<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-11750
PROSPECTUS
QUINTALINUX LIMITED
1,500,000 Shares of Common Stock
and
1,500,000 Warrants
----------------
We provide high quality construction services and interior fitting out works
and related contracting services in Hong Kong and China. We also intend to
become a leading Linux total solution provider and system integrator in Hong
Kong and China.
[lOGO OF QUINTALINUX]
This is our initial public offering of common stock and warrants. We are
offering 1,500,000 shares of common stock priced at $8.00 per share and
1,500,000 warrants priced at $0.125 per Warrant. No public market currently
exists for our shares and warrants.
You may purchase the common stock and warrants separately and transfer them
separately at any time. Each warrant entitles you to purchase through August 9,
2005, one common share at a price of $10.88 per share, subject to adjustment
under certain circumstances. We may redeem the warrants at a redemption price
of $0.25 per warrant. Before the first anniversary of the date of this
prospectus, the warrants may not be redeemed by us without the written consent
of Barron Chase Securities, Inc., our managing underwriter.
Our common stock and warrants have been approved for trading on the Nasdaq
National Market under the symbols "QLNX"and "QLNXW."
See "Risk Factors" beginning on page 8 to read about factors you should
consider before buying our common stock and warrants.
----------------
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>
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<CAPTION>
Per Share Per Warrant Total
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<S> <C> <C> <C>
Public Offering Price:...................... $8.00 $0.125 $12,187,500
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Underwriting discounts and commissions:..... $0.64 $0.01 $975,000
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Proceeds to Quintalinux:.................... $7.36 $0.115 $11,212,500
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</TABLE>
We have granted the managing underwriter an option for 45 days to purchase up
to an additional 225,000 shares and 225,000 warrants at the same prices
indicated above solely to cover over-allotments, if any.
The date of this Prospectus is August 9, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary....................................................... 2
Summary Consolidated/Combined and Unaudited Pro Forma Financial Data..... 4
Currency Translations.................................................... 7
Risk Factors............................................................. 8
Forward-Looking Statements............................................... 12
Use of Proceeds.......................................................... 12
Dividend Policy.......................................................... 13
Exchange Rates........................................................... 13
Dilution................................................................. 14
Capitalization........................................................... 15
Selected Consolidated/Combined and Unaudited Pro Forma Financial Data.... 16
Unaudited Pro Forma Condensed Consolidated Statement of Operations....... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Our Business............................................................. 33
Our Management........................................................... 46
Certain Transactions..................................................... 48
Principal Shareholders................................................... 49
Description of Securities................................................ 50
Taxation................................................................. 54
Underwriting............................................................. 56
Legal Matters............................................................ 58
Experts.................................................................. 58
Additional Information................................................... 58
Index to Financial Statements............................................ F-1
</TABLE>
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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.
Until September 3, 2000 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
Delivery of the shares of common stock and warrants will be made on or about
August 15, 2000.
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 Quintalinux..
1,500,000 shares of common stock and 1,500,000
warrants.
Common Stock
Outstanding Prior to
Offering................
8,000,000 shares of common stock.
Common Stock to be
Outstanding After
Offering................ 9,500,000 shares of common stock.
2
<PAGE>
Use of Proceeds......... Expansion of our computer and software business;
development of new technological products; marketing
and promotion; acquisition of Class C contractors
license; and working capital. See "Use of Proceeds."
Nasdaq National Market
Symbols.................
Common Stock--"QLNX" Warrants--"QLNXW"
Risk Factors............ Please read the Risk Factors section of this
prospectus on page 8 since an investment in our
common stock and warrants involves a high degree of
risk and could result in a loss of your entire
investment.
The information in this prospectus assumes that there has been no exercise
of:
. the 1,500,000 warrants being offered
. the managing underwriter's over-allotment option to purchase an
additional 225,000 shares of common stock and 225,000 warrants
. the managing underwriter's warrants to purchase 150,000 shares of common
stock and 150,000 warrants
If the over-allotment option granted to the managing underwriter is exercised
in full, 225,000 additional shares of common stock and 225,000 additional
warrants will be sold, with estimated additional net proceeds to Quintalinux of
$1,627,000 after deducting commissions and expenses.
--------
Linux is a registered trademark of Linus Torvalds.
3
<PAGE>
Summary Consolidated / Combined and Unaudited Pro Forma Financial Data
(Dollars in thousands except per share amounts)
The following summary actual and unaudited pro forma consolidated financial
data of Quintalinux and its subsidiaries should be read in conjunction with the
balance sheets information as of March 31, 1998, 1999 and 2000 (Unaudited) and
the statements of operations information for the fiscal years ended March 31,
1997, 1998, 1999 and 2000 (unaudited) and the Notes thereto, included elsewhere
in this prospectus. The summary unaudited pro forma consolidated financial data
have been derived from the unaudited 2000 historical financial statements and
reflect the same adjustments as the unaudited pro forma condensed consolidated
financial information included elsewhere in this prospectus.
The acquisition of the Tat Group for accounting purposes, has been treated on
"reverse acquisition" basis with the Tat Group as the accounting acquirer. On
this basis, the historical stockholders' equity amount of the Company since
April 1, 1997 has been retroactively restated to reflect the equivalent number
of shares of common stock of the Company issued for this acquisition. The
acquisition of the Li Group and Linux System Solution has been accounted for
using the purchase method of accounting.
The unaudited pro forma condensed consolidated statement of operations
reflects the acquisitions of the Tat Group, on the basis set out above and the
Li Group and Linux System Solution which occurred in November 1999 as if the
acquisitions had occurred on April 1, 1999. These unaudited pro forma results
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 Group, 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 operation that may be achieved in the future.
The following summary combined financial data of Tat Group and Li Group
should be read in conjunction with the combined balance sheets as of March 31,
1998, 1999 and 2000 (unaudited) and the related combined statements of
operations, cash flows and changes in shareholders' equity for the fiscal years
ended March 31, 1997, 1998, 1999 and 2000 (unaudited) and the Notes thereto,
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations", included elsewhere in this prospectus. The combined
financial statements have been prepared and presented in accordance with U.S.
GAAP.
As Linux System Solution was newly incorporated on April 23, 1999 and is
still a development stage company, its assets, liabilities and operations were
not significant as of March 31, 2000, no separate summary condensed financial
data of Linux System Solution is presented.
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) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated / Combined
Statements of
Operations Data:
Operating revenues...... -- 208,679 171,495 188,103 24,271 201,343 25,980
Net income.............. -- 12,794 17,027 22,040 2,844 22,645 2,922
Dividend per share...... -- -- -- -- -- -- --
Net income per share.... -- 2.65 3.52 3.68 0.48 2.83 0.37
Weighted average number
of shares outstanding.. 10,000 4,825,000 4,831,932 5,985,808 5,985,808 8,000,000 8,000,000
</TABLE>
4
<PAGE>
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(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$
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues.. 141,599 59,919 173,281 208,679 171,495 171,197 22,090
Net income (loss)... 2,584 (9,899) (1,827) 12,794 17,180 18,324 2,364
</TABLE>
Li Group
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------------------------
1995 1996 1997 1998 1999 2000 2000
------ ------ ------ ------ ------ ------ -----
HK$ HK$ HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues.......... 64,976 35,276 33,331 59,147 44,064 69,363 8,950
Net income (loss)........... 1,150 562 1,971 (545) 428 5,747 742
</TABLE>
5
<PAGE>
Quintalinux Limited
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------------------
As Adjusted
Actual (1) to (5) As Adjusted
----------- ----------- -----------
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital.......................... 9,625 82,060 10,588
Total assets............................. 188,123 260,558 33,620
Long term obligations.................... 6,084 6,084 785
Total shareholders' equity............... 63,185 135,620 17,500
</TABLE>
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(1) Adjusted to give effect to (i) the sale of 1,500,000 shares of Common Stock
at US$8.00 per share and 1,500,000 Purchase Warrants at US$0.125 each by
the Company, (ii) the estimated issuing expenses including Underwriter's
discount of approximately US$2,841.
(2) It is assumed that there has been no exercise of the Purchase Warrants
offered hereby, the Over-Allotment Option or the Underwriter Warrants.
(3)The estimated net proceeds are assumed to be deposited at the bank as cash
balances.
(4) Estimated net proceeds received from the sale of the Purchase Warrants have
been credited to additional paid in capital as part of the shareholders'
equity.
(5)Translation of HK$ amounts into US$ is at the approximate rate of
US$1=HK$7.75
6
<PAGE>
CURRENCY TRANSLATIONS
Our published financial statements are presented in Hong Kong dollars, the
lawful currency of Hong Kong. In this prospectus, references to "U.S. dollars",
"US$" 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.
7
<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.
8
<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 98.5%
of our outstanding shares, and following this offering will beneficially own
approximately 82.9% of the outstanding shares, or 81.0% if the managing
underwriter exercises its over-allotment option in full. Accordingly, they will
have controlling influence in determining the outcome of any corporate
transaction or other matter submitted to the shareholders
9
<PAGE>
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 will 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.
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.
10
<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.
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.
Our new investors' stock value will be diluted.
New investors will incur an immediate and substantial reduction in the book
value per share of our common stock of approximately $6.38 per share between
the net tangible book value per share after the offering of $1.75 and the
public offering price of $8.00 per share and $0.125 per warrant. Our existing
stockholders acquired their shares of common stock at prices below $8.00 and,
accordingly, new investors will bear most of the risks inherent in an
investment in us.
11
<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 in 1999 and
2000 and beyond could differ materially from the forward-looking statements
contained in this prospectus. However, we are not obligated to release publicly
any revisions to the forward-looking statements contained in this prospectus
except as otherwise required by the securities laws of the United States.
USE OF PROCEEDS
After payment of underwriting commissions and other expenses of the offering,
the net proceeds of the offering are estimated to be $9,347,000 or $10,974,000
if the over-allotment option is fully exercised. We expect to use
approximately:
. $3,500,000 to expand our computer and software business;
. $2,800,000 to fund business development in new technological products;
. $400,000 to market and promote our services;
. $1,800,000 to acquire a Hong Kong Government Class C contractors
license; and
. $847,000 for working capital.
We intend to expand our computer and software business by improving our
technical support for the Linux industry with recruitment and training of
computer expertise and continued research and development.
We intend to further develop and enhance our range of state of the art high-
technology products by way of possible acquisition and/or in-house development
of complementary new and innovative information display products, under-floor
flexible systems, technologies or businesses. However, we have no specific
plans, agreements or commitments, oral or written, to do so and are not
currently engaged in any negotiations for any such acquisition or joint
venture.
Our planned marketing and promotional activities include:
. Participation in local and overseas trade shows and exhibitions;
. Advertising in industry magazines and journals;
. Expenses for exploring overseas markets; and
. Hosting of educational seminars.
The amount that we actually expend for working capital purposes will vary
significantly depending on a number of factors, including:
. future revenue growth, if any;
. the amount of cash we generate from operations; and
. the progress of our business and product development efforts.
As a result, we retain broad discretion in the allocation of the net proceeds
of this offering.
We expect that the net proceeds from this offering, together with cash flow
from operations, will be sufficient to fund our operations for at least 12
months following this offering.
12
<PAGE>
Any proceeds from the exercise of either the over-allotment option or the
warrants will be used as additional working capital. There may be changes in
our proposed use of proceeds due to changes in our business. Proceeds not
immediately needed will be invested in bank certificates of deposit, insured
bank deposit accounts or similar investments.
DIVIDEND POLICY
We do not intend to pay dividends on our common stock in the foreseeable
future. Instead, we will retain our earnings to 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 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>
13
<PAGE>
DILUTION
As of March 31, 2000, the net tangible book value of our outstanding shares
of common stock was HK$56,655,000 (US$7,311,000), or approximately HK$7.08
(US$0.91) per share. "Net tangible book value" per share represents the total
amount of our tangible assets, less the total amount of our liabilities,
divided by the number of shares of common stock outstanding. Without taking
into account any changes in net tangible book value after March 31, 2000, other
than to give effect to the sale of the 1,500,000 shares of common stock offered
at an initial public offering price of $8.00 per share and the 1,500,000
warrants at an initial public offering price of $0.125 per warrant, less
underwriting discounts and commissions and estimated costs of the offering, our
net tangible book value as of March 31, 2000 would have been approximately
HK$129,090,000 (US$16,657,000) or HK$13.59 (US$1.75) per share. This represents
an immediate increase in net tangible book value of approximately HK$6.52
(US$0.84) per share of common stock to our existing shareholders and an
immediate dilution of approximately HK$49.38 (US$6.38) per share to new
investors. "Dilution" per share to new investors represents the difference
between the price to be paid by the new shareholders and the net tangible book
value per share of common stock immediately after this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share and warrant (1)........ $8.13
Net tangible book value per share before the offering........ $0.91
Increase in net tangible book value per share attributable to
new investors purchasing in the offering (1) & (2).......... $0.84
-----
Pro forma net tangible book value per share after the
offering...................................................... $1.75
-----
Dilution per share to new investors............................ $6.38
=====
</TABLE>
The following table sets forth the number of shares of common stock
purchased, the total consideration paid and the average price per share paid by
our existing shareholders as of March 31, 2000 and new investors purchasing the
shares of common stock offered:
<TABLE>
<CAPTION>
Average
Shares Purchased Consideration Price
----------------- ------------------- Per
Number Percent Amount Percent Share
--------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
New investors..................... 1,500,000 15.8% $12,000,000 83.1% $8.00
Existing shareholders............. 8,000,000 84.2% $ 2,444,000 16.9% $0.31
--------- ------ ----------- ------
Totals.......................... 9,500,000 100.0% $14,444,000 100.0%
========= ====== =========== ======
</TABLE>
--------
(1) Before deducting estimated underwriting discounts, commissions and
estimated expenses payable by the Company.
