SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1998
[ ] 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 of (I.R.S. Employer Identification Number)
incorporation or organization)
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:
Title of Each Class Name of Each Exchange 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 No X
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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 $840,000.
As of September 10, 1999, 35,911,954 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 $8,977,989.
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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TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS................................... 3
ITEM 2. DESCRIPTION OF PROPERTIES................................. 7
ITEM 3. LEGAL PROCEEDINGS......................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS....................................... 7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................... 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS...................... 8
ITEM 7. FINANCIAL STATEMENTS...................................... 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT......................... 13
ITEM 10. EXECUTIVE COMPENSATION.................................... 14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................... 14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 15
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K.......................... 15
SIGNATURES................................................ 16
FINANCIAL STATEMENTS...................................... F-1
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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. ("Opal") was incorporated in the State of Nevada
May 14, 1987 under the name of Sportsland, Inc. Following the acquisition of
Enpak Medical Corporation and its subsidiary, Enpak Surgical Products, Inc. in
1994, the Opal 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, Opal disposed of its
entire interest in the Enpak companies and remained dormant from that time until
May 1997. 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, Opal 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 common stock
(after the one-for-ten reverse stock split). 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 US$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. By 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.
The other key provisions of the revised joint venture agreement are:
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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; and
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 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 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.
Business Operations
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 Company from the date of acquisition.
Principal Products
Opal (together with its subsidiaries TSG and OAD is collectively referred
to as "the Company") is engaged in the manufacturing, selling and distribution
of environment friendly organic fertilizers. The Company's principle products
include a series of organic mineral fertilizers produced in both liquid ("Opal
Foliar") and granular forms. ("Opal Granules").
Designed to be diluted 300-800 times with water, Opal Foliar is applied
directly onto crops as well as soil. thereby aiding photosynthesis and providing
necessary nutrients to the plant's soil. This series consists of one
general-purpose fertilizer used on a variety of crops, and several specific
fertilizers, each for a specified crop. Fertilizers in the Opal Foliar group
contain a balance of key nutrients such as nitrogen, phosphorous and potassium,
and trace elements, humic acids and organic colloidal matter derived from peat.
The Opal Granules are granular in form and release nutrients slowly into
the soil. The granular process is slower than the foliar process but has a
longer lasting effect. Key nutrients include nitrogen, phosphoric anhydride,
potassium oxide, calcium oxide, magnesium oxide, silicon dioxide, trace
material, humic acid and organic matters. These fertilizers can replace
conventional chemical fertilizers, like urea, and do not cause environmental
problems for the soil.
The Company also manufactures and sells Opal Soil Conditioner, a key
ingredient of both the Opal Foliar and the Opal Granules which is independently
used as a soil.
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 ( "Beijing Opal"),
purchased the land use rights to a block of land consisting of approximately 206
acres for 50 years. In August 1997, Beijing Opal opened the first segment of
Phase I, a 53,000 square foot spray fertilizer facility. The plant is capable of
producing up to 7,500 metric tons of spray fertilizers, and can be expanded to
produce an additional 7,500 metric tons. This facility is also used for the
production of specially formulated catalyst, an essential ingredient in the
production of granular fertilizers and soil conditioners.
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In November 1998, the Company completed the second segment of the
production facility. This segment adds 110,500 square feet to the existing
facility and is capable of producing 100,000 metric tons of granular fertilizers
per year. This facility began operation in March 1999. The Company also
constructed an administration building, green house, and staff quarters at the
site.
Sales Division
The sale and marketing of Opal products is conducted by Opal Agriculture
Development Limited (referred to as "OAD"). OAD has contracted with Beijing Opal
for the exclusive distribution of Beijing Opal's products through 2015. Although
OAD's marketing territory includes the People's Republic of China, Taiwan, Hong
Kong and Macau, it has concentrated its sales and marketing efforts in China and
Taiwan. Sales in China are made through several tiers of distributors -- from a
provincial distributor to county/city distributors to town/village agents. The
village agents sell directly 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 is the China National Hybrid Rice Research
Centre of Hunan, which has signed an agreement to promote the Company's
products.
Over the last two years, Opal Beijing has been conducting tests in over 20
state owned farms in Taiwan in an attempt to secure government approval of its
product. In 1998, the Taiwanese government sponsored agency responsible for
agricultural planning and coordination signed an exclusive five-year contract
with the Company for the purchase of organic mineral fertilizers to be funded by
irrevocable letter of credit. The trial order for the first year consists of
1,220 metric tons of Opal Foliar and 29,000 metric tons of Opal Granules with a
value of US$10 million. The contract will be updated annually.
Research and Development
The Company employs 13 personnel whose activities relate primarily to the
improvement of the existing products. The Company spent approximately $400,000
and $300,000 during 1998 and 1997 respectively on research and development
activities.
Competition
The Company has traditionally targeted China and Taiwan markets, and
competes primarily with locally manufactured spray fertilizers and a few
imported spray fertilizers. Most of the competitors' products are designed as
additives of trace elements and are for foliar use only; therefore, they are not
used as soil conditioners. On the contrary, Opal Foliar can also be applied
directly to the soil, thus creating a healthier root system, an environment for
microbiological activities, and improved soil conditions. Despite this
fertilizer conditioning edge, competition in this sector of the market is
strong. 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.
Currently, China uses approximately 38 million metric tons of chemical
fertilizers, 10 million metric tons of which are imported. However, the Central
Government has publicized its policy decision to gradually replace chemical with
organic mineralized fertilizers. Following the inauguration of its granular
facility in its Beijing factory, Opal will be the only producer of mineralized
organic fertilizer in granular form in China. This should position the Company
to compete in the market of traditional chemical fertilizers.
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In late 1998 the Taiwanese Commodities Inspection Bureau granted its
approval to the Company's samples, clearing the way for shipment pursuant to the
5 year contract described above. This evidences Taiwan's first attempt in over
25 years to import fertilizers, and the Company believes its presence as an
initial supplier will give it a competitive edge in Taiwan.
Raw Materials
The major raw material utilized in the production of Beijing Opal's
fertilizers is peat. This is available in abundance in China. The Company has
historically purchased the majority of its raw materials from Beijing Opal
Biochemistry Factory ("BOBF"), the PRC state owned enterprise which owns 45% of
Beijing Opal. Other raw materials used in production, such as bone powder and
potassium chloride are generally available in sufficient quantities to meet the
Company's requirements.
Employees
As of December 31, 1998, the Company had 60 employees.
Federal, State and Local Regulations Regarding Environment
Federal, state and local regulations relating to protection of the
environment have not had and are not expected to have a material adverse effect
upon the Company's capital expenditures, liquidity, earnings, or competitive
position. The Company's manufacturing facilities comply with existing
environmental requirements of the Chinese government.
Trademarks, Patents and Licenses
The Company has developed proprietary technology relating to its organic
mineral fertilizers, but has no trademarks or patent registrations. Through its
subsidiary OAD, the Company has obtained a license for the exclusive right to
sell and distribute organic fertilizer manufactured by Beijing Opal for 18 years
up to February 7, 2015. The Company has received endorsement from the China
Green Food Centre certifying that the Company's products are environmentally
friendly.
Future Accounting Requirements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement requires that all derivative
instruments be recorded on the balance sheet at their fair market value. Changes
in the fair value of derivatives will be recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The new rules will be effective the first quarter of 2000. The
Company does not believe that the new standard will have a material impact on
the Company's financial statements.
