
Pursuant to Rule 416 under the Securities Act, such additional number of
Underwriter warrant purchase options (the "Warrant Underwriter Warrants")
are also being registered to cover any adjustment resulting from the
operation of the anti-dilution provisions relating to the Warrant
Underwriter Warrants.
(8) Reserved for issuance upon exercise of the Warrant Underwriter Warrants.
Pursuant to Rule 416 under the Securities Act, such additional number of
warrants to purchase shares of Common Stock subject to the Warrant
Underwriter Warrants (the "Underwriter Underlying Warrants") are also being
registered to cover any adjustment resulting from the operation of the
anti-dilution provisions relating to the Warrant Underwriter Warrants.
(9) Reserved for issuance upon exercise of the Underwriter Underlying Warrants.
Pursuant to Rule 416 under the Securities Act, such additional number of
shares of Common Stock subject to the Underwriter Underlying Warrants are
also being registered to cover any adjustment resulting from the operation
of the anti-dilution provisions relating to the Underwriter Underlying
Warrants.
(10) No additional fees are payable since the Registrant paid a registration fee
of $19,794 upon the initial filing.
_______________
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
================================================================================
<PAGE>
PROSPECTUS
QUINTALINUX LIMITED
1,500,000 Warrants to Purchase Shares of Common Stock
and
1,500,000 Shares of Common Stock upon Exercise of the Warrants
In our August 2000 initial public offering, we sold 1,500,000 shares of
common stock and 1,500,000 warrants to purchase 1,500,000 shares of common
stock. Each warrant entitles the holder to purchase one share of common stock
at $10.88 per share through August 9, 2005.
In addition to these 1,500,000 warrants and 1,500,000 underlying shares of
common stock, this prospectus covers the sale of 300,000 shares of common stock
underlying the following securities that we sold to the underwriter and/or
persons related to the underwriter:
. stock purchase options to purchase 150,000 shares of common stock; and
. warrant purchase options to purchase 150,000 warrants to purchase shares of
common stock.
No minimum number of warrants must be exercised, and all funds that we
receive upon exercise of the warrants and the underwriter warrants will be used
for general corporate purposes. As of September 29, 2000, all 1,500,000
warrants and all of the underwriter warrants were outstanding. The common stock
covered by this prospectus which is issuable upon exercise of the underwriter
warrants is to be sold from time to time by or for the account of certain
selling shareholders. We will not receive any of the proceeds from the sale of
the underwriter warrants and underlying common stock.
See "Risk Factors" beginning on page 5 to read about factors you should
consider before buying our common stock and warrants.
Our common stock and warrants are traded on The Nasdaq National Market
under the symbols "QLNX" and "QLNXW." On September 25, 2000, the last sale
prices for the common stock and the warrants were $6.3125 per share of common
stock and $0.625 per warrant.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
<TABLE>
<CAPTION>
Underwriting Gross
Price to Discounts and Proceeds to
Public Commissions Us
<S> <C> <C> <C>
Per share of common stock on exercise of warrant.............. US$ 10.88 US$0.00 US$ 10.88
Total......................................................... US$16,320,000 US$0.00 US$16,320,000
</TABLE>
This information excludes estimated total expenses of this offering of
approximately US$32,000 payable by us. It also does not include 300,000 shares
of common stock registered for the account of selling shareholders to be offered
from time to time in the market.
The date of this prospectus is ____________, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................................... 2
Currency Translations...................................................................... 4
Risk Factors............................................................................... 5
Forward-Looking Statements................................................................. 9
Use of Proceeds............................................................................ 9
Nature of Trading Market................................................................... 9
Dividend Policy............................................................................ 9
Exchange Rates............................................................................. 10
Selected Consolidated/Combined and Unaudited Pro Forma Financial Data...................... 11
Unaudited Pro Forma Condensed Consolidated Statement of Operations......................... 14
Management's Discussion and Analysis of Financial Condition and Results of Operations...... 16
Our Business............................................................................... 29
Our Management............................................................................. 42
Certain Transactions....................................................................... 45
Principal Shareholders..................................................................... 46
Selling Shareholders....................................................................... 47
Description of Securities.................................................................. 48
Taxation................................................................................... 52
Plan of Distribution....................................................................... 54
Legal Matters.............................................................................. 54
Experts.................................................................................... 54
Additional Information..................................................................... 54
Index to Financial Statements.............................................................. F-1
</TABLE>
______________
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
1
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes appearing elsewhere in this
prospectus.
Our Business
We provide high quality construction services and interior fitting out
works services utilizing state of the art high-technology products in Hong Kong
and China. We also intend to become a leading Linux total solution provider and
system integrator in Hong Kong and China, providing comprehensive consulting
services, one-stop solutions, support and application development on Linux. We
intend to continue to deliver the best business solutions on Linux to warrant
the adoption of Linux for our corporate enterprise customers. We also intend to
develop and design custom applications of Linux for use in our businesses.
Our Strategy
Using Linux as the main technology platform to derive new business
opportunities and application areas and to develop our position as a leading
Linux total solution provider and system integrator in Hong Kong, China and
other ASEAN countries, we intend to:
. expand our strategic alliances;
. expand our core competence relating to Linux technologies and
applications;
. expand our domestic and international market; and
. develop and design custom applications of Linux for use in our
businesses in Hong Kong, China and other ASEAN countries, which
include:
. high quality construction services utilizing state of the art high-
technology products and services
. interior fitting out works
Our History and Offices
We were incorporated as an international business company of the British
Virgin Islands in January 1997. In November 1999, we acquired all of the common
stock of the Tat Group and the Li Group and 72.5% of the common stock of Linux
System Solution Limited. The companies comprising the Tat Group and the Li
Group, and Linux System Solution Limited, are our primary operating
subsidiaries. Our corporate offices are located at Suite 2209-2217, 22/F Metro
Centre II, 21 Lam Hing Street, Kowloon Bay, Hong Kong, telephone number 011-852-
2893-2682.
The Offering
Securities offered by us............. 1,500,000 warrants and 1,500,000 shares
of common stock underlying the warrants.
Each warrant entitles the holder to
purchase one share of common stock at
$10.88 per share through August 9, 2005.
The warrants are not exercisable unless,
at the time of exercise, we have a
current prospectus under the Securities
Act covering the shares of common stock
issuable upon exercise of the warrants
and such shares have been registered,
qualified or deemed to be exempt under
the securities laws of the states of
residence of the exercising holders of
the warrants. The warrants are subject
to redemption by us.
2
<PAGE>
Securities offered by selling
shareholders......................... 300,000 shares of common stock
underlying the underwriter warrants.
Use of Proceeds...................... We will not receive any proceeds from
the sale of the underwriter warrants or
the underlying common stock. All funds
that we receive upon the exercise of the
warrants and the underwriter warrants
will be used for general corporate
purposes.
Risk Factors......................... Please read the Risk Factors section of
this prospectus since an investment in
our common stock or warrants involves a
high degree of risk and could result in
a loss of your entire investment.
Nasdaq National Market symbols
Common Stock.................... QLNX
Purchase Warrant................ QLNXW
Unless otherwise indicated the information in this prospectus assumes that
there has been no exercise of:
. the 1,500,000 warrants being offered
. the underwriter warrants to purchase 150,000 shares of common stock and
150,000 warrants to purchase an additional 150,000 shares
___________
Linux is a registered trademark of Linus Torvalds.
3
<PAGE>
CURRENCY TRANSLATIONS
Our published financial statements are presented in Hong Kong dollars, the
lawful currency of Hong Kong. In this prospectus, references to "U.S. dollars",
"US$" or "$" are to U.S. currency and references to "Hong Kong dollars" or "HK$"
are to Hong Kong currency. Solely for the convenience of the reader, this
prospectus contains translations of various Hong Kong dollar amounts into U.S.
dollars at specified rates. These translations should not be construed as
representations that the Hong Kong dollar amounts actually represent such U.S.
dollar amounts or could be converted into U.S. dollars at the rate indicated.
Unless otherwise stated, the translations of Hong Kong dollars into U.S. dollars
have been made at the rate of HK$7.75 to US$1.00.
See "Exchange Rates" for historical information regarding the exchange
rate. As of March 31, 2000, the noon buying rate for cable transfers as
certified for customs purposes by the Federal Reserve Bank of New York was
US$1.00 to HK$7.7867.
4
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock. If
any of these risks occur, our business, results of operations and financial
condition could be adversely affected. This could cause the trading price of our
common stock to decline, and you might lose part or all of your investment.
Risks Related To Our High-Technology Products And Construction Related Business
Competition from numerous competitors may limit our ability to generate revenue
or income.
The high-technology construction-related services industry in Hong Kong is
highly competitive and served by numerous small, owner-operated private
companies and several public companies. In addition, there are relatively few,
if any, barriers to entry into the markets in which we operate and, as a result,
any organization that has adequate financial resources and access to technical
expertise may become a competitor to us. Competition in the industry depends on
a number of factors, including price. Certain of our competitors may have lower
overhead cost structures and may, therefore, be able to provide their services
and products at lower prices than us. Furthermore, some of our competitors are
larger and have greater resources than us. There can be no assurance that our
competitors do not currently possess or will not develop the expertise,
experience, and resources to provide the products and services that are equal or
superior in both price and quality to our products and services, or that we will
be able to maintain or enhance our competitive position.
Fixed price contracts may result in reduced profitability on projects.
We currently generate, and expect to continue to generate, a significant
portion of our revenues under fixed price contracts. We must estimate the costs
of completing a particular project to bid for such fixed price contracts. The
cost of labor and materials, however, may vary from the costs we originally
estimated. These variations, along with other risks inherent in performing fixed
price contracts, may result in actual revenue and gross profits for a project
differing from those we originally estimated and could result in reduced
profitability and losses on projects. Depending upon the size of a particular
project, variations from estimated contract costs can have a significant
negative impact on our operating results for any fiscal quarter or year.
Any downturn in the construction industry in Hong Kong and China would adversely
affect our business.
A large portion of our business involves interior fitting out works in
newly constructed and renovated properties for commercial and industrial
customers. The level of fitting out services is affected by fluctuations in the
level of new construction of properties for commercial and industrial customers.
The extent to which we are able to maintain or increase revenues from the
fitting out services will depend on the level of new construction projects in
Hong Kong and China and the volume of projects successfully tendered.
Risk Factors Related To Our Information Technology Business
Our limited operating history in the new and developing market for software
products makes it difficult to evaluate our business.
One of our operating subsidiaries, Linux System Solution Limited, commenced
business in April 1999. Accordingly, we have a limited operating history, and we
face all of the risks and uncertainties encountered by early-stage companies.
Our limited operating history makes it difficult to forecast our future
operating results.
5
<PAGE>
Our business will be affected if Linux products are not accepted by the market.
Although we plan to expand our business in other software applications, we
currently focus on the sale of Linux software and the provision of Linux related
services and support. The Linux operating system has only recently gained broad
market acceptance. Even if Linux is widely accepted, the Linux operating system
is an open source software product, which users are licensed to freely copy,
use, modify and distribute. Accordingly, anyone may download the Linux operating
system and numerous related software applications from the Internet, or
otherwise copy it, without cost, and run it on an existing Linux compatible
product. Our success depends on customers purchasing new systems which integrate
and are optimized to run the Linux operating system.
Changes in technology may adversely affect our financial results.
The markets for our products change rapidly because of technological
innovation, changes in customer requirements, declining prices, and evolving
industry standards, among other factors. As a result, our success depends on our
ability to timely innovate and integrate new technologies into our current
products and service offerings. We cannot guarantee that we will successfully
integrate new technologies into our services or develop new services in a timely
manner.
Advances in technology also require us to commit substantial resources to
acquiring and applying new technologies for use in our operations. We have to
continually commit resources to train our personnel to use these new
technologies and maintain the compatibility of existing software systems with
these new technologies. We cannot be sure that we will be able to continue to
commit the resources necessary to refresh our technology infrastructure at the
rate demanded by our markets.
Risks Related To Overall Operations
If qualified employees are not available to us, our operations and growth
strategy will be adversely affected.
Our ability to provide high-quality services on a timely basis requires
that we employ an adequate number of skilled engineers, scientists, design and
technology professionals and project managers. Accordingly, our ability to
increase our operating efficiency and profitability will be limited by our
ability to employ, train and retain skilled personnel necessary to meet our
requirements. We, like many of our competitors, may experience shortages of
qualified personnel. We may not be able to maintain an adequate level of skilled
labor necessary to operate efficiently and to support our growth strategy and
our labor expenses may increase as a result of a shortage in the supply of
skilled personnel.
We depend upon certain key personnel to manage our company.
Our ability to successfully carry out our business plans continues to be
largely dependent upon the efforts of our senior management and executive
officers, particularly our Chairman, Chu Tat, and our Vice Chairman, Perick Li.
Although we have entered into employment agreements with Messrs. Chu and Li, the
loss of their services would have a material adverse effect on our ability to
achieve our business objectives. We have obtained key-person life insurance in
the total amount of US$2,000,000 on their lives, with the proceeds payable to
us.
We are controlled by two of our existing shareholders, whose interests may
differ from other shareholders.
Our two largest shareholders currently beneficially own approximately 82.9%
of our outstanding shares. Accordingly, they have controlling influence in
determining the outcome of any corporate transaction or other matter submitted
to the shareholders for approval, including mergers, consolidations and the sale
of all or substantially all of our assets, election of directors and other
significant corporate actions. They also have the power to prevent or cause a
change in control. In addition, without the consent of these shareholders, we
could be prevented from entering into transactions that could be beneficial to
us. The interests of these shareholders may differ from the interests of the
other shareholders.
6
<PAGE>
Our sales and marketing operations are performed principally at our executive
offices which are located in Hong Kong. As a result, our results of operations
and financial condition may be influenced by the political situation in Hong
Kong and by the general state of the Hong Kong economy.