(2) No account has been taken of (i) the Underwriter's option to purchases from
the Company up to an additional 225,000 shares of Common Stock and 225,000
Purchase Warrants to cover over-allotments, if any, and (ii) the
Underwriter Warrants.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March 31,
2000 as reflected in the Company's unaudited consolidated financial statements
and as adjusted to reflect the sale of the 1,500,000 shares of common stock
offered at an initial public offering price of US$8 per share and 1,500,000
warrants at an initial public offering of US$0.125 per warrants, less
underwriter's discounts and commissions and the estimated offering expenses of
this offering of HK22,018,000 (US$2,841,000) and the receipt of the net
proceeds.
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------------
Actual As As
(Unaudited) adjusted adjusted
----------- -------- --------
HK$ HK$ US$
(In Thousands)
<S> <C> <C> <C>
Long term debt, net of current maturities........ 6,047 6,047 780
------ ------- ------
Stockholders' Equity:
Common Stock, $0.01 par value per share:
100,000,000 shares authorized, 8,000,000 shares
issued and outstanding, 9,500,000 shares
issued and outstanding, as adjusted;.......... 620 736 95
Additional paid-in capital....................... 18,324 90,643 11,696
Accumulated other comprehensive income........... 969 969 125
Retained earnings................................ 43,272 43,272 5,584
------ ------- ------
Total shareholders' equity..................... 63,185 135,620 17,500
------ ------- ------
Total capitalization........................... 69,232 141,667 18,280
====== ======= ======
</TABLE>
15
<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, 1999 have been derived from our
audited financial statements. The data with respect to the year ended March 31,
2000 have been derived from the unaudited 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
(Unaudited) 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) (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$
(Unaudited)
<S> <C> <C> <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>
16
<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$
(Unaudited)
<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
======= ====== ======= ======= ======= ======= ======
<CAPTION>
As of March 31
-----------------------------------------------------------
1995 1996 1997 1998 1999 2000 2000
------- ------ ------- ------- ------- ------- ------
HK$ HK$ HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Combined Balance Sheet
data:
Working capital......... 5,894 (4,682) (6,467) 6,366 21,864 16,786 2,164
Total assets............ 48,158 86,630 62,207 77,367 76,816 137,437 17,734
Long-term obligations... -- 76 104 21 38 4,317 557
Total stockholders'
equity................. 6,137 (3,762) (5,589) 7,205 24,385 42,709 5,510
</TABLE>
17
<PAGE>
Li Group
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------------------------
1995 1996 1997 1998 1999 2000 2000
------ ------ ------ ------ ------ ------ -----
HK$ HK$ HK$ HK$ HK$ HK$ US$
(Unaudited)
<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$
(Unaudited)
<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>
18
<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 unaudited 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 Unaudited Pro Forma
Combined Li Group Solution adjustments (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
income................. -- 464 -- -- 464 60
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 (547) -- 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>
19
<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>
20
<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.
21
<PAGE>
We have entered into employment agreements with Mr. Chu Tat, Mr. Perick Li
and Mr. David Lee, who are key management of our Company, effective upon the
closing of this offering for a period of three years at annual salaries of
HK$2,730,000 (US$350,000), HK$2,730,000 (US$350,000) and HK$1,080,000
(US$139,000) respectively. Should the effects of these employment agreements be
included in the proforma consolidated statement of operations, our consolidated
pro forma net income will become US$17,713,000 (US$2,285,000) for fiscal year
ended March 31, 2000.
TAT GROUP
Overview
Mr. CHU Tat owns 100% of the equity interest of Interact Contracting Company
Limited, Interact (China) Design & Contracting Company Limited and Uni-Zone
Holdings Limited. Collectively, these entities are referred to as the "Tat
Group". On November 19, 1999, Mr. Chu completed the transaction to transfer all
the equity of Tat Group to us.
The Tat Group derives most of its revenue from various professional
construction contracting services, including interior design, alternations and
additions, fit-outs, project design and management, and trading of high-
technology building materials.
Costs of revenue include labor, non-reimbursable subcontract costs, materials
and various direct and indirect overhead costs. Direct labor employees
basically work at our offices, and in some cases at the clients' job site. The
number of direct labor employees assigned to a contract will vary according to
the size, complexity, duration and demands of the project. Depending on the
nature of the projects, gross profit margins may vary significantly.
Selling, general, and administrative expenses consist primarily of corporate
costs related to finance and accounting, information technology, contract
proposal, executive salaries, rent, utilities and other indirect overhead
costs.
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>
22
<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 August 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.
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.
23
<PAGE>
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%.
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.
24
<PAGE>
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.
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.
25
<PAGE>
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.
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
26
<PAGE>
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.
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.
27
<PAGE>
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.
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.
28
<PAGE>
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.
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
29
<PAGE>
of the profit of Tat Group, offset by an increase in the amount advanced to Mr.
Chu. The advances have been repaid in fiscal 2000.
For fiscal 2000, net cash used in investing and financing activities for the
Tat Group was HK$1,247,000 (US$161,000) and HK$7,953,000 (US$1,025,000)
respectively. The negative cash flow from financing activities was mainly due
to a decrease in bank overdraft utilized, partly offset by a new Small and
Medium Enterprises Loan offered by the Hong Kong Government.
Tat Group's net cash used in investing activities was HK$2,640,000
(US$341,000) for fiscal 1999, which is mainly due to complete renovation of its
new office. Net cash used for investing activities for fiscal 1998 and 1997 was
HK$110,000 (US$14,000) and HK$89,000 (US$11,000) respectively.
Net cash provided by financing activities was HK$1,033,000 (US$133,000) in
fiscal 1999, as compared with net cash used in financing activities of
HK$701,000 (US$90,000) in fiscal 1998, reflecting an increase in bank overdraft
financing. Net cash provided by financing activities was HK$3,930,000
(US$507,000) in fiscal 1997, mainly because of an increase of HK$2,895,000
(US$374,000) in bank overdraft financing.
LI GROUP
Since inception, the Li Group have financed its operations primarily through
net cash flows from operating activities and bank borrowings.
Net cash provided by operating activities for fiscal 2000 was HK$165,000
(US$21,000) as compared with net cash of HK$480,000 (US$62,000) provided by
operating activities for fiscal 1999.
As at March 31, 2000, the Li Group had working capital of approximately
HK$11,491,000 (US$1,482,000) as compared to approximately HK$5,340,000
(US$689,000) at March 31, 1999. Net accounts receivable increased from
HK$10,048,000 (US$1,296,000) as at 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.
30
<PAGE>
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 activties was HK$378,000 (US$49,000) for fiscal
1999. Because of an increase of bank overdraft of HK$2,022,000 (US$261,000) to
finance the growth of its business activities, net cash provided by financing
activities was HK$1,752,000 (US$226,000) in fiscal 1998. Net cash used in
financing activities was HK$1,791,000 (US$216,000) in fiscal 1997, reflecting a
decrease in bank overdraft financing.
Inflation
Based on historical experience, the duration of our alternations and
additions contracts as well as high-technology products and services, from
commencement to completion, has varied between two and eleven months, with the
majority of projects being approximately four months. Thus, it has not been
necessary to provide for inflation in contracts entered into by the Company.
The inflation rate in Hong Kong was -4% in 1999 and 2.8% in 1998 and in the
PRC was -1.4% in 1999 and -0.8% in 1998. However, we will continue to avoid
problems resulting from inflation by ensuring our works are kept to schedule.
We have always been able to purchase supplies and materials once a project is
signed, thus minimizing the effect of inflation.
New works projects that may be awarded to us could extend for up to two
years, in which case we intend to include cost escalation clauses in such
contracts.
Currency Risks
We expect to continue our present practice of entering into contracts under
which contract sums are payable in Hong Kong or United States dollars. Expenses
for PRC projects will be paid in Renminbi (Rmb) or Hong Kong dollars. The
Company will gain on foreign exchange if the Rmb depreciates against the Hong
Kong or United States dollar. Conversely, the Company will incur foreign
exchange losses if the Rmb appreciated against the Hong Kong or United States
dollar.
Due to the recent shortage of Rmb within the PRC, we have been experimenting,
in relation to PRC projects, accepting part of the contract sum in Rmb in such
amounts as may be required to meet Rmb expenditure in relation to these
projects. This reduces our requirement to manage actively our foreign exchange
exposure under these contracts. Under these arrangements, we are not exposed to
the risk of the non-convertibility of Rmb into foreign exchange, as the project
element under these contracts remains payable in freely convertible foreign
currencies.
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
31
<PAGE>
industries concerning the scope and magnitude of problems associated with the
century and other industries concerning the scope and magnitude of problems
associated with the century change. We recognize the need to ensure our
operations will not be adversely affected by Year 2000 software failures.
Internal operations. We believe that we have identified substantially all of
the major computers, software applications, and related equipment used in
connection with our internal operations that must be modified, upgraded or
replaced to minimize the possibility of a material disruption to our business.
In addition, we are also continuously assessing the operation of office and
facilities equipment, such as fax machines, photocopies, telephone switches,
security systems, elevators, and other common devices which may be affected by
the Year 2000 problem. We have appointed an agent as the Y2K Project Manager to
oversee all our Y2K issues.
Suppliers. We have communicated with the external vendors that supplied us
with material software and information systems and with our significant
suppliers to determine their Year 2000 readiness. In the course of these
investigations, we have not encountered any material Year 2000 problems with
these third-party products. However, we have neglected the likely effects on
our non-computerized systems.
To date, we have not incurred any material costs directly associated with our
Year 2000 compliance efforts, except for compensation expense associated with
our salaried employees who have devoted some of their time to our Year 2000
assessment and remediation efforts. As discussed above, we do not expect the
total cost of Year 2000 problems to be material to our business, financial
condition and operating results. However, during the months prior to the
century change, we will continue to evaluate new versions of our software
products, new software and information systems provided to us by third parties
and any new infrastructure systems that we acquire to determine whether they
are Year 2000 compliant. Despite our current assessment, we may not identity
and correct all significant Year 2000 problems on a timely basis. Year 2000
compliance efforts may involve significant time and expense and unremediated
problems could materially adversely affect our business, financial condition
and operating results. We currently have no contingency plans to address the
risks associated with unremediated Year 2000 problems.
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<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.)
------------------------------------------------------------------
<TABLE>
<CAPTION>
100% 72.5%
---- -----
<S> <C>
- Interact Contracting Company Limited Linux System
(H.K.) Solution 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.)
</TABLE>
33
<PAGE>
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.
34
<PAGE>
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
35
<PAGE>
22% of our proforma combined revenues for the fiscal year ended March 31, 2000.
Our major products and services include:
. 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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<PAGE>
. 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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<PAGE>
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 into the
industry in which we operate. A significant
38
<PAGE>
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.
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
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<PAGE>
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
- process control
- environment monitoring
- process monitoring and automation
- control and distributed systems
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<PAGE>
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.
Customers
With our wide range of professional products and well-designed services, we
target customers ranging from individuals to large corporate users in Hong
Kong, China and other ASEAN countries.
<TABLE>
<CAPTION>
Services Customer Base
-------- -------------
<C> <S>
Internet and Internet solution using Linux as Individual users and enterprises
a launching platform
Support and maintenance services of Linux Enterprises
system
Training Small to medium enterprises Individual
users
Enterprise Solution Medium to large enterprises Oracle customer
base IBM DB2
Sales and distribution of TurboLinux based Enterprises and individual users
products
Publication of Linux material Individual users
</TABLE>
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<PAGE>
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.