Year 2000 Issue
Until recently computer programs generally were written using two digits
rather then four to define the applicable year. Accordingly, programs may
recognize a date using "00" as the year 1900 instead of the year 2000. This
problem may affect the Company's information technology systems (IT systems),
such as sales, accounts receivable, inventory management, accounts payable,
general ledger, payroll and forecasting systems. The Company has assessed its
year 2000 readiness with regard to critical IT systems and believes such systems
are Year 2000 compliant. However, despite the Company's evaluation, there can be
no guarantee that the Company will not experience Year 2000 compliance
difficulties which could have a material adverse effect on the Company's
business, results of operations and financial condition. Thus there could be
circumstances in which the Company would be unable to process customer orders,
or ship product, invoice customers or receive customary governmental approvals
or authorizations as they relate to the Company's business.
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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
manufactures its products in its Sino-foreign joint venture factory located in
Shunyi County, Beijing, China. Beijing Opal purchased the land use rights to a
block of land consisting of approximately 206 acres for 50 years. In August
1997, Beijing Opal opened the first segment of Phase I, a 53,000 square foot
spray fertilizer facility capable of producing up to 7,500 metric tons of spray
fertilizers. In November 1998, the Company completed the second segment of the
production facility. This segment adds 110,500 square feet to the existing
facility and is capable of producing 100,000 metric tons of granular fertilizers
per year. This facility began operation in March 1999. The Company also
constructed an administration building, green house, and staff quarters at the
site. 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, 1998.
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.
1998 1997
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High Low High Low
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First Quarter 2.75 0.50 0.50 0.50
Second Quarter 2.50 0.875 2.87 0.50
Third Quarter 1.25 0.375 3.00 1.25
Fourth Quarter 0.60 0.26 2.75 0.87
The quotation reflects the inter-dealer prices without retail markup,
markdown or commissions and may not represent actual transactions.
As of September 10, 1999, the bid price of the Common Stock was $.25.
Record Holders
As of September 10, 1999, there were approximately 613 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.
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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
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.
Overview
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.
The Company's focus over the past year has been to complete its organic
fertilizer production facilities. With Phase I of the Beijing Plant on line, the
Company is poised to meet increased demands for its products. During the
development stage between 1997 and 1998, the Company's major product was Opal
Foliar, which, as previously described, is a supplement of the traditional
fertilizers. With the completion of its Beijing facilities, the Company
introduced Opal Granules into the market. The Company plans to market Opal
Foliar and Granules together as a complete package, enabling farmers to use Opal
Granules as base fertilizers replacing traditional chemical fertilizers, and
Opal Foliar as supplementary supply of essential nutrients during the growth
cycle.
Despite having completed Phase I of its Beijing facility, the Company
suffered unexpected losses as a result of the devastating floods of the Yangtze
River in China in 1998. Sales volume dropped substantially; and distributors
failed to timely pay trade debts to the Company. Additionally, some of the
distributors goods were damaged by the flood. As a result, the Company has
increased its allowance for doubtful accounts for prudence purposes.
In an effort to diversify its market, Management explored other Asian
countries with great demand of organic fertilizers, such as Taiwan, Malaysia,
Philippines and Vietnam. As a result, the Taiwanese government sponsored agency
responsible for agricultural planning and coordination has signed an exclusive
five-year contract with the Company for the purchase of organic mineral
fertilizers to be funded by irrevocable letter of credit. The trial order for
the first year consists of 1,220 metric tons of Opal Foliar and 29,000 metric
tons of Opal Granules with a value of US$10 million. The contract will be
updated annually.
To meet the growing market demand for Opal Granules, the Company is
considering installing a second granule production line in its Beijing
facilities and another granule production line in Guizhou Province. The Company
is negotiating with interested investors for additional funding. Should the
financing materialize and demand necessitate, the Company plans to increase
production capacity to 300,000 metric tons from 100,000 metric tons.
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Results of Operations - Fiscal Year 1998 Compared to Fiscal Year 1997
The following table sets forth certain items as a percentage of total
revenues from the Company's Statements of Operations during 1998 and 1997:
1997 1998
Amount % Amount %
($000) of Sales ($000) of Sales
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Sales Revenues 4,532 100 840 100
Cost of Goods Sold (3,097) 68.3 (716) 85.2
Gross Profit 1,435 31.7 124 14.8
Loss from Sales Return - - (423) 50.3
Selling, General and
Administrative Expense (1,474) 32.5 (3,379) 402.3
Other Expense, net 4 0 (172) 20.5
Loss from continuing operations (35) .8 (3,850) 458.3
Net loss (73) 1.6 (3,583) 426.6
Net Sales. Net sales for the year ended December 31, 1998 decreased by
$3,692,000 or 81.5% to $840,000 from $4,532,000 for the year-ended December 31,
1997. The 1998 amount includes $5,000 of sales to the Company's holding company
at cost. This compares with sales of $1,758,000 to Sino-foreign joint venture
partner at cost in 1997. Sales to third parties decreased by $1,939,000 to
$835,000 for the year-ended December 31, 1998 from $2,774,000 for the
corresponding periods of the prior year. These decreases are principally the
result of Yangtze River floods in China, which reduced the demand for
fertilizers and the Company's lack of working capital necessary to purchase raw
materials.
Gross Profits. Gross profits for the year-ended December 31, 998 decreased
by $1,311,000 or 91.4% to $124,000 from $1,435,000 for the year-ended December
31, 1997. Gross profit as percent of sales decreased to 14.8% for the year-ended
December 31, 1998 from 31.7% for the corresponding period of the prior year.
This decrease is attributable to reduced sales volume as a result of the Yangtze
Flood, and a provision for slow moving and obsolete inventory of $271,000.
Selling and Administrative Expenses. Selling, general and administrative
expenses for the year-ended December 31, 1998 increased by $1,905,000 or 129.2%
to $3,379,000 from $1,474,000 for the year-ended December 31, 1997. This
increase is mainly attributable to the booking of provision for bad and doubtful
accounts of $1,852,000 in 1998 as a result of losses from the flood, compared to
$266,000 in 1997 and additional depreciation for plant and machinery in use in
1998.
Interest Expense, Net. Interest, expense, net for the year-ended December
31, 1998 increased to $165,000 from net interest income of $9,000 for the
corresponding period of the prior year. This increase is attributable to
increased borrowings by the Company.
Income Taxes. Income taxes for the year-ended December 31, 1998 totaled $0
compared to $38,000 tax liability for the corresponding period of the prior
year.
Net Loss. The net loss for the year-ended December 31, 1998 increased by
$3,510,000 to $3,583,000 from $73,000 for the year-ended December 31, 1997. The
increase is due to lower sales volume, higher interest expense, and high
provision for bad and doubtful accounts.
Changes in Financial Condition, Liquidity and Capital Resources
For the past twelve months, the Company has funded its operating and
capital requirements with loans from its controlling shareholder, its PRC
joint-venture partner and short term bank loans. As of December 31, 1998, the
Company had cash of $384,000 and a working capital deficit of ($1,586,000). This
compares with cash of $1,453,000 and working capital of $3,022,000 as of
December 31, 1997.
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Net cash used in operating activities increased to $1,575,000 for the
year-ended December 31, 1998 compared to $1,902,000 net cash provided by
operating activities for the year-ended December 31, 1997. This change resulted
from a decrease in accounts receivable, an increase in accounts payable and
accrued liabilities which were partially offset by an increase in other assets
and inventories.
Net cash used in investing activities decreased to $2,437,000 for the
year-ended December 31, 1998 from $5,207,000 for the corresponding period of the
prior year. This decrease resulted from less expenditure for the acquisition of
property, machinery and equipment, which was partially offset by the repayment
of a shareholder loan.
