SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year-ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________.
Commission File No. 33-18834-LA
OPAL TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Nevada 87-0306463
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Suite 4704, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Include Area Code: 011-852-2541-1999
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (12) months (or
for such shorter period that the registrant was required to file such reports);
and (2) has been subject to such filing requirements for the past ninety (90)
days. Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $4,532,000.
As of April 15, 1998, 35,911,964 shares of common stock of the Registrant
were outstanding. As of such date, the aggregate market value of the common
stock held by non-affiliates, based on the closing bid price on the NASD
Bulletin Board, was approximately $12,214,000.
DOCUMENTS INCORPORATED BY REFERENCE
No annual reports to security holders, proxy or information statements, or
prospectuses filed pursuant to Rule 424(b) or (c) have been incorporated by
reference in this report.
Transitional Small Business Disclosure Format: Yes No X
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<PAGE>
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS................................ 3
ITEM 2. DESCRIPTION OF PROPERTIES.............................. 6
ITEM 3. LEGAL PROCEEDINGS...................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................... 6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................ 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS................... 7
ITEM 7. FINANCIAL STATEMENTS................................... 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................. 11
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT...................... 11
ITEM 10. EXECUTIVE COMPENSATION................................. 12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................. 13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 13
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K....................... 13
SIGNATURES............................................. 14
FINANCIAL STATEMENTS................................... F-1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 10 of this Form 10- KSB.
Background
Opal Technologies, Inc. (the "Company") was incorporated in the State of
Nevada May 14, 1987 under the name of Sportsland Sales, Inc. Following the
acquisition of Enpak Medical Corporation and its subsidiary, Enpak Surgical
Products, Inc. in 1994, the Company changed its name to Med-Tex Corporation. The
Enpak companies were engaged in assembling and marketing custom and standard
surgical kits used in diagnostic and surgical procedures. On October 31, 1996,
the Company disposed of its entire interest in the Enpak companies for $1.00.
From October 31, 1996 to June 6, 1997 the Company was dormant. On May 14, 1997,
in anticipation of an acquisition, Med-Tex Corporation changed its name to Opal
Technologies, Inc. and affected an one for ten reverse stock split,
re-classified its authorized share capital of 50,000,000 shares of Common Stock,
par value $.001 each into 49,000,000 shares of Common Stock par value $.001 each
and 1,000,000 shares of Preferred Stock, par value $.001 each.
On June 6, 1997, the Company entered into an agreement with Bestalong
Group, Inc. ("Bestalong"; a company incorporated in the British Virgin Islands)
to acquire from Bestalong a 100% interest in Triple Star Holdings Limited
("TSH"; a company incorporated in the British Virgin Islands) and a 100%
interest in Opal Agriculture Development Limited ("OAD"; a company incorporated
in the British Virgin Islands) by (i) issuing to Bestalong 8,452,768 shares of
post reverse common stock and 100,000 shares of Series A preferred stock, and
(ii) assuming Bestalong's liabilities in the form of a promissory note of
US$2,100,000, which was subsequently canceled by the issuance of 4,200,000
shares of post reverse common stock. Bestalong is beneficially controlled by Mr.
John K.C. Koon, the Chairman and Chief Executive Officer of the Company.
The TSH Group
TSH and its wholly-owned subsidiary, Triple Star Group Limited ("TSG"; a
company incorporated in the British Virgin Islands) are investment holding
companies. On August 6, 1996, TSG acquired a 55% interest in Beijing Opal
Agriculture Biochemistry Co., Ltd. ("Beijing Opal"), an equity joint venture
established in the People's Republic of China ("the PRC"). Beijing Opal is
engaged in the manufacturing and sale of organic agricultural fertilizers.
Beijing Opal was originally established as a PRC equity joint venture for a
period of 20 years from February 8, 1995 to February 7, 2015 between Ideit
Enterprise Co., Ltd. ("IECL"; a company incorporated in Taiwan) having a 40%
interest and Beijing Opal Biochemistry Factory ("BOBF"; a PRC state-owned
enterprise) having a 60% interest. Pursuant to a sale and purchase agreement
dated August 6, 1996, TSG acquired from IECL a 40% interest in Beijing Opal and
acquired from BOBF a 15% interest in Beijing Opal for an aggregate consideration
of approximately $140,000. A revised joint venture agreement between TSG and
BOBF was executed on August 6, 1996, which was approved by the relevant PRC
authorities on March 24, 1997. Under the revised joint venture agreement, the
joint venture period has been extended to 30 years from February 8, 1995 to
February 7, 2025, and the total investment to be made by Beijing Opal has been
increased from US$350,000 to US$10,000,000 (equivalent to approximately
Rmb82,900,000), of which US$6,000,000 (equivalent to Rmb49,920,000) must be in
the form of registered capital to be invested within one year after Beijing Opal
obtains its revised business license from the PRC authorities. As of December
31, 1997, all of the registered capital requirement of Beijing Opal
(US$6,000,000) was paid and verified by certified public accountants in the PRC
under PRC regulations.
3
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The other key provisions of the revised joint venture agreement are:
* the profit and loss sharing ratio is the same as the respective percentage
of equity interest.
* upon early termination or liquidation of Beijing Opal, the net assets of
Beijing Opal will be distributed in accordance with the respective
percentage of equity interest.
* the Board of Directors of Beijing Opal will consist of seven members, four
designated by TSG and three designated by BOBF.
OAD
OAD was incorporated in the British Virgin Islands on December 15, 1995. On
January 2, 1996, OAD issued 50,000 shares of common stock to Asian Connections
Limited (a company incorporated in the British Virgin Islands), which was owned
by independent investors, for a total cash consideration of US$50,000. On March
22, 1997, Bestalong acquired the entire interest in OAD for approximately
US$19,405,000.
OAD is engaged in the trading of organic agricultural fertilizer
manufactured by Beijing Opal. On December 16, 1996, OAD was appointed by Beijing
Opal as its sole agent and was granted the exclusive right to distribute and
sell organic agriculture fertilizer manufactured by Beijing Opal in the PRC,
Hong Kong, Taiwan and Macau for a period from January 1, 1997 to February 7,
2015.
The acquisition of Beijing Opal by TSG on August 6, 1996 has been accounted
for using the purchase method of accounting. Accordingly, the assets and
liabilities assumed have been recorded at their estimated fair values, and the
operations of Beijing Opal are included in the consolidated financial statements
of the Group from the date of acquisition.
Business Operations
The Company is engaged in the manufacturing, selling and distribution of
environment friendly organic fertilizers and related products, such as soil
conditioner, and other organic products for agriculture.
The Company's principle products include a series of both organic spray
fertilizers and organic granular fertilizers. These fertilizers are based on
proprietary formulations of humic acids, amino acids, organic matters and a
balance of nitrogen, phosphorous, potassium, minor nutrients and trace elements.
The Company distributes the spray fertilizers through its network of
distributors in approximately 15 provinces throughout China. Through tests and
trials with different crops, ranging from grains to fruits and vegetables, the
Company has demonstrated the fertilizers' efficacy in increasing yield,
enhancing quality, reducing the use of chemical fertilizers, strengthening crops
to withstand environmental hazards and improve soil conditions. More
importantly, the fertilizers are environment friendly, and have been endorsed by
the National Green Food Centre of China as green food fertilizers. To date, Opal
is the only mineralized organic fertilizer manufacture having received such an
endorsement.
The Company produced granular fertilizers in a pilot plant, and has
conducted tests and field trials on various crops. The granular fertilizers are
designed for use as base fertilizers, and contain nitrogen, phosphorous,
potassium, micro and trace elements (such as iron, copper, magnesium, manganese,
sulfur, zinc and etc.) and organic matters. These fertilizers can replace single
element and compound fertilizers commonly used by farmers, and do not cause
environmental problems for the soil.
The Company is divided into two principle divisions: manufacturing and
sales.
4
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Manufacturing Division
The Company manufactures its products in its Sino-foreign joint venture
factory located in Shunyi County, Beijing, China. The joint-venture company,
Beijing Opal Agricultural and Biochemistry Company Limited (referred to herein
as "Beijing Opal"), purchased the land use rights to a block of land consisting
of approximately 35.1 acres. Beijing Opal is in the process of completing Phase
I of the manufacturing facilities on this property.
In August, 1997, the Company opened the first segment of Phase I, a 53,000
square foot spray fertilizer facility. The plant is capable of producing up to
3,500 metric tons of spray fertilizers, and can be expanded to produce 7,500
metric tons of spray fertilizers. This facility can also be used for the
production of specially formulated catalyst, an essential ingredient in the
production of granular fertilizers and soil conditioners.
In March, 1998, the Company completed the second segment of the production
facility. This segment adds 110,500 square feet to the existing facility and
will have the capacity to produce 75,000 metric tons of granular fertilizers per
year. Installation of machinery and equipment has begun with the expectation
that this facility will open in June, 1998.
The Company is also constructing an administration building, green house,
staff quarters and other facilities at the site. These facilities will be
completed during the third quarter of 1998.
Sales Division
The sale and marketing of Opal products is conducted by Opal Agriculture
Development Limited (herein referred to as "OAD"). OAD has contracted with
Beijing Opal for the exclusive distribution of Beijing Opal's products through
2015. OAD's marketing territory includes the People's Republic of China, Taiwan,
Hong Kong and Macau.
OAD has concentrated its sales and marketing efforts in China, and to a
lesser extent, in Taiwan. The sales in China are made through several tiers of
distributors, a provincial distributor, who distributes to county/city
distributors; a county/city distributor who distributes to town/village agents,
who then sell direct to the farmers. Most of the distributors are agricultural
product companies authorized by the government to sell fertilizer and other
agricultural chemicals, or government agencies which operate under the
agriculture committees of provinces, counties or villages. In provinces where
there are no provincial distributors, OAD sells directly to county/city
distributors.