On July 1, 1997, sovereignty over Hong Kong was transferred from the United
Kingdom to China, and Hong Kong became a Special Administrative Region of China,
an SAR. As provided in the Sino-British Joint Declaration on the Question of
Hong Kong, the "Joint Declaration", and the Basic Law of the Hong Kong SAR of
China, the "Basic Law", the Hong Kong SAR is to have a high degree of autonomy
except in foreign and defense affairs. Under the Basic Law, the Hong Kong SAR is
to have its own legislature, legal and judicial system and full economic
autonomy for 50 years. Changes in the political and/or economic conditions due
to the transfer of sovereignty over Hong Kong may have an adverse impact on our
financial and operating environment.
Many of our fitting out and installation projects have been located in the PRC.
Our results of operations and financial condition may therefore be influenced by
the economic, political, legal and social conditions in the PRC.
Since 1978, the PRC government has been reforming, and is expected to
continue to reform, the PRC's economic and political systems. Such reforms have
resulted in significant social progress. Other political, economic and social
factors could also lead to further readjustment of the reform measures. This
refinement and readjustment process may not always have a positive effect on our
operations in the PRC. At times, we may also be adversely affected by changes in
policies of the PRC's government such as changes in laws and regulations or
their interpretation, the introduction of additional measures to control
inflation, changes in the rate or method of taxation and imposition of
additional restrictions on currency conversion and remittances abroad.
Our holding company structure creates restrictions on the payment of dividends.
We have no direct business operations, other than our ownership of our
subsidiaries. While we have no current intention of paying dividends, should we
decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiaries and other holdings and
investments. In addition, our operating subsidiaries, from time to time, may be
subject to restrictions on their ability to make distributions to us, including
as a result of restrictive covenants in loan agreements, restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions. If future dividends are paid in Hong Kong dollars,
fluctuations in the exchange rate for the conversion of Hong Kong dollars into
U.S. dollars may adversely affect the amount received by U.S. shareholders upon
conversion of the dividend payment into U.S. dollars.
It may be difficult to serve us with legal process or enforce judgments against
us or our management.
We are a British Virgin Islands holding company, and all or a substantial
portion 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 the assets of such non-residents are located outside the
United States. As a result, it may not be possible to effect service of process
within the United States upon such persons. Moreover, there is doubt as to
whether the courts of the British Virgin Islands or Hong Kong would enforce:
. judgments of United States courts against us, our directors or our
officers 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 non-residents based upon the securities laws
of the United States or any state.
7
<PAGE>
Non-registration of the warrants and the underlying common stock in certain
jurisdictions may make them worthless.
The warrants are not exercisable unless, at the time of the exercise, we
have a current prospectus covering the shares of common stock issuable upon
exercise of the warrants, and such shares are registered, qualified or deemed to
be exempt under the securities laws of the states of residence of the exercising
holders of the warrants. For the life of the warrants, we will attempt to
maintain a current effective registration statement relating to the shares of
common stock issuable upon exercise of the warrants. If we are unable to
maintain a current registration statement because the costs render it
uneconomical, or because the value of the shares of common stock underlying the
warrants is less than the exercise price, or any number of other reasons, the
warrant holders will be unable to exercise the warrants and the warrants may
become valueless.
Although the warrants will not knowingly be sold to purchasers in
jurisdictions in which the securities are not registered or otherwise qualified
for sale, purchasers may buy warrants in the after-market or may move to
jurisdictions in which the shares underlying the warrants are not registered or
qualified during the period that the warrants are exercisable. In this event, we
would be unable to issue shares of common stock to those persons desiring to
exercise their warrants, whether in response to a redemption notice or
otherwise, unless and until the shares could be qualified for sale in the
jurisdictions in which such purchasers reside, or exemptions exist in such
jurisdictions from such qualification. Warrant holders would have no choice but
to attempt to sell the warrants or allow them to expire unexercised.
Some information about us may be unavailable due to exemptions under the
Exchange Act for a foreign private issuer.
We are a foreign private issuer within the meaning of the rules under the
Exchange Act. As such, we are exempt from certain provisions applicable to
United States public companies, including:
. the rules under the Exchange Act requiring the filing with the
Securities and Exchange Commission of quarterly reports on Form 10-Q or
current reports on Form 8-K;
. the sections of the Exchange Act regulating the solicitation of
proxies, consents or authorizations in respect of a security registered
under the Exchange Act; and
. the sections of the Exchange Act requiring insiders to file public
reports of their stock ownership and trading activities and
establishing insider liability for profits realized from any "short-
swing" trading transaction.
Because of these exemptions, investors are not provided the same information
generally available to investors in public companies organized in the United
States.
8
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus 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 prospectus. However, we are not obligated to release publicly any
revisions to the forward-looking statements contained in this prospectus except
as otherwise required by the securities laws of the United States.
USE OF PROCEEDS
We presently anticipate that the proceeds from the exercise of the warrants
and the underwriter warrants will be applied and allocated to our working
capital for general corporate purposes. If the proceeds are not used
immediately, they may be invested in short-term interest bearing, investment
grade securities.
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:
Quarter ended: High Low
-------------- ---- ---
September 30, 2000 $8.00 $6.125
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:
Quarter ended: High Low
-------------- ---- ---
September 30, 2000 $1.50 $0.50
We do not believe that there is any principal non-United States trading
market for the common stock or the warrants. We believe that Cede & Co. holds a
substantial majority of the outstanding common stock and warrants in the United
States as record holder.
DIVIDEND POLICY
We do not intend to pay dividends on our common stock in the foreseeable
future. Instead, we will retain our earnings to support our growth strategy and
for general corporate purposes. As a holding company, our ability to pay
dividends depends upon our receipt of dividends or other payments from our
subsidiaries and other holdings and investments. In addition, our operating
subsidiaries from time to time may be subject to restrictions on their ability
to make distributions to us, including as a result of restrictive covenants in
loan agreements, restrictions on the conversion of local currency into U.S.
dollars or other currency and other regulatory restrictions. Any determination
to pay dividends in the future will be at the discretion of our
9
<PAGE>
board of directors and will depend upon our results of operations, financial
condition, contractual restrictions and other factors. Any dividends paid in the
future on the common stock may be paid in either U.S. dollars or Hong Kong
dollars. If future dividends are paid in Hong Kong dollars, fluctuations in the
exchange rate for the conversion of Hong Kong dollars into U.S. dollars may
adversely affect the amount received by U.S. shareholders upon conversion of the
dividend payment into U.S. dollars.
EXCHANGE RATES
We have prepared our financial statements in accordance with U.S. generally
accepted accounting principles consistently applied and publish such statements
in Hong Kong dollars, which is the functional currency of our subsidiaries and
the legal tender currency of Hong Kong. All references to "Hong Kong dollars" or
"HK$" 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$7.75.
The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods indicated. It
represents the noon buying rate in New York for cable transfers payable in
foreign currencies as certified for customs purposes by the Federal Reserve Bank
of New York. The average noon buying rate is determined by averaging the rates
on the last business day of each month during the relevant period.
<TABLE>
<CAPTION>
Noon Buying Rate
----------------
Calendar Year Period End Average High Low
------------- ---------- ------- ---- ---
(HK$ per US$)
<S> <C> <C> <C> <C>
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).......... 7.7867 7.7818 7.7867 7.7765
</TABLE>
10
<PAGE>
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
prospectus.
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 prospectus. 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
------ --------- --------- --------- --------- --------- ---------
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
<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>
11
<PAGE>
____________
(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$0.29
========= =========
Shares used in computing net income per share..................................... 8,000,000 8,000,000
========= =========
</TABLE>
Tat Group
<TABLE>
<CAPTION>
Years ended March 31,
--------------------
1995 1996 1997 1998 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
HK$ 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
======= ====== ======= ======= ======= ======= ======
As of March 31
--------------
1995 1996 1997 1998 1999 2000 2000
---- ---- ---- ---- ---- ---- ----
HK$ HK$ HK$ HK$ HK$ HK$ US$
<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>
12
<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
====== ====== ====== ====== ====== ====== =====
<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>
13
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations of
Quintalinux Limited
The following unaudited pro forma condensed consolidated statement of
operations for the year ended March 31, 2000 has been derived from the
application of pro forma adjustments to the audited 2000 historical financial
statements of the Company, Linux System Solution and the combined financial
statements of Tat Group and Li Group. The unaudited pro forma condensed
consolidated statement of operations information for the year ended March 31,
2000 give effect to the acquisitions that the Company completed in November 1999
as if such acquisitions had occurred on April 1, 1999. All significant inter-
company transactions have been eliminated in the pro forma condensed
consolidated statement of operations.
The unaudited pro forma condensed consolidated statement of operations do
not purport to be indicative of what the Company's actual results of operations
would have been assuming the acquisitions that the Company completed in November
1999 had been completed on such date, nor does it purport to be indicative of
results of operations that may be achieved in the future.
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
As of March 31, 2000
--------------------
Linux
System Pro Forma
Combined Li Group Solution adjustments Unaudited Pro Forma (1)
-------- -------- -------- ----------- ------------------------
HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Contract revenue.................................. 171,197 69,363 849 (40,066) 201,343 25,980
Contract costs.................................... (131,049) (55,803) (584) (40,066) (147,370) (19,015)
-------- ------- ----- ----------- --------- ---------
Gross profit...................................... 40,148 13,560 265 -- 53,973 6,965
-------- ------- ----- ----------- --------- ---------
Expenses
Selling, general and administrative............... (21,399) (6,804) (764) -- (28,967) (3,738)
Depreciation...................................... (548) (418) (48) -- (1,014) (131)
-------- ------- ----- ----------- --------- ---------
(21,947) (7,222) (812) -- (29,981) (3,869)
-------- ------- ----- ----------- --------- ---------
Other operating income
Management fee income / Project handling
-- -- --
Rental income..................................... -- 783 -- -- 783 101
-------- ------- ----- ----------- --------- ---------
-- 1,247 -- -- 1,247 161
-------- ------- ----- ----------- --------- ---------
Operating income (loss)........................... 18,201 7,585 (547) -- 25,239 3,257
-------- ------- ----- ----------- --------- ---------
Interest income................................... 88 99 187 24
Interest expense.................................. (1,012) (1,318) -- -- (2,330) (301)
-------- ------- ----- ----------- --------- ---------
(924) (1,219) -- -- (2,143) (277)
-------- ------- ----- ----------- --------- ---------
Other income (expenses)
Other income...................................... 168 274 -- -- 442 57
-------- ------- ----- ----------- --------- ---------
Income (loss) before income taxes................. 17,445 6,640 (5 47) -- 23,538 3,037
Income tax expense................................ -- (893) -- -- (893) (115)
-------- ------- ----- ----------- --------- ---------
Net income (loss)................................. 17,445 5,747 (547) -- 22,645 2,922
Other comprehensive income........................ 969 -- -- -- 969 125
-------- ------- ----- ----------- --------- ---------
Comprehensive income.............................. 18,414 5,747 (547) -- 23,614 3,047
======== ======= ===== =========== ========= =========
Net income per share.............................. HK$ 2.83 US$ 0.37
========= =========
Shares used in computing net income per share..... 8,000,000 8,000,000
========= =========
</TABLE>
14
<PAGE>
__________
(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 the 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>
15
<PAGE>
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
prospectus. 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
prospectus. 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.
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.
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
16
<PAGE>
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.
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>
17
<PAGE>
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.
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.
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.
18
<PAGE>
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 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%.
19
<PAGE>
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.
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.
20
<PAGE>
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 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
-------------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
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.
<TABLE>
<CAPTION>
For years ended March 31
------------------------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Design and contracting......................................... 60% 52% 36% 30%
High-technology Products....................................... 40% 48% 64% 70%
</TABLE>
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.
21
<PAGE>
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.
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.
22
<PAGE>
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 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.
23
<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.
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.
24
<PAGE>
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.
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.
25
<PAGE>
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 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 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.
26
<PAGE>
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.
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.
27
<PAGE>
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.
28
<PAGE>
OUR BUSINESS
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.
QUINTALINUX LIMITED
(B.V.I.)
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100% 72.5%
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<S> <C>
- 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.)
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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.
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-Zone Holdings, 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 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.
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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.
. 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 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.
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. 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.
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.
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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.
. 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.
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
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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.
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.
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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.
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
. visual and information display systems
- process control
- animation
- database technology
. raised floor systems and under-floor air-conditioning systems
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- 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
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.
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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.
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Services Customer Base
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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
Sales and distribution of TurboLinux based products Enterprises and individual users
Publication of Linux material Individual users
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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
. having the technical capabilities of integrating Linux products to
provide various system support and internet services for our clients.
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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.
Properties
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.
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 prospectus, 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
involving us or our subsidiaries, or has an interest in any proceeding which is
adverse to us or our subsidiaries.
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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 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
40
<PAGE>
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. 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.
41
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OUR MANAGEMENT
Executive Officers and Directors
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 Director
CHIU Wai Ching................. 37 Chief Financial Officer and Director
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, 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
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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 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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Compensation of Directors and Executive 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.
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<PAGE>
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 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.
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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PRINCIPAL SHAREHOLDERS
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
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.
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SELLING SHAREHOLDERS
In addition to our warrants and the underlying common stock being offered
by this prospectus, we are registering 300,000 shares of common stock underlying
the underwriter warrants on behalf of the beneficial owners. We have agreed to
bear all expenses other than underwriting or selling commissions or any fees and
disbursements of counsel to the selling shareholders in connection with the
registration of these securities.
The underwriter warrants were acquired by the selling shareholders in
connection with the underwriter's acting as the underwriter of our initial
public offering of common stock and warrants in August 2000.