Net cash provided by financing activities decreased to $2,943,000 for the
year-ended December 31, 1998 from $8,490,000 for the year-ended December 31,
1997. The decrease is attributable to the absence of share sales which was
partially offset by loans from shareholders, bank loans and other loans.
Despite its negative cash flow from operating activities, the Company has
secured financing of $600,000 loan from a financial institution in the People's
Republic of China in February 1999 and is in the process of negotiating a loan
for working capital. While there is no assurance that additional funding will be
available to finance future operations, the Company continues to negotiate with
interested investors and lenders. Without additional financing there is
insufficient capital to support the Company's requirements for the current
fiscal year.
Certain Factors Affecting Future Operating Results
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 include the following:
Business Risks
Need for Additional Capital. The Company requires additional capital or outside
financing in order to meet its financial needs for the current fiscal year.
Although management is negotiating for such funds, there is no assurance that
the Company will be able to secure necessary financing, as and when needed.
Limited operating history. The Company reorganized and commenced its operations
in trading and manufacturing of organic agricultural fertilizers in August 1996,
and such operations were still in the development stages as of December 31,
1998. The Company incurred losses from continuing operations (net of minority
interests) for the years ended December 31, 1997 and 1998, and its 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 billing to new customers. Realization of the Company's investment
in assets is dependent on the success of its future operations.
Dependence strategic relationship. The Company conducts its operations in the
PRC through an equity joint venture with Beijing Opal biochemical Factory, a PRC
government owned entity. Any deterioration of this strategic relationship could
have an adverse effect on the operations and financial position of the Company.
Concentration of credit risk. A substantial portion of the Company'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 Company's sales are as follows:
<TABLE>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Agricultural and Production Information Company 81.3% 38.9% -
Heng Yang Agricultural and Technology - 11.6% -
Development Company
Yunnan Xing Long Agriculture and Trade 1.4% 11.4% 13.0%
Development Centre
Xin Jiang Agriculture and Science Institute - 8.2% -
Gansu Nong Ken Technological Development 1.2% 5.2% -
Company
Xiamen Station of Soil and Fertilizer Work - - 12.5%
Zhejiang Jiangshan Group - - 8.4%
Hunan Dalong Group - - 15.5%
Hainan Global Industry Company Limited - - 15.0%
Shaoguan Agricultural Association - - 7.7%
Wulong Group - - 5.5%
======== ========== ==========
</TABLE>
10
<PAGE>
Concentration of accounts receivable as of December 31, 1997 and 1998 is as
follows:
1997 1998
------------ -----------
Five largest accounts receivable 68.6% 54.4%
The Company 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, 1998,
the Company maintained a specific provision of approximately US$227,300 and a
general provision of 51% of the remaining balance against its trade receivables.
The Directors, in their opinion, consider that the risk of recoverability of the
unprovided for receivable is minimal.
Concentration of suppliers. The Company purchases raw material from a number of
suppliers. Details of individual suppliers accounting for more than 5% of the
Company's purchases are as follows:
1996 1997 1998
--------- --------- --------
Purchase from: 85.4% 15.9% 71.6%
Agriculture and Production Information Company
Shun Yi County Chemical Fertilizer - 63.7% -
Shengli Plastic Factory - - 11.6%
Bestalong - 9.8% -
========== ========= ========
Factors Affecting Fertilizer Demand and Prices. With virtually of its sales in
China and Taiwan, the Company's operating results are highly dependent upon
conditions in the PRC and Taiwanese agricultural industries. A variety of
factors beyond the Company's control can materially affect fertilizer demand and
pricing. These factors include but are not limited to: planted acreage;
government agricultural policies, projected grain stocks, crop failure, weather
and changes in agricultural production methods and seasonality based upon
weather related shifts in planting.
Permitting. The Company holds several environmental and other permits
authorizing operations at its Beijing facility. A decision by a governmental
agency to deny an application for a new or renewed permit, or to revoke or
substantially modify an existing permit, could have a material adverse effect on
the Company's ability to continue operations.
Dependence on Management. The operations of the Company have depended to a great
extent on management efforts of John Koon, yet the Company has no employment
agreement with either. The loss of the service of key personnel or the inability
to attract additional personnel as required could have a material adverse effect
on the Company's business, financial condition and results of operations.
11
<PAGE>
Competition. The fertilizer industry is highly competitive in China and many
competitors, both domestic and international, have substantially greater
technical, financial and marketing resources than the Company.
Currency Exchange Rates. The Company transacts business in Renminbi and U.S.
dollars. In all trading transactions involving more than one currency, the
Company employs strategies to minimize or eliminate risks associated with
currency exchange rate fluctuations; however it is not possible to eliminate all
exchange rate risk, and the Company may experience losses as a result of
exchange rate fluctuations from time to time.
Inflation. The Company has made its projections assuming a stable economy, and
has not considered any inflation factors which would affect the value of the
products and the purchasing ability of its customers.
China and Other Foreign Operation Risks
Internal Political and Other Risks. Substantially all of the Company's
operations are conducted in the PRC and, accordingly, the Company 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 Company'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. Changes in policies by the Chinese government resulting
in changes in laws, regulations, or the interpretation thereof, confiscatory
taxation, restrictions on imports and sources of supply, currency devaluations
or the expropriation of private enterprise could materially adversely affect the
Company. Under its current leadership, the Chinese government has been pursuing
economic reform policies, including the encouragement of private economic
activity and greater economic decentralization. There can be no assurance,
however, that the Chinese government will continue to pursue such policies, that
such policies will be successful if pursued, that such policies will not be
significantly altered from time to time or that business operations in the China
would not become subject to the risk of nationalization, which could result in
the total loss of investments in that country. Economic development may be
limited as well by the imposition of austerity measures intended to reduce
inflation, the inadequate development of an infrastructure and the potential
unavailability of adequate power and water supplies, transportation,
satisfactory roads and communications.
Uncertain Legal System and Application of Laws. The legal system of China
relating to foreign investments is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. China does not have a comprehensive system
of laws. Enforcement of existing laws or agreements may be sporadic and
implementation and interpretation of laws inconsistent. The Chinese judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of litigation. Even where
adequate law exists in China, it may not be possible to obtain swift and
equitable enforcement of that law.
Inflation and China's Rapid Economic Growth. In an attempt to control the
country's rapidly growing inflation rate, the Chinese government imposed
measures attempting to check inflation but to date those methods have not been
effective. Because almost all of the Company's operations are conducted in
China, that country's inflation and austerity may adversely effect the Company's
business.
12
<PAGE>
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, 1998
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, PROMOTORS 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.
Name Age Title
- ----- ------ --------------
John Koon 51 Chairman of the Board, President, Chief Executive
Officer and Director
Kenneth C.W. Poon 40 Chief Financial Officer
Long Chen Chen 48 Vice President, Sales and Marketing and Director
Xing Hua Chen 50 General Manager of Beijing Opal
Michael W. Botts 51 Vice President of Research and Development and
Director
Raul F. Sanchez-Elia 45 Director
Agnes K.O. Koon 48 Director
James H. Shane 53 Director
Mr. John Koon, Chairman of the Board, President and Chief Executive Officer of
the Company. He is the founder and Chairman of Bestalong Group, Inc., the
controlling shareholder of the Company. He is also the principal and director of
several private companies with operations in China. Mr. Koon is a graduate of
the University of Hong Kong with a Bachelor of Social Services degree in
Accounting and Economics. He is a member of the International Institute of
Management.
Mr. Kenneth C.W. Poon, Chief Financial Officer of the Company. He had held
senior financial management positions in a number of multinational companies in
information technology, banking and trading industries. He is also an executive
director of Bestalong Group, Inc. and is responsible for the management of its
investment and operations. Mr. Poon 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.