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 December 31, 1999, we had a total of 79 full time employees, as well
as a network of consultants and hourly workers available on an as-required
basis. Of the 79 full time employee, ten are key management staff, 36 are
engaged in project management, ten in sales and marketing and 23 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,
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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.
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
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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 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;
. To restrain directors from acting on resolutions, where notice of a
shareholders' meeting failed adequately to inform shareholders of a
resolution proposed at the meeting;
. To restrain a company, where it proposes to perform an act not
authorized by the Memorandum of Association and the Articles of
Association or to seek damages from 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;
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. To restrain a company from acting upon a resolution that was not made in
good faith and for the benefit of shareholders as a whole;
. To redress where a resolution passed at a shareholders' meeting was not
properly passed, for instance, if it was not passed with the necessary
majority;
. To restrain a company from performing an act which is contrary to law;
and
. To restrain a company from taking any action in the name and for the
benefit of a company.
Such an action also may be brought against directors and promoters who have
breached their fiduciary duties to 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.
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OUR MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
CHU Tat............................... 43 Chairman
Perick LI Wai Ho...................... 44 Vice-Chairman
David LEE Chai Ve..................... 52 Chief Executive Officer
Chief Financial Officer and
CHIU Wai Ching........................ 37 Director
CHAN Kin Hang......................... 37 Director
CHAN Sai Keung........................ 44 Non-executive Director
Samuel YUNG Wing Ki................... 42 Non-executive Director
Fernando MARCHITELLI.................. 60 Non-executive Director
</TABLE>
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. 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 is
mainly responsible for the business development and strategic management of
Linux System Solution Limited.
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).
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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.
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
effective upon the closing of this offering 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 will include benefits
with respect to a motor car. In addition, they will be 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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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 the date of this prospectus 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 Percentage
Owned Prior To of Shares
Offering Beneficially
----------------- Owned After
Name of Shareholder Number Percent Offering
------------------- --------- ------- ------------
<S> <C> <C> <C>
CHU Tat........................................ 4,824,000 60.3 50.8
Perick LI Wai Ho............................... 3,054,000 38.2 32.1
David LEE Chai Ve.............................. 0 0 0
CHIU Wai Ching................................. 0 0 0
CHAN Kin Hang.................................. 60,000 * *
CHAN Sai Keung................................. 0 0 0
Samuel YUNG Wing Ki............................ 0 0 0
Fernando MARCHITELLI........................... 0 0 0
All directors and executive officers as a group
(8 persons)................................... 7,938,000 99.2 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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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 8,000,000 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.
This offering is our initial registered public offering of our securities and
there is no regular public trading market for our securities at the present
time. There is no assurance that a public trading market will ever develop or
that it will be maintained. Although it has no obligation to do so, the
managing underwriter may
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from time to time become a market-maker and otherwise effect transactions in
the securities. The managing underwriter, if it participates in the market, may
be a dominating influence in any market that might develop for any of the
securities. The price and liquidity of the securities may be significantly
affected by the degree, if any, of the managing underwriter's participation in
the market.
Underwriter Warrants
See "Underwriting" for a complete description of the common stock underwriter
warrants and the warrant underwriter warrants to be issued by us at the closing
to the managing underwriter and/or persons related to the managing underwriter.
Shares Eligible for Future Sale
Before this offering, there has been no public market for our common stock or
warrants. 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 will be available for sale shortly after the offering 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.
Upon completion of the offering, we will have outstanding 9,500,000 shares of
common stock. Of these shares, 1,500,000 shares sold in the offering, plus any
shares issued upon exercise of the managing underwriter's over-allotment
option, will be 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 the
date of this prospectus 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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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 will be authorized to indemnify any director or officer who is made or
threatened to be made a party to a legal or administrative proceeding by virtue
of being one of our directors or officers, provided such person acted honestly
and in good faith and with a view to our best interests and, in the case of a
criminal proceeding, such person had no reasonable cause to believe that his
conduct was unlawful. Our Articles of Association also enable us to indemnify
any director or officer who was successful in such a proceeding against expense
and judgments, fines and amounts paid in settlement and reasonably incurred in
connection with the proceeding.
52
<PAGE>
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.
53
<PAGE>
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.
54
<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.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, Barron
Chase Securities, Inc. as the managing underwriter has agreed to purchase from
us an aggregate of 1,500,000 shares and 1,500,000 warrants. The shares and the
warrants are referred to as the securities. The securities are offered by the
managing underwriter subject to prior sale, when, as and if delivered to and
accepted by the managing underwriter and subject to approval by counsel. The
managing underwriter is committed to purchase all of the securities offered, if
any are purchased (other than those covered by the over-allotment option
described below).
We have been advised by the managing underwriter that the managing
underwriter proposes to offer the securities to the public at the offering
prices set forth on the cover page of this prospectus through members of the
National Association of Securities Dealers, Inc. The managing underwriter may
allow concessions, in its discretion, to selected dealers who are members of
the NASD and who agree to sell the securities in conformity with the NASD's
Conduct Rules. These concessions will not exceed the amount of the underwriting
discount that the managing underwriter is to receive.
We have granted to the managing underwriter an over-allotment option,
exercisable for 45 days from the date of this prospectus, to purchase up to an
additional 225,000 shares and an additional 225,000 warrants at the public
offering prices less the underwriting discounts and commissions. The managing
underwriter may exercise this option solely to cover over-allotments in the
sale of the securities being offered by this prospectus.
Our officers and directors may introduce the managing underwriter to persons
to consider this offering and to purchase securities either through the
managing underwriter or through participating dealers. Our officers and
directors will not receive any commissions or any other compensation.
We have agreed to pay to the managing underwriter a commission or
underwriting discount of eight percent (8%) of the gross proceeds of this
offering, including the gross proceeds from any exercise of its over-allotment
option. In addition, we have agreed to pay to the managing underwriter a non-
accountable expense allowance of three percent (3%) of the gross proceeds of
this offering, including the gross proceeds from any exercise of its over-
allotment option. We have paid to the managing underwriter a $50,000 advance of
the non-accountable expense allowance. The managing underwriter's expenses in
excess of the non-accountable expense allowance will be paid by the managing
underwriter. If the expenses of the managing underwriter are less than the
amount of the non-accountable expense allowance received, such excess will be
deemed additional compensation to the managing underwriter. The managing
underwriter has informed us that it does not expect sales to discretionary
accounts to exceed five percent (5%) of the total number of securities offered.
We have agreed with the managing underwriter that if we participate in any
transaction which the managing underwriter has introduced in writing to us
during five years after the closing and which is consummated after the closing
or if we retain the managing underwriter in connection with any transaction,
then we will pay for the managing underwriter's services an amount equal to 5%
of up to one million dollars of value paid or received in the transaction, 4%
of the next million of such value, 3% of the next million of such value, 2% of
the next million of such value, and 1% of the next million dollars of such
value and of all such value above $4,000,000.
Before this offering, there has been no public market for our shares of
common stock or our warrants. The initial public offering prices for the
securities, and the terms of the warrants, have been determined by negotiation
between us and the managing underwriter. Among the factors considered in
determining the public offering prices were:
. The history of and the prospects for our business;
. An assessment of our management;
. Our past and present operations; and
. The general condition of the securities market at the time of this
offering.
56
<PAGE>
The initial public offering prices do not necessarily bear any relationship
to our assets, book value, earnings, or other established criteria of value.
Such prices are subject to change as a result of market conditions and other
factors. We cannot guarantee that a public market for the shares or the
warrants will develop after the closing, or will be sustained, or that the
shares or the warrants can be resold at any time at the offering or any other
price.
At the closing, we have agreed to issue to the managing underwriter and/or
persons related to the managing underwriter, for nominal consideration, 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. The Common
Stock Underwriter Warrants and the Warrant Underwriter Warrants are referred to
as the Underwriter Warrants. The Common Stock Underwriter Warrants and the
Warrant Underwriter Warrants will be exercisable for a five-year period
commencing on the date of the prospectus. The initial exercise price of each
Common Stock Underwriter Warrant shall be $13.20 per Underlying Share (165% of
the public offering price). The initial exercise price of each Warrant
Underwriter Warrant shall be $0.20625 per Underwriter Underlying Warrant (165%
of the public offering price). Each Underwriter Underlying Warrant will be
exercisable for a five-year period commencing on the date of the prospectus to
purchase one share of common stock at an exercise price of $17.952 per share of
common stock. The Underwriter Warrants will be restricted from sale, transfer,
assignment, or hypothecation for a period of twelve months from the date of the
prospectus by the holder, except:
. to officers of the managing underwriter and members of the selling group
and their officers and partners;
. by will; or
. by operation of law.
The Common Stock Underwriter Warrants and the Warrant Underwriter Warrants
provide for adjustment in the event of any merger, consolidation,
recapitalization, reclassification, stock dividend, stock split or similar
transaction. The Underwriter Warrants contain net issuance provisions
permitting the holders to elect to exercise the Underwriter Warrants in whole
or in part and instruct 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 Underwriter Warrants
will have the same dilutive effect on the interests of our shareholders as will
a cash exercise. The Underwriter Warrants do not entitle the holders thereof to
any rights as a shareholder until such Underwriter Warrants are exercised and
shares of common stock are purchased.
The Underwriter Warrants and the securities issuable thereunder may not be
offered for sale except in compliance with the applicable provisions of the
Securities Act. We have agreed that if we cause a post-effective amendment, a
new registration statement, or similar offering document to be filed with the
Commission, the holders shall have the right, for seven (7) years from the date
of the prospectus, to include in such filing the Underwriter Warrants and/or
the securities issuable upon their exercise at no expense to the holders.
Additionally, we have agreed that, upon request by the holders of 50% or more
of the Underwriter Warrants during the period commencing one year from the date
of the prospectus and expiring four years after, we will, under certain
circumstances, register the Underwriter Warrants and/or any of the securities
issuable upon their exercise.
The managing underwriter may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock and warrants. Specifically,
the managing underwriter may over-allot in connection with the offering,
creating a short position in the common stock and warrants for its own account.
In addition, to cover over-allotments or to stabilize the price of the common
stock and warrants, the managing underwriter may bid for, and purchase, shares
of common stock and warrants in the open market. Finally, the managing
underwriter may reclaim selling concessions allowed to a dealer for
distributing the common stock and warrants in the offering, if the managing
underwriter repurchases previously distributed common stock or
57
<PAGE>
warrants in transactions to cover the managing underwriter's short position in
stabilization transactions or otherwise. Any of the activities may stabilize or
maintain the market price of the common stock and warrants above independent
market levels. The managing underwriter is not required to engage in these
activities, and may end any of these activities at any time.
We have agreed to indemnify the managing underwriter against any costs or
liabilities incurred by the managing underwriter by reason of misstatements or
omissions to state material facts in connection with the statements made in the
registration statement and this prospectus. The managing underwriter has in
turn agreed to indemnify us against any costs or liabilities by reason of
misstatements or omissions to state material facts in connection with the
statements made in the registration statement and this prospectus, based on
information relating to the managing underwriter and furnished in writing by
the managing underwriter. To the extent that these provisions may purport to
provide exculpation from possible liabilities arising under the federal
securities laws, in the opinion of the Commission, such indemnification is
contrary to public policy and therefore unenforceable.
LEGAL MATTERS
Certain legal matters will be 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 will be passed on for us by Harney Westwood & Riegels as to
British Virgin Islands law. Certain legal matters will be passed on for the
managing underwriter by David A. Carter, P.A., Boca Raton, Florida. 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 and 1999 and for each of the three years
ended March 31, 1999 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 shares of common
stock, the warrants, the underwriter warrants and the underlying shares of
common stock being offered in this offering. This prospectus does not contain
all the information set forth in the registration statement, as permitted by
the rules and regulations of the Commission.
After the offering, we will be subject to the informational requirements of
the Exchange Act as they apply to a foreign private issuer and will be 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.
