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, 1999
[ ] 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.
(Name of small business issuer in its charter)
Nevada 87-0306463
-------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Suite 4704, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong
(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
------------------- -----------------------------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
None
----------------
(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
--- ----
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 $361,000.
As of May 19, 2000, 67,241,954 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 $4,269,994.
DOCUMENTS INCORPORATED BY REFERENCE
No annual reports to security holders, proxy or information statements, or
prospectuses filed pursuant to Rule 424(b) or (c) have been incorporated by
reference in this report.
Transitional Small Business Disclosure Format: Yes No X
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<PAGE>
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS..................................... 3
ITEM 2. DESCRIPTION OF PROPERTIES................................... 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
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the section entitled "Certain Factors
Affecting Future Operating Results" beginning on page 10 of this Form 10-KSB.
Background
Opal Technologies, Inc. ("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, 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 post-reverse split shares
of common stock. Bestalong is beneficially controlled by Mr. John K.C. Koon, the
Chairman and Chief Executive Officer of the Company.
The TSH Group
TSH and its wholly-owned subsidiary, Triple Star Group Limited ("TSG"; a
company incorporated in the British Virgin Islands) are investment holding
companies. On August 6, 1996, TSG acquired a 55% interest in Beijing Opal
Agriculture Biochemistry Co., Ltd. ("Beijing Opal"), an equity joint venture
established in the People's Republic of China ("the PRC"). Beijing Opal is
engaged in the manufacturing and sale of organic agricultural fertilizers.
Beijing Opal was originally established as a PRC equity joint venture for a
period of 20 years beginning February 8, 1995 to February 7, 2015 between Ideit
Enterprise Co., Ltd. ("IECL"; a company incorporated in Taiwan) owning 40% and
Beijing Opal Biochemistry Factory ("BOBF"; a PRC state-owned enterprise) owning
60%. 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 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:
* 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.
3
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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, owned by
independent investors, for a total cash consideration of US$50,000. On March 22,
1997, Bestalong acquired the entire interest in OAD for approximately
US$19,405,000.
OAD is engaged in the trading of organic agricultural fertilizer
manufactured by Beijing Opal. On December 16, 1996, OAD was appointed by Beijing
Opal as its sole agent and was granted the exclusive right to distribute and
sell organic agriculture fertilizer manufactured by Beijing Opal in the PRC,
Hong Kong, Taiwan and Macau for a period from January 1, 1997 to February 7,
2015.
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 the soil. thereby aiding photosynthesis and
providing necessary nutrients to the plant's soil. This fertilizer 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, with the advantage that they 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
applied.
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 for fifty (50) years to a block of land consisting
of approximately 206 acres. 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.
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.
4
<PAGE>
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
provincial distributors 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 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 past several years, Opal Beijing has been conducting tests on 20
state owned farms in Taiwan in an attempt to secure government approval for its
product. In 1998, the Taiwanese government 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
1,000 metric tons of Opal Foliar and 30,000 metric tons of Opal Granules with a
value of US$10 million. The contract will be updated annually.
Research and Development
The Company employs 15 personnel whose activities relate primarily to the
improvement of the existing products. The Company spent approximately $280,00
and $400,00 during 1999 and 1998 respectively on research and development
activities.
Competition
The Company has traditionally targeted PRC 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. However, Opal Foliar can 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 intense. 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 will give 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 formulated a policy 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 the PRC. This should position the Company to
compete in the market of traditional chemical fertilizers.
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 the PRC. 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.
5
<PAGE>
Employees
As of December 31, 1999, the Company had 65 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.
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 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. 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, 1999.
6
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is currently traded on the OTC Electronic
Bulletin Board and is quoted under the symbol OPAL. The trading market in the
Company's common stock is limited and sporadic. The following table sets forth
the high and low bid price per share for the Company's common stock for each
quarterly period.
1999 1998
------------------- -------------------
High Low High Low
------ ------ -------- -----
First Quarter .45 .22 2.75 .50
Second Quarter .50 .27 2.50 .875
Third Quarter .41 .13 1.25 .375
Fourth Quarter .19 .06 0.60 .26
The quotation reflects the inter-dealer prices without retail markup,
markdown or commissions and may not represent actual transactions.
As of May 19, 2000 the bid price of the Common Stock was $0.26.
Record Holders
As of May 19, 2000 there were approximately 601 record owners of the Common
Stock of the Company.
Dividends
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to declare or pay any such dividend in the foreseeable
future.
Sales of Unregistered Securities
On June 6, 1997, the Company acquired all of the issued and outstanding
capital stock of Triple Star Holdings Limited and Opal Agriculture Development
Limited in exchange for 8,452,768 shares of the Company's common stock, $.001
par value, 100,000 shares of the Company's Series A Preferred Stock, $.001 par
value and the issuance of 4,200,000 shares of the Company's common stock, $.001
par value for the cancellation of the promissory note.
On July 1, 1997, the Company sold 11,400,000 shares of its common stock,
$.001 par value, at $0.50 per share for a total of $5,700,000 pursuant to the
exemption provision of Regulation S.
On September 29, 1997, the Company issued 11,000,000 shares of its common
stock, $.001 par value for the cancellation of $5,500,000 in debt.
On September 28, 1999, the Company issued 25,000,000 shares of its common
stock, $.001 par value to Bestalong, Inc. for 5,000,000 shares or 38.116% of
China Can Holdings, Inc., a BVI Company.
7
<PAGE>
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 9 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 engaged in the production and sale of fertilizer in the People's
Republic of China. 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 completed
and the procurement of a $10 million loan, the Company is poised to begin full
production. 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 during 1998.
In an effort to diversify its market, Management has explored other Asian
markets such as Taiwan, Malaysia, Philippines and Vietnam. As a result of this
effort, the Taiwanese government 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, a value of US$10 million.
The contract will be updated annually.
Results of Operations - Fiscal Year 1999 Compared to Fiscal Year 1998
The following table sets forth certain items as a percentage of total
revenues from the Company's Statements of Operations during 1998 and 1997:
<TABLE>
1998 1999
Amount % Amount %
($000) of Sales ($000) of Sales
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales Revenues 840 100.0% 361 100.0%
Cost of Goods Sold 716 85.2% 227 62.9%
Gross Profit 124 14.8% 134 37.1%
Selling, General and Administrative Expense 338 40.2% 2,344 649.3%
Interest Expense, net 165 19.6% 494 136.8%
Net loss (358) - (2,386) -
</TABLE>
8
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Net Sales. Net sales for the year ended December 31, 1999 decreased
$479,000 or 57% to $361,000 from $840,000 for the prior year. This decrease
resulted from a lack of sale of granular products which the Company did not
produce because of insufficient working capital.