The common stock underlying the underwriter warrants is to be sold from
time to time by or for the account of the following selling shareholders, none
of whom are affiliated with us nor have been within the past three years. We
will not receive any of the proceeds from the sale of either the underwriter
warrants or the common stock underlying them. The selling shareholders will pay
all brokerage discounts or commissions attributable to the sale for their
account. We are not aware of any existing agreement with any broker with respect
to the sale of the underwriter warrants or underlying common stock.
The following table sets forth the name of each selling shareholder and the
number of shares of common stock to be offered for each selling shareholder's
account.
Name Number of Shares of Common Stock
---- --------------------------------
Robert T. Kirk 238,000
Marie Lima 15,000
Brian Herman 10,000
Brian Fitzgerald 5,000
Gennero Christiano 2,000
David A. Carter 15,000
Bert L. Gusrae 15,000
------
TOTAL 292,000
The sale of these securities may be effected from time to time in
transactions which may include block transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the common
stock, or a combination of such methods of sale, at fixed prices which may be
changed, at market prices prevailing at the time of sale, or at negotiated
prices. The selling shareholders may effect such transactions by selling the
securities directly to purchasers or to or through broker-dealers which may act
as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions, or commissions from the selling shareholders
and/or the purchasers of the securities for which such broker-dealers may act as
agents or to whom they sell as principal, or both. The compensation as to a
particular broker-dealer may be in excess of customary commissions. The selling
shareholders and any broker-dealers that act in connection with the sale of the
securities may be deemed to be underwriters within the meaning of Section 2(11)
of the Securities Act.
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DESCRIPTION OF SECURITIES
Common Stock
Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.01 par value per share, of which 9,500,000 shares are outstanding as
of the date of this prospectus. Each share of common stock is entitled to one
vote on all matters submitted to a vote by shareholders, including the election
of directors. There are no cumulative voting rights in the election of
directors. All shares of common stock are equal to each other with respect to
liquidation and dividend rights and are entitled to receive dividends if and
when we declare them out of funds legally available under British Virgin Islands
law. Upon our liquidation, all assets available for distribution are
distributable among shareholders according to their holdings. There are no
preemptive rights to purchase any additional, unissued shares of common stock.
All the outstanding common stock is, and the common stock offered by this
prospectus will be, when issued against the consideration set forth in this
prospectus, duly authorized, validly issued, fully paid and nonassessable.
Warrants
Each warrant entitles the holder to purchase at any time through August 9,
2005 one share of common stock at $10.88 per share. After August 9, 2005, the
warrants expire.
A warrant may be exercised by surrendering it to the transfer and warrant
agent, with the subscription form on the reverse side properly completed and
executed, together with payment of the exercise price.
The warrants are subject to redemption by us, at our option, at $0.25 per
warrant upon 30 days' prior written notice. Prior to August 9, 2001, the
warrants cannot be redeemed without the written consent of the managing
underwriter. The closing bid price, as reported on the Nasdaq National Market,
of the common stock for 30 consecutive trading days ending within ten days of
the notice of redemption of the warrants must average in excess of $16.00 per
share. We are required to maintain an effective registration statement covering
the common stock underlying the warrants prior to their redemption. If we redeem
the warrants, they will be exercisable until the close of business on the date
for redemption fixed in such notice. If any warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price. Redemption of the warrants could force
the holder either to:
. exercise the warrants and pay the exercise price at a time when it may
be less advantageous to do so; or
. accept the redemption price in cancellation of the warrant, which could
be substantially less than the market value at the time of redemption.
The exercise price of the warrants bears no relation to any objective
criteria of value and should not be regarded as an indication of its future
market price.
We have authorized and reserved for issuance a sufficient number of shares
of common stock to permit the exercise of all warrants. All shares of common
stock issued upon exercise of the warrants, if exercised in accordance with
their terms, will be fully paid and non-assessable.
The warrants are subject to adjustment upon the occurrence of various
events, including stock dividends, stock splits, combinations or
reclassification of the common stock, or our sale of common stock at a price per
share below the exercise price of the warrants or the then-current market price
of the common stock. Additionally, an adjustment would be made if we
reclassified or exchanged common stock, consolidated or merged with another
corporation, or sold all or substantially all of our assets.
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Underwriter Warrants
We issued to the underwriter and/or persons related to the underwriter the
common stock underwriter warrants to purchase up to 150,000 shares of common
stock and the warrant underwriter warrants to purchase up to 150,000 warrants to
purchase 150,000 shares. The common stock underwriter warrants are exercisable
through August 9, 2005 at $13.20 per share. The warrant underwriter warrant is
exercisable at $.20625 per warrant. Each underlying warrant is exercisable
through August 9, 2005 at $17.952 per share.
The warrants provide for adjustment in the event of any merger,
consolidation, recapitalization, reclassification, stock dividend, stock split
or similar transaction. The warrants contain net issuance provisions permitting
exercise in whole or in part and instructing us to withhold from the securities
issuable upon exercise, a number of securities, valued at the current fair
market value on the date of exercise, to pay the exercise price. Such net
exercise provision has the effect of requiring us to issue shares of common
stock without a corresponding increase in capital. A net exercise of the
warrants will have the same dilutive effect on the interests of our shareholders
as will a cash exercise. The warrants do not entitle the holders to any rights
as a shareholder until they are exercised and shares of common stock are
purchased.
Shares Eligible for Future Sale
Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices. Furthermore, since only
1,500,000 shares are currently available for sale because of the contractual and
legal restrictions on resale of outstanding shares described below, sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
We have outstanding 9,500,000 shares of common stock. Of these shares,
1,500,000 shares sold in the initial public offering are freely tradable without
restriction under the Securities Act, unless purchased by our affiliates, such
as our officers, directors or 10% shareholders.
The remaining 8,000,000 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. Restricted securities
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144. Sales of restricted securities in
the public market, or the availability of such securities for sale, could
adversely affect the market price of the common stock.
All of our shareholders owning the 8,000,000 shares have entered into lock-
up agreements with the managing underwriter providing that they will not sell or
transfer our common stock owned by them for a period of fifteen months from
August 9, 2000 without the prior written consent of the managing underwriter. As
a result of these contractual restrictions, even though the shares might be
eligible for sale under the provisions of Rule 144, shares subject to lockup
agreements will not be salable until such agreements expire or are waived by the
managing underwriter. In addition to the lock-up agreements, 7,980,000 shares of
our outstanding common stock may not be sold until at least November 2000 under
Rule 144.
In general, under Rule 144, a person who has beneficially owned restricted
securities for at least one year is entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal 95,000 shares immediately after this offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 also are subject to certain requirements relating to
the manner of sale, notice and availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares without complying with these limitations of Rule 144.
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<PAGE>
Transfer and Warrant Agent
The transfer agent for our common stock and the warrant agent for our warrants
is Corporate Stock Transfer, Inc., Denver, Colorado.
Exchange Controls and Other Limitations Affecting Shareholders
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.
Differences in Corporate Law
Under the laws of most jurisdictions in the US, majority and controlling
shareholders generally have certain "fiduciary" responsibilities to the minority
shareholders. Shareholder action must be taken in good faith and actions by
controlling shareholders which are obviously unreasonable may be declared null
and void. BVI law protecting the interests of minority shareholders may not be
as protective in all circumstances as the law protecting minority shareholders
in US jurisdictions.
While BVI law does permit a shareholder of a BVI company to sue its
directors derivatively, that is, in the name of and for the benefit of our
company and to sue a company and its directors for his benefit and for the
benefit of others similarly situated, the circumstances in which any such action
may be brought, and the procedures and defenses that may be available in respect
of any such action, may result in the rights of shareholders of a BVI company
being more limited than those of shareholders of a company organized in the US.
Our directors have the power to take certain actions without shareholder
approval, including an amendment of our Memorandum of Association or Articles of
Association or an increase or reduction in our authorized capital, which would
require shareholder approval under the laws of most US jurisdictions. In
addition, the directors of a BVI corporation, subject in certain cases to court
approval but without shareholder approval, may, among other things, implement a
reorganization, certain mergers or consolidations, the sale, transfer, exchange
or disposition of any assets, property, part of the business, or securities of
the corporation, or any combination, if they determine it is in the best
interests of the corporation, its creditors, or its shareholders. Our ability to
amend our Memorandum of Association and Articles of Association without
shareholder approval could have the effect of delaying, deterring or preventing
a change in our control without any further action by the shareholders,
including a tender offer to purchase our common stock at a premium over then
current market prices.
As in most US jurisdictions, the board of directors of a BVI corporation is
charged with the management of the affairs of the corporation. In most US
jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, under which directors must properly
apprise themselves of all reasonably available information, and a duty of
loyalty, under which they must protect the interests of the corporation and
refrain from conduct that injures the corporation or its shareholders or that
deprives the corporation or its shareholders of any profit or advantage. Many US
jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under BVI law,
liability of a corporate director to the corporation is primarily limited to
cases of willful malfeasance in the performance of his duties or to cases where
the director has not acted honestly and in good faith and with a view to the
best interests of the corporation. However, under our Articles of Association,
we are authorized to indemnify any director or officer who is made or threatened
to be made a party to a legal or administrative proceeding by virtue of being
one of our directors or officers, provided such person acted honestly and in
good faith and with a view to our best interests and, in the case of a criminal
proceeding, such person had no reasonable cause to believe that his conduct was
unlawful. Our Articles of Association also enable us to indemnify any director
or officer who was successful in such a proceeding against expense and
judgments, fines and amounts paid in settlement and reasonably incurred in
connection with the proceeding.
50
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The above description of certain differences between BVI and US corporate laws
is only a summary and does not purport to be complete or to address every
applicable aspect of such laws. However, we believe that all material
differences are disclosed above.
51
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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 prospectus, all of which are
subject to change.
United States Federal Income Taxation
The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person, 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 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.
52
<PAGE>
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.
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.
53
<PAGE>
PLAN OF DISTRIBUTION
If the underwriter and any other soliciting broker-dealer solicit warrant
exercises and have not been granted an exemption by the SEC, they will be
prohibited from engaging in any market-making activities with respect to our
securities for either two or nine business days, depending on the market price
of the common stock, prior to any solicitation activity for the exercise of
warrants until the later of the termination of such solicitation activity or the
termination of any right to receive a fee for the exercise of warrants following
such solicitation. As a result, the underwriter or any other soliciting broker-
dealer may be unable to provide a market for our securities, should they desire
to do so, during certain periods while the warrants are exercisable.
LEGAL MATTERS
Certain legal matters have been passed upon for us as to U.S. law by Andrew
N. Bernstein, P.C., Greenwood Village, Colorado. The validity of our shares of
common stock and our warrants offered by this prospectus and certain other legal
matters have been passed on for us by Harney Westwood & Riegels as to British
Virgin Islands law. Certain legal matters as to our PRC litigation have been
passed upon for us by The Shenzhen Yatai Law Office, Shenzhen, China.
EXPERTS
Our audited historical financial statements of Quintalinux Limited, Tat
Group and Li Group as of March 31, 1998, 1999 and 2000 and for each of the three
years ended March 31, 2000 included in this prospectus have been audited by
Moores Rowland, Hong Kong, independent auditors, as indicated in their report
with respect thereto, and are included in reliance upon the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form F-1 under the Securities Act covering the warrants, the
underwriter warrants and the underlying shares of common stock being offered.
This prospectus does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission.
We are subject to the informational requirements of the Exchange Act as
they apply to a foreign private issuer and are required to file reports and
other information with the Commission. As a foreign private issuer, we are
exempt under the Exchange Act from, among other things, the rules prescribing
the furnishing and content of proxy statements and annual reports to
shareholders. In addition, our officers, directors and principal shareholders
are exempt from the reporting and short-swing profit recovery provisions set
forth in Section 16 of the Exchange Act. We are also not required under the
Exchange Act to file periodic reports and financial statements with the
Commission as frequently or as promptly as United States companies whose
securities are registered under the Exchange Act.
Any reports we file, including the registration statement and all exhibits,
may be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60601 upon payment of prescribed rates.
54
<PAGE>
Index to Financial Statements
================================================================================
<TABLE>
QUINTALINUX LIMITED
(Formerly Known As Quinta Development Limited)
<S> <C>
Report of Independent Certified Public Accountants F3
Consolidated Statements of Operations for the years ended March 31, 1998, 1999
and 2000 F4
Consolidated Balance Sheets as of March 31, 1999 and 2000 F5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
March 31, 1998, 1999 and 2000 F6
Consolidated Statements of Cash Flows for the years ended March 31, 1998, 1999
and 2000 F7
Notes to and Forming Part of the Consolidated Financial Statements F8 - F29
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED
AND UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Report of Independent Certified Public Accountants F30
Combined Statements of Operations for the years ended March 31, 1998, 1999 and 2000 F31
Combined Balance Sheets as of March 31, 1999 and 2000 F32
Combined Statements of Changes in Stockholders' Equity (Deficit) for the years
ended March 31, 1998, 1999 and 2000 F33
Combined Statements of Cash Flows for the years ended March 31, 1998, 1999 and 2000 F34
Notes to and Forming Part of the Combined Financial Statements F35 - F53
</TABLE>
F-1
<PAGE>
Index to Financial Statements
================================================================================
<TABLE>
<S> <C>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES,
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Report of Independent Certified Public Accountants F54
Combined Statements of Operations for the years ended March 31, 1998, 1999 and 2000 F55
Combined Balance Sheets as of March 31, 1999 and 2000 F56
Combined Statements of Changes in Stockholders' Equity for the years ended March F57
31, 1998, 1999 and 2000
Combined Statements of Cash Flows for the years ended March 31, 1998, 1999 and 2000 F58
Notes to and Forming Part of the Combined Financial Statements F59 - F75
</TABLE>
F-2
<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-3
<PAGE>
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
gain on marketable equity securities - - 969 125
----------- ----------- ------------ ------------
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$0.48
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Consolidated Balance Sheets
================================================================================
(Dollars in thousands)
<TABLE>
<CAPTION>
As of March 31,
-----------------------------------------------
1999 2000 2000
---- ---- ----
Notes HK$ HK$ US$
<S> <C> <C> <C> <C>
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
HK$5,762 in 1998 and HK$6,006 in 1999 and HK$7,049 in 2000 11d 15,074 76,026 9,810
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-5
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
================================================================================
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Common Stock
------------------------------ Accumulated
Additional other
Number of paid-in comprehensive Retained
shares Amount capital income earnings Total
-------------- -------------- --------------- --------------- ------------- ------------------------
HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <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$0.01 per share effected on July
3, 1998.