Our common stock and warrants have been approved for trading on the Nasdaq
National Market.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
QUINTALINUX LIMITED
(Formerly Known As Quinta Development Limited)
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants................. F-3
Consolidated Statements of Operations for the period from January
8, 1997 (date of incorporation) to March 31, 1997 and for the years
ended March 31, 1998, 1999 and 2000 (unaudited).................... F-4
Consolidated Balance Sheets as of March 31, 1998, 1999 and 2000
(unaudited)........................................................ F-5
Consolidated Statements of Changes in Stockholders' Equity for the
period from January 8, 1997 (date of incorporation) to March 31,
1997 and for the years ended March 31, 1998, 1999 and 2000
(unaudited)........................................................ F-6
Consolidated Statements of Cash Flows for the period from January
8, 1997 (date of incorporation) to March 31, 1997 and for the years
ended March 31, 1998, 1999 and 2000 (unaudited).................... F-7
Notes to and Forming Part of the Consolidated Financial
Statements......................................................... F-8--F-27
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Report of Independent Certified Public Accountants................. F-28
Combined Statements of Operations for the years ended March 31,
1997, 1998 and 1999 and 2000 (unaudited)........................... F-29
Combined Balance Sheets as of March 31, 1998, 1999 and 2000
(unaudited)........................................................ F-30
Combined Statements of Changes in Stockholders' Equity (Deficit)
for the years ended March 31, 1997, 1998, 1999 and 2000
(unaudited)........................................................ F-31
Combined Statements of Cash Flows for the years ended March 31,
1997, 1998, 1999 and 2000 (unaudited).............................. F-32
Notes to and Forming Part of the Combined Financial Statements..... F-33--F-47
</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.................. F-48
Combined Statements of Operations for the years ended March 31,
1997, 1998, 1999 and 2000 (unaudited)............................... F-49
Combined Balance Sheets as of March 31, 1998, 1999 and 2000
(unaudited)......................................................... F-50
Combined Statements of Changes in Stockholders' Equity for the years
ended March 31, 1997, 1998, 1999 and 2000 (unaudited)............... F-51
Combined Statements of Cash Flows for the years ended March 31,
1997, 1998, 1999 and 2000 (unaudited)............................... F-52
Notes to and Forming Part of the Combined Financial Statements...... F-53--F-66
</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, 1998 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
the period from January 8, 1997 (date of incorporation) to March 31, 1997 and
for the years ended March 31, 1998 and 1999. 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, 1998 and 1999, and the
consolidated results of its operations and cash flows for the period from
January 8, 1997 (date of incorporation) to March 31, 1997 and for the years
ended March 31, 1998 and 1999, in conformity with accounting principles
generally accepted in the United States of America.
Moores Rowland
Chartered Accountants
Certified Public Accountants
Hong Kong
Dated:June 23, 1999, except for
Note 1 as to which the date is
November 24, 1999
F-3
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Period from
January 8,
1997 (date of
incorporation)
to March 31, Years ended March 31,
-------------- ------------------------------------------
1997 1998 1999 2000 2000
-------------- --------- --------- --------- ---------
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <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................... 10,000 4,825,000 4,831,932 5,985,808 5,985,808
====== ========= ========= ========= =========
Net income per share of
common stock Nil 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>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
As of March 31,
-----------------------------
Notes 1998 1999 2000 2000
------ ------ ------ ------- ------
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............... 807 438 5,421 699
Restricted cash......................... 6 1,774 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 19,297 15,074 76,026 9,810
Due from customers for contract work.... 4 14,887 16,802 24,219 3,125
Retention money receivable.............. 4,049 2,914 5,816 751
Inventories............................. 883 875 2,018 260
Due from related parties................ 11 31,710 33,297 -- --
Deposit outward......................... 1,074 710 581 75
Prepayments and other current assets.... 2,027 2,409 3,348 432
Prepaid taxes........................... -- -- 50 7
------ ------ ------- ------
Total current assets................. 76,508 74,338 128,629 16,598
Property, plant and equipment, net...... 5 860 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......................... 77,368 78,362 188,123 24,274
====== ====== ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft.......................... 6 8,717 9,910 9,589 1,237
Bank loans, current..................... 7 -- -- 4,197 542
Accounts and bills payable--trade....... 51,778 38,109 90,530 11,681
Capital lease obligations, current...... 8 85 40 75 10
Accrued expenses and other payable...... 2,974 1,239 5,434 701
Contract work deposit from customers.... 4 6,278 1,587 1,819 235
Other deposits received................. -- -- 176 23
Retention money payable................. 60 171 306 39
Due to related parties.................. 11 249 416 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............ 70,141 54,090 119,004 15,355
Bank loans, non-current................. 7 -- -- 6,030 778
Capital lease obligations, non-current.. 8 21 38 17 2
Deferred taxation....................... -- -- 37 5
------ ------ ------- ------
Total liabilities.................... 70,162 54,128 125,088 16,140
------ ------ ------- ------
Minority interest....................... -- -- (150) (19)
------ ------ ------- ------
Commitments and contingencies........... 12, 13
Stockholders' equity
Common stock............................ 1, 10 374 375 620 80
Additional paid-in capital.............. 2,627 2,627 18,324 2,364
Accumulated other comprehensive income.. -- -- 969 125
Retained earnings....................... 4,205 21,232 43,272 5,584
------ ------ ------- ------
Total stockholders' equity........... 7,206 24,234 63,185 8,153
------ ------ ------- ------
Total liabilities and stockholders'
equity.............................. 77,368 78,362 188,123 24,274
====== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
CONSOLIDATED STATEMENTS OF 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>
Period from January 8,
1997 (date of
incorporation) to
March 31, 1997.........
Common stock issued
(Note (1))............. 10,000 1 -- -- -- 1 1
Net income.............. -- -- -- -- -- -- --
---------- ------- -------- ------- -------- -------- -------
Balance as of March 31,
1997................... 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
(unaudited)............ -- -- -- 969 -- 969 125
Net income (unaudited).. -- -- -- -- 22,040 22,040 2,844
---------- ------- -------- ------- -------- -------- -------
Balance as of March 31,
2000 (unaudited)....... 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$0.01 per share effected on July
3, 1998.
(2) Adjusted to reflect issuance of 4,815,000 shares of common stock of the
Company in exchange for the outstanding common stock of Tat Group effected
on November 19, 1999.
(3) Issuance of 2,985,000 shares of common stock of the Company in exchange for
the outstanding common stock of Li Group effected on November 19, 1999.
(4) Issuance of 180,000 shares of common stock of the Company in exchange for
72.5% equity interest in LSSL effected on November 24, 1999.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Period from
January 8,
1997 (date of
incorporation)
to March 31, Years ended March 31,
-------------- ---------------------------------
1997 1998 1999 2000 2000
-------------- ------- ------- ------- ------
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <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 -- 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... 1 (701) 1,077 (11,512) (1,486)
--- ------- ------- ------- ------
Net (decrease) increase in
cash and cash equivalents.. 1 806 (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........ 1 807 438 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>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(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>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(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 forma 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>
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.
F-9
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
1.BASIS OF FINANCIAL STATEMENTS PRESENTATION AND REORGANIZATION (Continued)
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
Name of Date of Place of owned by the
company incorporation incorporation Company Principal activities
------- ------------- ------------- --------------- --------------------
Direct Indirect
<S> <C> <C> <C> <C> <C>
Interact January 21, 1992 Hong Kong 100% construction,
Contracting engineering,
Company decoration and
Limited designs works
Interact December 20, 1994 Hong Kong 100% general
(China) contracting and the
Design & provision of
Contracting decoration work
Company in the PRC
Limited
Uni-Zone May 19, 1994 Hong Kong 100% design, supply and
Holdings installation of
Limited carpet and raised
floor system
Pado December 16, 1983 Hong Kong 100% renovation work
Contracting
Company
Limited
Pado March 11, 1993 Hong Kong 100% investment
(Holdings) holding
Limited
Good April 18, 1990 Hong Kong 100% construction and
Prominent installation of light
Technology emitting diode
Company
Limited
Good October 1, 1992 Hong Kong 100% trading and
Prominent installation of
Engineering lighting materials
Company
Limited
Good December 28, 1987 Hong Kong 100% trading of
Prominent building materials
Trading
Limited
</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.
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.
F-10
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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:
<TABLE>
<S> <C>
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%
</TABLE>
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.
F-12
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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.
(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.
F-13
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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.
(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
During the year ended March 31, 1999, 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) Unaudited consolidated financial statements
The unaudited consolidated financial information included herein for the year
ended March 31, 2000 have been prepared in accordance with accounting
principles generally accepted in the United States of America. In the opinion
of the Company, these unaudited consolidated financial statements reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein.
(t) 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.
F-14
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
3.OPERATING RISKS
(a) Concentration of major customers and suppliers
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------
1998 1999 2000 2000
------- ------- ------- ------
HK$ HK$ HK$ US$
(Unaudited)
<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.
(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.
F-15
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
4.CONSTRUCTION CONTRACTS
<TABLE>
<CAPTION>
March 31,
-------------------------------------
1998 1999 2000 2000
-------- -------- -------- -------
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C>
Accumulated contract costs
incurred........................... 205,856 151,633 265,842 34,302
Add: Attributable profits........... 55,350 45,555 56,246 7,257
-------- -------- -------- -------
261,206 197,188 322,088 41,559
Less: Progress payments
received/receivable............. (252,597) (181,973) (299,688) (38,669)
-------- -------- -------- -------
8,609 15,215 22,400 2,890
======== ======== ======== =======
Amounts disclosed as:
Due from customers for contract
work............................... 14,887 16,802 24,219 3,125
Contract work deposit from
customers.......................... (6,278) (1,587) (1,819) (235)
-------- -------- -------- -------
8,609 15,215 22,400 2,890
======== ======== ======== =======
5.PROPERTY, PLANT AND EQUIPMENT, NET
<CAPTION>
March 31,
-------------------------------------
1998 1999 2000 2000
-------- -------- -------- -------
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C>
Yacht............................... -- -- 1,301 168
Leasehold land and buildings........ -- -- 37,632 4,856
Furniture and fixtures.............. 394 2,545 4,618 596
Motor vehicles...................... 230 230 745 96
Plant and machinery................. 149 -- 234 30
Others and computer equipment....... 884 886 1,910 246
-------- -------- -------- -------
1,657 3,661 46,440 5,992
Accumulated depreciation............ (797) (1,102) (5,920) (764)
-------- -------- -------- -------
860 2,559 40,520 5,228
======== ======== ======== =======
</TABLE>
F-16
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
6.BANKING FACILITIES
The 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,
---------------------------
1998 1999 2000 2000
------ ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C>
Facilities granted
Letter of credit and import loans.............. 17,800 17,800 22,600 2,917
Overdrafts..................................... 9,500 10,200 21,500 2,774
====== ====== ====== =====
Utilized
Letter of credit and import loans.............. 7,996 9,289 20,757 2,678
Overdrafts..................................... 8,717 9,910 9,589 1,237
====== ====== ====== =====
Unutilized facilities
Letter of credit and import loans.............. 9,804 8,511 1,843 239
Overdrafts..................................... 783 290 11,911 1,537
====== ====== ====== =====
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 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 (unaudited), the Group was not in
violation of the key financial covenant.
7.BANK LOANS
<CAPTION>
March 31,
---------------------------
1998 1999 2000 2000
------ ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <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>
F-17
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
7.BANK LOANS (Continued)
Expected maturities of bank loans are as follows:
<TABLE>
<CAPTION>
March 31,
2000
------------
HK$ US$
(Unaudited)
<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>
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$
(Unaudited)
<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
=== ====== =====
Expected maturities of capital lease are as follows:
<CAPTION>
March 31,
-----------------------
1999 2000 2000
---------- ------ -----
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
2000................................................. 40 -- --
2001................................................. 21 75 10
2002................................................. 17 17 2
--- ------ -----
78 92 12
=== ====== =====
9.MARKETABLE EQUITY SECURITIES
Investment in marketable equity securities as of March 31, 2000 (unaudited)
is as follows:
<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-18
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
10COMMON 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.
F-19
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
11.RELATED PARTY TRANSACTIONS
a. Name and relationship of related parties
<TABLE>
<C> <S>
Existing relationships with the
Company
-------------------------------
Mr. Chu Director and stockholder of the
Company
Genuine Interior Design & Associates Common director and a company owned
Limited ("GIDAL") by Mr. Chu, major stockholder of the
Company
Prographic Productions Company -- ditto --
("PPC")
Ba Wah Design & Construction Company -- ditto --
Limited ("BWDCCL")
T & T (HK) Investment Limited -- ditto --
("TTHKIL")
</TABLE>
<TABLE>
<S> <C>
Interact (Guangzhou) Design and -- ditto --
Contracting 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 Common director and a company owned
Limited ("GPFSCL") by Mr. Li, major stockholder of the
Company
Pado (China) Design and Contracting -- ditto --
Company Limited ("PCDCL")
Good Prominent Media Advertising -- ditto --
Company Limited ("GPMACL")
Pado Contracting Company Limited Common director and a company owned
("PCCL") by Mr. Li, major stockholder of the
Company. Became a subsidiary of the
Company, following the
reorganization effected on November
19, 1999
</TABLE>
F-20
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
11.RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions
<TABLE>
<CAPTION>
March 31,
--------------------------
1998 1999 2000 2000
------ ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<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-21
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
11.RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions (Continued)
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1999 2000 2000
----- ----- ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<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.