OAD also sells to major end users, such as large-scale farms. In addition,
OAD works closely with agricultural research institutions in tests of its
products. Among these institutions China National Hybrid Rice Research Centre of
Hunan, which has signed an agreement to promote the Company's products.
OAD believes China is, and will, be the principle market for its products.
Although not currently included in its exlucsive marketing agreement, OAD is
developing other markets, such as Taiwan, Malaysia and Argentina. Taiwan and
Malaysia have the potential to become OAD's major overseas markets as the need
for quality organic fertilizer has been growing in both countries. Potential
customers from Taiwan and Malaysia have been making inquiries of the supply of
the granular fertilizers for several months. OAD hopes to meet the needs of
these markets upon completion of its first granular fertilizer plant in June,
1998.
Sales of Opal products in China are seasonal. In northern China, where only
one crop is grown per year, the growing season begins in April. In southern
China, where two crops are grown per year, the first growing season begins in
March. Therefore, it is essential that Opal fertilizers reach the farmers before
these growing seasons begin.
China is still hindered by an underdeveloped transportation infrastructure.
The strain on its transportation network is particularly acute during the
Chinese New Year when millions of workers return to visit their families through
out the country. OAD's peak season generally occurs before the year end or in
early January as the fertilizers must be delivered before the Chinese New Year
migration. The other Opal sales peaks generally occur in May/June when
additional applications of fertilizers are made, and in August/September when
the second crops in the southern provinces is planted.
5
<PAGE>
Competition
The Company competes primarily with locally manufactured spray fertilizers
and a few imported spray fertilizers. Most of these products are designed as
additives of trace elements and are for foliar use only. However, competition in
this sector of the market is keen.
Opal spray fertilizers have a competitive market edge because they are also
applied directly to the soil, to create a healthier root system, an environment
for microbiological activities, and improvement of soil conditions. The Company
believes that the endorsement of its products by the National Green Food Centre
of China, its new modern production facility, and several years of field testing
gives the Company a firm footing in the Chinese market.
The Company envisages that when its granular facility begins production in
the third quarter of 1998, it will produce two complementary organic
fertilizers, and it will be the only mineralized organic granular fertilizer
manufacturer in China. This should position the Company to compete in the market
of traditional chemical fertilizers of which 38 million metric tons are used in
China each year, 10 million metric tons of which are imported.
Raw Materials
The major raw material utilized in the production of Beijing Opal's
fertilizers is peat. This is available in abundance in China. Other raw
materials used in production are generally available in sufficient quantities to
meet the Company's requirements.
Environmental Matters
The Company's manufacturing facilities comply with existing environmental
requirements of the Chinese government. The Company does not envisage that
compliance with provisions relating to protection of the environment will have a
material effect upon the capital expenditures, earnings or its competitive
position.
Employees
As of December 31, 1997, the Company had 61 employees.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases approximately 2,900 square feet of office in Hong Kong
for use as its corporate headquarters. As described in Item 1, the Company
through its Sino-foreign joint venture acquired land use right for a block of
land of approximately 35.1 acres in Shunyi County, Beijing, China. The land use
rights will expire in 2025 when the joint-venture of Beijing Opal terminates.
The Company is completing the construction of Phase I of its manufacturing
facilities on this block of land. On completion of Phase I, the Company will
have a facility of approximately 260,900 square feet including the
administrative building, green house and staff quarters.
The Company believes that these properties are adequate for its present
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently a party to, and management is not aware of,
any pending or threatened legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders through the
solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year-ended December 31, 1997.
6
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is currently traded on the OTC Electronic
Bulletin Board and is quoted under the symbol OPAL. The trading market in the
Company's common stock is limited and sporadic. The following table sets forth
the high and low bid price per share for the Company's common stock for each
quarterly period.
1997 1996
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High Low High Low
First Quarter .50 .50 2.00 .50
Second Quarter 2.87 .50 2.00 .50
Third Quarter 3.00 1.25 2.00 .50
Fourth Quarter 2.75 .87 2.00 .50
The quotation reflects the inter-dealer prices without retail markup,
markdown or commissions and may not represent actual transactions.
As of April 15, 1998, the bid price of the Common Stock was $0.75.
Record Holders
As of April 15, 1998, there were approximately 541 record owners of the
Common Stock of the Company.
Dividends
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
Sales of Unregistered Securities
On June 6, 1997, the Company acquired all of the issued and outstanding
capital stock of Triple Star Holdings Limited and Opal Agriculture Development
Limited in exchange for 8,452,768 shares of the Company's common stock, $.001
par value, 100,000 shares of the Company's Series A Preferred Stock, $.001 par
value and the issuance of 4,200,000 shares of the Company's common stock, $.001
par value for the cancellation of the promissory note.
On July 1, 1997, the Company sold 11,400,000 shares of its common stock,
$.001 par value, at $0.50 per share for a total of $5,700,000 pursuant to the
exemption provision of Regulation S.
On September 29, 1997, the Company issued 11,000,000 shares of its common
stock, $.001 par value for the cancellation of $5,500,000 in debt.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Material Changes in Results of Operations
In June, 1997, the Company acquired the operations of Opal Agriculture
Development Limited ("OAD") and Triple Star Holding Limited ("Triple Star"). For
the year prior to the acquisition of OAD and Triple Star, the Company had no
operations other than the sale of its inactive Enpak Medical assets. OAD and
Triple Star are primarily engaged in the production and sale of fertilizer in
the People's Republic of China and both had limited operations during 1996. The
financial statements of the Company and the following discussion include the
operations of OAD and Triple Star for all periods presented.
7
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Year-ended December 31, 1997 Compared to the Year-ended December 31, 1996
Net Sales. Net sales for the year-ended December 31, 1997 increased by,
USD1,651,000 (RMB13,777,000) or 57.3% to USD4,532,000 (RMB37,664,000) from
USD2,881,000 (RMB23,887,000) for the year-ended December 31, 1996. The 1997
amount includes $1,758,000 of sales to the Company's Sino-foreign joint venture
partner at cost. This compares with sales to the Sino-foreign joint venture
partner in 1996 of $2,418,000 at a mark up of 2.6%. This increase is the result
of the Company beginning the commercial production and sale of fertilizer. Sales
to third parties increased by $2,311,000 to $2,774,000 for the year-ended
December 31, 1997 from $463,000 for the corresponding periods of the prior year
while sales to the Company's Sino-foreign joint venture partner declined by
$660,000 to $1,758,000 for the year-ended December 31, 1997 from $2,418,000 for
the corresponding period of the prior year.
Gross Profits. Gross profits for the year-ended December 31, 1997 increased
by USD1,023,000 (RMB8,516,000) or 248.3% to USD1,435,000 (RMB11,928,000) from
USD412,000 (RMB3,412,000) for the year ended December 31, 1996. This increase in
the result of the Company beginning the commercial production and sale of
fertilizer to third parties. Gross profit as a percent of sales increased to
31.7% for the year-ended December 31, 1997 from 14.3% for the corresponding
period of the prior year. This increase in gross profit as a percent of sale
resulted from a greater percentage of sales to third parties at reasonable mark
ups and a reduction in sales to the Sino- foreign joint venture partner at cost.
General and Administrative Expenses. General and administrative expenses
for the year-ended December 31, 1997 increased by USD751,000 (RMB6,268,000) or
104% to USD1,474,000 (RMB12,260,000) from USD723,000 (RMB5,992,000). This
increase resulted from the Company staffing its operations to begin the
commercial production and sale of fertilizer, and the booking of a provision for
doubtful accounts of USD266,000 (RMB2,213,000) and a provision for slow-moving
and obsolete inventories of USD6,000 (RMB54,000).
Interest Income. Interest income for the year-ended December 31, 1997
totaled $9,000 compared to net interest expenses of $750 for the corresponding
period of the prior year. This change to interest income resulted from
additional funds being held on deposit during the current year.
Other Expenses, net. Other expenses, net increased nominally during the
year-ended December 31, 1997 to $5,000 from $4,000 for the corresponding period
of the prior year. Other expenses consist of foreign exchange losses incurred in
normal business operations.
Loss from Discontinued Operations. The Company incurred a loss from
discontinued operations of USD234,000 (RMB1,944,000) for the year-ended December
31, 1996 as compared to no loss from discontinued operations for the year-ended
December 31, 1997. The loss from discontinued operations resulted from the
liquidation of the Company's prior business activities conducted through Enpak
Medical Corporation.
Net Loss on Disposal of Discontinued Operations. The Company incurred a
loss on the disposal of discontinued operations of USD204,000 (RMB1,696,000) for
the year-ended December 31, 1996 as compared to no net loss from the disposal of
discontinued operations for the year-ended December 31, 1997. The net loss on
the disposal of discontinued operations resulted from the sale of the Company's
entire interest in Enpak Medical Corporation on October 31, 1996 for USD1.
Income Taxes. Income taxes for the year-ended December 31, 1997 totaled
$38,000 compared to no income tax liability for the corresponding period of the
prior year. Although the Company reported a consolidated loss for the year-ended
December 31, 1997, it still incurred an income tax liability because certain of
its operations in the PRC were profitable.
Net Loss. The net loss for the year-ended December 31, 1997 decreased by
$800,000 to $73,000 from a $873,000 loss for the corresponding period of the
prior year. The decrease in the net loss is attributable to higher gross profit
margins and the lack of a write off from discontinued operations which were
partially offset by higher selling and general and administrative expenses and
the provision for income taxes.