(2) Adjusted to reflect issuance of 4,815,000 shares of common stock of the
Company in exchange for the outstanding common stock of Tat Group effected
on November 19, 1999.
(3) Issuance of 2,985,000 shares of common stock of the Company in exchange for
the outstanding common stock of Li Group effected on November 19, 1999.
(4) Issuance of 180,000 shares of common stock of the Company in exchange for
72.5% equity interest in LSSL effected on November 24, 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
Consolidated Statements of Cash Flows
================================================================================
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------------------
1998 1999 2000 2000
------- ------- ------- -------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
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-7
<PAGE>
Notes to and Forming Part of the Consolidated Financial Statements
================================================================================
(Dollars in thousands except share amounts)
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$0.01.
Acquisition of the Tat Group, for accounting purposes, has been treated as
the acquisition of the Company by the Tat Group with the Tat Group as the
accounting acquirer ("reverse acquisition"). On this basis, the historical
stockholders' equity amounts since April 1, 1997 has been retroactively
restated to reflect the equivalent number of shares of common stock of the
Company issued for acquisition with the difference between par value of the
Company's and Tat Group's common stock reported in additional paid-in
capital. The historical financial statements prior to November 19, 1999,
are those of the Tat Group.
F-8
<PAGE>
Notes to and Forming Part of the Consolidated Financial Statements
================================================================================
(Dollars in thousands except share amounts)
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATION
(Continued)
Acquisitions of the Li Group and LSSL have been accounted for using the
purchase method of accounting. The purchase method of accounting allocates
the aggregate purchase price to the assets acquired and liabilities assumed
based upon their respective fair value.
The following supplementary unaudited pro forma condensed consolidated
statement of operations information for the years ended March 31, 1999 and
2000 give effect to the acquisitions of Li Group and LSSL as if such
acquisitions had occurred at the beginning of each period. All significant
inter-company transactions have been eliminated.
The supplemental unaudited pro form presentation does not purport to be
indicative of what the Group's actual results would have been assuming the
acquisitions mentioned above had been completed at the beginning of each
period, nor does it purport to be indicative of results of operations that
may be achieved in the future.
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------------
1999 2000 2000
HK$ HK$ US$
<S> <C> <C> <C>
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-9
<PAGE>
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-10
<PAGE>
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-11
<PAGE>
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-12
<PAGE>
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-13
<PAGE>
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-14
<PAGE>
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-15
<PAGE>
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,
---------------------------------------------------------
1998 1999 2000 2000
------- ------- ------- ------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
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-16
<PAGE>
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,
-------------------------------------------------
1999 2000 2000
-------- -------- -------
HK$ HK$ US$
<S> <C> <C> <C>
Accumulated contract costs incurred 151,633 265,842 34,302
Add: Attributable profits 45,555 56,246 7,257
------------- ------------- -------------
197,188 322,088 41,559
Less: Progress payments
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-17
<PAGE>
Notes to and Forming Part of the Consolidated Financial Statements
================================================================================
(Dollars in thousands)
5. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------
1999 2000 2000
------ ------ -----
HK$ HK$ US$
<S> <C> <C> <C>
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,
---------------------------------------------
1999 2000 2000
------ ------ -----
HK$ HK$ US$
<S> <C> <C> <C>
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-18
<PAGE>
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,
------------------------------------
1999 2000 2000
------- ------ -----
HK$ HK$ US$
<S> <C> <C> <C>
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-19
<PAGE>
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$117 as of March 31, 1999. The following is
a schedule of future minimum lease payments under capital lease as of March
31, 1999 and 2000.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
1999 2000 2000
HK$ HK$ US$
<S> <C> <C> <C>
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,
-----------------------------------------
1999 2000 2000
HK$ HK$ US$
<S> <C> <C> <C>
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
--------------- --------------------------
HK$ HK$ US$
<S> <C> <C> <C>
Available-for-sale securities - common stock 969 12,594 1,625
=============== =========== ===========
</TABLE>
F-20
<PAGE>
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$0.01.
11. RELATED PARTY TRANSACTIONS
a. Name and relationship of related parties
<TABLE>
<CAPTION>
Existing relationships with the Company
------------------------------------------
<S> <C>
Mr. Chu Director and stockholder of the Company
Genuine Interior Design & Associates Limited Common director and a company owned by
("GIDAL") Mr. Chu, major stockholder of the Company
Prographic Productions Company ("PPC") - ditto -
Ba Wah Design & Construction Company Limited - ditto -
("BWDCCL")
T & T (HK) Investment Limited ("TTHKIL") - ditto -
</TABLE>
F-21
<PAGE>
Notes to and Forming Part of the Consolidated Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
a. Name and relationship of related parties
<TABLE>
<CAPTION>
Existing relationships with the Company
--------------------------------------
<S> <C>
Interact (Guangzhou) Design and Contracting - ditto -
Company Limited ("IGDCCL")
Mr. Chan Kin Hang ("Mr. Chan") Director and stockholder of the Company
Mr. Liu Chuk Wang ("Mr. Liu") Stockholder of the Company
Mr. Li Director and stockholder of the Company
Good Prominent Fire Safety Company Limited Common director and a company owned by
("GPFSCL") Mr. Li, major stockholder of the Company
Pado (China) Design and Contracting Company -ditto-
Limited ("PCDCL")
Good Prominent Media Advertising Company - ditto -
Limited ("GPMACL")
Pado Contracting Company Limited ("PCCL") Common director and a company owned by
Mr. Li, major stockholder of the Company.
Became a subsidiary of the Company,
following the reorganization effected on
November 19, 1999
</TABLE>
b. Summary of related party transactions
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------
1998 1999 2000 2000
------ ------ ----- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
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-22
<PAGE>
Notes to and Forming Part of the Consolidted Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions (Continued)
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------
1998 1999 2000 2000
----- ----- ------ -----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
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-23
<PAGE>
Notes to and Forming Part of the Consolidted 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$5,416 as of March
31, 1999 and 2000, due from a debtor of the Tat Group which has been
outstanding for approximately two and a half years and three and a
half years respectively. The director of the Tat Group is, however,
confident that this debt would be recovered in full eventually.
Accordingly, there was no provision made against this amount in the
consolidated statements of operations. The director, who is also the
stockholder, has further given an undertaking to the Tat Group that he
would make good of any losses suffered by the Tat Group had such
debtor been default in repayment. Any such payments by the stockholder
will be recorded as expenses by the Tat Group with the corresponding
credit to the equity.
F-24
<PAGE>
Notes to and Forming Part of the Consolidted Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
12. OPERATING LEASES
As of March 31, 1999 and 2000, the Group had commitments under non-
cancelable operating lease payments in respect of land and buildings as
follows:
March 31,
--------------------------
1999 2000 2000
---- ---- ----
HK$ HK$ US$
2000 276 - -
2001 42 1,729 223
2002 - 354 46
----- ------ ----
Total 318 2,083 269
===== ====== ====
Total lease expense for the years ended March 31, 1998, 1999 and 2000 was
HK$2,090, HK$1,682 and HK$1,505 respectively.
As of March 31, 1999 and 2000, the Group had commitments under non-
cancelable operating lease rentals to be received in respect of land and
buildings as follows:
March 31,
----------------------------
1999 2000 2000
---- ---- ----
HK$ HK$ US$
2000 - - -
2001 - 482 62
----- ----- -----
Total - 482 62
===== ===== =====
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$177 respectively.
F-25
<PAGE>
Notes to and Forming Part of the Consolidted Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
15. INCOME TAXES
In the opinion of management, the Company is not subject to any tax in the
British Virgin Islands ("BVI") or in Hong Kong. Under current BVI and Hong
Kong laws, dividends and capital gains arising from the investment are not
subject to income taxes. No withholding tax is imposed on payments of
dividends.
Companies comprising the Tat and Li Groups and LSSL are subject to income
taxes on an entity basis on income arising in or derived from the tax
jurisdiction in which each of the companies is domiciled and operates.
Companies with income arising in or derived from Hong Kong are subject to
Hong Kong Profits Tax at a rate of 16.5% for 1998 and 16% for 1999 and
2000.
Income tax expense is comprised of the following:
March 31,
------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
Current tax - 1,200 893 115
Deferred tax - - - -
------ ----- ----- -----
Income tax expense - 1,200 893 115
====== ===== ===== =====
Reconciliation to the expected statutory tax rate in Hong Kong is as
follows:
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
====== ===== ======
F-26
<PAGE>
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,
-------------------------------------------------------------------
1998 1999 2000 1998 1999 2000
---- ---- ---- ---- ---- ----
HK$ HK$ HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C>
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
======= ======== ======== ======= ======= ========
<CAPTION>
Total
-------------------------------------------
-------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
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-27
<PAGE>
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:
Years ended March 31,
----------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
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
======= ======= ======== =======
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-28
<PAGE>
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-29
<PAGE>
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors of
Interact Contracting Company Limited,
Interact (China) Design & Contracting Company Limited and
Uni-Zone Holdings Limited
We have audited the accompanying combined balance sheets of Interact
Contracting Company Limited, Interact (China) Design & Contracting Company
Limited and Uni-Zone Holdings Limited, hereinafter collectively referred to as
the "Tat Group", as of March 31, 1999 and 2000 and the related combined
statements of operations, changes in stockholders' equity (deficit) and cash
flows for each of the years in the three year period ended March 31, 2000. These
combined financial statements are the responsibility of the management of the
Tat Group. Our responsibility is to express an opinion on these combined
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 combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements, prepared on the basis
of presentation as set out in notes 1 and 2 to the combined financial
statements, present fairly, in all material respects, the combined financial
position of the Tat Group as of March 31, 1999 and 2000, and the combined
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-30
<PAGE>
Combined Statements of Operations
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Contract revenue 208,679 171,495 171,197 22,090
Contract costs (167,557) (127,905) (131,049) (16,910)
-------------- -------------- -------------- --------------
Gross profit 41,122 43,590 40,148 5,180
-------------- -------------- -------------- --------------
Expenses
Selling, general and administrative (27,112) (23,997) (20,520) (2,648)
Depreciation (230) (649) (548) (71)
-------------- -------------- -------------- --------------
(27,342) (24,646) (21,068) (2,719)
-------------- -------------- -------------- --------------
Other operating income
Management fee income 84 57 - -
-------------- -------------- -------------- --------------
Operating income 13,864 19,001 19,080 2,461
-------------- -------------- -------------- --------------
Interest income 122 192 88 11
Interest expense (1,307) (990) (1,012) (130)
-------------- -------------- -------------- --------------
(1,185) (798) (924) (119)
-------------- -------------- -------------- --------------
Other income
Exchange gain 108 - 57 7
Debt forgiveness from suppliers - 144 3 1
Others 7 33 108 14
-------------- -------------- -------------- --------------
115 177 168 22
-------------- -------------- -------------- --------------
Income before income taxes 12,794 18,380 18,324 2,364
Income tax expense - (1,200) - -
-------------- -------------- -------------- --------------
Net income 12,794 17,180 18,324 2,364
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-31
<PAGE>
Combined Balance Sheets
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
---------------------------------------
1999 2000 2000
---- ---- ----
Notes HK$ HK$ US$
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents 436 4,976 642
Restricted cash 7 1,819 8,850 1,142
Accounts receivable, net of allowance for doubtful
accounts HK$6,006 in 1999 and HK$6,015 in 2000 11d 15,074 61,289 7,908
Due from customers for contract work 4 16,802 24,184 3,121
Retention money receivable 2,914 5,169 667
Inventories 875 1,428 184
Due from related parties 11 33,245 - -
Deposit outward 710 581 75
Prepayments and other current assets 2,382 720 93
---------- ----------- ----------
Total current assets 74,257 107,197 13,832
Property, plant and equipment, net 5 2,559 30,240 3,902
---------- ----------- ----------
Total assets 76,816 137,437 17,734
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft 7 9,900 1,318 170
Bank loans, current 6 - 3,400 439
Accounts and bills payable - trade 38,109 61,509 7,937
Capital lease obligations, current 8 40 21 3
Accrued expenses and other payable 1,236 440 57
Contract work deposit from customers 4 1,587 1,454 188
Retention money payable 171 306 39
Due to related parties 11 230 21,384 2,759
Income taxes payable 1,120 579 75
---------- ----------- ----------
Total current liabilities 52,393 90,411 11,667
Capital lease obligations, non-current 8 38 17 2
Bank loans, non-current 6 - 4,300 555
---------- ----------- ----------
Total liabilities 52,431 94,728 12,224
---------- ----------- ----------
Commitments and contingencies 9, 12
Stockholders' equity
Common stock 1, 10 3,000 3,000 387
Retained earnings 21,385 39,709 5,123
---------- ----------- ----------
Total stockholders' equity 24,385 42,709 5,510
---------- ----------- ----------
Total liabilities and stockholders' equity 76,816 137,437 17,734
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-32
<PAGE>
Combined Balance Sheets
--------------------------------------------------------------------------------
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Common stock*
-------------------------------
Retained
Number earnings
of shares Amount (deficit) Total
--------------- ------------ ------------- ------------------------------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Balance as of April 1, 1997 3,000,000 3,000 (8,589) (5,589) (721)
Net income - - 12,794 12,794 1,651
--------------- ------------ ------------- ------------ ------------
Balance as of March 31, 1998 3,000,000 3,000 4,205 7,205 930
Net income - - 17,180 17,180 2,216
--------------- ------------ ------------- ------------ ------------
Balance as of March 31, 1999 3,000,000 3,000 21,385 24,385 3,146
Net income - - 18,324 18,324 2,364
--------------- ------------ ------------- ------------ ------------
Balance as of March 31, 2000 3,000,000 3,000 39,709 42,709 5,510
=============== ============ ============= ============ ============
</TABLE>
* The amount of common stock outstanding of the Tat Group reflects the
aggregate amount of common stock outstanding in respect of each of the
companies comprising the Tat Group (see note 1).