(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.
F-22
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--
(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
11.RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions (Continued)
(v) The Group received management fee income from PPC and GPMACL for
management services provided and rental income from GPFSCL for
properties let out at approximately market rates. The management fee
income was determined between the two respective parties.
(vi) Pursuant to an arrangement with Mr. Chu, the amounts owing from Mr.
Chu and companies owned and controlled by him as of March 6, 2000
amounted to HK$25,487 was fully repaid by means of transferring legal
title of a class A residential property and a commercial property
located in Hong Kong to the Tat Group. The fair market value of these
properties as valued by independent professional valuer as of August
19, 1999 was HK$27,000. This amount has been used to record the value
of the properties and the amount repaid by Mr. Chu. The excess of
payment of approximately HK$1,513 has been accounted for as due to
related parties.
(vii) Pursuant to an arrangement made with Mr. Li, the amount owing from
Mr. Li and companies owned and controlled by him as of December 28,
1999 amounted to HK$22,443 was partially repaid by means of
transferring good title of 400,000 shares in Intermost Corporation, a
company listed on NASDAQ OTC Bulletin Board to the Company. The
shares were valued at US$3.75 per share by a third party as of
December 3, 1999 and the transfer was completed on December 28, 1999.
Consequently, HK$11.6 million was repaid. The market value as of
March 31, 2000 was US$4.0625 per share.
In addition, HK$12 million was paid to the Company by PCDCL, a company
owned and controlled by Mr. Li on January 26, 2000 as final settlement
of a debt to the Li Group.
c. The stockholders have undertaken to indemnify the Group against any
contingent liabilities including tax liabilities and claims that may result
from the operating activities of the Group in Hong Kong, the PRC and elsewhere
occurring before March 31, 1999. Any such payments by the stockholders will be
recorded as expenses by the Group with the corresponding credit to the equity.
d. Included in accounts receivable is an amount of HK$5,416 as of March 31,
1999 and 2000, due from a debtor of the Tat Group which has been outstanding
for approximately two and a half years and three and a half years
respectively. The director of the Tat Group is, however, confident that this
debt would be recovered in full eventually. Accordingly, there was no
provision made against this amount in the consolidated statements of
operations. The director, who is also the stockholder, has further given an
undertaking to the Tat Group that he would make good of any losses suffered by
the Tat Group had such debtor been default in repayment. Any such payments by
the stockholder will be recorded as expenses by the Tat Group with the
corresponding credit to the equity.
F-23
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
12.OPERATING LEASES
As of March 31, 1999 and 2000, the Group had commitments under non-cancelable
operating lease payments in respect of land and buildings as follows:
<TABLE>
<CAPTION>
March 31,
-----------------
1999 2000 2000
---- ------ -----
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
2000....................................................... 276 -- --
2001....................................................... 42 1,729 223
2002....................................................... -- 354 46
--- ------ ----
Total...................................................... 318 2,083 269
=== ====== ====
</TABLE>
Total lease expense for the years ended March 31, 1998, 1999 and 2000
(unaudited) was HK$2,090, HK$1,682 and HK$1,505 respectively.
As of March 31, 1999 and 2000, the Group had commitments under non-cancelable
operating lease rentals to be received in respect of land and buildings as
follows:
<TABLE>
<CAPTION>
March 31,
-----------------
1999 2000 2000
---- ----- -----
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
2000....................................................... -- -- --
2001....................................................... -- 482 62
--- ----- -----
Total...................................................... -- 482 62
=== ===== =====
</TABLE>
13.PERFORMANCE BONDS
There were contingent liabilities as of March 31, 1999 and 2000 in respect of
performance bonds issued by third parties which are inherent in the nature of
the business in which the Group operates. The directors do not anticipate
material losses to crystallize.
14.PENSION COSTS
The Group operates a defined contribution retirement plan ("Plan") which is
optional for all qualified employees. The assets of the Plan are held
separately from those of the Group in a provident fund managed by an
independent trustee. The pension cost charge represents contributions payable
to the fund by the Group at rates specified in the rules of the Plan. Where
employees leave the Plan prior to vesting fully in the contributions, the
contribution payable by the Group is reduced by the amount of forfeited
contribution.
The pension expense for the years ended March 31, 1998, 1999 and 2000
(unaudited) was HK$350, HK$80 and HK$177 respectively.
15.INCOME TAXES
In the opinion of management, the Company is not subject to any tax in the
British Virgin Islands ("BVI") or in Hong Kong. Under current BVI and Hong Kong
laws, dividends and capital gains arising from the investment are not subject
to income taxes. No withholding tax is imposed on payments of dividends.
F-24
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
15.INCOME TAXES (Continued)
Companies comprising the Tat and Li Groups and LSSL are subject to income
taxes on an entity basis on income arising in or derived from the tax
jurisdiction in which each of the companies is domiciled and operates.
Companies with income arising in or derived from Hong Kong are subject to
Hong Kong Profits Tax at a rate of 16.5% for 1998 and 16% for 1999 and 2000.
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
March 31,
----------------------------
1997 1998 1999 2000 2000
---- ---- ----- ----- -----
HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
<CAPTION>
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current tax........................................ -- -- 1,200 893 115
Deferred tax....................................... -- -- -- -- --
--- --- ----- ----- -----
Income tax expense................................. -- -- 1,200 893 115
=== === ===== ===== =====
</TABLE>
Reconciliation to the expected statutory tax rate in Hong Kong is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- ----
% % %
<S> <C> <C> <C>
Statutory rate.............................................. 16.5 16.5 16.0
Non-taxable income.......................................... -- (24.4) (8.8)
Tax effect on net operating loss............................ (16.5) 7.6 (0.9)
Effect of temporary differences............................. -- -- (0.6)
Effect of permanent differences............................. -- 0.3 0.9
Others...................................................... -- -- (0.1)
----- ----- ----
Effective tax rate.......................................... -- -- 6.5
===== ===== ====
</TABLE>
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.
F-25
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
16.REPORT ON SEGMENT INFORMATION (Continued)
Segment information for the years 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
Design and Contracting High-Technology Products
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$
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Segment revenue......... 177,066 105,334 177,729 31,613 66,161 10,374 208,679 171,495 188,103 24,271
Segment profits......... 9,932 9,928 19,322 2,862 7,099 2,718 12,794 17,027 22,040 2,844
Included in segment
profits:
Depreciation and
amortization.......... (170) (617) (619) (60) (32) (165) (230) (649) (784) (101)
Interest income........ 122 104 127 -- 88 1 122 192 128 17
Interest expense....... (688) (810) (1,297) (619) (180) (219) (1,307) (990) (1,516) (196)
Segment assets.......... 71,809 67,509 111,912 5,559 10,853 76,211 77,368 78,362 188,123 24,274
======= ======= ======= ====== ====== ====== ======= ======= ======= ======
</TABLE>
Segment information for the years 1998, 1999 and 2000 relating to the Group's
operations by geographic areas are as follows:
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------
1998 1999 2000 2000
------- ------- ------- ------
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C>
Segment revenue
Hong Kong..................................... 84,468 94,500 104,441 13,476
PRC........................................... 124,211 76,995 83,662 10,795
------- ------- ------- ------
208,679 171,495 188,103 24,271
======= ======= ======= ======
</TABLE>
All long-lived assets are situated in Hong Kong for the years 1998, 1999, and
2000.
17.FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. The Group currently does not hold or issue derivative financial
instruments in the normal course of business. Accordingly, adoption of SFAS No.
133 is not expected to affect the Group's financial statements.
18.CONTINGENCIES
(a) The Tat Group received on January 5, 1999 a claim for liquidated
damages amounting to HK$21,832 in respect of the delay in completion of
a PRC contract. No formal court action has been filed in connection
with this claim, nor has the Tat Group received any further notice from
the claimant. Work on the contract has been completed and the developer
took possession of the property. The delay in completion was caused by
changes in job specifications, which under normal practice, the Tat
Group would be given an extension of time for completion. Accordingly,
management is of the opinion that the Tat Group will not suffer any
losses in respect of this claim. The Tat Group's
F-26
<PAGE>
QUINTALINUX LIMITED
(FORMERLY KNOWN AS QUINTA DEVELOPMENT LIMITED)
Notes to and Forming Part of the Consolidated Financial Statements--
(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
18CONTINGENCIES (Continued)
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.
(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
On November 19, 1999, the Company completed its acquisition of the Tat and
Li Groups by issuing in aggregate 7,800,000 shares of common stock to Mr. Chu
and Mr. Li.
On November 24, 1999, the Company completed its acquisition of 72.5% equity
interest in LSSL, a company incorporated in Hong Kong by issuing on aggregate
180,000 shares of common stock in exchange.
On December 28, 1999, the Company acquired 400,000 shares in Intermost
Corporation, a company listed on NASDAQ OTC Bulletin Board from Mr. Li for a
consideration of US$3.75 per share.
On February 3, 2000, the Board of Directors approved the name of the Company
be changed to Quintalinux Limited. The name was approved by the Registrar of
Companies of the British Virgin Islands on February 17, 2000.
On March 6, 2000, the Tat Group acquired a class A residential property and
a commercial property located in Hong Kong from Mr. Chu, valued at in
aggregate HK$27,000.
F-27
<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, 1998 and 1999 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, 1999.
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, 1998 and 1999, and the combined results of its
operations and cash flows for each of the years in the three year period ended
March 31, 1999, in conformity with accounting principles generally accepted in
the United States of America.