Gross Profits. Gross profits for the year ended December 31, 1999 increased
by $10,000 or 8.1% to 134,000 from $124,000 for the prior year. The gross profit
for 1998 was distorted by the high rate of non-collectible receivables which
were booked as a reduction of sale. However, the company still incurred the
expense of producing goods for these sales, thus making the cost of goods sold
disproportionately high as a percentage of net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 1999 increased by
$2,006,000 or 593.5% to $2,344,000 from $338,000 for the prior year. This
increase resulted from the Company's decision to increase the number of sales
teams, the promotion and marketing expenses, and other related administrative
expenses in expectation of the production of 100,000 MT. of organic granules.
Interest Expense, Net. Interest expense, net for the year ended December
31, 1999 increased by $329,000 or 199.4% to $494,000 from $165,000 for the prior
year. This increase resulted from increased short-term borrowings to fund
current production.
Because of reduced sales, higher selling, general and administrative
expenses and increased interest expense, the Company's net loss after minority
interest for the year ended December 31, 1999 increased by $2,028,000 or 566.5%
to 2,386,000 from $385,000 for the prior year.
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 various third parties. As of December 31,
1999, the Company had cash of $19,000 and a working capital deficit of
($5,316,000). This compares with cash of $384,000 and a working capital deficit
of $158,000 as of December 31, 1998.
Net cash provided by operating activities increased to $696,000 for the
year-ended December 31, 1999 compared to $158,000 of net cash used in operating
activities for the year-ended December 31, 1998. This change resulted from
increases in payables which were partially offset by an increase in other
assets, inventories and the net operating loss.
Net cash used in investing activities decreased to $183,000 for the
year-ended December 31, 1999 from $2,435,000 for the prior year. This decrease
resulted from reduced expenditures for the acquisition of property, machinery
and equipment and no loan payment.
Net cash used in financing activities increased to $895,000 for the
year-ended December 31, 1999 from $2,942,000 for the year-ended December 31,
1998. The change is attributable to the repayment of loans and reduced
shareholder loans.
Despite its negative cash flow from operating activities on April 10, 2000,
the Company has secured financing of $10,000,000 loan from an independent third
party. With the financing, the Company has sufficient working capital to execute
its business plan for the next twelve months.
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.
Subsequent to year end, the Company obtained a loan of $10,000,000. However,
there is no assurance that the Company will be able to generate sufficient
earnings to repay this loan or that the lender will convert this loan to equity.
9
<PAGE>
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,
1999. The Company incurred losses from continuing operations (net of minority
interests) for the years ended December 31, 1998 and 1999, 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 are
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>
1998 1999
---------- ----------
<S> <C> <C>
Agricultural and Production Information Company, a related - -
party
Heng Yang Agricultural and Technology Development Company - -
Yunnan Xing Long Agriculture and Trade Development Centre 13.0% -
Xin Jiang Agriculture and Science Institute - -
Gansu Nong Ken Technological Development 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% 42.2%
Shaoguan Agricultural Association 7.7% -
Wulong Group 5.5% -
Foshan Couty Enterprises Co. - 18.8%
Shanghai Yong Dao Trading Company Limited - 15.1%
=========== ==========
</TABLE>
Concentration of accounts receivable as of December 31, 1998 and 1999 is as
follows:
1998 1999
----------- ---------
Five largest accounts receivable 54.4% 53.7%
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, 1999,
the Company maintained a specific provision of approximately US$2,178,000
against its trade receivables. The Directors, in their opinion, consider that
the risk of recoverability of the unprovided for receivable is minimal.
10
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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:
1998 1999
---------- ---------
Purchase from: 71.6% 13%
Agriculture and Production Information Company
Shun Yi County Chemical Fertilizer - -
Shengli Plastic Factory 11.6% -
Bestalong - -
Nuclear Industry Xi Feng Hong Tai Chemical Factory - 10%
Tianjing Da Fang Chemical Limited - 6%
Yunnan Province Chemical Company - 5%
Miyun Carton Box Factory - 13%
Neimenggu Yikezhaomeng Tax Bureau - 15%
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.
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.
11
<PAGE>
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.
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-32 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.
On February 9, 2000, the Board of Directors selected Grant Thornton of Hong
Kong as its certifying accountants for the year ended December 31, 1999
replacing Arthur Andersen & Co. who had resigned. During the period that Arthur
Andersen & Co. was the certifying accountant, the Company had no disagreements
with them on any matter of accounting principals or practices, financial
statement disclosures or auditing scope or procedure.
12
<PAGE>
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 53 Chairman of the Board, President and
Director
Cheng Kai Sum, Eric 41 Director and acting CEO
Au Wah, Edmond 46 Director
Chen Long Chen 50 Vice President, Sales and Marketing and Director
Chen Xing Hua 52 General Manager of Beijing Opal
Michael W. Botts 53 Vice President of Research and Development and
Director
James H. Shane 55 Director
Chung Siu Wah 43 Director
Miss Ho Wan Lai, Tammy 41 Chief Financial Officer
Mr. John Koon, Chairman of the Board, President and Chief Executive Officer of
the Company, is the founder and Chairman of Bestalong Group, Inc., the
controlling shareholder of the Company. He is also a 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 majoring in
Accounting and Economics. He is a member of the International Institute of
Management.
Mr. Eric Cheng, is an Executive Director of United Power Investment Limited, a
company listed on The Stock Exchange of Hong Kong Limited. Mr. Cheng graduated
with an honors from the Faculty of Social Sciences, The University of Hong Kong
in 1982 majoring in Business Management and Economics. Since his graduation, Mr.
Cheng held various senior positions with major international financial
institutions including Citicorp and James Capel (a unit of hte HSBC group).
