BEIJING WINTECH TECHNOLOGY CO., LTD.
INDEPENDENT AUDITORS' REPORT
AND FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1999 AND 2000
BEIJING WINTECH TECHNOLOGY CO., LTD.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Contents ................................................................. Page(s)
Independent Auditors' Report ............................................. 1
Balance Sheets at June 30, 1999 and 2000 ................................. 2
Statements of Operations for the years ended June 30, 1999 and 2000 ...... 3
Statements of Investors' Equity for the years ended June 30, 1999 and 2000 4
Statements of Cash Flows for the years ended June 30, 1999 and 2000 ...... 5
Notes to Financial Statements ............................................ 6-11
</TABLE>
<PAGE>
1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Beijing Wintech Technology Co., Ltd.
We have audited the accompanying balance sheets of Beijing Wintech Technology
Co., Ltd. (the " Company") as of June 30, 1999 and 2000 and the related
statements of operations, cash flows, and investors' equity for the years then
ended (expressed in Renminbi). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 1999 and 2000 and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
August 14, 2000
By: /s/ Deloitte Touche Tohmatsu
<PAGE>
2
BEIJING WINTECH TECHNOLOGY CO., LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
---------
<S> ........................................................................................ <C> <C> <C>
ASSETS ....................................................................................... 1999 2000 2000
--------- --------- ---------
Rmb Rmb US$
Current Assets:
Cash .................................................................................... 965,098 3,820,391 461,511
Accounts receivable, trade .............................................................. 926,610 1,483,719 179,237
Amounts due from investors .............................................................. -- 1,529,532 184,771
Other receivables ....................................................................... 80,200 204,940 24,757
Inventories ............................................................................. 847,439 1,739,284 210,109
Prepaid expenses ......................................................................... 42,500 42,500 5,134
--------- --------- ---------
Total Current Assets .......................................................... 2,861,847 8,820,366 1,065,519
Amounts due from investors ................................................................. 674,000 -- --
Property and equipment, net ................................................................ 350,116 357,411 43,176
--------- --------- ---------
Total Assets ............................................................................... 3,885,963 9,177,777 1,108,695
========= ========= =========
LIABILITIES AND INVESTORS' EQUITY
Current Liabilities:
Accounts payable, trade .................................................................. 50,634 60,775 7,342
Amounts due to investors ................................................................. 930,000 180,000 21,744
Other payables and accrued expenses ...................................................... 157,735 2,052,825 247,985
Income tax payable ............................................................. ......... -- 244,707 29,561
Other taxes payable ...................................................................... 512,046 1,188,691 143,597
--------- --------- ---------
Total Current Liabilities ..................................................... 1,650,415 3,726,998 450,229
--------- --------- ---------
Commitments and contingencies (note 10)
Investors' Equity:
Paid-in capital ............................................................. ...... 500,000 5,000,000 604,011
Retained earnings ................................................................... 1,543,986 399,999 48,321
Statutory reserves .................................................................. 191,562 50,780 6,134
--------- --------- ---------
Total Investors' Equity ......................................................... 2,235,548 5,450,779 658,466
--------- --------- ---------
Total Liabilities and Investors' Equity ................................................... 3,885,963 9,177,777 1,108,695
========= ========= =========
</TABLE>
See notes to financial statements.
<PAGE>
3
BEIJING WINTECH TECHNOLOGY CO., LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30,
<S> <C> <C> <C> 1999 2000 2000
--------- --------- ---------
Rmb Rmb US$
Sales of products and services ............................................................. 4,379,682 7,720,004 932,593
Cost of sales .............................................................................. 1,707,376 2,242,755 270,930
--------- --------- ---------
Gross profit ............................................................................... 2,672,306 5,477,249 661,663
Selling, general and administrative expenses ............................................... 1,638,919 2,244,063 271,087
--------- --------- ---------
Income from operations ..................................................................... 1,033,387 3,233,186 390,576
Interest income ............................................................................ 5,498 9,950 1,202
Other income, net .......................................................................... 173,942 216,802 26,190
--------- --------- ---------
Income before income tax ................................................................... 1,212,827 3,459,938 417,968
Income tax ................................................................................. -- 244,707 29,561
--------- --------- ---------
Net income ................................................................................. 1,212,827 3,215,231 388,407
========= ========= =========
</TABLE>
See notes to financial statements
<PAGE>
4
BEIJING WINTECH TECHNOLOGY CO., LTD.