Moores Rowland
Chartered Accountants
Certified Public Accountants, Hong Kong
Dated: June 23, 1999
F-28
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
COMBINED STATEMENTS OF OPERATIONS
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------
1997 1998 1999 2000 2000
-------- -------- -------- -------- -------
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Contract revenue............. 173,281 208,679 171,495 171,197 22,090
Contract costs............... (154,696) (167,557) (127,905) (131,049) (16,910)
-------- -------- -------- -------- -------
Gross profit................. 18,585 41,122 43,590 40,148 5,180
-------- -------- -------- -------- -------
Expenses
Selling, general and
administrative.............. (19,757) (27,112) (23,997) (20,520) (2,648)
Depreciation................. (266) (230) (649) (548) (71)
-------- -------- -------- -------- -------
(20,023) (27,342) (24,646) (21,068) (2,719)
-------- -------- -------- -------- -------
Other operating income
Management fee income........ 60 84 57 -- --
-------- -------- -------- -------- -------
Operating income (loss)...... (1,378) 13,864 19,001 19,080 2,461
-------- -------- -------- -------- -------
Interest income.............. 307 122 192 88 11
Interest expense............. (975) (1,307) (990) (1,012) (130)
-------- -------- -------- -------- -------
(668) (1,185) (798) (924) (119)
-------- -------- -------- -------- -------
Other income
Exchange gain................ 44 108 -- 57 7
Debt forgiveness from
suppliers................... -- -- 144 3 1
Others....................... 173 7 33 108 14
-------- -------- -------- -------- -------
217 115 177 168 22
-------- -------- -------- -------- -------
Income (loss) before income
taxes....................... (1,829) 12,794 18,380 18,324 2,364
Income tax expense........... 2 -- (1,200) -- --
-------- -------- -------- -------- -------
Net income (loss)............ (1,827) 12,794 17,180 18,324 2,364
======== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-29
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
COMBINED BALANCE SHEETS
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
March 31,
----------------------------
Notes 1998 1999 2000 2000
----- ------ ------ ------- ------
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................. 806 436 4,976 642
Restricted cash............................ 7 1,774 1,819 8,850 1,142
Accounts receivable, net of allowance for
doubtful accounts HK$5,762 in 1998,
HK$6,006 in 1999 and HK$6,015 in 2000..... 11d 19,297 15,074 61,289 7,908
Due from customers for contract work....... 4 14,887 16,802 24,184 3,121
Retention money receivable................. 4,049 2,914 5,169 667
Inventories................................ 883 875 1,428 184
Due from related parties................... 11 31,710 33,245 -- --
Deposit outward............................ 1,074 710 581 75
Prepayments and other current assets....... 2,027 2,382 720 93
------ ------ ------- ------
Total current assets................... 76,507 74,257 107,197 13,832
Property, plant and equipment, net......... 5 860 2,559 30,240 3,902
------ ------ ------- ------
Total assets........................... 77,367 76,816 137,437 17,734
====== ====== ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft............................. 7 8,717 9,900 1,318 170
Bank loans, current........................ 6 -- -- 3,400 439
Accounts and bills payable--trade.......... 51,778 38,109 61,509 7,937
Capital lease obligations, current......... 8 85 40 21 3
Accrued expenses and other payable......... 2,974 1,236 440 57
Contract work deposit from customers....... 4 6,278 1,587 1,454 188
Retention money payable.................... 60 171 306 39
Due to related parties..................... 11 249 230 21,384 2,759
Income taxes payable....................... -- 1,120 579 75
------ ------ ------- ------
Total current liabilities.............. 70,141 52,393 90,411 11,667
Capital lease obligations, non-current..... 8 21 38 17 2
Bank loans, non-current.................... 6 -- -- 4,300 555
------ ------ ------- ------
Total liabilities...................... 70,162 52,431 94,728 12,224
------ ------ ------- ------
Commitments and contingencies.............. 9, 12
Stockholders' equity
Common stock............................... 1, 10 3,000 3,000 3,000 387
Retained earnings.......................... 4,205 21,385 39,709 5,123
------ ------ ------- ------
Total stockholders' equity............. 7,205 24,385 42,709 5,510
------ ------ ------- ------
Total liabilities and stockholders'
equity................................ 77,367 76,816 137,437 17,734
====== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-30
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Common stock*
---------------- Retained
Number of earnings
shares Amount (deficit) Total
--------- ------ --------- -------------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Balance as of April 1, 1996......... 3,000,000 3,000 (6,762) (3,762) (485)
Net loss.......................... -- -- (1,827) (1,827) (236)
--------- ----- ------ ------ -----
Balance as of March 31, 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 (unaudited)............ -- -- 18,324 18,324 2,364
--------- ----- ------ ------ -----
Balance as of March 31, 2000
(unaudited)........................ 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-31
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------------------
1997 1998 1999 2000 2000
------- ------- ------- ------- ------
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities
Net income (loss)................. (1,827) 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................... 266 230 649 548 71
Allowance for doubtful accounts.. -- 5,762 244 9 1
(Gain) loss on disposal of
property, plant and equipment... (13) 2 369 18 3
Changes in operating assets and
liabilities:
Accounts receivable.............. (10,287) (1,013) 3,979 (46,224) (5,964)
Due from customers for contract
work............................ 19,150 (8,399) (1,915) (7,382) (953)
Retention money receivable....... (3,517) 194 1,135 (2,255) (291)
Inventories...................... 1,536 788 8 (553) (71)
Due from related parties......... 458 (17,170) (1,535) 7,747 1,000
Deposit outward.................. 17,380 919 364 129 17
Prepayments and other current
assets.......................... (2,679) 1,647 (355) 1,662 214
Accounts and bills payable--
trade........................... 6,669 14,641 (13,669) 23,400 3,019
Accrued expenses and other
payable......................... 723 2,067 (1,738) (796) (103)
Contract work deposit from
customers....................... (38,268) (6,796) (4,691) (133) (17)
Retention money payable.......... (41) 60 111 135 17
Due to related parties........... 5,395 (6,954) (19) 19,652 2,535
Taxation......................... 248 -- 1,120 (541) (70)
------- ------- ------- ------- ------
Net cash provided by (used in)
operating activities............ (4,807) (1,228) 1,237 13,740 1,772
------- ------- ------- ------- ------
Cash flows from investing
activities
Purchase of property, plant and
equipment....................... (91) (112) (2,705) (1,247) (161)
Proceeds on disposal of property,
plant and equipment............. 2 2 65 -- --
------- ------- ------- ------- ------
Net cash used in investing
activities...................... (89) (110) (2,640) (1,247) (161)
------- ------- ------- ------- ------
Cash flows from financing
activities
Repayment of capital lease
obligations..................... (53) (96) (105) (40) (5)
Restricted cash.................. 1,088 (51) (45) (7,031) (907)
Bank overdraft................... 2,895 (554) 1,183 (8,582) (1,107)
Loan acquired.................... -- -- -- 7,700 994
------- ------- ------- ------- ------
Net cash provided by (used in)
financing activities............ 3,930 (701) 1,033 (7,953) (1,025)
------- ------- ------- ------- ------
Net (decrease) increase in cash
and cash equivalents............. (966) (2,039) (370) 4,540 586
Cash and cash equivalents, as of
beginning of period.............. 3,811 2,845 806 436 56
------- ------- ------- ------- ------
Cash and cash equivalents, as of
end of period.................... 2,845 806 436 4,976 642
======= ======= ======= ======= ======
Supplemental disclosure of cash
flow information
Cash paid for interest........... 975 1,307 990 1,012 130
======= ======= ======= ======= ======
Cash paid for taxes.............. 68 -- 80 541 70
======= ======= ======= ======= ======
Non-cash transaction
Purchase of equipment under
capital lease.................... 149 -- 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-32
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(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 value 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> <C>
Interact Contracting January 21, 1992 Hong Kong 1,000,000 1,000 100% constructing
Company Limited engineering,
decoration and
designs works
Interact (China) Design December 20, 1994 Hong Kong 1,000,000 1,000 100% general contracting
& Contracting Company and the provision
Limited of decoration work
in PRC
Uni-Zone Holdings May 19, 1994 Hong Kong 1,000,000 1,000 100% design, supply and
Limited 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.
(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.
F-33
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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:
<TABLE>
<S> <C>
Leasehold land and buildings...... over the remaining term of relevant lease
Furniture and fixtures............ 20%
Motor vehicles.................... 30%
Plant and machinery............... 20%
Others and computer equipment..... 20%
</TABLE>
Assets held under capital lease contracts are depreciated over their expected
useful lives on the same basis as owned assets.
(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.
F-34
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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.
(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.
F-35
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
During the year ended March 31, 1999, 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.
(p) Unaudited financial statements
The unaudited financial information included herein for year ended March 31,
2000 have been prepared in accordance with accounting principles generally
accepted in the United States of America. In the opinion of the Company, these
unaudited financial statements reflect all adjustments necessary, consisting of
normal recurring adjustments, for a fair presentation of such data on a basis
consistent with that of the audited data presented herein.
3. OPERATING RISKS
(a) Concentration of major customers and suppliers
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------
1997 1998 1999 2000 2000
------ ------- ------- ------- ------
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Major customers with revenues
of more than 10% of contract
revenue
Sales to major customers....... 84,737 128,566 168,104 111,365 14,370
Percentage of contract
revenue....................... 50% 62% 98% 65% 65%
Number......................... 3 3 2 2 2
Major suppliers with purchases
of more than 10% of contract
cost
Purchases from major
suppliers..................... 23,384 35,474 99,643 34,344 4,431
Percentage of contract cost.... 15% 21% 78% 26% 26%
Number......................... 2 2 2 2 2
</TABLE>
F-36
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
3. OPERATING RISKS (Continued)
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.
(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,
------------------------------------------
1998 1999 2000 2000
-------- -------- -------- -------
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Accumulated contract costs
incurred....................... 205,856 151,633 260,767 33,647
Add: Attributable profits....... 55,350 45,555 54,643 7,051
-------- -------- -------- -------
261,206 197,188 315,410 40,698
Less: Progress payments
received/receivable............ (252,597) (181,973) (292,680) (37,765)
-------- -------- -------- -------
8,609 15,215 22,730 2,933
======== ======== ======== =======
Amounts disclosed as:
Due from customers for contract
work........................... 14,887 16,802 24,184 3,121
Contract work deposit from
customers...................... (6,278) (1,587) (1,454) (188)
-------- -------- -------- -------
8,609 15,215 22,730 2,933
======== ======== ======== =======
</TABLE>
F-37
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
5. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
March 31,
---------------------------------
1998 1999 2000 2000
----- ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Leasehold land and buildings............... -- -- 28,075 3,623
Furniture and fixtures..................... 394 2,545 2,653 342
Motor vehicles............................. 230 230 230 30
Plant and machinery........................ 149 -- -- --
Others and computer equipment.............. 884 886 911 118
----- ------ ------ -----
1,657 3,661 31,869 4,113
Accumulated depreciation................... (797) (1,102) (1,629) (211)
----- ------ ------ -----
860 2,559 30,240 3,902
===== ====== ====== =====
</TABLE>
6. BANK LOANS
<TABLE>
<CAPTION>
March 31,
---------------------------
1998 1999 2000 2000
---- ---- ------ ----
HK$ HK$ HK$ US$
---- ---- ------ ----
(Unaudited)
<S> <C> <C> <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
=== === ====== ====
</TABLE>
Expected maturities of bank loans are as follows:
<TABLE>
<CAPTION>
March 31,
2000
-----------
HK$ US$
(Unaudited)
<S> <C> <C>
2001............................................................. 3,400 439
2002............................................................. 4,300 555
------ ----
Total............................................................ 7,700 994
====== ====
</TABLE>
F-38
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
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,
--------------------------
1998 1999 2000 2000
------ ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C>
Facilities granted
Letter of credit and import loans............. 17,800 17,800 18,000 2,323
Overdrafts.................................... 9,500 10,200 13,000 1,677
====== ====== ====== =====
Utilized
Letter of credit and import loans............. 7,996 9,289 16,965 2,189
Overdrafts.................................... 8,717 9,900 1,318 170
====== ====== ====== =====
Unutilized facilities
Letter of credit and import loans............. 9,804 8,511 1,035 134
Overdrafts.................................... 783 300 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 (unaudited), Tat Group
was not in violation of the key financial covenant.
F-39
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
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$117 as of March 31, 1999. The following is a
schedule of future minimum lease payments under capital lease as of March 31,
1999 and 2000.
<TABLE>
<CAPTION>
March 31,
-------------------
1999 2000 2000
---- ----- -----
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
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$
(Unaudited)
<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-40
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
11. RELATED PARTY TRANSACTIONS
a.Name and relationship of related parties
<TABLE>
<CAPTION>
Existing relationships
with the Tat Group
------------------------
<C> <S>
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 ("IGDCCL") -- ditto --
Quintalinux Limited ("QLL") Common director and
major stockholder of Tat
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 ("GPE") -- ditto --
</TABLE>
b. Summary of related party transactions
<TABLE>
<CAPTION>
March 31,
------------------------------
1998 1999 2000 2000
------ ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Due from related parties (Note (i))
Mr. Chu....................................... 30,111 31,245 -- --
QLL........................................... -- 8 -- --
BWDCCL........................................ 1,385 1,887 -- --
PPC........................................... 214 104 -- --
TTHKIL........................................ -- 1 -- --
------ ------ ------ -----
31,710 33,245 -- --
====== ====== ====== =====
Due to related parties (Note (ii))
QLL........................................... -- -- 7,586 979
GIDAL......................................... 249 230 -- --
PCCL.......................................... -- -- 9,884 1,275
GPE........................................... -- -- 2,412 311
Mr. Chu....................................... -- -- 1,502 194
------ ------ ------ -----
249 230 21,384 2,759
====== ====== ====== =====
</TABLE>
F-41
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions (Continued)
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------
1997 1998 1999 2000 2000
------ ----- ----- ------ -----
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
General expenses (Note (iii))
PPC........................................... -- 147 242 -- --
====== ===== ===== ====== =====
Rental expenses (Note (iv))
BWDCCL........................................ 1,365 600 150 -- --
GIDAL......................................... 367 -- 1,114 960 124
------ ----- ----- ------ -----
1,732 600 1,264 960 124
====== ===== ===== ====== =====
Management fee income (Note (v))
PPC........................................... 60 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........................................ 19,910 -- -- -- --
====== ===== ===== ====== =====
</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.
(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.
F-42
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions (Continued)
(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$5,416 as of March 31,
1999 and 2000, due from a debtor which has been outstanding for approximately
two and a half years and three and a half years respectively. The director of
the Tat Group is, however, confident that this debt would be recovered in full
eventually. Accordingly, there was no provision made against this amount in the
combined statements of operations. The director, who is also the stockholder,
has further given an undertaking to the Tat Group that he would make good of
any losses suffered by the Tat Group had such debtor been default in repayment.
Any such payments by the stockholder will be recorded as expenses by the Tat
Group with the corresponding credit to the equity.
12. OPERATING LEASES
As of March 31, 1999 and 2000, the Tat Group had commitments under non-
cancelable operating lease payments in respect of land and buildings as
follows:
<TABLE>
<CAPTION>
March 31,
--------------
1999 2000 2000
---- ---- ----
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
2000.................................................... 276 -- --
2001.................................................... 42 982 127
--- --- ---
Total................................................... 318 982 127
=== === ===
</TABLE>
Total lease expense for the years ended March 31, 1997, 1998, 1999 and 2000
(unaudited) was HK$2,738, 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.
F-43
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
13. PENSION COSTS (Continued)
The pension expense for the years ended March 31, 1997, 1998, 1999 and 2000
(unaudited) was HK$247, HK$350, HK$80 and HK$120 respectively.