Mr. Au Wah Edmond, is a Director of Golden Island (Management) Limited, a wholly
owned subsidiary of United Power Investment Limited, a company listed on The
Stock Exchange of Hong Kong Limited. Mr. Au is also a director of Dynasty Hotel,
Zhaoqing, The People's Republic of China (PRC) and several other privately owned
companies in Hong Kong and PRC. Mr. Au is a member of Certified General
Accountants of Canada (CGA) and has held senior finance and management positions
in various companies and busines sectors in Hong Kong, PRC, Canada and Singapore
over the last twenty years.
Mr. Chen Long Chen, a director and Vice President for Sales and Marketing, has
been involved in the fertilizer project since 1990. Prior thereto, he was
involved in various 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.
Mr. Chen Xing Hua, has been General Manager of Beijing Opal since 1995. He is
responsible for the 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, a Director and Vice President of Research and Development
of the Company, 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. James H. Shane, a Director, 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 a
consultant for US companies in the importing of products from Pacific Rims
countries.
13
<PAGE>
Mr. Chung Siu Wah, Director has been a solicitor practicing in Hong Kong since
1989 and is a partner of Messrs. Tony Kan and Company, Solicitors and Notaries.
Ms. Ho Wan Lai, Tamm, has been employed in the accounting field for various
corporations and organizations in Hong Kong and the PRC for over the past twenty
years.
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 1999 $ 64,000
1998 $ 90,000
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.
<TABLE>
Amount and Nature of
------------------------------------
Name and Address of Beneficial Owner Beneficial Owner Percent of Class
--------------------------------------------- ---------------- ----------------
<S> <C> <C>
John Koon 43,671,768 64.95%
Chen Long Chen 2,220,480 3.28%
Chen Xing Hua 100,000 .0015%
Michael W. Botts 100,000 .0015%
James H. Shane 50,000 .0007%
---------------- ---------------
Total all officers and directors (5 persons) 68.23%
---------------- ---------------
</TABLE>
(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.
14
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
<TABLE>
Name and relationship of related parties:
<S> <C>
Name of related parties Relationship with the Company
Bestalong Group, Inc. ("Bestalong") Parent company
Anshun Opal Company Limited ("Anshun Opal") Subsidiary of Bestalong Group, Inc.
Agriculture and Production Information Company Holding company of BOBF
Best Wishes Holding Company ("BWH") Common director
</TABLE>
Summary of related party balances and transactions is as follows:
<TABLE>
1997 1998 1999
-------- -------- ---------------------
Rmb '000 Rmb '000 Rmb '000 Rmb '000
<S> <C> <C> <C> <C>
Due from a shareholder 3,430 - - -
- Bestalong
Due from (to) a director (a) 19 (21) 11 1
- Mr. Chen Long Chen - - (62) (7)
- Mrs. Koon Woo Kam Oi
Due from (to) a related company (a) - 45 - -
- Anshun Opal - - 696 84
- BWH
Loan from a shareholder - 15,378 24,078 2,908
- Bestalong (Note 17)
Accounts payable to related companies 4,072 4,001 3,818 461
(b)
- APIC
Sales to related companies (c) 14,609 - - -
- APIC - 40 - -
- Bestalong
Purchases from related companies (d) 3,648 4,331 271 33
- APIC 2,568 - - -
- Bestalong
Interest expenses paid to - - 1,987 240
- Bestalong
Rental expenses paid to 29 55 - -
- APIC 831 578 1,663 201
- Bestalong
Management fees paid to directors (e) 357 183 25 3
- Mr. Michael William Botts - - 835 101
- BWH 897 904 - -
- Mr. Chen Long Chen ----------- --------- ---------- ---------
</TABLE>
Notes:
a. The balances due from (to) related companies and directors were unsecured,
non-interest bearing and without pre-determined repayment terms.
15
<PAGE>
b. These represented payables on purchases of raw materials from related
companies in the ordinary course of business.
c. Sales to APIC were at cost for the year ended December 31, 1997. Sales to
Bestalong were at cost for the year ended December 31, 1998.
d. Purchases from related companies were made at the original cost with no
mark-up charges.
e. These represent management fees paid to Mr. Michael William Botts and a
related company for the provision of executive services.
In addition, the Group re-imbursed Bestalong for expenditures (both capital and
operating in nature) incurred by Bestalong on behalf of the Group. Such
re-imbursement amounted to approximately Rmb25,020,000, Rmb1,274,000 and Nil
during the years ended December 31, 1997, 1998 and 1999.
The Company acquired from Bestalong, Inc. "Bestalong" 5,000,000 shares in CCHI
by issuing to Bestalong 25,000,000 shares of common stock. Bestalong is
beneficially controlled by Mrs. Koon Woo Kam Oi, a director of the Company.
(Note 1)
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
4.2 Warrant to Corinthian (2)
23.1 Consent of Arthur Andersen
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, 1999.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OPAL TECHNOLOGIES, INC.
By: /s/ John Koon
---------------------
John Koon, Chairman
Dated: May _____, 2000
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
------------- ------- ------
/s/ John Koon Chairman of the Board, President,
----------------------
John Koon Chief Executive Officer and Director May __, 2000
/s/ Chen Long Chen Vice President, Sales and Marketing and
----------------------
Chen Long Chen Director May __, 2000
/s/ Michael W. Botts Vice President of Research and
----------------------
Michael W. Botts Development and Director May __, 2000
/s/ Eric Cheng Director May __, 2000
----------------------
Eric Cheng
/s/ Au Wah Edmond Director May __, 2000
----------------------
Au Wah Edmond
17
<PAGE>
OPAL TECHNOLOGIES, INC.
Index to Consolidated Financial Statements
Page
------
Independent Auditors Report F-2
Consolidated Balance Sheet as of December 31, 1998 and 1999 F-3
Consolidated Statement of Operations for the Years Ended December 31,
1997, 1998 and 1999 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1997, 1998 and 1999 F-7
Notes to Consolidate Financial Statements F-8
18
<PAGE>
Opal Technologies Inc.
Report of Independent Certified Public Accountants
To the Board of Directors and the Shareholders 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,
1998 and 1999, and the related consolidated statements of operations, cash flows
and changes in shareholders' equity for the years ended December 31, 1997, 1998
and 1999. 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 audit. The financial statements of Opal Technologies
Inc. as of December 31, 1998 and for the years ended December 31, 1997 and 1998,
were audited by other auditors whose report dated August 31, 1999, on those
statements included an explanatory paragraph that described the issue of going
concern discussed in Note 1 to the financial statements.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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 audit provides 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, 1998 and 1999, and the results of their
operations and their cash flows for the years ended December 31, 1997, 1998 and
1999, in conformity with generally accepted accounting principles in the United
States of America.