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Year-Ended December 31, 1996 Compared to the Year-Ended December 31, 1995
For the year-ended December 31, 1995, the Company incurred a net loss from
discontinued operations of USD356,000. While the Company had nominal operations
from the winding down and liquidation of its Enpak Medical operations, there are
no meaningful comparative data comparing results for the year-ended December 31,
1996 with the results for the year-ended December 31, 1995 as the year-ended
December 31, 1996 contains the beginning of operations for the fertilizer
business while the year-ended December 31, 1995 contains the winding down of the
Enpak Medical operations. The loss from beginning the fertilizer business for
the year-ended December 31, 1996 was USD315,000 and the loss from winding down
the Enpak Medical operations was USD234,000 for a total loss of USD549,000,
while this loss from the winding down of the Enpak Medical operations for the
year-ended December 31, 1995 was USD356,000.
Changes in Financial Condition, Liquidity and Capital Resources
For the past twelve months, the Company has funded its operations and
capital requirements with loans from both its parent company and PRC
joint-venture partner, the sale of common stock and from bank loans. As of
December 31, 1997, the Company had cash USD1,453,000 (RMB12,078,000) and working
capital of USD3,022,000 (RMB25,120,000). This compares with cash of $67,000 and
working capital of $545,000 as of December 31, 1996.
Net cash used in operating activities increased to USD975,000
(RMB8,101,000) for the year-ended December 31, 1997 from (USD711,000) or
(RMB5,890,000) for the year-ended December 31, 1996. This increase resulted from
a decrease in the loss from operations and increase in depreciation,
amortization, accounts payable and other payables and a decrease in inventories
which was partially offset by an increase in accounts receivable.
Net cash used in investing activities increased to USD5,421,000
(RMB45,050,000) for the year-ended December 31, 1997 from USD2,400,000
(RMB19,902,000) for the year-ended December 31, 1996. This increase resulted
from additional expenditures for the acquisition of machinery, equipment and
land an advance to a director and an advance to a shareholder which were
partially offset by the repayment of an advance from a related party.
Net cash provided by financing activities increased to USD5,827,000
(RMB48,421,000) for the year-ended December 31, 1997 from USD3,211,000
(RMB26,615,000) for the year-ended December 31, 1996. This increase is
attributable to proceeds from the issuance of common stock, loans from the
parent company, loans from PRC joint venture partner and bank loans which were
partially offset by the repayment of a loan to the parent company.
On July 1, 1997 the Company issued 11,400,000 shares of common stock for
USD5,700,000 and 4,200,000 shares of common stock in exchange for the
cancellation of a promissory note of USD2,100,000. On September 29, 1997, an
additional USD5,500,000 of the loan from the parent company was capitalized in
exchange for 11,000,000 shares of common stock. These funds have been used for
working capital and the acquisition of additional property, plant and equipment.
However, to complete the remaining portion of the manufacturing facility and
execute its business plan, the Company will need additional loans and/or capital
of $2,000,000 over the next twelve months. It is the opinion of management that
such funds will be forthcoming.
The foregoing is subject to various factors which could affect future
operating results. These include, but are not limited to the following:
Certain Factors Affecting Future Operating Results
a. Limited operating history
The Group reorganized and commenced its operations in trading and
manufacturing of organic agricultural fertilizers in August, 1996, and such
operations were still in the development stage as of December 31, 1997. The
Group incurred losses from continuing operations (net of minority
interests) for the years-ended December 31, 1996 and 1997 and had
accumulated losses as of December 31, 1996 and 1997, respectively. The
Group's operations are subject to all the risks inherent in an emerging
business enterprise. These include, but are not limited to, competition
from other fertilizer manufacturers, the need to expand production and
distribution, and slow settlement of billings to new customers. Realization
of the Group's investment in assets is dependent on the success of its
future operations.
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b. Dependence strategic relationship
The Group conducts its operations in the PRC through an equity joint
venture with BOBF as described in Note 1. Any deterioration of this
strategic relationship could have an adverse effect on the operations and
financial position of the Group.
c. Concentration of credit risk
A substantial portion of the Group's sales is made to a small number of
customers on an open account basis and generally no collateral is required.
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
<TABLE>
1996 1997
----------- ----------
<S> <C> <C>
Agriculture and Production Information Company 81.3% 38.9%
Heng Yang Agriculture and Technology Development - 11.6%
Yunnan Xing Long Agriculture and Trade Development 1.4% 11.4%
Xin Jiang Agriculture and Science Institute - 8.2%
Gansu Nong Ken Technological Development Company 1.2% 5.2%
----------- ----------
</TABLE>
Concentration of accounts receivable as of December 31, 1996 and 1997 is as
follows:
1996 1997
----------- ------------
Five largest accounts receivable 82.9% 68.6%
=========== ============
The Group performs ongoing credit evaluation of each customer's financial
condition. It maintains reserves for potential credit losses and such
losses in aggregate have not exceeded management's projections. As of
December 31, 1997, the Group maintained a specific provision of USD 175,500
(RMB1,458,000) and a general provision of 3% of the remaining balance
against its trade receivables. The Directors, in their opinion, consider
that the risk of recoverability of the outstanding receivable is minimal.
d. Concentration of suppliers
The Group purchases raw material from a number of suppliers. Details of
individual suppliers accounting for more than 5% of the Group's purchases
are as follows:
1996 1997
----------- -----------
Purchases from: 85.4% 15.9%
Agriculture and Production Information Company
Shun Yi County Chemical Fertilizer factory - 63.7%
Bestalong - 9.8%
============= ===========
e. Country risk
Substantially all of the Group's operations are conducted by its subsidiary
Beijing Opal, in the PRC and, accordingly, the Group is subject to special
considerations and significant risks not typically associated with
companies operating in North America and Western Europe. These include
risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Group's results may be
affected by, among other things, changes in the political and social
conditions in the PRC and changes
10
<PAGE>
in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and
rates and methods of taxation. The PRC government has implemented economic
reform policies in recent years, and these reforms may be refined or
changed by the government at any time. It is also possible that a change in
the PRC leadership could lead to changes in economic policy.
In addition, a substantial portion of the Group's revenue is denominated in
Renminbi ("Rmb"), which must be converted into other currencies before
remittance outside the PRC. Both the conversion of Renminbi into other
foreign currencies and the remittance of foreign currencies abroad require
approvals of the PRC government.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, together with the
independent auditors' report thereon of Arthur Andersen & Co., appears on pages
F-2 through F-27 of this report. See Index to Financial Statements on page F-1
of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 23, 1998, the Board of Directors selected Arthur Andersen & Co.
of Hong Kong, as its certifying accountants for the year-ended December 31, 1997
replacing H.J. Swart & Co. of Kissimmee, Florida. During the preceding two years
and the subsequent interim periods preceding their dismissal, the Company had no
disagreements with the prior accountants on any matter of accounting principals
or practices, financial statement disclosure, or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information Regarding Present Directors and Executive Officers
The following table sets forth the names and ages of the present executive
officers and directors of the Company and the positions held by each.
<TABLE>
Name Age Title
- ------------------- -------- -----------------
<S> <C> <C>
John Koon 50 Chairman of the Board, President Chief Executive Officer and Director
Antonio C.K. Young 49 Vice President, Chief Operating Officer and Director
Kenneth C.W. Poon 39 Chief Financial Officer
Long Chen Chen 47 Vice President, Sales and Marketing and Director
Michael W. Botts 50 Vice President of Research and Development and Director
Raul F. Sanchez-Elia 43 Director
James H. Shane 52 Director
James Wong 50 Director
</TABLE>
John Koon, Chairman of the Board, President Chief Executive Officer and
Director, has been involved in developing the fertilizer project since 1990. He
is the founder and Chairman of Bestalong Group, Inc. the controlling shareholder
of the Company and he is the principal and director of several private companies
with operations in China, including real estate, entertainment, and
manufacturing. Mr. Koon is a graduate of The University of Hong Kong, with a
Bachelor of Social Science (Honours) degree in Accounting and Economics and is a
member of The International Institute of Management.
Antonio C.K. Young, Vice President, Chief Operating Officer and Director,
has been involved in developing the fertilizer project since 1991. He is also an
Executive Director of Bestalong Group, Inc. the controlling shareholder of the
Company and is responsible for the management of its investment and operations.
Mr. Young has an MBA from the Chinese University of Hong Kong.
11
<PAGE>
Kenneth C.W. Poon, Chief Financial Officer, served as financial controller
in major multinational companies in information technology, banking and trading
industries before joining the Company. Prior to joining the Company, Mr. Poon
was employed by Newco Resources Limited, as financial controller. He is a
graduate of The Hong Kong Baptist University and a member of The American
Institute of Certified Public Accountants and Certified General Accountants
Association of Canada.
Long Chen Chen, Vice President, Sales and Marketing Director, has been
involved in developing the fertilizer project since 1990. In addition to Sales
and Marketing, he is also responsible for product applications, sourcing and
quality control. Mr. Chen is a graduate of Taipei Technical University.
Michael W. Botts, Vice President of Research and Development and Director,
is a soil scientist who originally brought the Opal fertilizer technology to
China. He is a consultant on the procurement, installation and testing OPAL OMF
and OPAL OMS production facilities in Beijing and is responsible for research
and development for both existing and new products. Mr. Botts holds a B.S.
degree in Soil Science from the University of Oregon.
Raul F. Sanchez-Elia, Director, is the principal of Condor Capital, an
investment banking firm in New York, and director of Condor Mercosur Investment
Limited, an investment company based in Argentina. He is also a director of
Bestalong Group, Inc., the controlling shareholder of the Company. Mr. Sanchez
holds a Bachelor of Arts from Brown University and a Master of International
Management from A.G.S.I.M.
James H. Shane, Director, is President and Chief Executive Officer of Shane
Associates Limited, a diversified operating company in the U.S. which has
developed and managed real estate properties since 1969, and consulted for U.S.
companies importing from Pacific Rim countries.
James Wong, Director, is Chairman and Chief Executive Officer of Directions
International, Inc., a Dallas, Texas-based management consulting firm for Global
Industrial 500 corporations and entrepreneurs. His clients include American
Express, Arco, Budget Rent A Car, CNA, Compaq, EDS, etc. Mr. Wong is a graduate
of Massachussetts Institute of Technology and MBA from Harvard University.