14. INCOME TAXES
Companies comprising the Tat Group are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which each
of the companies is domiciled and operates.
Companies with income arising in or derived from Hong Kong are subject to
Hong Kong Profits Tax at a rate of 16.5% for 1997 and 1998 and 16% for 1999 and
2000.
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------
1997 1998 1999 2000 2000
---- ---- ----- ----- -----
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current tax..................................... (2) -- 1,200 -- --
Deferred tax.................................... -- -- -- -- --
--- --- ----- ----- -----
Income tax expense.............................. (2) -- 1,200 -- --
=== === ===== ===== =====
</TABLE>
Reconciliation to the expected statutory tax rate in Hong Kong is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- ----
<S> <C> <C> <C>
% % %
Statutory rate........................................... 16.5 16.5 16.0
Non-taxable income....................................... 51.1 (24.4) (8.8)
Tax effect on net operating loss......................... (67.6) 7.6 (0.9)
Effect of temporary differences.......................... -- -- (0.6)
Effect of permanent differences.......................... -- 0.3 0.9
Others................................................... (0.1) -- (0.1)
----- ----- ----
Effective tax rate....................................... (0.1) -- 6.5
===== ===== ====
</TABLE>
F-44
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
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 1997, 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
Design and Contracting Section High-Technology Products Section Total
-------------------------------------- ----------------------------------- --------------------------
Years ended March, 31
-----------------------------------------------------------------------------------------------------
1997 1998 1999 2000 1997 1998 1999 2000 1997 1998 1999
------- ------- ------- ----------- ------ ------ ------ ----------- ------- ------- -------
HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Segment revenue... 159,707 177,066 105,334 166,576 13,574 31,613 66,161 4,621 173,281 208,679 171,495
Segment profits
(losses).......... (280) 9,932 10,081 19,193 (1,547) 2,862 7,099 (869) (1,827) 12,794 17,180
Included in
segment profits:
Depreciation.... (195) (170) (617) (522) (71) (60) (32) (26) (266) (230) (649)
Interest
income.......... 307 122 104 88 -- -- 88 -- 307 122 192
Interest
expense......... (638) (688) (810) (1,009) (337) (619) (180) (3) (975) (1,307) (990)
Segment assets.... 55,391 71,809 65,963 99,968 6,816 5,558 10,853 37,469 62,207 77,367 76,816
======= ======= ======= ======= ====== ====== ====== ====== ======= ======= =======
<CAPTION>
2000 2000
-------- -------
HK$ US$
(Unaudited)
<S> <C> <C>
Segment revenue... 171,197 22,090
Segment profits
(losses).......... 18,324 2,364
Included in
segment profits:
Depreciation.... (548) (71)
Interest
income.......... 88 11
Interest
expense......... (1,012) (130)
Segment assets.... 137,437 17,734
======== =======
</TABLE>
F-45
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
15. REPORT ON SEGMENT INFORMATION (Continued)
Segment information for the years 1997, 1998, 1999 and 2000 relating to the
Tat Group's operations by geographic areas are as follows:
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------
1997 1998 1999 2000 2000
------- ------- ------- ------- ------
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Segment revenue
Hong Kong........................... 117,920 84,468 94,500 87,535 11,295
PRC................................. 55,361 124,211 76,995 83,662 10,795
------- ------- ------- ------- ------
173,281 208,679 171,495 171,197 22,090
======= ======= ======= ======= ======
</TABLE>
All long-lived assets are situated in Hong Kong for the years 1997, 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.
(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-
F-46
<PAGE>
INTERACT CONTRACTING COMPANY LIMITED,
INTERACT (CHINA) DESIGN & CONTRACTING COMPANY LIMITED AND
UNI-ZONE HOLDINGS LIMITED ("TAT GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
17. CONTINGENCIES (Continued)
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.
18. SUBSEQUENT EVENT
On November 19, 1999, the Tat Group effected a reorganization pursuant to
which Mr. Chu transferred all his equity interest in each of the companies
comprising the Tat Group to Quintalinux Limited in exchange for 4,815,000
shares.
On March 6, 2000, the Tat Group acquired a class A residential property and a
commercial property located in Hong Kong from Mr. Chu valued at in aggregate
HK$27,000.
F-47
<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 Limited hereinafter collectively referred to as the "Li
Group" as of March 31, 1998 and 1999 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, 1999. 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, 1998 and 1999, and the combined results of its
operations and cash flows for each of the years in the three year period ended
March 31, 1999, in conformity with accounting principles generally accepted in
the United States of America.
Moores Rowland
Chartered Accountants
Certified Public Accountants, Hong Kong
Dated: June 23, 1999
F-48
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES,
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
COMBINED STATEMENTS OF OPERATIONS
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------
1997 1998 1999 2000 2000
------- -------- ------- ------- ------
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Contract revenue................. 33,331 59,147 44,064 69,363 8,950
Contract costs................... (19,944) (47,062) (32,799) (55,803) (7,200)
------- -------- ------- ------- ------
Gross profit..................... 13,387 12,085 11,265 13,560 1,750
------- -------- ------- ------- ------
Expenses
Selling, general and
administrative.................. (11,154) (13,335) (9,390) (6,804) (878)
Depreciation..................... (550) (621) (520) (418) (54)
------- -------- ------- ------- ------
(11,704) (13,956) (9,910) (7,222) (932)
------- -------- ------- ------- ------
Other operating income
Rental income.................... 610 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
------- -------- ------- ------- ------
610 2,189 1,059 1,247 161
------- -------- ------- ------- ------
Operating income................. 2,293 318 2,414 7,585 979
------- -------- ------- ------- ------
Interest income.................. 255 221 145 99 13
Interest expense................. (851) (1,400) (2,058) (1,318) (170)
------- -------- ------- ------- ------
(596) (1,179) (1,913) (1,219) (157)
------- -------- ------- ------- ------
Other income
Gain on disposal of property,
plant and equipment............. 60 53 10 -- --
Debt forgiveness from suppliers.. -- 384 -- -- --
Others........................... 366 140 267 274 35
------- -------- ------- ------- ------
426 577 277 274 35
------- -------- ------- ------- ------
Income (loss) before income
taxes........................... 2,123 (284) 778 6,640 857
Income tax expense............... (152) (261) (350) (893) (115)
------- -------- ------- ------- ------
Net income (loss)................ 1,971 (545) 428 5,747 742
======= ======== ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-49
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES,
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
COMBINED BALANCE SHEETS
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
March 31,
--------------------------
Notes 1998 1999 2000 2000
----- ------ ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................... 78 40 197 25
Restricted cash............................... 7 2,300 2,300 2,300 297
Accounts receivable, net of allowance for
doubtful accounts HK$304 in 1998 and HK$1,034
in 1999 and 2000............................. 14,848 10,048 14,682 1,894
Due from customers for contract work.......... 4 677 364 35 5
Retention money receivable.................... 1,329 729 647 84
Inventories................................... 1,755 1,356 590 76
Due from related parties...................... 11 12,775 20,426 35,037 4,521
Prepaid taxes................................. 533 53 50 6
Prepayments and deposits paid................. 1,056 883 2,452 316
------ ------ ------ -----
Total current assets........................ 35,351 36,199 55,990 7,224
Property, plant and equipment, net............ 5 9,841 9,471 9,079 1,172
------ ------ ------ -----
Total assets................................ 45,192 45,670 65,069 8,396
====== ====== ====== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft................................ 7 8,694 8,728 8,271 1,067
Bank loans, current........................... 6 240 282 797 103
Accounts and bills payable--trade............. 14,487 13,428 28,958 3,736
Capital lease obligations, current............ 8 152 80 54 7
Accrued expenses and other payable............ 4,294 5,424 4,897 632
Contract work deposit from customers.......... 4 1,130 1,483 365 47
Other deposits received....................... 235 232 176 23
Due to related parties........................ 11 950 698 -- --
Income taxes payable.......................... 245 504 981 127
------ ------ ------ -----
Total current liabilities................... 30,427 30,859 44,499 5,742
Bank loans, non-current....................... 6 1,960 1,658 1,730 223
Capital lease obligations, non-current........ 8 140 60 -- --
Deferred taxation............................. 37 37 37 5
------ ------ ------ -----
Total liabilities........................... 32,564 32,614 46,266 5,970
------ ------ ------ -----
Commitments and contingencies................. 9,12
Stockholders' equity
Common stock.................................. 1,10 311 311 311 40
Retained earnings............................. 12,317 12,745 18,492 2,386
------ ------ ------ -----
Total stockholders' equity.................. 12,628 13,056 18,803 2,426
------ ------ ------ -----
Total liabilities and stockholders' equity.. 45,192 45,670 65,069 8,396
====== ====== ====== =====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES,
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Common stock*
--------------
Number
of Retained
Shares Amount earnings Total
------- ------ -------- -------------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C>
Balance as of April 1, 1996............ 311,000 311 10,891 11,202 1,445
Net income........................... -- -- 1,971 1,971 254
------- --- ------ ------ -----
Balance as of March 31, 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 (Unaudited)............... -- -- 5,747 5,747 742
------- --- ------ ------ -----
Balance as of March 31, 2000
(Unaudited)........................... 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-51
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES,
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------
1997 1998 1999 2000 2000
------ ------ ------ ------- ------
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss).................... 1,971 (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.......................... 550 621 520 418 54
Allowance for doubtful accounts..... -- 304 730 -- --
Loss (Gain) on disposal of property,
plant and equipment................ (60) (53) (10) 26 3
Changes in operating assets and
liabilities:
Accounts receivable................. 3,545 (5,814) 4,070 (4,634) (597)
Due from customers for contract
work............................... -- (677) 313 329 42
Retention money receivable.......... (1,142) 223 600 82 11
Inventories......................... 166 43 399 766 99
Due from related parties............ (2,192) 1,015 (7,651) (14,611) (1,886)
Prepayments and deposits paid....... (615) 1,000 173 (1,569) (202)
Accounts and bills payable--trade... 368 4,478 (1,059) 15,530 2,003
Accrued expenses and other payable.. 1,984 1,606 1,130 (527) (68)
Contract work deposit from customers
and other deposits received........ (589) (152) 350 (1,174) (152)
Due to related parties.............. (3,056) (3,808) (252) (698) (90)
Taxation............................ (35) 91 739 480 62
------ ------ ------ ------- ------
Net cash provided by (used in)
operating activities................ 895 (1,668) 480 165 21
------ ------ ------ ------- ------
Cash flows from investing activities
Purchase of property, plant and
equipment........................... (633) (256) (160) (52) (7)
Proceeds on disposal of property,
plant and equipment................. 1,200 84 20 -- --
------ ------ ------ ------- ------
Net cash provided by (used in)
investing activities................ 567 (172) (140) (52) (7)
------ ------ ------ ------- ------
Cash flows from financing activities
Loan acquired........................ -- -- -- 1,000 129
Repayment of capital lease
obligations......................... (35) (155) (152) (86) (11)
Repayment of amounts borrowed........ (339) (115) (260) (413) (53)
Bank overdraft....................... (1,417) 2,022 34 (457) (59)
------ ------ ------ ------- ------
Net cash provided by (used in)
financing activities................ (1,791) 1,752 (378) 44 6
------ ------ ------ ------- ------
Net (decrease) increase in cash and
cash equivalents..................... (329) (88) (38) 157 20
Cash and cash equivalents, as of
beginning of period.................. 495 166 78 40 5
------ ------ ------ ------- ------
Cash and cash equivalents, as of end
of period............................ 166 78 40 197 25
====== ====== ====== ======= ======
Supplemental disclosure of cash flow
information
Cash paid for interest............... 851 1,400 2,058 1,318 170
====== ====== ====== ======= ======
Cash paid for taxes.................. 200 170 384 413 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-52
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES,
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(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
Name of Date of Place of HK$1 each Equity interest Principal
company incorporation incorporation outstanding Amount owned by Mr. Li activities
------- ------------- ------------- ----------- ------ --------------- --------------
HK$ Direct Indirect
<S> <C> <C> <C> <C> <C> <C> <C>
Pado March 11, Hong Kong 1,000 1 100% investment
(Holdings) 1993 holding
Limited
Pado December Hong Kong 3,000* 300* 100% renovation
Contracting 16, 1983 (par work
Company value at
Limited HK$100)
Good Prominent October Hong Kong 200,000* 200* 100% trading and
Engineering 1, 1992 installation
Company of lighting
Limited materials
Good Prominent April 18, Hong Kong 10,000 10 100% construction
Technology 1990 and
Company installation
Limited of light
emitting diode
Good Prominent December Hong Kong 300,000 300 100% trading of
Trading 28, 1987 building
Limited 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-53
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
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:
<TABLE>
<S> <C> <C>
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%
</TABLE>
Assets held under capital lease contracts are depreciated over their expected
useful lives on the same basis as owned assets.