The accompanying financial statements have been prepared assuming that the Group
will continue as a going concern. As discussed in Note 26a to the accompanying
financial statements, the Group has suffered net losses (net of minority
interests) of approximately Rmb29,670,000 and Rmb19,745,000 (equivalent to
US$3,583,000 and US$2,386,000) respectively for the years ended December 31,
1998 and 1999, respectively. As of December 31, 1999, the Group's current
liabilities exceeded its current assets by approximately Rmb44,014,000
(equivalent to US$5,316,000). These matters raise substantial doubt about the
Group's ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 1. The financial statements do not include
any adjustments relating to the recoverability and classification of the Group's
assets and classification of the Group's liabilities as of December 31, 1999
that might result should the Group be unable to continue as a going concern.
GRANT THORNTON
Hong Kong
April 28, 2000
F-2
<PAGE>
Opal Technologies Inc.
Consolidated Balance Sheets
As of December 31, 1998 and 1999
<TABLE>
Notes 1998 1999
---------- -------------------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
ASSETS AND LIABILITIES
Current assets
Cash and bank deposits 3,182 154 19
Accounts receivable, net 6 2,391 2,358 285
Due from a director 24 - 11 1
Due from a related company 24 45 - -
Prepayments and other current assets 1,225 1,400 169
Inventories, net 7 9,636 7,900 954
----- --------- --------- --------
Total current assets 16,479 11,823 1,428
Construction-in-progress 9 63,912 75,924 9,170
Licensing costs, net 10 7,093 6,649 803
Goodwill, net 11 1,458 1,375 166
Investment 5 - 40,423 4,882
----- --------- --------- --------
Total assets 158,945 202,806 24,494
========= ========= ========
LIABILITIES, MINORITY INTERESTS AND
Current liabilities
Short-term borrowings 12 20,470 7,200 870
Accounts payable 15 6,312 37,049 4,475
Accrued liabilities 13 2,484 4,838 584
Loan from PRC joint venture partner 16 - 5,677 686
Due to a related company 24 - 696 84
Due to a director 24 21 62 7
Taxation payable 14 315 315 38
----- --------- --------- --------
Total current liabilities 29,602 55,837 6,744
--------- --------- --------
Non-current payable 20,635 - -
Long-term borrowings 12 - 17,000 2,053
Loan from PRC joint venture partner 16 5,627 - -
Loans from a shareholder 17,24 15,378 24,078 2,908
----- --------- --------- --------
Total liabilities 71,242 96,915 11,705
--------- --------- --------
Minority Interests 19,796 16,190 1,955
--------- --------- --------
Shareholders' equity :
Common stock, par value US$0.001 :
- Authorized 49,000,000 and 100,000,000
- Outstanding and fully paid 35,991,964 and
60,991,964 shares as of December 31, 1998
and 1999 respectively 19 299 505 61
Preferred stock, par value US$0.001 :
- Authorized 1,000,000 and 25,000,000 shares
as of December 31, 1998 and 1999 respectively
- Outstanding and fully paid 100,000 shares
as of December 31, 1998 and 1999 19 1 1 -
Additional paid-in capital 101,894 143,088 17,281
Accumulated losses (33,876) (53,621) (6,475)
Cumulative translation adjustments (411) (272) (33)
--------- --------- --------
Total shareholders' equity 67,907 89,701 10,834
--------- --------- --------
Total liabilities, minority interests and 158,945 202,806 24,494
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$")
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, 1999 of US$1.00
= Rmb8.28. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at the rate or at any other
rate.
F-3
<PAGE>
Opal Technologies Inc.
Consolidated Statements of Operations
For the years ended December 31, 1997, 1998 and 1999
<TABLE>
Note 1997 1998 1999
--------- --------- ----------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C> <C>
Net sales 37,664 6,952 2,985 361
Cost of goods sold (25,736) (5,927) (1,876) (227)
--------- -------- --------- -------
Gross profit 11,928 1,025 1,109 134
Loss from sales return - (3,504) - -
Selling, general and administrative expense (12,260) (27,983) (19,394) (2,344)
Interest expense - (1,396) (4,089) (494)
Interest income 77 29 - -
Other expenses, net (38) (50) - -
Share of losses in an investment - - (977) (118)
--------- -------- --------- -------
Loss before income taxes (293) (31,879) (23,351) (2,822)
Provision for income taxes 14 (315) - - -
---- --------- -------- --------- -------
Loss before minority interests (608) (31,879) (23,351) (2,822)
Minority interests 3 2,209 3,606 436
--------- -------- --------- -------
Net loss (605) (29,670) (19,745) (2,386)
--------- -------- --------- -------
Basic and diluted loss per share (0.03) (0.82) (0.45) (0.05)
========= ======== ========= =======
</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, 1999 of US$1.00
= Rmb8.28. No representation is made that the Renminbi amounts could have been,
or could be, converted into United States dollars at that rate or at any other
rate.
F-4
<PAGE>
Opal Technologies Inc.