Mr. Long Chen Chen, Director and Vice President of Sales and Marketing of the
Company. He has been involved in the fertilizer project since 1990. Before that,
he was involved in the trials and tests of organic fertilizers in Vietnam for
the production of seeds for Taiwan. In addition to sales and marketing, he is
also responsible for product applications, sourcing and quality control. Mr.
Chen is a graduate of the Taipei Technical University.
13
<PAGE>
Mr. Xing Hua Chen, General Manager of Beijing Opal since 1995. He is responsible
for plant construction and production of organic fertilizers. From 1981 to 1997,
he served as General Manager of Beijing Shunyi County Agricultural Supplies and
Provision Corporation, a Chinese Government official agent for the supply and
distribution of fertilizers to farmers. Mr. Chen is a graduate of the Beijing
Agricultural University, with a major in fertilizers.
Mr. Michael W. Botts, Director and Vice President of Research and Development of
the Company. He is a soil scientist who developed the OMS technology and
invented the chelating agent KOM. He is also the technical advisor of the
procurement, installation and testing of OPAL OMF production facilities in
Beijing. Mr. Botts holds a Bachelor of Science degree in Soil Science from the
University of Oregon.
Mr. Raul F. Sanchez-Elia, Director. He is the principal of Condor Group, a New
York based investment banking firm specializing in emerging markets direct
investments. He is also a director of Bestalong Group, Inc. and USA Capital, a
Denver based mid-size leasing company. Mr. Sanchez-Elia holds a Bachelor of Arts
degree from Brown University ('76) and a Master of International Management
degree from AGSIM (Thunderbird).
Mrs. Agnes K.O. Koon, Director. Mrs. Koon is a Chartered Insurer with 25 years
experience in insurance and marketing. Mrs. Koon holds a Bachelor Degree of
Social Science from the University of Hong Kong. She is also a member of the
Hong Kong Institute of Human Resources Management, Associate of the Chartered
Insurance Institute, member of the Hong Kong Women Professionals and
Entrepreneurs Association and member of the Hong Kong Direct Marketing
Association.
Mr. James H. Shane, independent Director. He is the President and Chief
Executive Officer of Shane Associates Limited, a diversified operating company
in the United States. He has been developing and managing real estate properties
since 1969 and consulting US companies in the importing of products from Pacific
Rims countries.
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
(US000)
Kenneth Poon 1998 $ 90,000
1997 32,000
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 1998 or 1997.
Each non-executive director was compensated with 50,000 shares of common
stock for their services as directors. No additional compensation was paid to
non-executive directors.
The Board of Directors of the Company annually reviews all executive
positions and compensation.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of September 10, 1999, 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.
Amount and Nature of
--------------------------------------
Name and Address of Beneficial Owner Beneficial Owner Percent of Class
- ---------------------------------------- ---------------- ------------------
John Koon 0 0
Agnes K.O. Koon 18,671,768 52
Long Chen Chen 100,000 0.3
Xing Hua Chen 100,000 0.3
Michael W. Botts 100,000 0.3
Raul F. Sanchez-Elia 100,000 0.3
James H. Shane 50,000 0.1
Total all officers and directors 19,121,768 53.3
------------------ --------------
14
<PAGE>
(1) The persons names 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 Suite 4704, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company paid a management fee to Mr. Michael Botts and Mr. Long Chen
Chen, for their services as directors during the year-ended December 31, 1998 in
the amounts of $22,000 and $109,000, respectively.
PART IV
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation(3)
4.1 Certificate of designation of Preferred Stock, Series A (1)
4.2 Warrant to Corinthian (2)
23.1 Consent of Arthur Andersen (1)
27.1 Financial Data Schedules (1)
(1) Filed herewith
(2) Incorporated by reference to the respective exhibits filed with
the Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 1998
(3) Incorporated by reference to the respective exhibits filed with
the Company's Report on Form 8-A filed on July 6, 1998.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 1998.
15
<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:
--------------------------
John Koon, President
Dated: September ___, 1999
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.
Signature Title Date
----------- ------- ------
- ------------------- Chairman of the Board, President,
John Koon Chief Executive Officer and Director September __, 1999
- ------------------- Vice President, Sales and Marketing and
Long Chen Chen Director September __, 1999
- ------------------- Vice President of Research and
Michael W. Botts Development and Director September __, 1999
- ------------------- Director
Raul Sanchez-Elia September __, 1999
- ------------------- Director
Agnes K.O. Koon September __, 1999
- ------------------- Director
James Shane September __, 1999
16
<PAGE>
OPAL TECHNOLOGIES, INC.
Index to Consolidated Financial Statements
Page
------
Independent Auditors Report F-2
Consolidated Balance Sheet as of December 31, 1997 and 1998 F-3
Consolidated Statement of Operations for the Years Ended
December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1996, 1997 and 1998 F-7
Notes to Consolidate Financial Statements F-8
17
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
=======================================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1998 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
TOGETHER WITH AUDITORS' REPORT
Approved by the Board of Directors on August 31, 1999
----------------------- -------------------------
<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,
1997 and 1998, and the related consolidated statements of operations, cash flows
and changes in shareholders' equity for the years ended December 31, 1996, 1997
and 1998. 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 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, 1997 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1996, 1997 and
1998 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.
1
<PAGE>
The accompanying financial statements have been prepared assuming that the Group
will continue as a going concern. As discussed in Note 26.a to the accompanying
financial statements, the Group has suffered recurring net loss from continuing
operations (net of minority interests) of approximately Rmb605,000 and
Rmb29,670,000 (equivalent to US$3,583,000) for the years ended December 31, 1997
and 1998, respectively. The Group also has recurring net cash used in operating
activities of approximately Rmb15,810,000 and Rmb13,046,000 (equivalent to
US$1,575,000) for the years ended December 31, 1997 and 1998, respectively, and
as of December 31, 1998, the Group's current liabilities exceeded its current
assets by approximately Rmb13,123,000 (equivalent to US$1,586,000). These
matters raise substantial doubt about the Group's ability to continue as a going
concern. Management's plans in regarding to these matters are described in Note
1. The financial statements do not include any adjustments relating to the
recoverability and classification of the Group's assets and classification of
the Group's liabilities as of December 31, 1998 that might result should the
Group be unable to continue as a going concern.
ARTHUR ANDERSEN & CO
Certified Public Accountants
Hong Kong
Hong Kong,
August 31, 1999.
2
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
Note 1 9 9 7 1 9 9 8
----------- ---------- -------------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and bank deposits 12,078 3,182 384
Accounts receivable, net 5 21,525 2,391 289
Due from a shareholder 24 3,430 - -
Due from a director 24 19 - -
Due from a related company 24 - 45 5
Prepayments and other current assets 212 1,225 148
Inventories, net 6 5,330 9,636 1,164
---------- ---------- ---------
Total current assets 42,594 16,479 1,990
Property, machinery and equipment, net 7 27,015 70,003 8,454
Construction-in-progress 8 85,460 63,912 7,719
Licensing costs, net 9 7,536 7,093 856
Goodwill, net 10 1,540 1,458 176
---------- ---------- ---------
Total assets 164,145 158,945 19,195
========== ========== =========
LIABILITIES, MINORITY INTERESTS AND
Current liabilities:
Short-term borrowings 11 10,300 20,470 2,473
Accounts payable 5,190 6,312 762
Accrued liabilities 12 1,669 2,484 300
Due to a director 24 - 21 3
Taxation payable 13 315 315 38
---------- ---------- ---------
Total current liabilities 17,474 29,602 3,576
Non-current payable 14 22,135 20,635 2,491
Loan from PRC joint venture partner 15 5,315 5,627 680
Loans from a shareholder 16, 24 - 15,378 1,856
---------- ---------- ---------
Total liabilities 44,924 71,242 8,603
---------- ---------- ---------
Minority interests 22,005 19,796 2,391
---------- ---------- ---------
Shareholders' equity:
Common stock, par value US$0.001:
- Authorized - 49,000,000 shares as of
- Outstanding and fully paid 35,991,964
Preferred stock, par value US$0.001:
- Authorized - 1,000,000 shares as of
- Outstanding and fully paid - 100,000
Additional paid-in capital 101,488 101,894 12,306
Accumulated losses (4,206) (33,876) (4,089)
Cumulative translation adjustments (366) (411) (52)
---------- ---------- ---------
Total shareholders' equity 97,216 67,907 8,201
---------- ---------- ---------
Total liabilities, minority 164,145 158,945 19,195
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- ----------------
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
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 December 31, 1998 of US$1.00
= Rmb8.28. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other
rate.