ITEM 10. EXECUTIVE COMPENSATION
The following officers received compensation from the Company for the
current and/or prior calendar year. Mr. John Koon, the Chief Executive Officer
of the Company, did not receive compensation for either year.
Total Compensation
---------------------
Kenneth Poon 1997 $ 32,000
1996 *
Antonio Young 1997 $ 46,000
1996
* Joined the Company in August, 1997.
Messrs. Botts and Chen each received management fees which are disclosed in
"Certain Relationships and Related Transactions". No other officer of the
Company received compensation for either the year-ended December 31, 1997 or
1996.
Each non-executive director was compensated with 50,000 shares of common
stock for their services as directors. No additional compensation was paid to
employee directors.
The Board of Directors of the Company annually reviews all executive
positions and compensation.
12
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 15, 1998 the number of shares of
the Company's Common Stock known to be held by the executive officers and
directors individually and as a group and by beneficial owners of more than five
percent of the Company's Common Stock.
<TABLE>
Amount and Nature of
------------------------------------------------------
Name and Address of Beneficial Owner (1) Beneficial Ownership Percent of Class
- ---------------------------------------------------- --------------------------- ---------------------
<S> <C> <C>
John Koon 18,671,768 51.99%
Antonio C.K. Young 100,000 *
Kenneth C.W. Poon N/L *
Long Chen Chen 100,000 *
Michael W. Botts 100,000 *
Raul F. Sanchez-Elia 100,000 *
James H. Shane 50,000 *
James Wong 50,000 *
--------------------------- ---------------------
Total all officers and directors 19,671,768 54.78%
--------------------------- ---------------------
</TABLE>
- -----------------
* Less than 1%.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
and the information contained in the footnotes to the table.
(2) Address is 4704, 47/F, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year-ended December 31, 1997, the Company advanced $252,000 to
its controlling shareholder, Bestalong Group, Inc. ("Bestalong"). These funds
were unsecured and non-interest bearing. The advances were settled subsequent to
December 31, 1997.
During the year-ended December 31, 1997, the Company made purchases of
$310,000 from Bestalong. These purchases were made at original cost with no
mark-up being charged. In addition, the Company paid $100,000 to Bestalong for
rent.
The Company paid a management fee to Mr. Michael Botts, a director in the
amount of $43,000 for his services during the year-ended December 31, 1997.
The Company paid a management fee to Mr. Chen Long Chen, a director in the
amount of $108,000 for his service during the year-ended December 31, 1997.
PART IV
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
None
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OPAL TECHNOLOGIES, INC.
By: /s/ John Koon
---------------------------
John Koon, President
Dated: May 6, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
Signature Title Date
--------------- --------- --------
<S> <C> <C>
/s/ John Koon
- ----------------------------- Chairman of the Board, President, Chief
John Koon Executive Officer and Director May 6, 1998
/s/ Antonio C.K. Young
- ---------------------------- Vice President, Chief Operating Officer
Antonio C.K. Young and Director May 6, 1998
/s/ Long Chen Chen
- ---------------------------- Vice President, Sales and Marketing and
Long Chen Chen Director May 6, 1998
/s/ Michael W. Botts
- ---------------------------- Vice President of Research and
Michael W. Botts Development and Director May 6, 1998
/s/ Raul F. Sanchez-Elia
- ---------------------------- Director
Raul F. Sanchez-Elia May 6, 1998
/s/ James H. Shane
- ---------------------------- Director
James H. Shane May 6, 1998
/s/ James Wong
- ---------------------------- Director May 6, 1998
James Wong
</TABLE>
14
<PAGE>
OPAL TECHNOLOGIES, INC.
Index to Consolidated Financial Statements
Page
--------
Independent Auditors Report F-2
Consolidated Balance Sheet as of December 31, 1996
and 1997 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1995, 1996 and 1997 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of Opal Technologies Inc.:
We have audited the accompanying consolidated balance sheets of Opal
Technologies Inc. (a company incorporated in the State of Nevada, United States
of America; the "Company") and Subsidiaries (the "Group") as of December 31,
1996 and 1997, and the related consolidated statements of operations, cash flows
and changes in shareholders' equity for the years ended December 31, 1995, 1996
and 1997. The accompanying financial statements give retroactive effect, for all
periods presented, to the acquisition of Opal Agriculture Development Limited
and Triple Star Holdings Limited as a reverse acquisition as described in Note 2
to the accompanying financial statements. 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 did not audit the
historical financial statements of the Company, before giving retroactive
effective to the acquisition of Opal Agriculture Development Limited and Triple
Star Holdings Limited as a reverse acquisition, as of December 31, 1996 and for
the years ended December 31, 1995 and 1996, which statements were immaterial to
the consolidated assets and liabilities as of December 31, 1996 and the
consolidated loss from continuing operations for the years ended December 31,
1995 and 1996 as reflected in the accompanying consolidated financial
statements. Those historical unconsolidated financial statements of the Company
were audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for the Company, before
giving retroactive effective to the acquisition of Opal Agriculture Development
Limited and Triple Star Holdings Limited as a reverse acquisition, as of
December 31, 1996 and for the years ended December 31, 1995 and 1996, is based
solely on the report of the other auditors.
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 audits 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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Opal Technologies
Inc. and Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the years ended December 31, 1995, 1996 and
1997 after giving retroactive effect to the acquisition of Opal Agriculture
Development Limited and Triple Star Holdings Limited as a reverse acquisition as
described in Note 2 to the financial statements, in conformity with generally
accepted accounting principles in the United States of America.
As described in Note 25.a to the accompanying financial statements, the Group
was reorganized and commenced the current operations in 1996 and, as shown in
the accompanying statement of operations, sustained a net loss from continuing
operations (net of minority interests) of approximately Rmb3,601,000 (equivalent
to US$433,000) and Rmb605,000 (equivalent to US$73,000) for the years ended
December 31, 1996 and 1997, respectively. Realization of the Group's investment
in assets is dependent upon the success of its future operations.
ARTHUR ANDERSEN & CO.
Certified Public Accountants
Hong Kong
Hong Kong,
March 31, 1998.
F-2
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
Note 1 9 9 6 1 9 9 7
--------- ---------------- ---------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and bank deposits 560 12,078 1,453
Accounts receivable, net 5 4,446 21,525 2,590
Due from a shareholder 23 - 3,430 412
Due from a director 23 5 19 2
Due from a related company 23 749 - -
Prepayments and other current assets 155 212 26
Inventories, net 6 6,918 5,330 642
---------------- --------------- ----------------
Total current assets 12,833 42,594 5,125
Property, machinery and equipment, net 7 11,582 17,638 2,123
Construction-in-progress 8 61,274 96,613 11,626
Licensing costs, net 9 7,980 7,536 907
Goodwill, net 10 1,624 1,540 186
---------------- --------------- ----------------
Total assets 95,293 165,921 19,967
================ =============== ================
LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings 11 - 10,300 1,239
Accounts payable 6,750 5,190 625
Accrued liabilities 12 1,566 1,669 201
Taxation payable 13 - 315 38
---------------- --------------- ----------------
Total current liabilities 8,316 17,474 2,103
Non-current payable 14 - 23,911 2,877
Loan from PRC joint venture partner 15 2,269 5,315 639
Loans from a shareholder 16 58,394 - -
---------------- --------------- ----------------
Total liabilities 68,979 46,700 5,619
---------------- --------------- ----------------
Minority interests 22,008 22,005 2,649
---------------- --------------- ----------------
Shareholders' equity:
Common stock, par value US$0.001:
- authorized - 49,000,000 shares as of
December 31, 1996 and 1997
- outstanding and fully paid -
13,591,964 shares as of December
31, 1996 and 35,991,964 shares as
of December 31, 1997 17 113 299 36
Preferred stock, par value US$0.001:
- -Authorized - 1,000,000 shares as of
December 31, 1996 and 1997
- outstanding and fully paid - 100,000
shares as of December 31, 1996 and 17 1 1 -
1997
Additional paid-in capital 8,205 101,488 12,213
Accumulated losses (3,601) (4,206) (506)
Cumulative translation adjustments (412) (366) (44)
---------------- --------------- ----------------
Total shareholders' equity 4,306 97,216 11,699
---------------- --------------- ----------------
Total liabilities, minority
interests and shareholders' equity 95,293 165,921 19,967
================ =============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on February 28, 1998 of US$1.00
= Rmb8.31. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other
rate.
F-3
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
Note 1 9 9 5 1 9 9 6 1 9 9 7
---------- --------------- --------------- --------------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C> <C>
Net sales 20 - 23,887 37,664 4,532
Cost of goods sold 20 - (20,475) (25,736) (3,097)
--------------- --------------- --------------- ---------------
Gross profit - 3,412 11,928 1,435
Selling, general and
administrative expenses - (5,992) (12,260) (1,474)
Interest expenses - (18) - -
Interest income - 12 77 9
Other expenses, net - (33) (38) (5)
--------------- --------------- --------------- ---------------
Loss from continuing
operations - (2,619) (293) (35)
Discontinued operations:
- Loss from discontinued
operations 1 (2,960) (1,944) - -
-- -Net loss on disposal
of discontinued 1 - (1,696) - -
operations
--------------- --------------- --------------- ---------------
Loss from discontinued
operations (2,960) (3,640) - -
--------------- --------------- --------------- ---------------
Loss before income (2,960) (6,259) (293) (35)
taxes
Provision for income taxes 13 - - (315) (38)
--------------- --------------- --------------- ---------------
Loss before minority
interests (2,960) (6,259) (608) (73)
Minority interests - (982) 3 -
--------------- --------------- --------------- ---------------
Net loss (2,960) (7,241) (605) (73)
=============== =============== =============== ===============
Loss per common share:
- Continuing operations - (0.26) (0.03) -
- Discontinued operations (0.22) (0.27) - -
--------------- --------------- --------------- ---------------
(0.22) (0.53) (0.03) -
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on February 28, 1998 of US$1.00
= Rmb8.31. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other
rate.