The accompanying notes are an integral part of these combined financial
statements.
F-33
<PAGE>
Combined Statements of Cash Flows
================================================================================
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) 12,794 17,180 18,324 2,364
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 230 649 548 71
Allowance for doubtful accounts 5,762 244 9 1
(Gain) loss on disposal of property, plant and 2 369 18 3
equipment
Changes in operating assets and liabilities:
Accounts receivable (1,013) 3,979 (46,224) (5,964)
Due from customers for contract work (8,399) (1,915) (7,382) (953)
Retention money receivable 194 1,135 (2,255) (291)
Inventories 788 8 (553) (71)
Due from related parties (17,170) (1,535) 7,747 1,000
Deposit outward 919 364 129 17
Prepayments and other current assets 1,647 (355) 1,662 214
Accounts and bills payable - trade 14,641 13,669) 23,400 3,019
Accrued expenses and other payable 2,067 (1,738) (796) (103)
Contract work deposit from customers (6,796) (4,691) (133) (17)
Retention money payable 60 111 135 17
Due to related parties (6,954) (19) 19,652 2,535
Taxation - 1,120 (541) (70)
------------ ----------- ----------- -----------
Net cash provided by (used in) operating activities (1,228) 1,237 13,740 1,772
------------ ----------- ----------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (112) (2,705) (1,247) (161)
Proceeds on disposal of property, plant and equipment 2 65 - -
------------ ----------- ----------- -----------
Net cash used in investing activities (110) (2,640) (1,247) (161)
------------ ----------- ----------- -----------
Cash flows from financing activities
Repayment of capital lease obligations (96) (105) (40) (5)
Restricted cash (51) (45) (7,031) (907)
Bank overdraft (554) 1,183 (8,582) (1,107)
Loan acquired - - 7,700 994
------------ ----------- ----------- ---------
Net cash provided by (used in) financing activities (701) 1,033 (7,953) (1,025)
------------ ----------- ----------- ---------
Net (decrease) increase in cash and cash equivalents (2,039) (370) 4,540 586
Cash and cash equivalents, as of beginning of period 2,845 806 436 56
------------ ----------- ----------- ---------
Cash and cash equivalents, as of end of period 806 436 4,976 642
============ =========== =========== =========
Supplemental disclosure of cash flow information
Cash paid for interest 1,307 990 1,012 130
============ =========== =========== =========
Cash paid for taxes - 80 541 70
============ =========== =========== =========
Non-cash transaction
Purchase of equipment under capital lease - 77 - -
Transfer-in of property from shareholder - - 27,000 3,484
============ =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-34
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
================================================================================
(Dollars in thousands except share amounts)
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATON
The accompanying combined financial statements include the accounts of
Interact Contracting Company Limited, Interact (China) Design & Contracting
Company Limited and Uni-Zone Holdings Limited, hereinafter collectively
referred to as the "Tat Group".
Each of these companies has been under the management and control of its
principal stockholder Mr. CHU Tat ("Mr. Chu").
As these companies have throughout the period from their date of
incorporation to March 31, 2000 been under common control and management,
the combined financial statements are prepared as if it was a pooling of
interests.
Details of each of these companies are set out herein below:
<TABLE>
<CAPTION>
Common stock
--------------------------
Number of
shares of
par values Equity interest
Date of Place of HK$1 each directly owned Principal
Name of company incorporation incorporation outstanding Amount by Mr. Chu activities
--------------- ------------- ------------- ----------- ------ ---------- ----------
HK$
<S> <C> <C> <C> <C> <C> 100% <C>
Interact Contracting January 21, Hong Kong 1,000,000 1,000 constructing
Company Limited 1992 engineering,
decoration and
designs works
Interact (China) Design December 20, Hong Kong 1,000,000 1,000 100% general
& Contracting 1994 contracting and
Company Limited the provision of
decoration
in PRC
Uni-Zone Holdings May 19, Hong Kong 1,000,000 1,000 100% design, supply
Limited 1994 and installation
of carpet and
raised floor
system
----------- ------
3,000,000 3,000
=========== ======
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting
The combined financial statements are presented in Hong Kong dollars
and have been prepared in accordance with the accounting principles
generally accepted in United States of America.
F-35
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
================================================================================
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b) Principles of combination
The combined financial statements reflect the combined assets,
liabilities, stockholders' equity and operations of each of the
companies as set out in note 1 above, in a manner similar to a pooling
of interests.
All material intercompany balances and transactions have been
eliminated on combination.
(c) 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.
(d) 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.
(e) 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.
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:
Leasehold land and building over the remaining term of relevant lease
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.
F-36
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
================================================================================
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Income taxes
The Tat 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.
(g) 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.
(h) 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(e) 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.
(i) 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.
(j) Revenue recognition
Revenue is recognized when it is probable that the economic benefits
will flow to the Tat 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.
F-37
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
================================================================================
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Foreign currencies
The books and records of each of the companies comprising the Tat
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 combined 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.
(l) 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 combined balance sheet at the net amount of costs
incurred plus attributable profits less foreseeable losses and
progress billings, and represented in the combined balance sheet as
due from customers for contract work (as an asset) or contract work
deposit from customers (as a liability), as applicable.
(m) Use of estimates
The preparation of the combined 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.
(n) Fair value of financial statements
The carrying amounts of the Tat Group's cash, accounts receivable,
accounts payable and accrued expenses approximate their fair values
because of the short term maturity of those instruments.
(o) Comprehensive income
The Tat 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. There were no items of comprehensive income as defined by
SFAS No. 130 for any of the periods presented.
F-38
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
================================================================================
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(p) 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.
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-39
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
================================================================================
(Dollars in thousands)
3. OPERATING RISKS
(a) Concentration of major customers and suppliers
<TABLE>
<CAPTION>
Year 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% 65% 65%
Number 3 2 2 2
Major suppliers with purchases of
more than 10% of contract cost
Purchases from major suppliers 35,474 99,643 34,344 4,431
Percentage of contract cost 21% 78% 26% 26%
Number 2 2 2 2
</TABLE>
Accounts receivable related to the Tat Group's major customers was
55% and 72% of all accounts receivable as of March 31, 1999 and 2000
respectively. In addition, the Tat 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
Tat Group's receivables. Even though the Tat Group does have a major
customer, it does not consider itself exposed to significant credit
risk with regards to collection of the related receivable.
(b) Country risks
The Tat 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 Tat 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 Tat 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.
F-40
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
3. OPERATING RISKS (Continued)
(c) Cash and time deposits
The Tat 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,
-----------------------------------------------
1999 2000 2000
----------- ----------- -----------
HK$ HK$ US$
<S> <C> <C> <C>
Accumulated contract costs incurred 151,633 260,767 33,647
Add : Attributable profits 45,555 54,643 7,051
----------- ----------- -----------
197,188 315,410 40,698
Less: Progress payments (181,973) (292,680) (37,765)
received/receivable ----------- ----------- -----------
15,215 22,730 2,933
=========== =========== ===========
Amounts disclosed as:
Due from customers for contract
work 16,802 24,184 3,121
Contract work deposit from
customers (1,587) (1,454) (188)
----------- ----------- -----------
15,215 22,730 2,933
=========== =========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------
1999 2000 2000
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Leasehold land and buildings - 28,075 3,623
Furniture and fixtures 2,545 2,653 342
Motor vehicles 230 230 30
Plant and machinery - - -
Others and computer equipment 886 911 118
----------- ------------- -----------
3,661 31,869 4,113
Accumulated depreciation (1,102) (1,629) (211)
----------- ------------- -----------
2,559 30,240 3,902
=========== ============= ===========
</TABLE>
F-41
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
6. BANK LOANS
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1999 2000 2000
--------- ----------- -----------
HK$ HK$ US$
<S> <C> <C> <C>
Bank loans, bear interest at 2% and 3%
over the prime rate (8.75% as of
March 31, 2000) and matures on June
2001, August 2001 and January 2002 - 7,700 994
Less : Amount due within one year
included under current liabilities - (3,400) (439)
--------- ----------- -----------
- 4,300 555
========= =========== ===========
Expected maturities of bank loans are as follows:
<CAPTION>
March 31, 2000
---------------------------
HK$ US$
<S> <C> <C>
2001 3,400 439
2002 4,300 555
----------- ---------
Total 7,700 994
=========== =========
</TABLE>
F-42
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
7. BANKING FACILITIES
The Tat Group had various letters of credit and overdraft under banking
facilities as of March 31, 1998, 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 18,000 2,323
Overdrafts 10,200 13,000 1,677
=========== =========== ===========
Utilized
Letter of credit and import loans 9,289 16,965 2,189
Overdrafts 9,900 1,318 170
=========== =========== ===========
Unutilized facilities
Letter of credit and import loans 8,511 1,035 134
Overdrafts 300 11,682 1,507
=========== =========== ===========
</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.
Under the banking facilities arrangements, the Tat Group's banking
facilities are collateralized by unlimited personal guarantee of the
directors and leasehold land and buildings owned by the Tat Group. In
addition, the Tat Group is required to maintain certain cash balances based
on the amount of facilities granted. These balances are reflected as
restricted cash in the combined financial statements.
Key financial covenant provide that facilities granted to the Tat Group
must not exceed a certain percentage of the market value of leasehold land
and buildings collateralized. As of March 31, 1999 and 2000, Tat Group was
not in violation of the key financial covenant.
F-43
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
8. CAPITAL LEASE OBLIGATIONS
The Tat 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 46 6
Less: Amount representing interest (19) (8) (1)
--------- ---------- ---------
Present value of net minimum lease payments 78 38 5
Less: Current portion (40) (21) (3)
--------- ---------- ---------
38 17 2
========= ========== =========
</TABLE>
Expected maturities of capital lease are as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1999 2000 2000
HK$ HK$ US$
<S> <C> <C> <C>
2000 40 - -
2001 21 21 3
2002 17 17 2
--------- ----------- ---------
78 38 5
========= =========== =========
</TABLE>
9. 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 Tat Group operates. The directors do
not anticipate material losses to crystallize.
10. COMMON STOCK
Common stock represents the aggregate amount of common stocks of Interact
Contracting Company Limited, Interact (China) Design & Contracting Company
Limited and Uni-Zone Holdings Limited.
F-44
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS
a. Name and relationship of related parties
<TABLE>
<CAPTION>
Existing relationships with the Tat Group
-----------------------------------------
<S> <C>
Mr. Chu Director and stockholder
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 -
Interact (Guangzhou) Design and Contracting Company Limited - ditto -
("IGDCCL")
Quintalinux Limited ("QLL") Common director and major stockholder
of Group
Pado Contracting Company Limited ("PCCL") A Company owned by Mr. Li, major
stockholder of QLL. Became a fellow
subsidiary following the reorganization
effected on November 19, 1999
Good Prominent Engineering Company Limited - ditto -
("GPE")
</TABLE>
F-45
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions
<TABLE>
<CAPTION>
March 31,
----------------------------------------------
1999 2000 2000
------ ------ -----
HK$ HK$ US$
<S> <C> <C> <C>
Due from related parties
(Note (i))
Mr. Chu 31,245 - -
QLL 8 - -
BWDCCL 1,887 - -
PPC 104 - -
TTHKIL 1 - -
------------ ------------ ------------
33,245 - -
============ ============ ============
Due to related parties
(Note (ii))
QLL - 7,586 979
GIDAL 230 - -
PCCL - 9,884 1,275
GPE - 2,412 311
Mr. Chu - 1,502 194
------------ ------------ ------------
230 21,384 2,759
============ ============ ============
</TABLE>
F-46
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------------------
1998 1999 2000 2000
----- ----- ------ -----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
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 - -
========== ========== ============ ==============
Management fee expenses
GIDAL 588 - - -
========== ========== ============ ==============
Subcontracting cost (Note (iii))
IGDCCL 5,109 - - -
GPE - - 20,444 2,638
---------- ---------- ------------ --------------
5,109 - 20,444 2,638
========== ========== ============ ==============
Property, plant and equipment
GIDAL(Note (iii)) - 2,405 - -
Mr. Chu (Note (vi)) - - 27,000 3,484
---------- ---------- ------------ --------------
- 2,405 27,000 3,484
========== ========== ============ ==============
Contract revenue (Note (v))
IGDCCL - - - -
========== ========== ============ ==============
</TABLE>
F-47
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions (Continued)
(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.
(iii) The Tat Group made payments to PPC, IGDCCL, GPE and GIDAL for
various general, management, subcontracting expenses and
property, plant and equipment. The amounts were determined
between the respective parties.
(iv) The Tat Group made rental expenses to BWDCCL and GIDAL for
leasing of office premises at approximately market rates.