Consolidated Statements of Cash Flows
For the years ended December 31 1997, 1998 and 1999
<TABLE>
1997 1998 1999
--------- -------- ------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Cash flows from operating activities :
Net loss (605) (29,670) (19,745) (2,386)
Adjustments to reconcile net loss to net cash used
Depreciation of property, machinery and 960 2,053 3,452 417
Amortization of licensing costs 444 443 444 54
Amortization of goodwill 84 82 83 10
Net loss on disposals of fixed assets - 97 - -
Imputed interest on shareholder's loan (Note 16) - 406 - -
Share of losses in an investment - - 977 118
Minority interests (3) (2,209) (3,606) (436)
(Increase)/Decrease in operating assets :
Accounts receivable, net (17,079) 19,134 33 4
Prepayments and other current assets (57) (1,013) (1,165) (140)
Inventories, net 1,588 (4,306) 1,736 209
Increase/(Decrease) in operating liabilities :-
Accounts payable (1,560) 1,122 21,220 2,562
Accrued liabilities 103 815 2,354 284
Taxation payable 315 - - -
--------- --------- -------- -------
Net cash (used in)/provided by operating (15,810) (13,046) 5,783 696
--------- --------- -------- -------
Cash flows from investing activities :
Acquisition of property, machinery and equipment (40,579) (23,680) (1,566) (189)
Proceeds from disposals of fixed assets - 90 - -
(Advance to) Repayment from a shareholder (3,430) 3,430 - -
(Advance to) Repayment from a director (14) 40 (11) 1
(Advance to) Repayment from a related company 749 (45) 45 5
--------- --------- -------- -------
Net cash used in investing activities (43,274) (20,165) (1,532) (183)
--------- --------- -------- -------
Cash flows from financing activities
Issuance of common stock 47,567 - - -
New bank loan 10,000 5,000 10,000 1,208
Other loans 300 5,170 7,000 845
Repayment of loans - - (13,270) (1,603)
Increase/(Decrease) in non-current payable 22,135 (1,500) (20,635) (2,491)
New loans from PRC joint venture partner 3,046 312 50 6
New loans from a shareholder 25,020 15,378 8,700 1,051
New loans from a director - - 41 5
New loans from a related company - - 696 84
Repayment of loans to a shareholder (37,512) - - -
--------- --------- -------- -------
Net cash provided by/(used in) financing activities 70,556 24,360 (7,418) (895)
--------- --------- -------- -------
Effect of cumulative translation adjustments 46 (45) 139 17
--------- --------- -------- -------
Net increase/(decrease) in cash and bank deposits 11,518 (8,896) (3,028) (365)
Cash and bank deposits, as of beginning of year 560 12,078 3,182 384
--------- --------- -------- -------
Cash and bank deposits, as of end of year 12,078 3,182 154 19
--------- --------- -------- -------
</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, 1999 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.
F-5
<PAGE>
Opal Technologies Inc.
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 1997, 1998 and 1999
<TABLE>
Common stock Preferred stock
--------------- ----------------- Accumulated
other comprehensive
Additional income cumulative
Numbers Numbers paid in Accumulated translation
of shares Amount of shares Amount capital losses adjustments
--------- ------ --------- ------ ---------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1997 12,653 105 100 1 8,213 (3,601) (412)
Issuance of common stock for cash 11,400 95 - - 47,472 - -
Effect of the exchange reorganization 939 8 - - (8) - -
Issuance of common stock by capitalization of
loan from a shareholder (note 17)
Net loss - - - - - (605) -
Translation adjustments - - - - - - 46
-------- ------ ------ ----- ---------- ---------- -------
Balance as of December 31, 1997 35,992 299 100 1 101,488 (4,206) (366)
Net loss - - - - - (29,670) -
Shareholder's contribution - - - - 406 - -
Translation adjustments - - - - - - (45)
-------- ------ ------ ----- ---------- ---------- -------
Balance as of December 31, 1998 35,992 299 100 1 101,894 (33,876) (411)
Issuance of common stock (note 19) 25,000 206 - - 41,194 - -
Net loss - - - - - (19,745) -
Translation adjustments - - - - - - 139
-------- ------ ------ ----- ---------- ---------- -------
Balance as of December 31, 1999 60,992 505 100 1 143,088 (53,621) (272)
-------- ------ ------ ----- ---------- ---------- -------
</TABLE>
F-6
<PAGE>
Opal Technologies Inc.
Notes to the 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 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 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 common stock (after the one-for-ten reverse stock split
described in Note 19) 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 19). 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"). The
remaining 45% is held by Beijing Opal Biochemistry Factory "BOBF", a PRC
state - owned enterprise. Beijing Opal is principally engaged in the
manufacturing and sale of organic agricultural fertilizers.
F-7
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
TSH Group (Continued)
---------
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 the 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 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.
Current year investment
-----------------------
On September 5, 1999, the company entered into an agreement with Bestalong
Inc. (a company incorporated in the City of Monrovia, Republic of Liberia),
to acquire from Bestalong Inc., 38.46% interest (5,000,000 shares) in China
Can Holdings Inc., ("CCHI"; a company incorporated in the British Virgin
Islands) by issuing to Bestalong Inc. 25,000,000 shares of common stock.
Bestalong is beneficially controlled by Mrs. Koon Woo Kam Oi, a director of
the company.
F-8
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
Management Plan
---------------
During the years ended December 31, 1998 and 1999, the Group reported
recurring net losses (net of minority interests) of approximately
Rmb29,670,000 and Rmb19,745,000 (equivalent to US$3,583,000 and
US$2,386,000) respectively. The Group also has recurring net cash used and
received in operating activities of approximately Rmb13,046,000 and
Rmb5,783,000 (equivalent to US$1,575,000 and US$696,000) for the years
ended December 31, 1998 and 1999, respectively, and as of December 31,
1999, the Group's current liabilities exceeded its current assets by
approximately Rmb44,014,000 (equivalent to US$5,316,000).
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 which has agreed to place orders of 30,000 metric tons of
Opal Granules and 1,000 metric tons of Opal Foliar. The actual sales to
this company in 1999 amounted to only approximately Rmb1,168,000
(equivalent to US$141,000). 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 improve in 2000.
In August 1999, a sales contract was signed with a company in Shanghai. The
order consists of 100,000 tons of granule fertilizer amounting to
approximately Rmb195 million (equivalent to US$23,550,000). The subsequent
delivery of goods will take place in 2000.
Subsequent to the year ended December 31, 1999, the Group issued a US$10
million three year Convertible Note (see Note 27c). This Convertible Note
enables the Group to begin production and complete its physical facilities
in Beijing. Management believes that this additional financing along with
its current facilities will be sufficient to support the Group's liquidity
requirements through the end of 2000.
F-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 19) 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 19) for the cancellation of a
promissory note (see Note 1).
Beijing Opal is 55% owned by the Group and accordingly its operations are
included in the consolidated financial statements of the Group from the
date of acquisition.
The investment in CCHI on September 5, 1999 was recorded at its fair value.
Investment in CCHI is accounted for using the equity method of accounting.
F-10
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Investments of 20% - 50% in other
companies are accounted for under the equity method of accounting. 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, 1997, 1998, 1999 was
approximately Rmb84,000, Rmb82,000 and Rmb83,000, respectively.