F-4
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
1 9 9 5 1 9 9 6 1 9 9 7
--------------- --------------- --------------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss (2,960) (7,241) (605) (73)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities -
Depreciation of property, machinery
and equipment - 53 960 115
Amortization of goodwill - 34 84 10
Amortization of licensing costs - - 444 53
Loss from discontinued operations 2,960 1,944 - -
Net loss on disposal of discontinued - 1,696 - -
operations
Change in discontinued operations 58 (149) - -
Minority interests - 982 (3) -
(Increase) Decrease in operating assets -
Accounts receivable, net - 374 (17,079) (2,055)
Prepayments and other current assets - (79) (57) (7)
Inventories, net - (2,629) 1,588 191
Increase (Decrease) in operating
liabilities -
Accounts payable - (1,246) (1,560) (187)
Accrued liabilities - 371 103 13
Taxation payable - - 315 38
Non-current payable - - 23,911 2,877
--------------- --------------- --------------- ---------------
Net cash provided by (used in)
operating activities 58 (5,890) 8,101 975
=============== =============== =============== ===============
Cash flows from investing activities:
Acquisition of property, machinery
and equipment - (10,573) (42,355) (5,097)
Net cash outflow from acquisition of
a subsidiary (Note 24) - (595) - -
Acquisition of license right - (7,980) - -
Advance to a shareholder - - (3,430) (412)
Advance to a director - (5) (14) (2)
(Advance to) Repayment from a related - (749) 749 90
company
--------------- --------------- --------------- ---------------
Net cash used in investing - (19,902) (45,050) (5,421)
activities
--------------- --------------- --------------- ---------------
Cash flows from financing activities:
Issuance of common stock, net of
issuance expenditures - - 47,567 5,724
New loans from a shareholder - 26,303 25,020 3,011
New loans from PRC joint venture - - 3,046 367
partner
New short-term bank loan - - 10,000 1,203
Other loans - - 300 36
Repayment of loans from a shareholder - - (37,512) (4,514)
Others - 312 - -
--------------- --------------- --------------- ---------------
Net cash provided by financing - 26,615 48,421 5,827
activities
--------------- --------------- --------------- ---------------
Effect of cumulative translation - (412) 46 5
adjustments
--------------- --------------- --------------- ---------------
Net increase in cash and bank deposits 58 411 11,518 1,386
Cash and bank deposits, as of beginning 91 149 560 67
of year
--------------- --------------- --------------- ---------------
Cash and bank deposits, as of end of year 149 560 12,078 1,453
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York on February 28, 1998 of US$1.00
= Rmb8.31. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other
rate.
F-5
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
Common stock Preferred stock Additional Cumulative
---------------------- ----------------------
Number Number of paid-in Accumulated translation
of shares Amount shares Amount capital losses adjustments
---------- ----------- ----------- ---------- ---------- ----------- -----------
'000 Rmb'000 '000 Rmb'000 Rmb'000 Rmb'000 Rmb'000
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 13,592 113 100 1 28,925 (14,120) -
1995
Net loss - - - - - (2,960) -
Translation adjustments - - - - - - -
---------- ----------- ----------- ---------- ---------- ----------- ----------
Balance as of January 1, 13,592 113 100 1 28,925 (17,080) -
1996
Net loss - - - - - (7,241) -
Accumulated loss
capitalized (Note 1) - - - - (20,720) 20,720 -
Translation adjustments - - - - - - (412)
---------- ----------- ----------- ---------- ---------- ----------- -----------
Balance as of December 13,592 113 100 1 8,205 (3,601) (412)
31, 1996
Issuance of common stock
for cash 11,400 95 - - 47,472 - -
Issuance of common stock
by capitalization of
loan from a 11,000 91 - - 45,811 - -
shareholder (Note 16)
Net loss - - - - - (605) -
Translation adjustments - - - - - - 46
---------- ----------- ----------- ---------- ---------- ----------- -----------
Balance as of December 35,992 299 100 1 101,488 (4,206) (366)
31, 1997
========== =========== =========== ========== ========== =========== ===========
</TABLE>
F-7
The accompanying notes are an integral part of these financial statements.
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Opal Technologies Inc. (the "Company") was incorporated in the State of Nevada
in the United States of America on September 9, 1987. With effect from May 14,
1997, the Company changed its name from Med-Tex Corporation to Opal Technologies
Inc.
Disposal of subsidiaries
During the period from January 1, 1995 (the earliest date cover by this report)
to October 30, 1996, the Company had two subsidiaries - Enpak Medical
Corporation ("EMC") and Enpak Surgical Products, Inc. ("ESP"), which were
engaged in assembling and marketing custom and standard surgical kits used in
interventions, and diagnostic and surgical procedures. On October 31, 1996, the
Company disposed of its entire interests in EMC and ESP for US$1. As a result of
the disposal, the operations of EMC and ESP for the years ended December 31,
1995 and 1996 have been reclassified as discontinued operations in the financial
statements. The Company recorded a net loss on disposal of discontinued
operations of approximately Rmb1,696,000 (equivalent of US$204,000).
During the year ended December 31, 1996, the Company capitalized its accumulated
loss of approximately Rmb20,720,000 (equivalent of US$2,499,000) against
additional paid-in capital.
During the period from October 31, 1996 to June 6, 1997, the Company remained
dormant.
Acquisition of subsidiaries
On June 6, 1997, the Company entered into an agreement with Bestalong Group Inc.
("Bestalong"; a company incorporated in the British Virgin Islands) to acquire
from Bestalong 100% interest in Triple Star Holdings Limited ("TSH"; a company
incorporated in the British Virgin Islands) and 100% interest in Opal
Agriculture Development Limited ("OAD"; a company incorporated in the British
Virgin Islands) by (i) issuing to Bestalong 8,452,768 shares of common stock
(after the one-for-ten reverse stock split described in Note 17) and 100,000
shares of Series A preferred stock, and (ii) assuming Bestalong's liabilities in
the form of a promissory note of US$2,100,000, which was subsequently cancelled
by the issuance of 4,200,000 shares of common stock (after the one-for-ten
reverse stock split described in Note 17). Bestalong is beneficially controlled
by Mr. John K. C. Koon, a director of the Company.
F-8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
TSH Group
TSH and its wholly-owned subsidiary, Triple Star Group Limited ("TSG"; a company
incorporated in the British Virgin Islands) are investment holding companies. On
August 6, 1996, TSG acquired a 55% interest in Beijing Opal Agriculture
Biochemistry Co., Ltd. ("Beijing Opal"), an equity joint venture established in
the People's Republic of China ("the PRC"). Beijing Opal is principally engaged
in the manufacturing and sales of organic agricultural fertilizers.
Beijing Opal was originally established as a PRC equity joint venture between
Ideit Enterprise Co., Ltd. ("IECL"; a company incorporated in Taiwan) - 40% and
Beijing Opal Biochemistry Factory ("BOBF"; a PRC state-owned enterprise) - 60%,
for a period of 20 years from February 8, 1995 to February 7, 2015. Pursuant to
a sale and purchase agreement dated August 6, 1996, TSG acquired from IECL a 40%
interest in Beijing Opal and acquired from BOBF a 15% interest in Beijing Opal
for an aggregate consideration of approximately Rmb1,159,000. A revised joint
venture agreement between TSG and BOBF was executed on August 6, 1996, which was
approved by the relevant PRC authorities on March 24, 1997. Under the revised
joint venture agreement, the joint venture period has been extended to 30 years
from February 8, 1995 to February 7, 2025, and the total investment of Beijing
Opal has been increased from US$350,000 to US$10,000,000 (equivalent to
approximately Rmb82,900,000), of which US$6,000,000 (equivalent to approximately
Rmb49,920,000) has to be in the form of registered capital to be injected within
one year after Beijing Opal obtains its revised business license from the PRC
authorities. As of December 31, 1997, all of the registered capital of Beijing
Opal of US$6,000,000 was paid-up and verified by a certified public accountant
in the PRC according to PRC regulations.
The other key provisions of the revised joint venture agreement are:
* the profit and loss sharing ratio is the same as the respective percentage
of equity interest.
* upon early termination or liquidation of Beijing Opal, the net assets of
Beijing Opal will be distributed in accordance with the respective
percentage of equity interest.
* the Board of Directors of Beijing Opal consists of seven members, with four
designated by TSG and three designated by BOBF.
F-9
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
OAD
OAD was incorporated in the British Virgin Islands on December 15, 1995. On
January 2, 1996, OAD issued 50,000 shares of common stock to Asian Connections
Limited (a company incorporated in the British Virgin Islands), which was owned
by independent investors, at par value for a total cash consideration of
US$50,000. On March 22, 1997, Bestalong acquired the entire interest in OAD for
a consideration of approximately US$19,405,000.
OAD is principally engaged in the trading of organic agricultural fertilizer
manufactured by Beijing Opal. On December 16, 1996, OAD was appointed by Beijing
Opal as its sole agent and was granted the exclusive right to distribute and
sell organic fertilizer manufactured by Beijing Opal in the PRC, Hong Kong,
Taiwan and Macau for the period from January 1, 1997 to February 7, 2015.
2. BASIS OF PRESENTATION
The acquisitions of TSH and OAD by the Company on June 6, 1997 have been treated
as a reverse acquisition since TSH and OAD are the continuing entities as a
result of the recapitalization and restructuring. On this basis, the historical
financial statements prior to June 6, 1997 represent the combined financial
statements of TSH and OAD. The historical shareholders' equity accounts of the
Company as of December 31, 1995 and 1996 have been retroactively restated to
reflect the issuance of 8,452,768 shares of common stock (after the effect of
the reverse stock split - described in Note 17) and 100,000 shares of Series A
preferred stock to Bestalong and the issuance of 4,200,000 shares of common
stock (after the effect of the reverse stock split - described in Note 17) for
the cancellation of a promissory note (see Note 1).