(v) The Tat Group received management fee income from PPC for
management services provided and contract revenue from IGDCCL
for contract work performed in the PRC. The amount 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.
c. The stockholder has also undertaken to indemnify the Tat Group against
any contingent liabilities including tax liabilities and claims that
may result from the operating activities of the Tat Group in Hong
Kong, the PRC and elsewhere occurring before March 31, 1999. Any such
payments by the stockholder will be recorded as expenses by the Tat
Group with the corresponding credit to the equity.
d. Included in accounts receivable is an amount of HK$5,416 as of March
31, 1999 and 2000, due from a debtor which has been outstanding for
approximately two and a half years and three and a half years
respectively. The director of the Tat Group is, however, confident
that this debt would be recovered in full eventually. Accordingly,
there was no provision made against this amount in the combined
statements of operations. The director, who is also the stockholder,
has further given an undertaking to the Tat Group that he would make
good of any losses suffered by the Tat Group had such debtor been
default in repayment. Any such payments by the stockholder will be
recorded as expenses by the Tat Group with the corresponding credit to
the equity.
F-48
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
12. OPERATING LEASES
As of March 31, 1999 and 2000, the Tat Group had commitments under non-
cancelable operating lease payments in respect of land and building as
follows:
March 31,
--------------------------------------------
1999 2000 2000
HK$ HK$ US$
2000 276 - -
2001 42 982 127
--------- ---------- ---------
Total 318 982 127
========= ========== =========
Total lease expense for the years ended March 31, 1998, 1999 and 2000 was
HK$2,090, HK$1,682 and HK$1,189 respectively.
13. PENSION COSTS
The Tat 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 Tat Group in a provident fund managed by
an independent trustee. The pension cost charge represents contributions
payable to the fund by the Tat 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 Tat 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$120 respectively.
14. INCOME TAXES
Companies comprising the Tat Group are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which
each of the companies is domiciled and operates.
Companies with income arising in or derived from Hong Kong are subject to
Hong Kong Profits Tax at a rate of 16.5% for 1998 and 16% for 1999 and
2000.
F-49
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
14. INCOME TAXES (Continued)
Income tax expense is comprised of the following:
Year ended March 31,
-------------------------------------------
1998 1999 2000 2000
---- ----
HK$ HK$ HK$ US$
Current tax - 1,200 - -
Deferred tax - - - -
-------- --------- --------- ------
Income tax expense - 1,200 - -
======== ========= ========= ======
Reconciliation to the expected statutory tax rate in Hong Kong is as
follows:
1998 1999 2000
---- ---- -----
% % %
Statutory rate 16.5 16.0 16.0
Non-taxable income (24.4) (8.8) (0.8)
Tax effect on net operating loss 7.6 (0.9) (15.2)
Others 0.3 0.2 -
--------- ------- -------
Effective tax rate - 6.5 -
========= ======= =======
F-50
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
================================================================================
(Dollars in thousands)
15. REPORT ON SEGMENT INFORMATION
The Tat Group adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in respect of its operating segments.
The Tat Group's 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 Tat 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>
High-Technology Products
Design and Contracting Section Section
------------------------------ ------------------------------
Years ended March, 31
--------------------------------------------------------------------
1998 1999 2000 1998 1999 2000
---- ---- ---- ---- ---- ----
HK$ HK$ HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C> <C>
Segment revenue 177,066 105,334 166,576 31,613 66,161 4,621
Segment profits (losses) 9,932 10,081 19,193 2,862 7,099 (869)
Included in segment profits:
Depreciation (170) (617) (522) (60) (32) (26)
Interest income 122 104 88 - 88 -
Interest expense (688) (810) (1,009) (619) (180) (3)
Segment assets 71,809 65,963 99,968 5,558 10,853 37,469
======= ======== ======== ====== ======= =======
<CAPTION>
Total
-----------------------------------------------
-----------------------------------------------
1998 1999 2000 2000
------- ------- ------- ------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Segment revenue 208,679 171,495 171,197 22,090
Segment profits (losses) 12,794 17,180 18,324 2,364
Included in segment profits:
Depreciation (230) (649) (548) (71)
Interest income 122 192 88 11
Interest expense (1,307) (990) (1,012) (130)
Segment assets 77,367 76,816 137,437 17,734
============ ======== ======== ========
</TABLE>
F-51
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
================================================================================
(Dollars in thousands)
15. REPORT ON SEGMENT INFORMATION (Continued)
Segment information for the years 1998, 1999 and 2000 relating to the Tat
Group's operations by geographic areas are as follows:
Years ended March 31,
------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
Segment revenue
Hong Kong 84,468 94,500 87,535 11,295
PRC 124,211 76,995 83,662 10,795
--------- --------- --------- --------
208,679 171,495 171,197 22,090
========= ========= ========= ========
All long-lived assets are situated in Hong Kong for the years 1998, 1999
and 2000.
16. 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 Tat 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 Tat
Group's combined financial statements.
17. 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 Company 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
Company 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-52
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
================================================================================
(Dollars in thousands)
17. 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 Tat Group has not been a party to any
material legal proceedings and there has been no material legal
proceedings pending with respect to the Tat Group's property.
F-53
<PAGE>
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors of
Pado (Holdings) Limited and its Subsidiaries,
Good Prominent Technology Company Limited and
Good Prominent Trading Limited
We have audited the accompanying combined balance sheets of Pado (Holdings)
Limited and its subsidiaries, Good Prominent Technology Company Limited and Good
Prominent Trading Company Limited hereinafter collectively referred to as the
"Li Group" as of March 31, 1999 and 2000 and the related combined 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 combined financial
statements are the responsibility of the management of the Li Group. Our
responsibility is to express an opinion on these combined 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 combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements, prepared on the basis
of presentation as set out in notes 1 and 2 to the combined financial
statements, present fairly, in all material respects, the combined financial
position of the Li Group as of March 31, 1999 and 2000, and the combined 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-54
<PAGE>
Combined Statements of Operations
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Contract revenue 59,147 44,064 69,363 8,950
Contract costs (47,062) (32,799) (55,803) (7,200)
------------- ------------ ------------ ------------
Gross profit 12,085 11,265 13,560 1,750
------------- ------------ ------------ ------------
Expenses
Selling, general and administrative (13,335) (9,390) (6,804) (878)
Depreciation (621) (520) (418) (54)
------------- ------------ ------------ ------------
(13,956) (9,910) (7,222) (932)
------------- ------------ ------------ ------------
Other operating income
Rental income 1,208 915 783 101
Management fee income 144 144 144 19
Overprovision of claims in previous years 497 - - -
Project handling income 340 - 320 41
------------- ------------ ------------ ------------
2,189 1,059 1,247 161
------------- ------------ ------------ ------------
Operating income 318 2,414 7,585 979
------------- ------------ ------------ ------------
Interest income 221 145 99 13
Interest expense (1,400) (2,058) (1,318) (170)
------------- ------------ ------------ ------------
(1,179) (1,913) (1,219) (157)
------------- ------------ ------------ ------------
Other income
Gain on disposal of property,
plant and equipment 53 10 - -
Debt forgiveness from suppliers 384 - - -
Others 140 267 274 35
------------- ------------ ------------ ------------
577 277 274 35
------------- ------------ ------------ ------------
Income (loss) before income taxes (284) 778 6,640 857
Income tax expense (261) (350) (893) (115)
------------- ------------ ------------ ------------
Net income (loss) (545) 428 5,747 742
============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-55
<PAGE>
Combined Balance Sheets
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31,
--------------------------------------
1999 2000 2000
---- ---- ----
Notes HK$ HK$ US$
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents 40 197 25
Restricted cash 7 2,300 2,300 297
Accounts receivable, net of allowance for doubtful accounts
HK$1,034 in 1999 and 2000 10,048 14,682 1,894
Due from customers for contract work 4 364 35 5
Retention money receivable 729 647 84
Inventories 1,356 590 76
Due from related parties 11 20,426 35,037 4,521
Prepaid taxes 53 50 6
Prepayments and deposits paid 883 2,452 316
---------- ---------- ----------
Total current assets 36,199 55,990 7,224
Property, plant and equipment, net 5 9,471 9,079 1,172
---------- ---------- ----------
Total assets 45,670 65,069 8,396
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft 7 8,728 8,271 1,067
Bank loans, current 6 282 797 103
Accounts and bills payable - trade 13,428 28,958 3,736
Capital lease obligations, current 8 80 54 7
Accrued expenses and other payable 5,424 4,897 632
Contract work deposit from customers 4 1,483 365 47
Other deposits received 232 176 23
Due to related parties 11 698 - -
Income taxes payable 504 981 127
---------- ---------- ----------
Total current liabilities 30,859 44,499 5,742
Bank loans, non-current 6 1,658 1,730 223
Capital lease obligations, non-current 8 60 - -
Deferred taxation 37 37 5
---------- ---------- ----------
Total liabilities 32,614 46,266 5,970
---------- ---------- ----------
Commitments and contingencies 9,12
Stockholders' equity
Common stock 1,10 311 311 40
Retained earnings 12,745 18,492 2,386
---------- ---------- ----------
Total stockholders' equity 13,056 18,803 2,426
---------- ---------- ----------
Total liabilities and stockholders' equity 45,670 65,069 8,396
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-56
<PAGE>
Combined Statements of Changes in Stockholders' Equity
--------------------------------------------------------------------------------
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Common stock*
-------------------------------
Number Retained
of Shares Amount earnings Total
--------------- ------------ ------------- -------------------------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Balance as of April 1, 1997 311,000 311 12,862 13,173 1,699
Net loss - - (545) (545) (70)
--------------- ------------ ------------- ----------- ---------
Balance as of March 31, 1998 311,000 311 12,317 12,628 1,629
Net income - - 428 428 55
--------------- ------------ ------------- ----------- ---------
Balance as of March 31, 1999 311,000 311 12,745 13,056 1,684
Net income - - 5,747 5,747 742
--------------- ------------ ------------- ----------- ---------
Balance as of March 31, 2000 311,000 311 18,492 18,803 2,426
=============== ============ ============= =========== =========
</TABLE>
* The amount of common stock outstanding of the Li Group reflects the
aggregate amount of common stock outstanding in respect of each of the
companies comprising the Li Group (see note 1).
The accompanying notes are an integral part of these combined financial
statements.
F-57
<PAGE>
Combined Statements of Cash Flows
--------------------------------------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) (545) 428 5,747 742
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment 621 520 418 54
Allowance for doubtful accounts 304 730 - -
Loss (Gain) on disposal of property, plant and
equipment (53) (10) 26 3
Changes in operating assets and liabilities:
Accounts receivable (5,814) 4,070 (4,634) (597)
Due from customers for contract work (677) 313 329 42
Retention money receivable 223 600 82 11
Inventories 43 399 766 99
Due from related parties 1,015 (7,651) (14,611) (1,886)
Prepayments and deposits paid 1,000 173 (1,569) (202)
Accounts and bills payable - trade 4,478 (1,059) 15,530 2,003
Accrued expenses and other payable 1,606 1,130 (527) (68)
Contract work deposit from customers and other
deposits received (152) 350 (1,174) (152)
Due to related parties (3,808) (252) (698) (90)
Taxation 91 739 480 62
------------ ----------- ------------ ------------
Net cash provided by (used in) operating activities (1,668) 480 165 21
------------ ----------- ------------ ------------
Cash flows from investing activities
Purchase of property, plant and equipment (256) (160) (52) (7)
Proceeds on disposal of property, plant and equipment 84 20 - -
------------ ----------- ------------ ------------
Net cash provided by (used in) investing activities (172) (140) (52) (7)
------------ ----------- ------------ ------------
Cash flows from financing activities
Loan acquired - - 1,000 129
Repayment of capital lease obligations (155) (152) (86) (11)
Repayment of amounts borrowed (115) (260) (413) (53)
Bank overdraft 2,022 34 (457) (59)
------------ ----------- ------------ ------------
Net cash provided by (used in) financing activities 1,752 (378) 44 6
------------ ----------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (88) (38) 157 20
Cash and cash equivalents, as of beginning of period 166 78 40 5
------------ ----------- ------------ ------------
Cash and cash equivalents, as of end of period 78 40 197 25
============ =========== ============ ============
Supplemental disclosure of cash flow information
Cash paid for interest 1,400 2,058 1,318 170
============ =========== ============ ============
Cash paid for taxes 170 384 413 53
============ =========== ============ ============
Non-cash transaction
Purchase of equipment under capital lease 400 - - -
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-58
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands except share amounts)
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATION
The accompanying combined financial statements include the accounts of Pado
(Holdings) Limited and its subsidiaries, Good Prominent Technology Company
Limited and Good Prominent Trading Limited, hereinafter collectively
referred to as the "Li Group".
Each of these companies has been under the management and control of its
principal stockholder Mr. Perick LI Wai Ho ("Mr. Li").
As these companies have throughout the period from their date of
incorporation to March 31, 2000 been under common control and management,
the combined financial statements are prepared as if it was a pooling of
interests.
Details of each of these companies are set out herein below:
<TABLE>
<CAPTION>
Common stock
---------------------------
Number of
shares of
par value
Date of Place of HK$1 each Equity interest
Name of company incorporation incorporation outstanding Amount owned by Mr. Li Principal activities
--------------- ------------- ------------- ----------- ------ --------------- --------------------
HK$ Direct Indirect
<S> <C> <C> <C> <C> <C> <C> <C>
Pado (Holdings) March 11, 1993 Hong Kong 1,000 1 100% investment holding
Limited
Pado Contracting December 16, Hong Kong 3,000* 300* 100% renovation work
Company Limited 1983 (par value at
HK$100)
Good Prominent October 1, Hong Kong 200,000* 200* 100% trading and
Engineering 1992 installation of
Company Limited lighting materials
Good Prominent April 18, 1990 Hong Kong 10,000 10 100% construction and
Technology installation of light
Company Limited emitting diode
Good Prominent December 28, Hong Kong 300,000 300 100% trading of building
Trading Limited 1987 materials
-------------- ------
311,000* 311*
============== ======
</TABLE>
* Pado Contracting Company Limited and Good Prominent Engineering
Company Limited are wholly-owned subsidiaries of Pado (Holdings)
Limited. Accordingly, the aggregate amount of common stock outstanding
of the Li Group for the purpose of this presentation, does not include
their share amounts as such amounts have been eliminated against the
investment cost carrying in the books of Pado (Holdings) Limited.