Accumulated amortization as of December 31, 1998 and 1999 was
approximately Rmb200,000 and Rmb283,000, 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, 1999.
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
comprise 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
use rights - 27 years, buildings - 10 years, machinery and equipment -
5 years, motor vehicles - 5 years, furniture and office equipment - 5
years. No depreciation has been or will be provided for a set of
unified production system for producing granule fertilizer until it
has been put into use. All ordinary repair and maintenance costs are
expensed as incurred.
F-11
<PAGE>
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
d) Property, machinery and equipment (Continued)
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 amounts by which the assets' carrying values exceed their
value.
e) Construction-in-progress
Construction-in-progress represents cost of land use rights 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, 1997, 1998 and
1999, Nil, approximately Rmb487,000, and Nil 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, 1997, 1998
and 1999 was approximately Rmb444,000, Rmb443,000 and Rmb444,000,
respectively. Accumulated amortization as of December 31, 1998 and
1999 was approximately Rmb444,000, Rmb887,000 and Rmb1,331,000,
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, 1999.
F-12
<PAGE>
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
g) Revenue recognition
Net sales represent the invoiced value of goods supplied to customers,
net of sales returns and allowances. Revenue is recognized upon
delivery of goods and passage of title to customers. Sales returns and
allowances are recorded and/or estimated at the time of the sale.
h) Income taxes
The group accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, which requires recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Deferred income taxes are provided using
the liability method. Under the liability method, deferred income
taxes are recognized for all significant temporary differences between
the tax and financial statement bases of assets and liabilities.
i) Operating leases
Operating leases represent those leases under which substantially all
the risks and rewards of ownership of the leased assets remain with
the lessors. Rental payments under operating leases are charged to
expense on the straight-line basis over the period of the relevant
leases.
j) 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 18 to the financial statements.
F-13
<PAGE>
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
k) Foreign currencies translation
The Group considers Renminbi ("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
Renminbi 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 the 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, 1997,
1998 and 1999 were approximately Rmb(38,000), Rmb131,000 and
Rmb(9,000) respectively.
l) Loss per common share
Basic loss per common share is computed in accordance with Statement
of Financial Accounting Standard 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 19.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 were 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.
1997 1998 1999
------ ------ ------
Basic/Diluted 22,172,000 35,991,964 43,684,272
F-14
<PAGE>
3. PRINCIPAL ACCOUNTING POLICIES (Continued)
m) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the Unites 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) Segment reporting
The Group adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" (SFAS No. 131). The Group's
results of operations and financial position were not affected by
implementation of SFAS No. 131 as it operates in only one line of
business, the production and trading of organic agricultural
fertilizer and it mainly sells to Asia.
o) Pension and other post retirement benefits
The Group adopted SFAS No. 132 "Employers' Disclosures about Pensions
and Other Post Retirement Benefits". The pension plan of the Group's
Subsidiary in Beijing is a defined contribution plan and that
subsidiary is not liable for any post retirement benefits.
p) New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards (FAS) No.133, "Accounting for Derivative Instruments and
Hedging Activities". FAS 133 establishes standards for accounting and
reporting for derivative instruments and confirms the requirements for
treatment of different types of hedging activities. This statement is
effective for all fiscal years beginning after June 15, 2000.
Management has not determined if the statement will have an impact on
the Group's operations or financial position.
F-15
<PAGE>
4. SUBSIDIARIES
Details of the Company's subsidiaries (which together with the Company are
collectively referred to as the "Group") as of December 31, 1999, were as
follows :
<TABLE>
Percentage of
Place of equity interest Principal
Name incorporation held activities
------ --------------- ----------------- ------------
<S> <C> <C> <C>
Triple Star Holdings Limited The British Virgin 100% Investment holding
Triple Star Group Limited The British Virgin 100% Investment holding
Opal Agriculture Development The British Virgin 100% Trading of organic
agricultural fertilizers
Beijing Opal Agriculture
Biochemistry Co., Ltd. The PRC 55% Manufacturing and sale of
organic agricultural fertilizers
</TABLE>
5. INVESTMENT
Details of the Company's investments in other companies as of December 31,
1999, were as follows :
<TABLE>
Percentage of
Place of equity interest Principal
Name incorporation held activities
------ --------------- --------------- ------------
<S> <C> <C> <C>
China Can Holdings Inc. The British Virgin 38.46% Investment holding
Shijiazhuang Huale Metal The PRC 25% Manufacturing and
sale of metal can tops
Summarized information on the investment in CCHI
Rmb US$
Loss for the year 7,687,782 928,476
Non-current assets 111,001,692 13,406,001
Current assets 4,370,232 527,806
Current liabilities 8,394,844 1,013,870
Share capital and reserve 77,859,821 9,403,360
</TABLE>
The above figures are based on the audited consolidated financial
statements of CCHI for the year ended December 31, 1999.
F-16
<PAGE>
6. ACCOUNTS RECEIVABLE
1998 1999
------ ------------------
Rmb'000 Rmb'000 US$'000
Trade receivables 20,000 20,391 2,463
Less : Allowance for bad and
doubtful accounts (17,609) (18,033) (2,178)
--------- -------- -------
Accounts receivable, net 2,391 2,358 285
========= ======== =======
7. INVENTORIES
Inventories comprised :
1998 1999
-------- ------------------
Rmb'000 Rmb'000 US$'000
Raw materials 4,732 5,180 625
Work-in-process 762 698
Finished goods 6,442 6,057 732
-------- -------- -------
11,936 11,935 1,441
Less : Allowance for slow-moving
and obsolete inventories (2,300) (4,035) (487)
-------- -------- -------
Inventories, net 9,636 7,900 954
======== ======== =======
8. PROPERTY, MACHINERY AND EQUIPMENT
1998 1999
-------- -------------------
Rmb'000 Rmb'000 US$'000
Property, machinery and equipment :
Land use rights 9,377 9,376 1,133
Buildings 5,335 5,335 644
Machinery and equipment 57,221 55,992 6,762
Motor vehicles 1,017 1,017 123
Furniture and office equipment 121 342 41
-------- -------- -------
Cost 73,071 72,062 8,703
Less : Accumulated depreciation (3,068) (5,450) (658)
-------- -------- -------
Property, machinery and equipment, net 70,003 66,612 8,045
======== ======== =======
F-17
<PAGE>
8. PROPERTY, MACHINERY AND EQUIPMENT (Continued)
Private ownership of land is not allowed in the PRC; rather, entities
acquire the right to use land for a designated term. The Group's buildings
are situated on land in Beijing, the PRC for a period of 50 years
commencing from the issuance date of land use right certificate. The Group
is in the process of completing the legal agreements relating to the
acquisition of the land use right as of December 31, 1999 (see note 9).