The acquisition of Beijing Opal by TSG on August 6, 1996 has been accounted for
using the purchase method of accounting. Accordingly, the assets and liabilities
assumed have been recorded at their estimated fair values, and the operations of
Beijing Opal are included in the consolidated financial statements of the Group
from the date of acquisition.
F-10
<PAGE>
3. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as "the Group") as of December 31, 1997 were as
follows:
<TABLE>
Percentage of
Place of equity interest
Name incorporation held Principal activities
- ------------------------------- --------------------- -------------------- --------------------------------
<S> <C> <C> <C>
Triple Star Holdings Limited The British Virgin 100% Investment holding
("TSH") Islands
Triple Star Group Limited The British Virgin 100% Investment holding
("TSG") Islands
Opal Agriculture Development The British Virgin 100% Trading of organic
Limited ("OAD") Islands agricultural fertilizers
Beijing Opal Agriculture The PRC 55% Manufacturing and sale of
Biochemistry Co., Ltd. organic agricultural
("Beijing Opal") fertilizers
</TABLE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intra-group balances and transactions
have been eliminated on consolidation.
b. Goodwill
Goodwill, being the excess of cost over the fair value of the Group's share
of the net assets of a subsidiary (Beijing Opal) acquired, is amortized on
a straight-line basis over 20 years. The amortization recorded during the
years ended December 31, 1995, 1996 and 1997 was approximately Nil,
Rmb34,000 and Rmb84,000, respectively. Accumulated amortization as of
December 31, 1996 and 1997 was approximately Rmb34,000 and Rmb118,000,
respectively. Management assesses the remaining life of the goodwill
annually, taking into consideration the current operating results and
future prospects of the subsidiary.
c. Inventories
Inventories are stated at the lower of cost, on a weighted average basis,
or market value. Costs of work-in-process and finished goods are composed
of direct materials, direct labor and an attributable portion of production
overheads.
F-11
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
d. Property, machinery and equipment
Property, machinery and equipment are recorded at cost. Gains or losses on
disposals are reflected in current operations. Depreciation for financial
reporting purposes is provided using the straight-line method over the
estimated useful lives of the assets as follows: machinery and equipment -
5 to 10 years, motor vehicles - 5 years, furniture and office equipment - 5
years. All ordinary repair and maintenance costs are expensed as incurred.
The Company recognizes an impairment loss on a fixed asset when evidence,
such as the sum of expected future cash flows (undiscounted and without
interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including
depreciation, and when the carrying amount of the asset cannot be realized
through sale. Measurement of the impairment loss is based on the fair value
of the assets.
e. Construction-in-progress
Construction-in-progress represents factories and office buildings under
construction and machinery pending installation. This includes costs of
land, costs of construction, and interest charges arising from borrowings
used to finance these assets during the period of construction. There was
no interest capitalized for the years ended December 31, 1995, 1996 and
1997. No deprecation is provided in respect of construction-in-progress
until the construction is completed.
f. Licensing costs
Licensing costs are costs incurred to acquire the exclusive right to
distribute and sell a brand of organic agricultural fertilizer.
Amortization for financial reporting purposes is provided using the
straight-line method over the license period of 18 years. The amortization
recorded during the years ended December 31, 1995, 1996 and 1997 was
approximately Nil, Nil and Rmb444,000, respectively. Accumulated
amortization as of December 31, 1996 and 1997 was approximately Nil and
Rmb444,000, respectively. Management assesses the remaining life of the
licensing costs annually, taking into consideration the current operating
results and future prospects of the subsidiary.
g. Net sales
Net sales represent the invoiced value of goods supplied to customers, net
of sales returns and allowances. Sales are recognized upon delivery of
goods and passage of title to customers.
F-12
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
h. Income taxes
The Group accounts for income taxes under the provisions of Statement of
Financial Accounting Standards 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 bases of assets and liabilities.
i. Operating leases
Operating leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets remain with the
lessors. Rental payments under operating leases are charged to expense on
the straight-line basis over the period of the relevant leases.
j. Foreign currency translation
The Group considers Reminbi ("Rmb") as its functional currency as most of
the Group's business activities are based in Reminbi.
The translation of the financial statements of group companies into Reminbi
is performed for balance sheet accounts using the closing exchange rate in
effect at the balance sheet date and for revenue and expense accounts using
an average exchange rate during each reporting period. Gains or losses
resulting from translation are included in shareholders' equity separately
as cumulative translation adjustments. Aggregate gains (losses) from
foreign currency transactions included in the results of operations for the
years ended December 31, 1995, 1996 and 1997 were approximately Nil, Nil
and Rmb38,000, respectively.
k. Loss per common share
Loss per common share is computed in accordance with Statement of Financial
Accounting Standards No. 128 by dividing net loss for each year by the
weighted average number of shares of common stock outstanding during the
years, as if the 8,452,768 shares of common stock issued for the
acquisition of OAD and TSH (see Note 1) and the one-for-ten reverse stock
split (see Note 17.a) had been consummated prior to the years presented.
The weighted average number of shares to compute loss per common share is
approximately 13,592,000, 13,592,000 and 22,172,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
F-13
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Use of estimates
The preparation of 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 results could differ from
those estimates.
m. Fair value of financial statements
The Group's financial instruments consist of cash, cash equivalents, trade
receivables and trade payables. The book value of these instruments are
considered to be representative of their fair values.
5. ACCOUNTS RECEIVABLE
Accounts receivable comprised:
<TABLE>
1 9 9 6 1 9 9 7
-------------------- -----------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Trade receivables 4,511 23,803 2,864
Less: Allowance for bad and doubtful
accounts (65) (2,278) (274)
-------------------- -------------------- -------------------
Accounts receivable, net 4,446 21,525 2,590
==================== ==================== ===================
6. INVENTORIES
Inventories comprised:
1 9 9 6 1 9 9 7
-------------------- -----------------------------------------
Rmb'000 Rmb'000 US$'000
Raw materials 2,653 4,003 482
Work-in-process 982 532 64
Finished goods 3,283 849 102
-------------------- -------------------- -------------------
6,918 5,384 648
Less: Allowance for slow-moving and
obsolete inventories - (54) (6)
-------------------- -------------------- -------------------
Inventories, net 6,918 5,330 642
==================== ==================== ===================
</TABLE>
F-14
<PAGE>
7. PROPERTY, MACHINERY AND EQUIPMENT
Property, machinery and equipment comprised:
<TABLE>
1 9 9 6 1 9 9 7
-------------------- -----------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Property, machinery and equipment:
Machinery and equipment 11,426 17,521 2,108
Motor vehicles 231 1,051 126
Furniture and office equipment 20 121 15
-------------------- -------------------- -------------------
Cost 11,677 18,693 2,249
Less: Accumulated depreciation (95) (1,055) (126)
-------------------- -------------------- -------------------
Property, machinery and equipment, net
11,582 17,638 2,123
==================== ==================== ===================
</TABLE>
8. CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents land cost and factories and office
buildings under construction in the PRC, which comprised:
<TABLE>
1 9 9 6 1 9 9 7
-------------------- -----------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Land cost 24,700 52,611 6,331
Construction costs 6,874 14,302 1,721
Machinery 29,700 29,700 3,574
-------------------- -------------------- -------------------
61,274 96,613 11,626
==================== ==================== ===================
</TABLE>
Private ownership of land is not allowed in the PRC; rather, entities acquire
the right to use the land for a designated term. As of December 31, 1997, land
cost represented the cost of acquiring the land use right to a plot of land of
approximately 213 acres (1996 - 110 acres) in Beijing, the PRC for a period of
50 years commencing from the issuance date of the land use right certificate.
The Group is in the process of completing the legal agreements relating to the
acquisition of the land use right.
As of December 31, 1997, approximately 122 acres of land was under development.
F-15
<PAGE>
9. LICENSING COSTS
<TABLE>
1 9 9 6 1 9 9 7
-------------------- -----------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Licensing costs 7,980 7,980 960
Less: Accumulated amortization - (444) (53)
-------------------- -------------------- -------------------
Licensing costs, net 7,980 7,536 907
==================== ==================== ===================
</TABLE>
Licensing costs represent fees paid to a third party to obtain the exclusive
right to distribute and sell organic agriculture fertilizer manufactured by
Beijing Opal in the PRC, Hong Kong, Taiwan and Macau for 18 years up to February
7, 2015.
10. GOODWILL
<TABLE>
1 9 9 6 1 9 9 7
-------------------- -----------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Goodwill 1,658 1,658 200
Less: Accumulated amortization (34) (118) (14)
-------------------- -------------------- -------------------
Goodwill, net 1,624 1,540 186
==================== ==================== ===================
</TABLE>
11. SHORT-TERM BORROWINGS
Short-term borrowings comprised:
<TABLE>
1 9 9 6 1 9 9 7
-------------------- -----------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Short-term bank loan (a) - 10,000 1,203
Other loan (b) - 300 36
-------------------- -------------------- -------------------
- 10,300 1,239
==================== ==================== ===================
</TABLE>
Notes -
a. Short-term bank loan is denominated in Renminbi and bore interest at 9.5%
per annum as of December 31, 1997. It was drawn in December 1997 for
working capital purposes and is repayable within one year and renewable
with the consent of the relevant bank. It is guaranteed by a third party in
the PRC.
b. .Other loan from a third party in the PRC is denominated in Renminbi,
unsecured, non-interest bearing and without pre-determined repayment terms.
It was used to finance the construction of the Group's factories and office
buildings.