F-59
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of accounting
The combined financial statements are presented in Hong Kong dollars
and have been prepared in accordance with the accounting principles
generally accepted in United States of America.
(b) Principles of combination
The combined financial statements reflect the combined assets,
liabilities, stockholders' equity and operations of each of the
companies as set out in note 1 above in a manner similar to a pooling
of interests.
All material intercompany balances and transactions have been
eliminated on combination.
(c) 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.
(d) Inventories
Inventories are stated at the lower of cost or net realizable value.
Cost comprises purchase cost of building and lighting materials and,
is calculated using the first-in, first-out method.
(e) 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 the statement of
operations.
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 land and buildings 0.75% or over the remaining term
of relevant lease, if
shorter
Motor vehicles 30%
Plant and machinery 20%
Furniture and fixtures 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.
F-60
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Income taxes
The Li 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 statement based of assets
and liabilities.
(g) 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 and receivable under operating leases are
charged and credited to statement of operations on a straight-line
basis over the lease terms.
(h) 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(e) above.
Finance charges implicit in the purchase payments are charged to
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.
(i) Related parties
Parties are considered to be related if one party has ability to
control the other party or exercise significant influence over the
other party in making financial and operating decisions.
(j) Revenue recognition
Revenue is recognized when it is probable that the economic benefits
will flow to the Li 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 project handling fee income is recognized in the period
when services are rendered.
Rental income is recognized in the period in which the properties are
let out and on a straight-line basis over the lease terms.
F-61
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Foreign currency translation
The books and records of each of the companies comprising the Li 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 combined 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.
(l) Construction contracts
When the outcome of a construction 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 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 combined balance sheet at the net amount of costs
incurred plus attributable profits less foreseeable losses and
progress billings, and represented in the combined balance sheet as
due from customers for contract work (as an asset) or contract work
deposit from customers (as a liability), as applicable.
(m) Use of estimates
The preparation of the combined 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.
(n) Fair value of financial statements
The carrying amounts of the Li Group's cash, accounts receivable,
accounts payable and accrued expenses approximate their fair values
because of the short term maturity of those instruments. The carrying
amount of mortgage loan approximate its fair value based on borrowing
rates currently available for mortgage loan with similar terms and
maturity.
(o) Comprehensive income
During the year ended March 31, 1999, the Li 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. There were no items
of comprehensive income as defined by SFAS No. 130 for any of the
periods presented.
F-62
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(p) 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.
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-63
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
3. OPERATING RISKS
(a) Concentration of major customers and suppliers
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Major customers with revenues
of more than 10% of contract
revenue
Sales to major customers 28,519 16,821 40,067 5,170
Percentage of contract revenue 48% 38% 58% 58%
Number 3 2 2 2
Major suppliers with purchases
of more than 10% of contract
cost
Purchases from major suppliers 13,986 12,435 19,706 2,543
Percentage of contract cost 30% 38% 35% 35%
Number 2 2 2 2
</TABLE>
Accounts receivable related to the Li Group's major customers was 4%
and 15% of all accounts receivable as of March 31, 1999 and 2000
respectively. In addition, the Li Group has another customer whose
accounts receivable represents approximately 23% and 5% 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 Li
Group's receivables. Even though the Li Group does have a major
customer, it does not consider itself exposed to significant credit
risk with regards to collection of the related receivable. Historical
losses have not been significant.
(b) Country risks
The Li Group may also be exposed to the risks as a result of part 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 Li 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 Li 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.
F-64
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
3. OPERATING RISKS (Continued)
(c) Cash and time deposits
The Li 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,
----------------------------------------------
1999 2000 2000
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Accumulated contract costs incurred 3,349 5,075 655
Add: Attributable profits /
(foreseeable losses) 2,435 1,603 207
----------- ------------ -----------
5,784 6,678 862
Less: Progress payments received /
receivable (6,903) (7,008) (904)
----------- ------------ -----------
(1,119) (330) (42)
=========== ============ ===========
Amounts disclosed as:
Due from customers for contract work 364 35 5
Contract work deposit from customers (1,483) (365) (47)
----------- ------------ -----------
(1,119) (330) (42)
=========== ============ ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------
1999 2000 2000
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Yacht 1,301 1,301 168
Leasehold land and buildings 8,452 8,452 1,090
Motor vehicles 667 515 66
Plant and machinery 234 234 30
Furniture and fixtures 1,856 1,856 240
Others and computer equipment 926 974 126
------------ ----------- -----------
13,436 13,332 1,720
Accumulated depreciation (3,965) (4,253) (548)
------------ ----------- -----------
9,471 9,079 1,172
============ =========== ===========
</TABLE>
F-65
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
6. BANK LOANS
<TABLE>
<CAPTION>
March 31,
-------------------------------------
1999 2000 2000
----- ----- ----
HK$ HK$ US$
<S> <C> <C> <C>
Collateralized bank loans, bear interest at 1.75%
and 3% over the prime rate (8.75% as of March 31,
1999 and 2000) and matures on December 2001 and
May 2004 1,940 2,527 326
Less: Amount due within one year
included under current liabilities (282) (797) (103)
--------- --------- ---------
1,658 1,730 223
========= ========= =========
</TABLE>
Expected maturities of bank loans are as follows:
March 31,
-----------------------------------
1999 2000 2000
HK$ HK$ US$
2000 282 - -
2001 330 797 103
2002 366 768 99
2003 406 406 52
2004 451 451 58
Thereafter 105 105 14
--------- --------- ---------
Total 1,940 2,527 326
========= ========= =========
F-66
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
7. BANKING FACILITIES
In addition to the bank loans stated above, the Li Group had various
letters of credit and overdraft under banking facilities as of March 31,
1999 and 2000 as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1999 2000 2000
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Facilities granted
Letter of credit and import loans 5,200 4,600 594
Overdrafts * 8,500 8,500 1,097
========== ========== ==========
Utilized
Letters of credit and import loans 3,696 3,792 489
Overdrafts * 8,728 8,271 1,067
========== ========== ==========
Unutilized facilities
Letters of credit and import loans 1,504 808 105
Overdrafts - 229 30
========== ========== ==========
</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
11.25% to 11.75% per annum as of March 31 1999 and 2000 and are renewable
annually with the consent of the relevant banks.
* The Li Group might have exceeded from time to time the overdraft limit
granted by the banks. Historically, such excess was not material and had
no adverse consequence on its operation.
Under the banking facilities arrangements, the Li Group's banking
facilities are collateralized by unlimited personal guarantee of the
directors and land and buildings owned by the Li Group. In addition, the Li
Group is required to maintain certain cash balances based on the amount of
facilities granted. These balances are reflected as restricted cash in the
combined financial statements.
8. CAPITAL LEASE OBLIGATIONS
The Li Group leased certain equipment under agreements classified as
capital lease. Equipment under these leases has a cost of HK$270 and
accumulated depreciation of approximately HK$138 as of March 31, 1999. The
following is a schedule of future minimum lease payments under capital
lease as of March 31, 1999 and 2000.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
1999 2000 2000
HK$ HK$ US$
<S> <C> <C> <C>
Future minimum lease payments 180 77 10
Less: Amount representing interest (40) (23) (3)
--------- ---------- ----------
Present value of net minimum lease payments 140 54 7
Less: Current portion (80) (54) (7)
--------- ---------- ----------
60 - -
========= ========== ==========
</TABLE>
F-67
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
8. CAPITAL LEASE OBLIGATIONS (Continued)
Expected maturities of capital lease are as follows:
March 31,
-----------------------------------------
1999 2000 2000
HK$ HK$ US$
2000 80 - -
2001 60 54 7
--------- ---------- ----------
140 54 7
========= ========== ==========
9. 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 Li Group operates. The directors do not
anticipate material losses to crystallize.
10. COMMON STOCK
Common stock represents the aggregate amount of common stocks of Pado
(Holdings) Limited, Good Prominent Technology Company Limited and Good
Prominent Trading Limited.
Common stocks of subsidiaries of Pado (Holdings) Limited comprising the Li
Group have been eliminated against the investment cost carrying in the
books of Pado (Holdings) Limited.
F-68
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS
a. Name and relationship of related parties
<TABLE>
<CAPTION>
Existing relationships with the Li Group
---------------------------------------------
<S> <C>
Mr. Li Director and stockholder
Quintalinux Limited ("QLL") Common director and major stockholder of
Li Group
Pado (China) Design and Constructing Company Common director and a company owned by
Limited ("PCDCL") Mr. Li, major stockholder of the Company
Joinprofit Company Limited ("JCL") - ditto -
Faithwin International Investment Limited ("FIIL") - ditto -
Good Prominent Fire Safety Company Limited - ditto -
("GPFSCL")
Chiu Cheung Technology Co. Ltd. ("CCTCL") - ditto -
Good Prominent Media Advertising Company - ditto -
Limited ("GPMACL")
Linux System Solution Limited ("LSSL") - ditto -
Oceanic Land Holdings Ltd ("OLHL") Major stockholder of QLL
Interact (China) Design & Contracting Company A company owned by Mr. Chu, major
Limited ("ICDCL") stockholder of QLL. Became a fellow
subsidiary following the reorganization
effected on November 19, 1999
Interact Contracting Company Limited ("ICCL") - ditto -
</TABLE>
F-69
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions
<TABLE>
<CAPTION>
March 31,
------------------------------------------
1999 2000 2000
---- ---- ----
HK$ HK$ US$
<S> <C> <C> <C>
Due from related parties (Note (i))
Mr. Li 5,478 14,480 1,868
QLL 186 8,177 1,055
PCDCL 12,989 - -
JCL 454 - -
FIIL 14 - -
GPFSCL 1,281 - -
CCTCL 5 - -
LSSL - 84 11
OLHL 19 - -
GPMACL - - -
ICDCL - 2,412 311
ICCL - 9,884 1,276
----------- ----------- ----------
20,426 35,037 4,521
=========== =========== ==========
Due to related parties (Note (ii))
Mr. Li - - -
GPMACL 698 - -
----------- ----------- ----------
698 - -
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------------------
1998 1999 2000 2000
---- ----
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Rental income (Note (iii))
GPFSCL 300 300 140 18
GPMACL 26 - - -
---------- --------- ---------- ---------
326 300 140 18
========== ========= ========== =========
Management fee income (Note (iv))
GPMACL 144 144 144 19
========== ========= ========== =========
Interest income (Note (v))
GPFSCL 70 - - -
========== ========= ========== =========
Subcontracting cost (Note (vi))
PCDCL 7,984 - - -
========== ========= ========== =========
Contract revenue (Note (vii))
PCDCL - - - -
GPFSCL - - - -
ICDCL - - 20,444 2,638
---------- --------- ---------- ---------
- - 20,444 2,638
========== ========= ========== =========
</TABLE>
F-70
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions (Continued)
(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, except for certain
advances to GPFSCL, please refer to note (v).
(ii) The amounts due to related parties represent unsecured advances
made from the Li Group from time to time. These amounts are
interest free and repayable on demand.
(iii) The Li Group received rental income from GPFSCL and GPMACL for
properties let out at approximately market rates.
(iv) The Li Group received management fee income from GPMACL for
management services provided. The amount was determined between
the two respective parties.
(v) The Li Group received interest income on advances made to GPFSCL
at approximately the bank lending rates during the advances.
(vi) The Li Group subcontracted work to PCDCL on projects situated in
the PRC. The amount was determined between the two respective
parties.
(vii) The Li Group received contract revenue from PCDCL, GPFSCL and
ICDCL for projects situated in Hong Kong. The amount was
determined between the two respective parties.
c. The stockholder has undertaken to indemnify the Li Group against any
contingent liabilities including tax liabilities and claims that may
result from the operating activities of the Li Group in Hong Kong, the
PRC and elsewhere occurring before March 31, 1999. Any such payments
will be recorded as expenses by the Li Group with the corresponding
credit to the equity.
d. As of March 31, 2000 the amount owing from Mr. Li to Li Group amounted
to HK$14,480. This amount was fully eliminated in QLL's consolidated
financial statements. For details please refer to page F-24.
F-71
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
12. OPERATING LEASES
As of March 31, 1999 and 2000 the Li Group had commitments under non-
cancelable operating lease payments in respect of land and buildings as
follows:
March 31,
-------------------------------------------
1999 2000 2000
HK$ HK$ US$
2000 412 - -
2001 130 519 67
2002 - 259 33
--------- ---------- --------
Total 542 778 100
========= ========== ========
Total lease expense for the years ended March 31, 1998, 1999 and 2000 was
HK$444 and HK$562 and HK$617 respectively.
As of March 31, 1999 and 2000, the Li Group had commitments under non-
cancelable operating lease rentals to be received in respect of land and
buildings are as follows:
March 31,
-------------------------------------------
1999 2000 2000
HK$ HK$ US$
2000 643 - -
2001 482 482 62
-------- --------- -------
Total 1,125 482 62
======== ========= =======
13. PENSION COSTS
The Li 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 Li Group in a provident fund managed by an
independent trustee. The pension cost charge represents contributions
payable to the fund by the Li 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 Li Group is reduced by the
amount of forfeited contribution.
The pension expense for the years ended March 31, 1998, 1999 and 2000 was
HK$173, HK$172 and HK$154 respectively.