STATEMENTS OF INVESTORS' EQUITY
<TABLE>
<CAPTION>
Total
Paid-in retained Statutory investors'
Capital earnings reserves equity
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Rmb rmb Rmb Rmb
Balance at July 1, 1998 ............................ ............... 500,000 522,721 -- 1,022,721
Net income ............................................ ......... -- 1,212,827 -- 1,212,827
Appropriations of reserves .......................................... -- (191,562) 191,562 --
---------- ----------- ----------- -----------
Balance at June 30, 1999 .............................................. 500,000 1,543,986 191,562 2,235,548
Net income ........................................................... -- 3,215,231 -- 388,407
Increase in capital ......................................... ......... 4,500,000 (4,100,000) (400,000) --
Appropriations of reserves ............................................ -- (259,218) 259,218 --
---------- ----------- ----------- -----------
Balance at June 30, 2000 .............................................. 5,000,000 399,999 50,780 5,450,779
========== =========== =========== ===========
US$ equivalent .......................................................... US$604,011 US$48,321 US$6,134 US$658,466
========== =========== =========== ===========
</TABLE>
See notes to financial statements
<PAGE>
5
BEIJING WINTECH TECHNOLOGY CO., LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
<S> ....................................................................................... <C> <C> <C>
---------------------------------------
1999 2000 2000
---------- ---------- ----------
Rmb Rmb US$
Cash flows from operating activities:
Net income ............................................................................ 1,212,827 3,215,231 388,407
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ....................................................................... 49,267 90,534 10,937
Changes in assets and liabilities:
Accounts receivable, trade .................................................... (826,610) (557,109) (67,300)
Other receivables ............................................................. (80,200) (124,740) (15,069)
Inventories ................................................................... (439,225) (891,845) (107,737)
Prepaid expenses ............................................................... (42,500) -- --
Accounts payable, trade ....................................................... (94,411) 10,141 1,225
Other payables and accrued expenses ........................................... 155,776 1,895,090 228,931
Income taxes payable ............................................................ -- 244,707 29,561
Other taxes payable ............................................................. 445,821 676,645 81,740
---------- ---------- ------------
Net cash provided by operating activities .............................................. 380,745 4,558,654 550,695
---------- ---------- ------------
Cash used in investing activities:
Purchase of property and equipment ................................................ (241,512) (97,829) (11,818)
---------- ---------- ------------
Cash used in financing activities:
Advances by investors ......................................................... 930,000 (750,000) (90,602)
Repayment of advances by investors ............................................. -- -- --
Advances to investors ......................................................... (674,000) (855,532) (103,350)
---------- ---------- -----------
Net cash provided by (used in) financing
activities ........................................................................... 256,000 (1,605,532) (193,952)
---------- ---------- ------------
Increase in cash ....................................................................... 395,233 2,855,293 344,925
Cash, beginning of year ................................................................ 569,865 965,098 116,586
---------- ---------- ------------
Cash, end of year ...................................................................... 965,098 3,820,391 461,511
========== ========== ===========
</TABLE>
See notes to financial statements
<PAGE>
BEIJING WINTECH TECHNOLOGY CO., LTD.
NOTES TO FINANCIAL STATEMENTS
6
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Beijing Wintech Technology Co., Ltd. (the "Company") was established on August
23, 1996 as a limited liability company in Beijing, People's Republic of
China ("PRC"), with an operating period of 10 years.
The Company is principally engaged in developing digital signal
processing ("DSP") solutions for network, telecommunication and general
purpose platforms. The Company manufactures and sells DSP products and
its related materials, as well as providing consulting services to
outside customers.
Pursuant to a resolution passed at an investors' meeting on June 5, 2000,
all retained earnings and statutory reserves of Rmb4,100,000 (equivalent
to US$495,303) and Rmb400,000 (equivalent to US$48,320), respectively,
were transferred to paid-in capital to increase paid-in capital from
Rmb500,000 (equivalent to US$60,401) to Rmb5,000,000 (equivalent to
US$604,011) to the statutory financial statements as paid-in capital.
At June 30, 1999 and 2000, details of paid-in capital were as follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 2000
Original Currency % Original Currency %
Rmb Rmb
------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Dong Yonghong - - 3,650,000 73
Tan Mingjuan 400,000 80 250,000 5
Zheng Baolin - - 400,000 8
Chen Xiaomin - - 500,000 10
Wan Yihe - - 100,000 2
Li Minglong - - 100,000 2
Yu Daoheng 50,000 10 - -
Zhang Guirong 50,000 10 - -
---------------------- ----------- ----------------------- -----------
---------------------- -----------
500,000 100 5,000,000 100
====================== =========== ======================= ===========
</TABLE>
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America ("US
GAAP"). This basis of accounting differs from that used in the statutory
financial statements of the Company which are prepared in accordance with
the accounting principles and the relevant financial regulations
applicable to limited liability company as established by the Ministry of
Finance of the PRC ("PRC GAAP"). There were no significant adjustments
made to the statutory accounts of the Company.