3
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
Note 1 9 9 6 1 9 9 7 1 9 9 8
---------- ----------- ----------- ------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C> <C>
Net sales 21 23,887 37,664 6,952 840
Cost of goods sold 21 (20,475) (25,736) (5,927) (716)
---------- ---------- --------- ---------
Gross profit 3,412 11,928 1,025 124
Loss from sales return - - (3,504) (423)
Selling, general and
Interest expense (18) - (1,396) (169)
Interest income 12 77 29 4
Other expenses, net (33) (38) (50) (7)
---------- ---------- --------- ---------
Loss from continuing
Discontinued operations:
- Loss from discontinued
operations 1 (1,944) - - -
- Net loss on disposal of
discontinued operations 1 (1,696) - - -
---------- ---------- --------- ---------
Loss from discontinued
operations (3,640) - - -
---------- ---------- --------- ---------
Loss before income taxes (6,259) (293) (31,879) (3,850)
Provision for income taxes 13 - (315) - -
---------- ---------- --------- ---------
Loss before minority
Minority interests (982) 3 2,209 267
---------- ---------- --------- ---------
Net loss (7,241) (605) (29,670) (3,583)
========== ========== ========= =========
Basic and diluted loss per share:
- Loss from continuing operations (0.26) (0.03) [(0.63)] [(0.08)]
(0.27) - - -
---------- ---------- --------- ---------
- Loss from discontinuing
operations
(0.53) (0.03) (0.82) (0.10)
========== ========== ========= ==========
</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 December 31, 1998 of US$1.00
= Rmb8.28. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other
rate.
4
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
1 9 9 6 1 9 9 7 1 9 9 8
----------- ----------- --------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss (7,241) (605) (29,670) (3,583)
Adjustments to reconcile net loss to net
Depreciation of property, machinery
Amortization of licensing costs - 444 443 54
Amortization of goodwill 34 84 82 10
Net loss on disposals of fixed assets - - 97 12
Imputed interest on shareholder's - - 406 49
Loss from discontinued operations 1,944 - - -
Net loss on disposal of discontinued 1,696 - - -
Charge in discontinued operations (149) - - -
Minority interests 982 (3) (2,209) (267)
(Increase) Decrease in operating assets -
Accounts receivable, net 374 (17,079) 19,134 2,311
Prepayments and other current assets (79) (57) (1,013) (122)
Inventories, net (2,629) 1,588 (4,306) (520)
Increase (Decrease) in operating
Accounts payable (1,246) (1,560) 1,122 135
Accrued liabilities 371 103 815 98
Taxation payable - 315 - -
---------- --------- -------- ---------
Net cash used in operating (5,890) (15,810) (13,046) (1,575)
---------- --------- -------- ---------
Cash flows from investing activities:
Acquisition of property, machinery
Proceeds from disposals of fixed - - 90 10
Net cash outflow from acquisition of
Acquisition of license right (7,980) - - -
(Advance to) Repayment from a - (3,430) 3,430 414
(Advance to) Repayment from a director (5) (14) 40 4
(Advance to) Repayment from a related (749) 749 (45) (5)
---------- --------- -------- ---------
Net cash used in investing (19,902) (43,274) (20,165) (2,437)
---------- --------- -------- ---------
Cash flows from financing activities:
Issuance of common stock - 47,567 - -
New short-term bank loan - 10,000 5,000 604
Other loans - 300 5,170 625
Increase (Decrease) in non-current - 22,135 (1,500) (181)
New loans from PRC joint venture - 3,046 312 38
New loans from a shareholder 26,303 25,020 15,378 1,857
Repayment of loans to a shareholder - (37,512) - -
Others 312 - - -
---------- --------- -------- ---------
Net cash provided by financing 26,615 70,556 24,360 2,943
---------- --------- -------- ---------
Effect of cumulative translation (412) 46 (45) (5)
---------- --------- -------- ---------
Net increase (decrease) in cash and bank 411 11,518 (8,896) (1,074)
Cash and bank deposits, as of beginning 149 560 12,078 1,458
---------- --------- -------- ---------
Cash and bank deposits, as of end of year 560 12,078 3,182 384
========== ========= ======== =========
</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 December 31, 1998 of US$1.00
= Rmb8.28. 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.
5
<PAGE>
OPAL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
Accumulated
other
comprehensive
Common Stock Preferred Stock income-
--------------------- -------------------- Addition cumulative
Number of Number of paid-in Accumulated translation
shares Amount shares Amount capital losses adjustments
-------- -------- --------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
'000 Rmb'000 '000 Rmb'000 Rmb'000 Rmb'000 Rmb'000
Balance as of January 1, 12,653 105 100 1 28,933 (17,080) -
Net loss - - - - - (7,241) -
Accumulated loss
Translation adjustments - - - - - - (412)
--------- -------- -------- -------- ---------- -------- --------
Balance as of January 1, 12,653 105 100 1 8,213 (3,601) (412)
Issuance of common stock
Effect of the exchange
Issuance of common stock
Net loss - - - - - (605) -
Translation adjustments - - - - - - 46
--------- -------- -------- -------- ---------- -------- --------
Balance as of December
Net loss - - - - - (29,670) -
Shareholder's
Translation adjustments - - - - - - (45)
--------- -------- -------- -------- ---------- -------- --------
Balance as of December 31,
1998 35,992 299 100 1 101,894 (33,876) (411)
========= ======== ======== ======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<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.
During the year ended December 31, 1996, the Company capitalized its accumulated
loss of approximately Rmb20,720,000 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 18) 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 18). Bestalong is beneficially controlled
by Mr. John K. C. Koon, a director of the Company.
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.
7
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
-------------------------------------
TSH Group (Cont'd)
- ---------
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.
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.
8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
-------------------------------------
Management Plan
- ---------------
During the years ended December 31, 1997 and 1998, the Group reported recurring
net loss from continuing operations (net of minority interests) of approximately
Rmb605,000 and Rmb29,670,000 (equivalent to US$3,583,000), respectively. In
addition, the Group has net cash used in operating activities of approximately
Rmb15,810,000 and Rmb 13,046,000 (equivalent to US$1,575,000) for the years
ended December 31, 1997 and 1998, respectively. As of December 31, 1998, the
Group's current liabilities exceeded current assets by approximately
Rmb13,123,000 (equivalent to US$1,586,000).
Despite its negative cash flow from operating activities, the Group has secured
financing of Rmb5 million (equivalent to US$604,000) loan from a financial
institution in the People's Republic of China in February 1999 and is in the
process of obtaining a loan for working capital purpose. While there is no
assurance that additional funding will be available to finance future
operations, the Group is negotiating with other interested investors and
lenders. Management believes that this additional financing should it
materialize, along with its current credit facilities will be sufficient to
support the Group's liquidity requirement through the end of 1999.