F-72
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
14. INCOME TAXES
Companies comprising the Li Group are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which
each of the companies is domiciled and operates. Accordingly each of the
companies is subject to Hong Kong Profits Tax at a rate of 16.5% for 1998
and 16% for 1999 and 2000.
Income tax expense is comprised of the following:
Years ended March 31,
--------------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
Current tax 261 350 893 115
Deferred tax - - - -
-------- -------- --------- ---------
Income tax expense 261 350 893 115
======== ======== ========= =========
Reconciliation to the expected statutory tax rate in Hong Kong is as
follows:
1998 1999 2000
---- ---- ----
% % %
Statutory rate 16.5 16.0 16.0
Tax effect on net operating loss (74.3) 13.6 (2.6)
Others (34.1) 15.4 -
--------- --------- --------
Effective tax rate (91.9) 45.0 13.4
========= ========= ========
F-73
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
15. REPORT ON SEGMENT INFORMATON
The Li Group adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in respect of its operating segments.
The Li Group's 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 Li 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>
High-Technology Products
Design and Contracting Section Section Total
---------------------------------
Years ended March 31,
---------------------------------------------------------------------------------------------
1998 1999 2000 1998 1999 2000 1998 1999 2000 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Segment revenue 30,573 15,706 20,921 28,574 28,358 48,442 59,147 44,064 69,363 8,950
Segment profits (losses) 125 (1,172) 152 (670) 1,600 5,595 (545) 428 5,747 742
Included in segment
profits(losses):
Depreciation (338) (289) (233) (283) (231) (185) (621) (520) (418) (54)
Interest income 221 145 97 - - 2 221 145 99 13
Interest expense (933) (1,343) (421) (467) (715) (897) (1,400) (2,058) (1,318) (170)
Segment assets 30,125 32,875 37,013 15,067 12,795 28,056 45,192 45,670 65,069 8,396
====== ======= ======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
F-74
<PAGE>
Notes to and Forming Part of the Combined Financial Statements
--------------------------------------------------------------------------------
(Dollars in thousands)
15. REPORT ON SEGMENT INFORMATON (Continued)
Segment information for the years 1998, 1999 and 2000 relating to the Li
Group's operations by geographic areas are as follows:
Years ended March 31,
-----------------------------------------
1998 1999 2000 2000
---- ---- ---- ----
HK$ HK$ HK$ US$
Segment revenue
Hong Kong 59,147 44,064 37,157 4,794
PRC - - 30,341 3,915
Others - - 1,865 241
--------- -------- -------- --------
59,147 44,064 69,363 8,950
========= ======== ========= ========
All long-lived assets are situated in Hong Kong for the years 1998, 1999
and 2000.
16. 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 Li 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 Li
Group's combined financial statements.
F-75
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses payable by the Company in
connection with the preparation of the post effective amendment covering the
Warrants, the Underwriter Warrants and the underlying Common Stock being
registered. All of the amounts shown are estimates.
Printing and Engraving Expenses..................... US$ 5,000
Legal Fees and Expenses............................. 25,000
Accounting Fees and Expenses........................ 2,000
---------
Total........................................... US$32,000
=========
Item 14. Indemnification of Directors and Officers.
As in most United States jurisdictions, the board of directors of a British
Virgin Islands company is charged with the management and affairs of the
company, and subject to any limitations to the contrary in the Memorandum of
Association of the Company, the Board of Directors is entrusted with the power
to manage the business and affairs of the Company. In most United States
jurisdictions, directors owe a fiduciary duty to the company and its
shareholders, including a duty of care, pursuant to which directors must
properly apprise themselves of all reasonably available information, and a duty
of loyalty, pursuant to which they must protect the interests of the company and
refrain from conduct that injures the company or its shareholders or that
deprives the company or its shareholders of any profit or advantage. Many United
States jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under British
Virgin Islands law, liability of a director to the company is basically limited
to cases of wilful malfeasance in the performance of his duties or to cases
where the director has not acted honestly and in good faith and with a view to
the best interests of the company. However, under its Memorandum of Association,
the Company is authorized to indemnify any person who is made or threatened to
be made a party to a legal or administrative proceeding by virtue of being a
director, officer or liquidator of the Company, provided such person acted
honestly and in good faith and with a view to the best interests of the Company
and, in the case of a criminal proceeding, such person had no reasonable cause
to believe that his conduct was unlawful. The Company's Memorandum of
Association also permits the Company to indemnify any director, officer or
liquidator of the Company who was successful in any proceeding against expenses
and judgments, fines and amounts paid in settlement and reasonably incurred in
connection with the proceeding, where such person met the standard of conduct
described in the preceding sentence.
The Company has provisions in its Memorandum of Association that insure or
indemnify, to the full extent allowed by the laws of the Territory of the
British Virgin Islands, directors, officers, employees, agents or persons
serving in similar capacities in other enterprises at the request of the
Company.
The Company may obtain a directors' and officers' insurance policy.
Item 15. Recent Sales of Unregistered Securities.
The securities of the Company that were issued and sold by the Company
within the past three years and not registered with the Securities and Exchange
Commission are described below.
II-1
<PAGE>
In August 1997, the Registrant issued an aggregate of 100 shares at par to
the following shareholders. On July 3, 1998, the Registrant split its
outstanding shares on a 100 for one basis and on July 22, 1998, the Registrant
issued an additional 10,000 shares to its current shareholders at $0.01 per
share in the same proportion as their existing shareholdings, resulting in the
following:
Number of
Name Shares
---- ------
Asian Progress Holdings Limited............................... 9,000
Oceanic Land Holdings Limited................................. 9,000
Metrolink Holdings Limited.................................... 1,000
Corporate Finance International Limited....................... 1,000
------
20,000
On November 19, 1999, the Registrant issued a total of 4,815,000 of its
shares pursuant to the Share Exchange Agreement with the Tat Group.as follows:
Number of
Name Shares
---- ------
Asian Progress Holdings Limited ............................. 1,991,000
Muehl Products & Service Asia Limited ....................... 2,824,000
---------
4,815,000
On November 19, 1999, the Registrant issued a total of 2,985,000 of its
shares pursuant to the Share Exchange Agreement with the Li Group as follows:
Number of
Name Shares
---- ------
Oceanic Land Holdings Limited ............................... 1,931,000
Muehl Products & Service Asia Limited ....................... 1,054,000
---------
2,985,000
On November 24, 1999, the Registrant issued a total of 180,000 of its
shares pursuant to Share Exchange Agreements with three shareholders of Linux
System Solution Limited as follows:
Number of
Name Shares
---- -----
Oceanic Land Holdings Limited ............................... 60,000
Chan Kin Hang ............................................... 60,000
Liu Chuk Wang, Ray .......................................... 60,000
-------
180,000
The foregoing 8,000,000 shares of common stock were offered and issued
outside the United States to buyers who were neither citizens nor residents of
the United States and were offered and issued in transactions not involving any
public offering. Accordingly, the offering and issuance of such securities were
not subject to the registration requirements of the Securities Act. No
underwriter was included in the distribution of these securities, and no
commissions were paid in connection therewith.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
1.1 Amended form of Underwriting Agreement*
1.2 Amended form of Agreement Among Underwriters*
1.3 Amended form of Selected Dealers Agreement*
1.4 Amended form of Underwriter's Warrant Agreement*
3.1 Memorandum of Association of the Company, as amended*
3.2 Articles of Association of the Company, as amended*
4.1 Form of Common Stock Certificate*
4.2 Form of Warrant Agreement by and between the Company and Corporate
Stock Transfer, Inc. as Warrant Agent, and Form of Warrant
Certificate*
5.1 Opinion of Harney Westwood & Riegels, British Virgin Island counsel to
the Company, as to the validity of the Shares and the Warrants*
5.2 Opinion of The Shenzhen Yatai Law Office, PRC counsel to the Company,
as to status of pending litigation*
10.1 Form of Merger and Acquisition Agreement with the Managing
Underwriter*
10.2 Employment Agreement of CHU Tat with the Company*
10.3 Employment Agreement of LI Wai Ho with the Company*
10.4 Employment Agreement of LEE, Chai Ve (David) with the Company*
10.5 Share Exchange Agreement between the Company and Tat Group*
10.6 Share Exchange Agreement between the Company and Li Group*
10.7 Share Exchange Agreement between the Company and one shareholder of
Linux System Solution Limited*
10.8 Letter of authorization from Pacific HiTech, Inc. (n/k/a Turbolinux)*
21.1 List of Subsidiaries of the Company*
23.1 Consent of Moores Rowland, Hong Kong, independent auditors*
23.2 Consent of Harney Westwood & Riegels (included in Exhibit 5.1)
23.3 Consent of The Shenzhen Yatai Law Office (included in Exhibit 5.2)
24.1 Powers of Attorney*
__________
* Previously filed
(b) Financial Statements and Schedules
(1) Financial Statements
The financial statements filed as part of this Registration Statement
are listed in the Index to Consolidated Financial Statements of Quintalinux
Limited on Page F-1.
(2) Schedules
The following financial statement schedules are filed herewith: none
Item 17. Undertakings.
(a) Rule 415 Offerings.
The undersigned registrant hereby undertakes that it will:
II-3
<PAGE>
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement which, individually
or in the aggregate, represent a fundamental change in the information
set forth in the Registration Statement; and
(iii) Include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
(2) For the purpose of determining any liability under the Securities
Act of 1933, treat each such post-effective amendment as a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time to be the initial bona fide offering thereof;
(3) Remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and
(4) File a post-effective amendment to the registration statement to
include any financial statements required by section 210.3-19 at the start
of any delayed offering or throughout a continuous offering.
(b) Equity offerings of nonreporting registrants.
The undersigned registrant hereby undertakes to provide to the Underwriter,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
(c) Request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(d) Reliance upon Rule 430A under the Securities Act.
The undersigned registrant hereby undertakes that it will:
(1) For purposes of determining any liability under the Securities
Act of 1933, as amended, treat the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant
under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of
this registration statement as of the time the Commission declared it
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, treat each post-effective amendment that contains
a form of prospectus as a new registration statement relating to the
securities offered therein, and that offering of such securities at that
time as the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form F-1 and has duly caused this
Registration Statement or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized, in Hong Kong on September 28, 2000.
QUINTALINUX LIMITED
By: /s/ Tat Chu
------------------------
Tat Chu
Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or amendment thereto has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Tat Chu Chairman of the Board of September 28, 2000
-----------------------------
Tat Chu Directors
/s/ Perick Wai Ho Li Vice Chairman of the Board of September 28, 2000
-----------------------------
Perick Wai Ho Li Directors
/s/ Chai Ve David Lee Chief Executive Officer and September 28, 2000
-----------------------------
Chai Ve David Lee Director (Principal Executive
Officer)
/s/ Wai Ching Chiu Chief Financial Officer and September 28, 2000
-----------------------------
Wai Ching Chiu Director (Principal Financial
and Accounting Officer)
/s/ Kin Hang Chan Director September 28, 2000
-----------------------------
Kin Hang Chan
Director
-----------------------------
Frank Bleackley
/s/ Cheung Kwok Ho, Richard Director September 28, 2000
-----------------------------
Cheung Kwok Ho, Richard
/s/ Ryoji Shikiba Director September 28, 2000
-----------------------------
Ryoji Shikiba
/s/ Sai Keung Chan Non-executive Director September 28, 2000
-----------------------------
Sai Keung Chan
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Wing Ki Samuel Yung Non-executive Director September 28, 2000
-----------------------------
Wing Ki Samuel Yung
/s/ Fernando Marchitelli Non-executive Director September 28, 2000
-----------------------------
Fernando Marchitelli
/s/ Andrew N. Bernstein Authorized Representative in September 28, 2000
-----------------------------
Andrew N. Bernstein the United States
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
----- ---------------------- ------
<C> <S> <C>
1.1 Amended form of Underwriting Agreement....................................................... *
1.2 Amended form of Agreement Among Underwriters................................................. *
1.3 Amended form of Selected Dealers Agreement................................................... *
1.4 Amended form of Underwriter's Warrant Agreement.............................................. *
3.1 Memorandum of Association of the Company, as amended......................................... *
3.2 Articles of Association of the Company, as amended........................................... *
4.1 Form of Common Stock Certificate............................................................. *
4.2 Form of Warrant Agreement by and between the Company and Corporate Stock Transfer,
Inc. , as Warrant Agent, and Form of Warrant Certificate..................................... *
5.1 Opinion of Harney Westwood & Riegels, British Virgin Island counsel to the Company, as
to the validity of the Shares and the Warrants............................................... *
5.2 Opinion of The Shenzhen Yatai Law Office, PRC counsel to the Company, as to status of
pending litigation........................................................................... *
10.1 Form of Merger and Acquisition Agreement with the Managing Underwriter....................... *
10.2 Employment Agreement of CHU Tat with the Company............................................. *
10.3 Employment Agreement of LI, Wai Ho with the Company.......................................... *
10.4 Employment Agreement of LEE, Chai Ve (David) with the Company................................ *
10.5 Share Exchange Agreement between the Company and Tat Group................................... *
10.6 Share Exchange Agreement between the Company and Li Group.................................... *
10.7 Share Exchange Agreement between the Company and one shareholder of Linux System
Solution Limited............................................................................. *
10.8 Letter of authorization from Pacific HiTech, Inc. (n/k/a TurboLinux)......................... *
21.1 List of Subsidiaries of the Company.......................................................... *
23.1 Consent of Moores Rowland, Hong Kong, independent auditors................................... *
23.2 Consent of Harney Westwood & Riegels (included in Exhibit 5.1)............................... -
23.3 Consent of The Shenzhen Yatai Law Office (included in Exhibit 5.2)........................... -
24.1 Powers of Attorney........................................................................... *
</TABLE>
_________
* - Previously filed