<PAGE>
BEIJING WINTECH TECHNOLOGY CO., LTD.
NOTES TO FINANCIAL STATEMENTS - (continued)
7
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories - Inventories mainly represent raw materials. The cost of
inventories is determined using the weighted average method. Cost
includes purchase price, freight charges and other related expenses.
Property and equipment - Property and equipment is stated at cost less
accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives as follows:
<TABLE>
<S> <C>
Electronic equipment 3 years
Furniture and fixtures 5 years
</TABLE>
Impairment - the Company reviews long-lived assets, for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. An impairment loss,
measured based on the fair value of the asset, is recognized if expected
future undiscounted cash flows are less than the carrying amount of the
assets.
Income taxes - Deferred income taxes are provided using the asset and
liability method. Under this method, deferred income taxes are recognized
for all significant temporary differences and classified as current or
non-current based upon the classification of the related asset or
liability in the financial statements. A valuation allowance is provided
to reduce the amount of deferred tax assets if it is considered more
likely than not that some portion of, or all of, the deferred tax asset
will not be realized.
Revenue recognition - Revenue from products sales are recorded when title
of products passed to customers, which usually occurs at the time of
delivery or acceptance. The Company recognizes revenues from consulting
services, net of business tax, when services are provided to customers.
Commissions, net of business tax, received from the sales of products on
behalf of third parties are recognized when the sales are made and the
Company is entitled to the commission.
Financial instruments - The carrying value of financial instruments,
which mainly consist of cash and cash equivalents, accounts receivable
and accounts payable approximates fair value due to the short-term nature
of these instruments.
Foreign currency translation - The Company maintains its accounting
records in Renminbi ("Rmb"). Transactions in currencies other than
Renminbi are translated at the market exchange rate ruling on the
transaction date. Monetary assets and liabilities denominated in
currencies other than Renminbi are translated at the market exchange rate
ruling on the balance sheet date at the year end.
<PAGE>
BEIJING WINTECH TECHNOLOGY CO., LTD.
NOTES TO FINANCIAL STATEMENTS - (continued)
8
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- Continued
Convenience translation into United States Dollars - The financial
statements are presented in United States Dollars for the convenience of
readers in the United States of America. The translation of Renminbi
amounts into United States dollars has been made at the rate of exchange
quoted by the People's Bank of China on June 30, 2000 of Rmb8.2780 to
US$1.00. The translation of Renminbi amounts into United States dollars
should not be construed as representations that Renminbi amounts could be
converted into United States dollars at that or any other rate of
exchange.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
New accounting standard not yet adopted - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement requires
companies to record all derivatives on the balance sheet as assets or
liabilities measured at fair value. Gains and losses resulting from
changes in fair market values of those derivative instruments would be
accounted for depending on the use of the instrument and whether it
qualifies for hedge accounting. SFAS 133 will be effective for the
Company's year ending December 31, 2001. The Company has not yet
determined the impact, if any, on its financial position, results of
operations or cash flows.
4. AMOUNTS DUE FROM/TO INVESTORS
<TABLE>
<S> <C> <C>
June 30,
-----------------------------------------------
1999 2000
---------------------- ----------------------
Rmb Rmb
Amounts due from investors
Dong Yonghong 674,000 1,390,237
Tan Mingjuan - 139,295
---------------------- ----------------------
674,000 1,529,532
====================== ======================
Noncurrent amount 674,000 -
Amount due within 1 year - 1,529,532
---------------------- ----------------------
674,000 1,529,532
====================== ======================
Amounts due to investors
Chen Xiaomin 100,000 180,000
Tan Mingjuan 830,000 -
---------------------- ----------------------
930,000 180,000
====================== ======================
</TABLE>
<PAGE>
BEIJING WINTECH TECHNOLOGY CO., LTD.
NOTES TO FINANCIAL STATEMENTS - (continued)
9
4. AMOUNTS DUE FROM/TO INVESTORS - Continued
The Company advanced investors Rmb674,000 and Rmb855,532 in the years
ended June 30, 1999 and 2000, respectively, on an interest free basis.
The amounts are repayable not later than January 31, 2001.
In the year ended June 30, 1999, investors advanced Rmb930,000 to the
Company on an interest free basis without fixed payment terms. In the
year ended June 30, 2000, investors repaid Rmb750,000 of these advances.