While there is no assurance that the Group's cash flow will improve in
foreseeable future, the Group has completed the installation of a granule
production facility and signed a five-year exclusive sales contract with a
Taiwanese government owned company. The trial order for the first year consists
of 29,000 metric tons of Opal Granules and 1,220 metric tons of Opal Foliar.
This translates into approximately US$10 million sales. The first shipment of
Opal Foliar was made on April 9, 1999. All export sales will be covered by
letters of credit or telegraphic transfer to be received prior to shipment. In
the light of this new payment terms arrangement, the cash flow situation of the
Group is expected to be improved in 1999.
Management believes that, if the financing now being negotiated materializes,
the Group's operating results can be significantly improved. The support of the
Group's vendors, customers, lenders and shareholders will continue to be key to
the Group's future success.
9
<PAGE>
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, 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 18) 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 18) 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.
3. SUBSIDIARIES
------------
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as the "Group") as of December 31, 1998 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
("OAD") Islands
Beijing Opal Agriculture The PRC 55% Manufacturing and sale of
("Beijing Opal") organic agricultural
fertilizers
</TABLE>
10
<PAGE>
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, 1996, 1997 and 1998 was approximately Rmb34,000,
Rmb84,000 and Rmb82,000, respectively. Accumulated amortization as of
December 31, 1997 and 1998 was approximately Rmb118,000 and Rmb200,000,
respectively.
Management reviews and evaluates the recoverability of goodwill
periodically as part of its assessment of the recoverability of the Group's
share of net assets of subsidiary to which it relates. The determinants
used for this evaluation include management's estimate of the asset's
ability to generate positive income from operations and positive cash flow
in future periods. In the opinion of the management, no material impairment
existed as of December 31, 1998.
c. Inventories
-----------
Inventories are stated at the lower of cost, on a weighted average basis,
and market value. Costs of work-in-process and finished goods are composed
of direct materials, direct labor and an attributable portion of production
overheads.
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: land - 27 years, buildings
- 10 years, machinery and equipment - 5 years, motor vehicles - 5 years,
furniture and office equipment - 5 years. All ordinary repair and
maintenance costs are expensed as incurred.
The Group 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.
11
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------
e. Construction-in-progress
------------------------
Construction-in-progress represents land costs as well as factories, office
and machinery under construction. It is the Group's policy to capitalize
interest during the construction phase of qualifying assets in accordance
with Statement of Financial Accounting Standards No. 34. During the years
ended December 31, 1996, 1997 and 1998, Nil, Nil and approximately
Rmb487,000 of interest were capitalized.
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, 1996, 1997 and 1998 was
approximately Nil, Rmb444,000 and Rmb443,000, respectively. Accumulated
amortization as of December 31, 1997 and 1998 was approximately Rmb444,000
and Rmb887,000, respectively.
Management reviews and evaluates the recoverability of licensing costs
periodically as part of its assessment of the recoverability of the Group's
net assets. The determinants used for this evaluation include management's
estimate of the asset's ability to generate positive income from operations
and positive cash flow in future periods. In the opinion of the management,
no material impairment existed as of December 31, 1998.
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.
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.
12
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------
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. Comprehensive income
--------------------
The Group has adopted Statement of Financial Accounting Standards No. 130
("SFAS No. 130"), which requires the Group to report all changes in equity
during a period, except for those resulting from investment by owners and
distribution to owners, in financial statements for the period in which
they are recognized. The Group has disclosed comprehensive income, which
encompasses net income and currency translation adjustments, in the
consolidated statements of changes in shareholders' equity and Note 17 to
the financial statements. Prior years financial statements have been
restated to conform to the SFAS No. 130 requirements.
k. 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 (losses) gains from
foreign currency transactions included in the results of operations for the
years ended December 31, 1996, 1997 and 1998 were approximately Nil,
Rmb(38,000) and Rmb131,000, respectively.
13
<PAGE>
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
------------------------------------------
l. Loss per common share
---------------------
Basic 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 common stock issued for the acquisition of OAD and TSH
(see Note 1) and the one-for-ten reverse stock splits (see Note 18.a) had
been consummated prior to the years presented.
The computation of diluted loss per common share is similar to basic loss
per common share, except that the denominator is increased to include the
number of additional common shares that would have been outstanding if all
dilutive securities outstanding during the years were exercised.
The basic and diluted loss per common share were the same for the years
presented because there was no dilutive securities outstanding as of each
year end. The numerator in calculating both basic and diluted loss per
share for each year is the reported net loss. The denominator is based on
the following weighted-average number of common shares:
1 9 9 6 1 9 9 7 1 9 9 8
--------- --------- ---------
Basic 13,592,000 22,172,000 35,991,964
Diluted 13,592,000 22,172,000 35,991,964
m. 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.
n. Fair value of financial instruments
-----------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and bank deposits and short-term borrowings The carrying amounts
approximate fair values because of the short maturity of those instruments.
Non-current payable The fair value of the Group's non-current payable is
estimated based on the quoted market prices for the same or similar issues.
14
<PAGE>
5. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable comprised:
1 9 9 7 1 9 9 8
Rmb'000 Rmb'000 US$'000
--------- -------------------------
Trade receivables 23,803 20,000 2,415
Less: Allowance for bad and doubtful
debts (2,278) (17,609) (2,126)
-------- -------- --------
Accounts receivable, net 21,525 2,391 289
======== ======== ========
6. INVENTORIES
-----------
Inventories comprised:
1 9 9 7 1 9 9 8
------------ -----------------------
Rmb'000 Rmb'000 US$'000
Raw materials 4,003 4,732 572
Work-in-process 532 762 92
Finished goods 849 6,442 778
5,384 11,936 1,442
Less: Allowance for slow-moving and
obsolete inventories (54) (2,300) (278)
-------- --------- ---------
Inventories, net 5,330 9,636 1,164
======== ========= =========
15
<PAGE>
7. PROPERTY, MACHINERY AND EQUIPMENT
---------------------------------
Property, machinery and equipment comprised:
1 9 9 7 1 9 9 8
----------- ----------------------
Rmb'000 Rmb'000 US$'000
Property, machinery and equipment:
Land 9,377 9,377 1,132
Buildings 5,023 5,335 644
Machinery and equipment 12,498 57,221 6,911
Motor vehicles 1,051 1,017 123
Furniture and office equipment 121 121 15
-------- --------- ---------
Cost 28,070 73,071 8,825
Less: Accumulated depreciation (1,055) (3,068) (371)
-------- --------- ---------
Property, machinery and equipment, net 27,015 70,003 8,454
======== ========= =========
Private ownership of land is not allowed in the PRC; rather, entities acquire
the right to use land for a designated term. The Group's buildings are located
on land in Beijing, the PRC for a period of 50 years commencing from the
issuance date of 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, 1998 (see Note 8).
Certain machinery and equipment with net book value of approximately Nil and
Rmb9,240,000 as of December 31, 1997 and 1998, respectively, were pledged to
secure certain of the Group's short-term borrowings (see Notes 11 and 23).
8. CONSTRUCTION-IN-PROGRESS
------------------------
Construction-in-progress represents land cost and factories and office buildings
and machinery under construction in the PRC, which comprised:
1 9 9 7 1 9 9 8
--------- ------------------------------
Rmb'000 Rmb'000 US$'000
Land cost 41,458 41,458 5,007
Construction costs 14,302 21,967 2,653
Machinery 29,700 - -
Interest cost capitalized - 487 59
-------- -------- --------
85,460 63,912 7,719
======== ======== ========
16
<PAGE>
8. CONSTRUCTION-IN-PROGRESS (Cont'd)
------------------------
Private ownership of land is not allowed in the PRC; rather, entities acquire
the right to use the land for a designated term. As of December 31, 1998, land
cost represented the cost of acquiring the land use right to a plot of land of
approximately 206 acres (1997 - 206 acres) in Beijing, the PRC for a period of
50 years commencing from the issuance date of the land use right certificate.