F-54
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
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-55
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
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-56
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(p) Unaudited financial statements
The unaudited financial information included herein for the year ended March
31, 2000 have been prepared in accordance with accounting principles generally
accepted in the United States of America. In the opinion of the Company, these
unaudited financial statements reflect all adjustments necessary, consisting of
normal recurring adjustments, for a fair presentation of such data on a basis
consistent with that of the audited data presented herein.
3. OPERATING RISKS
(a) Concentration of major customers and suppliers
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------
1997 1998 1999 2000 2000
------ ------ ------ ------ -----
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Major customers with revenues of
more than 10% of contract revenue
Sales to major customers......... 3,493 28,519 16,821 40,067 5,170
Percentage of contract revenue... 11% 48% 38% 58% 58%
Number........................... 1 3 2 2 2
Major suppliers with purchases of
more than 10% of contract cost
Purchases from major suppliers... 15,064 13,986 12,435 19,706 2,543
Percentage of contract cost...... 76% 30% 38% 35% 35%
Number........................... 3 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
F-57
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
3. OPERATING RISKS (Continued)
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.
(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,
-----------------------------
1998 1999 2000 2000
------ ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C>
Accumulated contract costs incurred......... 4,095 3,349 5,075 655
Add: Attributable profits / (foreseeable
losses).................................... (891) 2,435 1,603 207
------ ------ ------ -----
3,204 5,784 6,678 862
Less: Progress payments received /
receivable................................. (3,657) (6,903) (7,008) (904)
------ ------ ------ -----
(453) (1,119) (330) (42)
====== ====== ====== =====
Amounts disclosed as:
Due from customers for contract work........ 677 364 35 5
Contract work deposit from customers........ (1,130) (1,483) (365) (47)
------ ------ ------ -----
(453) (1,119) (330) (42)
====== ====== ====== =====
5. PROPERTY, PLANT AND EQUIPMENT, NET
<CAPTION>
March 31,
-----------------------------
1998 1999 2000 2000
------ ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C>
Yacht....................................... 1,301 1,301 1,301 168
Leasehold land and buildings................ 8,452 8,452 8,452 1,090
Motor vehicles.............................. 712 667 515 66
Plant and machinery......................... 234 234 234 30
Furniture and fixtures...................... 1,869 1,856 1,856 240
Others and computer equipment............... 752 926 974 126
------ ------ ------ -----
13,320 13,436 13,332 1,720
Accumulated depreciation.................... (3,479) (3,965) (4,253) (548)
------ ------ ------ -----
9,841 9,471 9,079 1,172
====== ====== ====== =====
</TABLE>
F-58
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
6. BANK LOANS
<TABLE>
<CAPTION>
March 31,
---------------------------
1998 1999 2000 2000
----- ----- ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <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.................. 2,200 1,940 2,527 326
Less: Amount due within one year included
under current liabilities............... (240) (282) (797) (103)
----- ----- ------ -----
1,960 1,658 1,730 223
===== ===== ====== =====
</TABLE>
Expected maturities of bank loans are as follows:
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000 2000
----- ------ -----
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
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
===== ====== ====
</TABLE>
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, 1998, 1999 and
2000 as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------
1998 1999 2000 2000
----- ----- ----- -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C>
Facilities granted
Letter of credit and import loans.................... 5,800 5,200 4,600 594
Overdrafts*.......................................... 8,500 8,500 8,500 1,097
===== ===== ===== =====
Utilized
Letters of credit and import loans................... 4,251 3,696 3,792 489
Overdrafts*.......................................... 8,694 8,728 8,271 1,067
===== ===== ===== =====
Unutilized facilities
Letters of credit and import loans................... 1,549 1,504 808 105
Overdrafts........................................... -- -- 229 30
===== ===== ===== =====
</TABLE>
F-59
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
7. BANKING FACILITIES (Continued)
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$
(Unaudited)
<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 -- --
=== ===== =====
Expected maturities of capital lease are as follows:
<CAPTION>
March 31,
-------------------
1999 2000 2000
---- ----- -----
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
2000................................................... 80 -- --
2001................................................... 60 54 7
--- ----- -----
140 54 7
=== ===== =====
</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 Li Group operates. The directors do not anticipate
material losses to crystallize.
F-60
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
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.
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 -- ditto --
("FIIL")
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 A company owned by Mr. Chu, major
Company Limited ("ICDCL") stockholder of QLL. Became a fellow
subsidiary following the reorganization
effected on November 19, 1999
Interact Contracting Company Limited -- ditto --
("ICCL")
</TABLE>
F-61
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Summary of related party transactions
<TABLE>
<CAPTION>
March 31,
--------------------------
1998 1999 2000 2000
------ ------ ------ -----
HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C>
Due from related parties (Note (i))
Mr. Li............................................ -- 5,478 14,480 1,868
QLL............................................... -- 186 8,177 1,055
PCDCL............................................. 10,844 12,989 -- --
JCL............................................... 441 454 -- --
FIIL.............................................. 12 14 -- --
GPFSCL............................................ 1,014 1,281 -- --
CCTCL............................................. -- 5 -- --
LSSL.............................................. -- -- 84 11
OLHL.............................................. -- 19 -- --
GPMACL............................................ 464 -- -- --
ICDCL............................................. -- -- 2,412 311
ICCL.............................................. -- -- 9,884 1,276
------ ------ ------ -----
12,775 20,426 35,037 4,521
====== ====== ====== =====
Due to related parties (Note (ii))
Mr. Li............................................ 950 -- -- --
GPMACL............................................ -- 698 -- --
------ ------ ------ -----
950 698 -- --
====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------
1997 1998 1999 2000 2000
---- ----- ---- ------ -----
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Rental income (Note (iii))
GPFSCL.......................................... 315 300 300 140 18
GPMACL.......................................... -- 26 -- -- --
--- ----- --- ------ -----
315 326 300 140 18
=== ===== === ====== =====
Management fee income (Note (iv))
GPMACL.......................................... -- 144 144 144 19
=== ===== === ====== =====
Interest income (Note (v))
GPFSCL.......................................... 103 70 -- -- --
=== ===== === ====== =====
Subcontracting cost (Note (vi))
PCDCL........................................... -- 7,984 -- -- --
=== ===== === ====== =====
Contract revenue (Note (vii))
PCDCL........................................... 87 -- -- -- --
GPFSCL.......................................... 65 -- -- -- --
ICDCL........................................... -- -- -- 20,444 2,638
--- ----- --- ------ -----
152 -- -- 20,444 2,638
=== ===== === ====== =====
</TABLE>
F-62
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
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$14,480. This amount was fully eliminated in QLL's consolidated financial
statements. For details please refer to page F-23.
12. OPERATING LEASES
As of March 31, 1999 and 2000 the Li Group had commitments under non-
cancelable operating lease payments in respect of land and buildings as
follows:
<TABLE>
<CAPTION>
March 31,
-----------------
1999 2000 2000
---- ----- -----
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
2000....................................................... 412 -- --
2001....................................................... 130 519 67
2002....................................................... -- 259 33
--- ----- -----
Total...................................................... 542 778 100
=== ===== =====
</TABLE>
Total lease expense for the years ended March 31, 1997, 1998, 1999 and 2000
(unaudited) was HK$436, HK$444 and HK$562 and HK$617 respectively.
F-63
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
12. OPERATING LEASES (Continued)
As of March 31, 1999 and 2000, the Li Group had commitments under non-
cancelable operating lease rentals to be received in respect of land and
buildings are as follows:
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000 2000
----- ----- -----
HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C>
2000...................................................... 643 -- --
2001...................................................... 482 482 62
----- ----- -----
Total..................................................... 1,125 482 62
===== ===== =====
</TABLE>
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, 1997, 1998, 1999 and 2000
(unaudited) was HK$183, HK$173, HK$172 and HK$154 respectively.
14. INCOME TAXES
Companies comprising the Li Group are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which each
of the companies is domiciled and operates. Accordingly each of the companies
is subject to Hong Kong Profits Tax at a rate of 16.5% for 1997 and 1998 and
16% for 1999 and 2000.
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------
1997 1998 1999 2000 2000
---- ---- ---- ----- -----
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current tax...................................... 209 261 350 893 115
Deferred tax..................................... (57) -- -- -- --
--- --- --- ----- -----
Income tax expense............................... 152 261 350 893 115
=== === === ===== =====
</TABLE>
Reconciliation to the expected statutory tax rate in Hong Kong is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ----- ----
% % %
<S> <C> <C> <C>
Statutory rate............................................ 16.5 16.5 16.0
Tax effect on net operating loss.......................... (6.9) (74.3) 13.6
Effect of temporary differences........................... 1.9 (6.3) 9.5
Effect of permanent differences........................... (1.6) (30.3) 8.5
Others.................................................... (2.7) 2.5 (2.6)
---- ----- ----
Effective tax rate........................................ 7.2 (91.9) 45.0
==== ===== ====
</TABLE>
F-64
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
15. REPORT ON SEGMENT INFORMATION
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 1997, 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
Design and Contracting Section High-Technology Products Section Total
----------------------------------- ----------------------------------- -------------------------------------
Years ended March 31,
-------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 1997 1998 1999 2000 1997 1998 1999 2000 2000
------ ------ ------ ----------- ------ ------ ------ ----------- ------ ------ ------ ------ -----
HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ HK$ US$
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Segment revenue... 19,941 30,573 15,706 20,921 13,390 28,574 28,358 48,442 33,331 59,147 44,064 69,363 8,950
Segment profits
(losses).......... 788 125 (1,172) 152 1,183 (670) 1,600 5,595 1,971 (545) 428 5,747 742
Included in
segment
profits(losses):
Depreciation.... (409) (338) (289) (233) (141) (283) (231) (185) (550) (621) (520) (418) (54)
Interest
income.......... 215 221 145 97 40 -- -- 2 255 221 145 99 13
Interest
expense......... (619) (933) (1,343) (421) (232) (467) (715) (897) (851) (1,400) (2,058) (1,318) (170)
Segment assets.... 32,042 30,125 32,875 37,013 9,338 15,067 12,795 28,056 41,380 45,192 45,670 65,069 8,396
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== =====
</TABLE>
F-65
<PAGE>
PADO (HOLDINGS) LIMITED AND ITS SUBSIDIARIES
GOOD PROMINENT TECHNOLOGY COMPANY LIMITED AND
GOOD PROMINENT TRADING LIMITED ("LI GROUP")
Notes to and Forming Part of the Combined Financial Statements--(Continued)
(Information with respect to dates and periods subsequent to March 31, 1999 is
unaudited)
(Dollars in thousands except share amounts)
15. REPORT ON SEGMENT INFORMATION (Continued)
Segment information for the years 1997, 1998, 1999 and 2000 relating to the
Li Group's operations by geographic areas are as follows:
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------
1997 1998 1999 2000 2000
------ ------ ------ ------ -----
HK$ HK$ HK$ HK$ US$
(Unaudited)
<S> <C> <C> <C> <C> <C>
Segment revenue
Hong Kong................................ 33,331 59,147 44,064 37,157 4,794
PRC...................................... -- -- -- 30,341 3,915
Others................................... -- -- -- 1,865 241
------ ------ ------ ------ -----
33,331 59,147 44,064 69,363 8,950
====== ====== ====== ====== =====
</TABLE>
All long-lived assets are situated in Hong Kong for the years 1997, 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.
17. SUBSEQUENT EVENT
On November 19, 1999, the Li Group effected a reorganization pursuant to
which Mr. Li transferred all his equity interest in each of the companies
comprising the Li Group to Quintalinux Limited in exchange for 2,985,000
shares.
On December 28, 1999, the Li Group acquired 400,000 shares in Intermost
Corporation, a company listed on NASDAQ OTC Bulletin Board from Mr. Li for a
consideration of US$3.75 per share.
F-66
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[LOGO OF QUINTALINUX]
1,500,000 Shares of Common Stock
And
1,500,000 Warrants
---------------------
PROSPECTUS
---------------------
[LOGO OF BARRON CHASE SECURITIES]
7700 W. Camino Real
Boca Raton, Florida 33433
(561) 347-1200
Beverly Hills, California
Boca Raton, Florida
Boston, Massachusetts
Buffalo, New York
Chicago, Illinois
Clearwater, Florida
Edison, New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrouk Heights, New Jersey
La Jolla, California
New York, New York
Orlando, Florida
Rockville Centre, New York
Sarasota, Florida
Tampa, Florida
---------------------
August 9, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