Certain machinery and equipment with net book value of approximately
Rmb9,240,000 and Rmb17,126,000 as of December 31, 1998 and 1999,
respectively, were pledged to secure certain of the Group's borrowings (see
Notes 12 and 23).
9. CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents the land use rights and factories and
office buildings and machinery under construction in the PRC, which
comprised :
1998 1999
--------- --------------------
Rmb'000 Rmb'000 US$'000
Land use rights 41,458 41,458 5,007
Construction cost 21,967 33,979 4,104
Machinery - - -
Interest cost capitalized 487 487 59
-------- -------- --------
63,912 75,924 9,170
======== ======== ========
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,
1999 land use rights represented the cost of acquiring the land use rights
to a plot of land of approximately 206 acres (1998 - 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, 1998 and 1999, 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, 1998 and 1999.
F-18
<PAGE>
10. LICENSING COSTS
1998 1999
------ -------------------
Rmb'000 Rmb'000 US$'000
Licensing costs 7,980 7,980 964
Less : Accumulated amortization (887) (1,331) (161)
-------- --------- -----
Licensing costs, net 7,093 6,649 803
======== ========= =====
Licensing costs represent fees paid to a third party to obtain the
exclusive right to distribute and sell organic agriculture fertilizer
manufactured by Beijing Opal in the PRC, Hong Kong, Taiwan and Macau for 18
years up to February 7, 2015.
11. GOODWILL
1998 1999
------ -------------------
Rmb'000 Rmb'000 US$'000
Goodwill 1,658 1,658 200
Less : Accumulated amortization (200) (283) (34)
------- ------- -------
Goodwill, net 1,458 1,375 166
======= ======= =======
12. BORROWINGS
Short-term borrowings comprised :
1998 1999
-------- --------------------
Rmb'000 Rmb'000 US$'000
Short-term bank loan(a) 15,000 5,000 604
Other loans (b) 5,470 2,200 266
-------- ------- ------
20,470 7,200 870
======== ======= ======
Long-term borrowings comprised :
1998 1999
------- --------------------
Rmb'000 Rmb'000 US$'000
Long-term bank loan(a) - 10,000 1,208
Other loans (b) - 7,000 845
------- ------- -------
- 17,000 2,053
======= ======= =======
F-19
<PAGE>
12. BORROWINGS (Continued)
Notes :
a. Bank loans are denominated in Renminbi and bear interest ranging from
5.86% to 7.92% per annum as of December 31, 1999. They are guaranteed
by a third party in the PRC and are collateralized by certain
machinery and equipment of the Group (see Notes 8 and 23).
b. Other loans include a loan from third parties in the PRC of
Rmb4,720,000 and Rmb9,200,000 as of December 31, 1998 and 1999,
respectively, which bear interest ranging from 6% to 12% per annum as
of December 31, 1999. A payment of Rmb1,200,000 is due July 2000 and
another payment of Rmb1,000,000 is due December 2000. The remaining
payment of Rmb7,000,000 is due March 2001. They were guaranteed by a
third party in the PRC and are collateralized by certain machinery and
equipment of the Group (see Notes 8 and 23). They were drawn for
financing the construction of the Group's factories and office
buildings. In addition, there was a loan from a third party in the PRC
of Rmb750,000 and Nil as of December 31, 1998 and 1999, 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.
13. ACCRUED LIABILITIES
Accrued liabilities comprised :
1998 1999
-------- ----------------------
Rmb'000 Rmb'000 US$'000
Accruals for operating expenses
- salary and bonus 385 1,111 134
- professional fees 1,098 1,052 127
- interest expense 247 615 74
Provision for welfare fund (a) 190 485 59
Provision for pension fund (a) 183 289 35
Others 381 1,286 155
------- ------- ------
2,484 4,838 584
======= ======= ======
Note :
a. Welfare fund is provided at 19% and 18% of total salary of 1998 and
1999 and pension fund is provided at 17% of total salary. The welfare
fund is for welfare expenses of employees (see Note 20) and the
pension fund is for the employees' retirement benefit (see Note 21).
F-20
<PAGE>
14. 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, Rmb263,000, Nil and
Nil for the years ended December 31, 1997, 1998 and 1999, respectively.
Deferred income taxes result from the effect of transactions that are
recognized in different periods for financial and tax reporting purposes.
They relate primarily to net operating losses and allowances for doubtful
accounts. The deferred tax assets were fully offset by a valuation
allowance, as the realization cannot be reasonably assured.
15. ACCOUNTS PAYABLE
Included in accounts payable are 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
before December 31, 2000. The amount was classified as a non-current
payable in the prior year.
16. LOAN FROM PRC JOINT VENTURE PARTNER
This represents a loan from the PRC joint venture partner - BOBF, for
financing the operations of the Group, which is denominated in Renminbi,
unsecured, non-interest bearing and repayable on demand. The amount was
classified as a long-term liability in the prior year.
F-21
<PAGE>
17. LOANS FROM A SHAREHOLER
During the year ended December 31, 1997, approximately Rmb45,902,000 of the
loans from Bestalong were converted to equity 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, 1999, loans from Bestalong, a major shareholder, amount
to approximately Rmb24,078,000 (equivalent to US$2,908,000) are unsecured,
bear interest at 9% per annum and Bestalong has agreed not to demand the
Group for repayment until the Group is financially capable to do so.
18. COMPREHENSIVE INCOME
1997 1998 1999
------- ------- ------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Net loss (605) (29,670) (19,745) (2,386)
Other comprehensive income
- Translation adjustments 46 (45) 139 17
------- -------- -------- -------
Comprehensive income (559) (29,715) (19,606) (2,369)
======= ======== ======== =======
19. SHARE CAPITAL
a) Common Stock
During the period from January 1, 1997 (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
resulting in 939,196 shares of common stock, par value US$0.001 each,
being outstanding. This reverse split has been reflected retroactively
in the accompanying financial statements and all loss per common share
computations.