The Group is in the process of completing the legal agreements relating to the
acquisition of the land use right. As of December 31, 1997 and 1998,
approximately 168 acres of land was under development and was recorded as
construction-in-progress. The remaining 38 acres of land was recorded as
property, machinery and equipment as of December 31, 1997 and 1998.
9. LICENSING COSTS
---------------
1 9 9 7 1 9 9 8
--------- -----------------------------
Rmb'000 Rmb'000 US$'000
Licensing costs 7,980 7,980 963
Less: Accumulated amortization (444) (887) (107)
------- ------- -------
Licensing costs, net 7,536 7,093 856
======= ======= =======
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
--------
1 9 9 7 1 9 9 8
--------- --------------------------
Rmb'000 Rmb'000 US$'000
Goodwill 1,658 1,658 200
Less: Accumulated amortization (118) (200) (24)
------- ------- --------
Goodwill, net 1,540 1,458 176
======= ======= ========
17
<PAGE>
11. SHORT-TERM BORROWINGS
---------------------
Short-term borrowings comprised:
1 9 9 7 1 9 9 8
--------- -------------------------
Rmb'000 Rmb'000 US$'000
Short-term bank loan (a) 10,000 15,000 1,812
Other loans (b) 300 5,470 661
------- ------- -------
10,300 20,470 2,473
======= ======= =======
Notes -
a. Short-term bank loan was denominated in Renminbi and bore interest at 9.5%
and 7.05% per annum as of December 31, 1997 and 1998 respectively. It was
guaranteed by a third party in the PRC and is collaterized by certain
machinery and equipment of the Group (see Notes 7 and 23).
b. Other loans include a loan from a third party in the PRC of Nil and
Rmb4,720,000 as of December 31, 1997 and 1998, respectively, which was
unsecured and bore interest ranging from 7.2% to 12% per annum as of
December 31, 1998. It was drawn for financing the construction of the
Group's factories and office buildings and is repayable within one year. In
addition, there was a loan from a third party in the PRC of Rmb300,000 and
Rmb750,000 as of December 31, 1997 and 1998, respectively, which was
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.
Supplemental information with respect to the short-term bank loan and other loan
for the year ended December 31, 1998 is as follows:
<TABLE>
Weighted
Maximum amount Average amount average interest Weighted
outstanding outstanding rate at the end average interest
during the year during the year of the year rate during the
----------------- ----------------- ------------------ -------------------
Rmb'000 Rmb'000
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
- Short-term bank loan 15,000 10,417 7.05% 7.92%
- Other loans 5,650 4,688 7.92% 9.74%
========= ========= ========== =========
Year ended December 31, 1997:
- Short-term bank loan 10,000 833 9.5% 9.5%
- Other loans 300 200 - -
========= ========= ========== =========
</TABLE>
18
<PAGE>
12. ACCRUED LIABILITIES
-------------------
Accrued liabilities comprised:
1 9 9 7 1 9 9 8
--------- ---------------------------
Rmb'000 Rmb'000 US$'000
Accruals for operating expenses
- salary and bonus 108 385 46
- professional fees 1,086 1,098 133
- interest expense - 247 30
Provision for welfare fund (a) 114 190 23
Provision for pension fund (a) 109 183 22
Others 252 381 46
------- ------- -------
1,669 2,484 300
======= ======= =======
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 19) and the pension fund is for the employees'
retirement benefit (see Note 20).
13. 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 Rmb396,000, Rmb263,000 and
Nil for the years ended December 31, 1996, 1997 and 1998, respectively.
19
<PAGE>
13. INCOME TAXES (Cont'd)
------------
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, 1997 and 1998 is as
follows:
1 9 9 7 1 9 9 8
--------- ---------
PRC statutory income tax rate (33%) (33%)
Non-taxable activities 9% -
Effect of tax exemption for the PRC joint venture (158%) 5%
Establishment of valuation allowance 289% 28%
------- -------
107% -
======= =======
Deferred taxation comprised:
1 9 9 7 1 9 9 8
--------- ---------------------
Rmb'000 Rmb'000 US$'000
Temporary difference arising from:
- net operating loss carryforwards 660 4,188 506
- provision for doubtful accounts 752 5,811 702
- provision for obsolete and
slow-moving inventories - 290 35
------ ------ ------
Deferred tax assets, gross 1,412 10,289 1,243
Valuation allowance (1,412) (10,289) (1,243)
------ ------ -------
Deferred tax assets, net - - -
====== ====== =======
The change in valuation allowance from December 31, 1997 to December 31, 1998,
is primarily related to the tax effect of the net operating loss of
approximately Rmb10,688,000, provision for doubtful accounts of approximately
Rmb15,331,000 and provision for obsolete and slow moving inventories of
approximately Rmb879,000. Management believes it is more likely than not that
the results of future operations will generate sufficient taxable income to
realize the deferred tax assets as reduced by the valuation allowance.
20
<PAGE>
14. NON-CURRENT PAYABLE
-------------------
Non-current payable represents the liabilities for the balance of acquisition
costs of the land for construction of factories and office buildings, the amount
is non-interest bearing and is wholly repayable in January 2000.
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
------------------------
During the year ended December 31, 1997, approximately Rmb45,902,000 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.
As of December 31, 1998, loans from Bestalong, a major shareholder, amounted to
approximately Rmb15,378,000 (equivalent of US$1,856,000) were unsecured and
Bestalong has agreed not to demand the Group for repayment before December 31,
2000. For financial reporting, interest expense of approximately Nil, Nil and
Rmb406,000 for the year ended December 31, 1996, 1997 and 1998, respectively,
were imputed according to cost of borrowings in the PRC and were recorded as
interest expenses and shareholder's contribution.
17. COMPREHENSIVE INCOME
--------------------
Comprehensive income and its components, net of tax, comprised:
1 9 9 6 1 9 9 7 1 9 9 8
--------- --------- -----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Net loss (7,241) (605) (29,670) (3,583)
Other comprehensive income
- Translation adjustments (412) 46 (45) (5)
------- ------ -------- --------
Comprehensive income (7,653) (559) (29,715) (3,588)
======= ====== ======== ========
21
<PAGE>
18. SHARE CAPITAL
-------------
a. Common stock
------------
During the period from January 1, 1996 (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.
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$0.001 per share. Also, the 100,000 shares of Series A
preferred stock carry voting rights of 30% of the total voting rights on
all corporate matters.
22
<PAGE>
19. DISTRIBUTION OF INCOME
----------------------
At present, a major portion of the Group's income is contributed by Beijing
Opal. Income of Beijing Opal as determined under generally accepted
accounting principles in the PRC is distributable to its joint venture
partners after transfer to (i) contributory dedicated capital as required
under PRC government regulations and the joint venture's articles of
association, and (ii) discretionary dedicated capital as determined by
Beijing Opal's board of directors. Discretionary capital includes a salary
fund and a staff welfare fund. Contributory dedicated capital is a form of
legal reserve fund. Contributory and discretionary dedicated capital is not
distributable in the form of dividends. In the financial statements
prepared under US GAAP, amounts designated for payments of employee salary
and welfare of approximately Rmb81,000 and Rmb86,000 for the years ended
December 31, 1997 and 1998 have been charged to income and the related
provisions are reflected as accrued liabilities in the balance sheets as of
December 31, 1997 and 1998.