F-16
<PAGE>
11. SHORT-TERM BORROWINGS (Cont'd)
Supplemental information with respect to the short-term bank loan for the year
ended December 31, 1997 is as follows:
<TABLE>
Maximum amount Average amount Weighted Weighted
outstanding outstanding average average
during the year during the year interest rate interest rate
at the end of during the year
year
----------------- ----------------- ----------------- ----------------
Rmb'000 Rmb'000
<S> <C> <C> <C> <C>
Short-term bank loan 10,000 833 9.5% 9.5%
================= ================= ================= ================
</TABLE>
12. ACCRUED LIABILITIES
Accrued liabilities comprised:
<TABLE>
1 9 9 6 1 9 9 7
-------------------- -----------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Accruals for operating expenses
- salary and bonus 199 108 13
- professional fees 1,036 1,086 130
Provision for welfare fund (a) 40 114 14
Provision for pension fund (a) 36 109 13
Others 255 252 31
-------------------- -------------------- -------------------
1,566 1,669 201
==================== ==================== ===================
</TABLE>
Note -
a. Welfare fund is provided at 19% of total salary and pension fund is
provided at 17% of total salary. The welfare fund is for welfare expenses
of employees (see Note 18) and the pension fund is for the employees'
retirement benefit (see Note 19).
F-17
<PAGE>
5
INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdictions in which they
operate. The British Virgin Islands entities (TSH, TSG and OAD) are incorporated
under the International Business Companies Act of the British Virgin Islands
and, accordingly, are exempted from payment of the British Virgin Islands income
taxes. OAD carries on business in the PRC through Beijing Opal and,
consequently, is subject to PRC enterprise income tax at a rate of 33% (30%
state tax and 3% local tax). Beijing Opal also carries on business in the PRC
and is subject to PRC enterprise income tax at a rate of 33% (30% state tax and
3% local tax). However, Beijing Opal is exempted from the state and local income
taxes for two years starting from the first year of profitable operations and
then is subject to a 50% reduction for the next ten years. The first profitable
year for Beijing Opal was the year ended December 31, 1996. If the tax holiday
for Beijing Opal did not exist, the Group's income tax expenses (net of minority
interests) would have been increased by approximately nil, Rmb396,000 and
Rmb263,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
The reconciliation of the statutory income tax rate in the PRC to the effective
income tax rate based on loss before income taxes as stated in the consolidated
statements of operations for the years ended December 31, 1996 and 1997 is as
follows:
<TABLE>
1 9 9 6 1 9 9 7
------------------ ------------------
<S> <C> <C>
PRC statutory income tax rate (33%) (33%)
Non-taxable activities 44% 134%
Effect of tax exemption for the PRC joint venture (11%) (158%)
Deferred tax assets for which no benefit has been recognised
due to establishment of valuation allowance (a)
- 164%
------------------ ------------------
- 107%
================== ==================
</TABLE>
Note -
(a) This represents the tax effect of the allowance for doubtful accounts of
approximately Rmb1,458,000 offsetted by a valuation allowance due to
uncertainties associated with the success of the Group's future operations
(see Note 25.a).
F-18
<PAGE>
NON-CURRENT PAYABLE
This represents the outstanding payable to acquire the right to use a plot of
land of approximately 97 acres in Beijing, the PRC.
15. LOAN FROM PRC JOINT VENTURE PARTNER
This represented a loan from the PRC joint venture partner - BOBF, for financing
the operations of the Group, which is denominated in Renminbi, unsecured and
non-interest bearing. BOBF has agreed not to demand the Group for repayment
until the Group is financially capable to do so.
16. LOANS FROM A SHAREHOLDER
As of December 31, 1996, loans from Bestalong, a major shareholder, amounted to
approximately Rmb58,394,000 (equivalent to US$7,003,000), and were unsecured and
non-interest bearing.
During the year ended December 31, 1997, approximately Rmb45,902,000 (equivalent
to US$5,500,000) of the loans from Bestalong were capitalized by issuance of
11,000,000 shares of common stock, par value US$0.001, at US$0.50 per share.
17. SHARE CAPITAL
a. Common stock
During the period from January 1, 1995 (the earliest date covered by the
report) to June 5, 1997, the Company had authorized share capital of
50,000,000 shares of common stock, par value US$0.001 each, and outstanding
share capital of 9,391,964 shares of common stock, par value US$0.001 each.
On June 6, 1997, the Company reclassified its authorized share capital of
50,000,000 shares of common stock, par value US$0.001 each, into 49,000,000
shares of common stock, par value US$0.001 each, and 1,000,000 shares of
preferred stock, par value US$0.001 each. Also, it effected a one-for-ten
reverse stock split and, resulting in 939,196 shares of common stock, par
value US$0.001 each, being outstanding. This reverse split has been
reflected retroactively in the accompanying financial statements and all
loss per common share computations.
F-19
<PAGE>
17. SHARE CAPITAL (Cont'd)
a. Common stock (Cont'd)
On June 6, 1997, in connection with the acquisitions of TSH and OAD (see
Note 1), the Company issued 8,452,768 shares of common stock, par value
$0.001 each (after the one-for-ten reverse stock split). On July 1, 1997,
the Company issued 4,200,000 shares of common stock, par value US$0.001
each (after the one-for-ten reverse stock split), for a consideration of
US$0.5 per share, in return for the cancellation of a promissory note of
US$2,100,000 (equivalent to Rmb17,451,000) (see Note 1).
On July 1, 1997, the Company issued 11,400,000 shares of common stock, par
value US$0.001 each, for cash consideration of US$0.5 per share, and raised
US$5,700,000 (equivalent to Rmb47,567,000).
On September 29, 1997, the Company issued 11,000,000 shares of common
stock, par value US$0.001 each, at US$0.5 per share to capitalize a loan
from a shareholder amounting to US$5,500,000 (equivalent to Rmb45,902,000,
see Note 16).
b. .Preferred stock
On June 6, 1997, the Company authorized the creation of 1,000,000 shares of
preferred stock, par value US$0.001 each, and authorized its board of
directors to assign these preferred stock to different series and to fix
the related designation, powers, preference and rights of the shares.
On June 6, 1997, in connection with the acquisitions of TSH and OAD (see
Note 1), the Company issued 100,000 shares of Series A preferred stock, par
value US$0.001 each. The Series A preferred stock carries preferential
rights to dividends, is not subject to redemption and has liquidation
preference of US$0.001 per share. Also, the 100,000 shares of Series A
preferred stock carry voting rights of 30% of the total voting rights on
all corporate matters.
18. DISTRIBUTION OF INCOME
At present, a major portion of the Group's income is contributed by Beijing
Opal. Income of Beijing Opal as determined under generally accepted
accounting principles in the PRC is distributable to its joint venture
partners after transfer to (i) contributory dedicated capital as required
under PRC government regulations and the joint venture's articles of
association, and (ii) discretionary dedicated capital as determined by
Beijing Opal's board of directors. Discretionary capital includes a salary
fund and a staff welfare fund. Contributory dedicated capital is a form of
legal reserve fund. Contributory and discretionary dedicated capital is not
distributable in the form of dividends. In the financial statements
prepared under US GAAP, amounts designated for payments of employee salary
and welfare of approximately Rmb40,000 and Rmb74,000 for the years ended
December 31, 1996 and 1997 have been charged to income and the related
provisions are reflected as accrued liabilities in the balance sheets as of
December 31, 1996 and 1997.
F-20
<PAGE>
18. DISTRIBUTION OF INCOME (Cont'd)
A reconciliation of the consolidated accumulated loss reported under US
GAAP to that reported under PRC GAAP as of December 31, 1996 and 1997 is as
follows:
<TABLE>
1 9 9 6 1 9 9 7
-------------------- -----------------------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Accumulated loss, under PRC GAAP
(3,567) (2,610) (315)
Increase in allowance for doubtful
accounts - (1,458) (175)
Increase in allowance for obsolete
inventories - (54) (6)
Amortization of goodwill (34) (84) (10)
-------------------- -------------------- -------------------
Accumulated loss, under US GAAP
(3,601) (4,206) (506)
==================== ==================== ===================
</TABLE>
19. RETIREMENT PLAN
The Group's employees in the PRC are all employed by Beijing Opal. As
stipulated by PRC regulations, Beijing Opal maintains a defined
contribution retirement plan for all of its employees. All retired
employees are entitled to an annual pension equal to their basic annual
salary upon retirement. Beijing Opal contributes to a state sponsored
retirement plan approximately 17% of the basic salary of its employees, and
has no further obligations for the actual pension payments or
post-retirement benefits beyond the annual contributions. The state
sponsored retirement plan is responsible for the entire pension obligations
payable to retired employees. Beijing Opal's contribution was approximately
Rmb36,000 and Rmb73,000 for the years ended December 31, 1996 and 1997,
respectively.
The Group has no other retirement plan for its employees outside the PRC.
F-21
<PAGE>
20. NET SALES AND COST OF GOODS SOLD
Net sales and cost of goods sold comprised:
<TABLE>
1 9 9 5 1 9 9 6 1 9 9 7
----------------- ----------------- ------------------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Net sales to related companies
(Note 23) - 20,045 14,609 1,758
Cost of goods sold (Note 23)
- (19,531) (14,609) (1,758)
----------------- ----------------- ----------------- ----------------
- 514 - -
Net sales to third parties - 3,842 23,055 2,774
Cost of goods sold (Note 23)
- (944) (11,127) (1,339)
----------------- ----------------- ----------------- ----------------
- 2,898 11,928 1,435
----------------- ----------------- ----------------- ----------------
Gross profit - 3,412 11,928 1,435
================= ================= ================= ================
</TABLE>
21. COMMITMENTS
The Group had capital commitments amounting to approximately Nil and
Rmb5,065,000 as of December 31, 1996 and 1997, respectively, for
construction of factories and office buildings in the PRC, and
approximately Rmb36,300,000 and Rmb3,300,000 as of December 31, 1996 and
1997, respectively, for purchases of machinery and equipment.