5. INVENTORIES
<TABLE>
<S> <C> <C>
June 30,
----------------------------------------
1999 2000
------------------- ------------------
Rmb Rmb
Raw materials 847,439 1,738,378
Finished goods - 906
------------------- ------------------
847,439 1,739,284
=================== ==================
6. PROPERTY AND EQUIPMENT, NET
June 30,
----------------------------------------
1999 2000
------------------- ------------------
Rmb Rmb
At cost:
Electronic equipment 416,757 513,790
Furniture and fixtures 16,557 17,351
------------------- ------------------
433,314 531,141
Less: Accumulated depreciation 83,198 173,730
------------------- ------------------
Net book value 350,116 357,411
=================== ==================
7. OTHER TAXES PAYABLE
June 30,
----------------------------------------
1999 2000
------------------- ------------------
Rmb Rmb
Value added tax payable ("VAT") 404,253 967,601
Business tax ("BT") 34,648 57,528
Others 73,145 163,562
------------------- ------------------
------------------- ------------------
512,046 1,188,691
=================== ==================
</TABLE>
<PAGE>
10
7. OTHER TAXES PAYABLE - Continued
The Company is subject to VAT at a rate of 17% on sales of DSP products
and 5% BT on revenue from consulting services.
8. INCOME TAXES
The Company is subject to the Income Tax Law of PRC Enterprises and
relevant local income tax laws (the "Income Tax Laws"). Under the Income
Tax Laws, limited liability enterprises generally are subject to income
tax at a rate of 33% (30% state income taxes plus 3% local income taxes)
on income as reported in their statutory financial statements after tax
adjustments.
Pursuant to the Income Tax Laws, limited liability enterprises approved
as high-tech enterprises which are established in the Beijing New
Technology Industry Development Zone ("BDZ") are subject to income tax at
the reduced rate of 15%. High-tech enterprises are also eligible for a
three-year exemption from income tax followed by a 50% reduction of
income tax for the next three years. This relief commences from the date
of commencement of operations. The Company has been approved as high-tech
enterprise and has obtained an approval from tax bureau for the
preferential tax treatment described above effective from September 1,
1996.
The Company was exempt from income tax for the year ended June 30, 1999.
The applicable income tax rate for the year ended June 30, 2000 was 7.5%.
Income tax on the PRC assessable income was Rmb244,707 for the year ended
June 30, 2000. There were no significant temporary differences in the
years ended June 30, 1999 and 2000 or at these dates.
9. RETIREMENT BENEFITS AND OTHER EMPLOYMENT BENEFITS
The Company's employees are entitled to retirement benefits calculated
with reference to their basic salaries on retirement and their length of
service in accordance with a government managed benefits plan. The PRC
government is responsible for the benefits liability to these retired
employees. The Company is required to make contributions to the state
retirement plan at 19% of the monthly basic salaries of the current
employees. The expense of such arrangement to the Company was Rmb40,118
in the year ended June 30, 1999 and Rmb87,430 in the year ended June 30,
2000.
In addition, the Company is required by law to contribute 14% and 1.5% of
basic salaries of the PRC employees for staff welfare fund and education
fund, respectively.
<PAGE>
10. COMMITMENTS AND CONTINGENCIES
Operating leases - As of June 30, 2000, the Company was committed under
certain operating leases, requiring annual minimum rentals as follows:
<TABLE>
<S> <C>
Rmb
----------------------
----------------------
2001 355,250
2002 41,000
----------------------
396,250
======================
</TABLE>
The leases are renewable subject to negotiation. Rental expense for the
years ended June 30, 1999 and 2000 was Rmb225,040 and Rmb419,000,
respectively.
11. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of temporary cash
investments and accounts receivable.
The Company places its temporary cash investments with various financial
institutions in the PRC. The Company believes that no significant credit
risk exists as these investments are placed principally with
government-owned financial institutions in the PRC.
The Company's business activities and accounts receivable are principally
with customers in the PRC. The Company believes that no significant
credit risk exists as credit losses, when realized, have been within the
range of management's expectations.
12. DISTRIBUTION OF PROFITS
As stipulated by the Company Law of PRC, net income after taxation can
only be distributed as dividends after allowance has been made for:
(i) Making up cumulative prior years' losses, if any;
(ii) Allocations to the statutory common reserve of at least 10% of
income after tax, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company's
registered capital;
(iii) Allocations of 5 to 10% of income after tax, as determined under
PRC accounting rules and regulations, to the Company's statutory
common welfare fund, which is established for the purpose of
providing employee facilities and other collective benefits to the
Company's employees; and
(iv) Allocations to the discretionary surplus common reserve, if approved by the
investors in general meeting.
The statutory reserves as stated in the financial statements represented
the allocations of 10% of net income to statutory common reserve and 5%
of net income to statutory common welfare fund for the years ended June
30, 1999 and 2000, respectively.
* * * * * * * * *
<PAGE>