A reconciliation of the consolidated accumulated loss reported under US GAAP to
that reported under PRC GAAP as of December 31, 1997 and 1998 is as follows:
1 9 9 7 1 9 9 8
--------- ------------------------
Rmb'000 Rmb'000 US$'000
Accumulated loss, under PRC GAAP (2,610) (16,217) (1,957)
Increase in allowance for doubtful
accounts (1,458) (15,331) (1,852)
Increase in allowance for obsolete
inventories (54) (2,246) (271)
Amortization of goodwill (84) (82) (9)
-------- --------- --------
Accumulated loss, under US GAAP (4,206) (33,876) (4,089)
======== ========= ========
23
<PAGE>
20. 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, Rmb73,000 and Rmb76,000 for the years ended December 31, 1996, 1997
and 1998, respectively.
The Group has no other retirement plan for its employees outside the PRC.
21. NET SALES AND COST OF GOODS SOLD
--------------------------------
Net sales and cost of goods sold comprised:
1 9 9 6 1 9 9 7 1 9 9 8
--------- ---------- ---------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Net sales to related companies
(Note 24) 20,045 14,609 40 5
Cost of goods sold (Note 24) (19,531) (14,609) (40) (5)
--------- --------- ------- -------
514 - - -
Net sales to third parties 3,842 23,055 6,912 835
Cost of goods sold (Note 24) (944) (11,127) (5,887) (711)
--------- --------- ------- -------
2,898 11,928 1,025 124
--------- --------- ------- -------
Gross profit 3,412 11,928 1,025 124
========= ========= ======= =======
24
<PAGE>
22. COMMITMENTS
-----------
The Group had capital commitments amounting to approximately Rmb5,065,000 and
Rmb143,000 as of December 31, 1997 and 1998, respectively, for construction of
factories and office buildings in the PRC, and approximately Rmb3,300,000 and
Nil as of December 31, 1997 and 1998, respectively, for purchases of machinery
and equipment.
The Group had operating commitments amounting to approximately Nil and
Rmb1,500,000 as of December 31, 1997 and 1998, respectively, for sponsorship of
an exhibition in the PRC.
23. BANKING FACILITIES
------------------
The Group had banking facilities of approximately Rmb15,000,000 as of December
31, 1998 for short-term bank loans. The facilities was fully utilized as of
December 31, 1997 and 1998. These facilities were secured by:
a. Pledges of the Group's machinery and equipment of approximately
Rmb9,240,000 as of December 31, 1998 (Note 7 and 11); and
b. A guarantee given by a third party in the PRC.
24. RELATED PARTY TRANSACTIONS
--------------------------
Name and relationship of related parties:
Relationships with the
Name of related parties Company
- ------------------------------ -------------------------
Bestalong Group Inc. ("Bestalong") Parent company
Oriental Alliance Limited Subsidiary of Bestalong
Anshun Opal Company Limited ("Anshun Opal") Subsidiary of Bestalong
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
25
<PAGE>
24. RELATED PARTY TRANSACTIONS (Cont'd)
--------------------------
Summary of related party balances and transactions is as follows:
<TABLE>
1 9 9 6 1 9 9 7 1 9 9 8
----------- ----------- ----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Due from a shareholder (a)
- Bestalong - 3,430 - -
Due from (to) a director (b)
- Mr. Chen Long Chen 5 19 (21) (3)
Due from a related company (b)
- Oriental Alliance Limited 749 - - -
- Anshun Opal - - 45 5
Loan from a shareholder
- Bestalong (Note 16) - - 15,378 1,856
Accounts payable to related companies
- APIC 1,260 4,072 4,001 483
- KAP 356 - - -
- BKVPL 4,435 - - -
Sales to related companies (d)
- APIC 19,423 14,609 - -
- Fuzhou Opal 622 - - -
- Bestalong - - 40 5
Purchases from related companies (e)
- APIC - 3,648 4,331 523
- KAP 2,164 - - -
- Bestalong - 2,568 - -
Rental expenses paid to
- APIC - 29 55 7
- Bestalong 290 831 578 70
Management fees paid to directors (f)
- Mr. Michael William Botts 348 357 183 22
- Mr. Chen Long Chen 522 897 904 109
</TABLE>
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 (to) 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. Sales to Bestalong were at
cost for the year ended December 31, 1998.
26
<PAGE>
24. RELATED PARTY TRANSACTIONS (Cont'd)
--------------------------
Notes - (Cont'd)
e. Purchases from related companies were made at the original cost with no
mark-up being charged.
a. 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 Rmb58,394,000, Rmb25,020,000 and
Rmb1,274,000 during the years ended December 31, 1996, 1997 and 1998.
25. 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)
=========
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
=========
27
<PAGE>
25. SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFORMATION (Cont'd)
-----------------------------------------------
b. Cash paid for interest comprised:
1 9 9 6 1 9 9 7 1 9 9 8
--------- --------- ----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Interest expense 18 - 1,396 169
======= ======= ======= =======
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 18.a).
26. 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, 1998. The
Group incurred losses from continuing operations (net of minority
interests) of approximately Rmb605,000 and Rmb29,670,000 for the years
ended December 31, 1997 and 1998, respectively, and had accumulated losses
amounting to approximately Rmb4,206,000 and Rmb33,876,000 as of December
31, 1997 and 1998, 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.
28
<PAGE>
26. OPERATING RISKS (Cont'd)
---------------
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 1998
------ ------ ------
<S> <C> <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% 13.0%
Xin Jiang Agriculture and
Science Institute - 8.2% -
Gansu Nong Ken Technological
Development Company 1.2% 5.2% -
Xiamen Station of Soil and
Fertilizer Work - - 12.5%
Zhejiang Jiangshan Group - - 8.4%
Hunan Dalong Group - - 15.5%
Hainan Global Industry Company Limited - - 15.0%
Shaoguan Agricultural Association - - 7.7%
Wulong Group - - 5.5%
========= ========= =========
</TABLE>
Concentration of accounts receivable as of December 31, 1997 and 1998 is as
follows:
1997 1998
-------- ---------
Five largest accounts receivable 68.6% 54.4%
======== ========
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, 1998, the Group maintained a specific provision of
Rmb1,882,000 and a general provision of 87% of the remaining balance
against its trade receivables. The Directors, in their opinion, consider
that the risk of recoverability of the unprovided for receivable is
minimal.
29
<PAGE>
26. OPERATING RISKS (Cont'd)
---------------
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 1998
------ ------ ------
Purchases from:
Agriculture and Production
Information Company 85.4% 15.9% 71.6%
Shun Yi County Chemical
Fertilizer factory - 63.7% -
Shengli Plastic Factory - - 11.6%
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 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.
30
<PAGE>
27. OTHER SUPPLEMENTAL INFORMATION
------------------------------
The following items were included in the consolidated statements of
operations:
<TABLE>
1996 1997 1998
--------- ----------- ------------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
After debiting
Depreciation of property,
Amortization expense
- Licensing costs - 444 443 54
- Goodwill 34 84 82 10
Advertising expenses 50 668 1,391 168
Provision for bad and doubtful
Provision for slow-moving and
Direct write off of obsolete
Rental expenses 290 860 633 76
Salary and employee benefits
Repair and maintenance expense
Foreign exchange loss - 44 - -
Net loss on disposals of fixed
Inputed interest on
Loss on termination of purchase
Interest expenses 18 - 1,396 169
======= ======= ======= =======
After crediting
Foreign exchange gain - 6 131 16
Interest income 12 77 29 4
======= ======= ======= ========
</TABLE>