22. BANKING FACILITIES
The Group had banking facilities of approximately Nil and Rmb10,000,000 as
of December 31, 1996 and 1997, respectively, for short-term bank loans. The
facilities was fully utilized as of December 31, 1997. These facilities
were secured by a guarantee given by a third party in the PRC.
F-22
<PAGE>
23. RELATED PARTY TRANSACTIONS
Name and relationship of related parties:
<TABLE>
Relationships with the
Name of related parties Company
- -------------------------------------------------------------------------- ------------------------------
<S> <C>
Bestalong Group Inc. ("Bestalong") Parent company
Oriental Alliance Limited Subsidiary of Bestalong
Group Inc.
Agriculture and Production Information Company ("APIC") Holding company of BOBF
Beijing Komix Vigour Property Liquid Fertilizer Co. Ltd. ("BKVPL") Affiliated company of BOBF
Komix Asia Pacific Company Limited ("KAP") Common directors
Fuzhou Opal Company Limited ("Fuzhou Opal") Common director
</TABLE>
Summary of related party balances and transactions is as follows:
<TABLE>
1 9 9 5 1 9 9 6 1 9 9 7
---------------- ---------------- ---------------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Due from a shareholder
- Bestalong (a) - - 2,100 252
Due from a related company
- Oriental Alliance Limited (b) - 749 - -
Due from a director
- Mr. Chen Long Chen (b) - 5 19 2
Accounts payable to related companies
(c)
- APIC - 1,260 4,072 490
- KAP - 356 - -
- BKVPL - 4,435 - -
Sales to related companies (d)
- APIC - 19,423 14,609 1,758
- Fuzhou Opal - 622 - -
Purchases from related companies (e)
- APIC - - 3,648 439
- KAP - 2,164 - -
- Bestalong - - 2,568 310
Rental expenses paid to
- APIC - - 29 3
- Bestalong - 290 831 100
Management fees paid to directors (f)
- Mr. Michael William Botts - 348 357 43
- Mr. Chen Long Chen - 522 897 108
</TABLE>
F-23
<PAGE>
23. RELATED PARTY TRANSACTIONS (Cont'd)
Notes -
a. This represented advances to Bestalong which were unsecured and
non-interest bearing. The advances were settled subsequent to December 31,
1997.
b. The balances due from a related company and a director were unsecured,
non-interest bearing and without pre-determined repayment terms.
c. These represented payables on purchases of raw materials from related
companies in the ordinary course of business.
d. Sales to APIC were at a mark-up of 0.5% for the year ended December 31,
1996 and at cost for the year ended December 31, 1997. Sales to Fuzhou Opal
were made in the ordinary course of business.
e. Purchases from related companies were made at the original cost with no
mark-up being charged.
f. These represent management fees paid to Mr. Michael William Botts and Mr.
Chen Long Chen for the provision of executive services.
In addition, the Group reimbursed Bestalong for expenditures (both capital and
operating in nature) incurred by Bestalong on behalf of the Group. Such
reimbursements amounted to approximately Nil, Rmb58,394,000 and Rmb25,020,000
during the years ended December 31, 1995, 1996 and 1997.
24. SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION
a. On August 6, 1996, TSG acquired a 55% interest in Beijing Opal for cash
consideration of approximately Rmb1,159,000. Details of assets acquired and
liabilities assumed were as follows:
Rmb'000
--------------
Cash and bank deposits 564
Accounts receivable 4,820
Prepayments and other current assets 76
Inventories 4,289
Property, machinery and equipment 2,292
Accounts payables (7,996)
Accrued expenses (1,195)
Loans from Bestalong Group Inc. (3,757)
--------------
Net liabilities assumed as of the date of acquisition (907)
==============
F-24
1
<PAGE>
24. SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION (Cont'd)
a. (Cont'd)
Rmb'000
--------------
Share of net liabilities as of the date of acquisition (55%) (499)
Goodwill 1,658
--------------
Consideration satisfied in cash 1,159
==============
Net cash outflow:
Cash paid 1,159
Cash and bank deposits acquired (564)
--------------
595
==============
b. Non cash items:
During the year ended December 31, 1997, the Company issued 11,000,000
shares of common stock by capitalization of a loan from a shareholder of
approximately Rmb45,902,000 (equivalent of US$5,500,000). In addition,
during the year ended December 31, 1997, the Company issued 4,200,000
shares of common stock by the cancellation of a promissory note of
approximately Rmb17,451,000 (equivalent of US$2,100,000) (See Note 17.a).
25. OPERATING RISKS
a. Limited operating history
The Group reorganized and commenced its operations in trading and
manufacturing of organic agricultural fertilizers in August 1996, and such
operations were still in the development stage as of December 31, 1997. The
Group incurred losses from continuing operations (net of minority
interests) of approximately Rmb3,601,000 and Rmb605,000 for the years ended
December 31, 1996 and 1997, respectively, and had accumulated losses
amounting to approximately Rmb3,601,000 and Rmb4,206,000 as of December 31,
1996 and 1997, respectively. The Group's operations are subject to all the
risks inherent in an emerging business enterprise. These include, but are
not limited to, competition from other fertilizer manufacturers, the need
to expand production and distribution, and slow settlement of billings to
new customers. Realization of the Group's investment in assets is dependent
on the success of its future operations.
b. Dependence strategic relationship
The Group conducts its operations in the PRC through an equity joint
venture with BOBF as described in Note 1. Any deterioration of this
strategic relationship could have an adverse effect on the operations and
financial position of the Group.
F-25
<PAGE>
25. OPERATING RISKS (Cond't)
c. Concentration of credit risk
A substantial portion of the Group's sales is made to a small number of
customers on an open account basis and generally no collateral is required.
Details of individual customers accounting for more than 5% of the Group's
sales are as follows:
<TABLE>
1 9 9 6 1 9 9 7
------------------ ------------------
<S> <C> <C>
Agriculture and Production Information Company,
a related party
81.3% 38.9%
Heng Yang Agriculture and Technology Development
Company
- 11.6%
Yunnan Xing Long Agriculture and Trade Development
Centre
1.4% 11.4%
Xin Jiang Agriculture and Science Institute
- 8.2%
Gansu Nong Ken Technological Development Company
1.2% 5.2%
================== ==================
</TABLE>
Concentration of accounts receivable as of December 31, 1996 and 1997 is as
follows:
<TABLE>
1 9 9 6 1 9 9 7
------------------ ------------------
<S> <C> <C>
Five largest accounts receivable 82.9% 68.6%
================== ==================
</TABLE>
The Group performs ongoing credit evaluation of each customer's financial
condition. It maintains reserves for potential credit losses and such
losses in aggregate have not exceeded management's projections. As of
December 31, 1997, the Group maintained a specific provision of Rmb
1,458,000 and a general provision of 3% of the remaining balance against
its trade receivables. The Directors, in their opinion, consider that the
risk of recoverability of the outstanding receivable is minimal.
F-26
<PAGE>
25. OPERATING RISKS (Cond't)
d. Concentration of suppliers
The Group purchases raw material from a number of suppliers. Details of
individual suppliers accounting for more than 5% of the Group's purchases
are as follows:
<TABLE>
1 9 9 6 1 9 9 7
------------------ ------------------
<S> <C> <C>
Purchases from:
Agriculture and Production Information Company
85.4% 15.9%
Shun Yi County Chemical Fertilizer factory
- 63.7%
Bestalong - 9.8%
================== ==================
</TABLE>
e. Country risk
Substantially all of the Group's operations are conducted by its subsidiary
Beijing Opal, in the PRC and, accordingly, the Group is subject to special
considerations and significant risks not typically associated with
companies operating in North America and Western Europe. These include
risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Group's results may be
affected by, among other things, changes in the political and social
conditions in the PRC and changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation. The PRC government
has implemented economic reform policies in recent years, and these reforms
may be refined or changed by the government at any time. It is also
possible that a change in the PRC leadership could lead to changes in
economic policy.
In addition, a substantial portion of the Group's revenue is denominated in
Renminbi ("Rmb"), which must be converted into other currencies before
remittance outside the PRC. Both the conversion of Renminbi into other
foreign currencies and the remittance of foreign currencies abroad require
approvals of the PRC government.
F-27
<PAGE>
26. OTHER SUPPLEMENTAL INFORMATION
The following items were included in the consolidated statements of
operations:
<TABLE>
1 9 9 5 1 9 9 6 1 9 9 7
------------------ ----------------- -------------------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Depreciation of property,
machinery and equipment
- 53 960 115
Amortization expense
- Licensing costs - - 444 53
- Goodwill - 34 84 10
Advertising expenses - 50 668 80
Provision for bad and
doubtful accounts - 65 2,213 266
Provision for slow-moving
and obsolete inventories
- - 54 6
Rental expenses - 290 860 103
Salary and employee benefits
- 76 154 19
Repair and maintenance
expense - 8 72 9
Net foreign exchange loss
- - 38 5
Interest expenses - 18 - -
Interest income - 12 77 9
================== ================= ================= =================
</TABLE>
F-28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 1,453
<SECURITIES> 0
<RECEIVABLES> 2,864
<ALLOWANCES> 274
<INVENTORY> 642
<CURRENT-ASSETS> 5,125
<PP&E> 2,249
<DEPRECIATION> 126
<TOTAL-ASSETS> 19,967
<CURRENT-LIABILITIES> 2,103
<BONDS> 0
0
0
<COMMON> 36
<OTHER-SE> 11,663
<TOTAL-LIABILITY-AND-EQUITY> 19,967
<SALES> 4,532
<TOTAL-REVENUES> 4,532
<CGS> 3,097
<TOTAL-COSTS> 3,097
<OTHER-EXPENSES> 1,479
<LOSS-PROVISION> (35)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (35)
<INCOME-TAX> (38)
<INCOME-CONTINUING> (73)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