F-22
<PAGE>
19. SHARE CAPITAL (Continued)
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 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 17).
On September 5, 1999, the authorized common stock of the Company was
increased from 49,000,000 shares, par value of US$0.001 each to 99,000,000
shares, par value of US$0.001 each.
On September 5, 1999, in connection with the acquisitions of CCHI (see Note
1), the Company issued 25,000,000 shares of common stock, par value
US$0.001 each. The investment was recorded at its fair value.
On November 1, 1999, the authorized common stock of the Company was
increased from 99,000,000 shares, par value of US$0.001 each to 100,000,000
shares, par value of US$0.001 each.
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.
F-23
<PAGE>
19. SHARE CAPITAL (Continued)
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.
On November 1, 1999, the authorized preferred stock of the Company was
increased from 1,000,000 shares, par value of US$0.001 each to 25,000,000
shares, par value of US$0.001 each.
20. DISTRIBUTION OF INCOME
At present, a major portion of the Group's income is contributed by Beijing
Opal. Income of Beijing Opal as determined under generally accepted
accounting principles in the PRC is distributable to its joint venture
partners after transfer to (i) contributory dedicated capital as required
under PRC government regulations and the joint venture's articles of
association, and (ii) discretionary dedicated capital as determined by
Beijing Opal's board of directors. Discretionary capital includes a salary
fund and a staff welfare fund. Contributory dedicated capital is a form of
legal reserve fund. Contributory and discretionary dedicated capital is not
distributable in the form of dividends.
A reconciliation of the consolidated accumulated loss reported under US
GAAP to that reported under PRC GAAP as of December 31, 1998 and 1999 is as
follows :
<TABLE>
1998 1999
------- --------------------
<S> <C> <C> <C>
Rmb'000 Rmb'000 US$'000
Accumulated loss, under PRC GAAP (16,217) (49,998) (6,038)
Increase in allowance for doubtful accounts (15,331) (1,873) (226)
Increase in allowance for obsolete (2,246) (1,667) (201)
Amortization of goodwill (82) (83) (10)
---------- -------- --------
Accumulated loss, under US GAAP (33,876) (53,621) (6,475)
========== ======== ========
</TABLE>
F-24
<PAGE>
21. 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 contributions were
approximately Rmb73,000, Rmb76,000 and Rmb106,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
22. COMMITMENTS
The Group has capital commitments amounting to approximately Rmb143,000 and
Rmb19,034,000 as of December 31, 1998 and 1999 respectively, for
construction of factories and office buildings in the PRC.
The Group has operating commitments amounting to approximately Rmb1,500,000
and Nil as of December 31, 1998 and 1999, respectively, for sponsorship of
an exhibition in the PRC.
23. BANKING FACILITIES
The Group has banking facilities of approximately Rmb15,000,000 as of
December 31, 1998 and 1999 for bank loans. The facilities have been fully
utilized as of December 31, 1998 and 1999. These facilities are secured by:
a. Pledges of the Group's machinery and equipment of approximately
Rmb9,240,000 as of December 31, 1998 and 1999 (Note 8 and 12); and
b. Guarantee given by third parties in the PRC.
F-25
<PAGE>
24. RELATED PARTY TRANSACTIONS
Name and relationship of related parties :
Name of related parties Relationships with the Company
----------------------- ------------------------------
Bestalong Group Inc. ("Bestalong") Parent company
Anshun Opal Company Limited ("Anshun Opal") Subsidiary of Bestalong Group
Inc.
Agriculture and Production Information
Company Holding company of BOBF
Best Wishes Holdings Company ("BWH") Common director
Summary of related party balances and transactions is as follows :
<TABLE>
1997 1998 1999
------- ------- ----------------
Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C>
Due from a shareholder 3,430 - - -
- Bestalong
Due from (to) a director (a)
- Mr Chen Long Chen 19 (21) 11 1
- Mrs Koon Woo Kam Oi - - (62) (7)
Due from (to) a related company (a)
- Anshun Opal - 45 - -
- BWH - - 696 84
Loan from a shareholder
- Bestalong (Note 17) - 15,378 24,078 2,908
Accounts payable to related companies (b)
- APIC 4,072 4,001 3,818 461
Sales to related companies (c)
- APIC 14,609 - - -
- Bestalong - 40 - -
Purchases from related companies (d)
- APIC 3,648 4,331 271 33
- Bestalong 2,568 - - -
Interest expenses paid to
- Bestalong - - 1,987 240
Rental expenses paid to
- APIC 29 55 - -
- Bestalong 831 578 1,663 201
Management fees paid to directors (e)
- Mr Michael William Botts 357 183 25 3
- BWH - - 835 101
- Mr Chen Long Chen 897 904 - -
------ ----- ----- ------
</TABLE>
F-26
<PAGE>
24. RELATED PARTY TRANSACTIONS (Continued)
Notes :
a. The balances due from (to) related companies and directors were
unsecured, non-interest bearing and without pre-determined repayment
terms.
b. These represented payables on purchases of raw materials from related
companies in the ordinary course of business.
c. Sales to APIC were at cost for the year ended December 31, 1997. Sales
to Bestalong were at cost for the year ended December 31, 1998.
d. Purchases from related companies were made at the original cost with
no mark-up charges.
e. These represent management fees paid to Mr. Michael William Botts and
a related company 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 Rmb25,020,000, Rmb1,274,000 and
Nil during the years ended December 31, 1997, 1998 and 1999.
The Company acquired from Bestalong Inc. 'Bestalong' 5,000,000 shares in
CCHI by issuing to Bestalong 25,000,000 shares of common stock. Bestalong
is beneficially controlled by Mrs. Koon Woo Kam Oi, a director of the
Company. (Note 1)
25. SUPPLEMENTAL DISCLOSURE OF CASHFLOW INFOMATION
a) Cash paid for interest comprised :
1997 1998 1999
------- ------- ------------------
Rmb'000 Rmb'000 Rmb'000 US$'000
Interest expense - 1,396 1,733 209
b) Non-cash items :
On September 5, 1999, the Company issued 25,000,000 shares of common
stock for acquiring CCHI (See Note 1).
F-27
<PAGE>
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. The
Group incurred losses (net of minority interest) of approximately
Rmb29,670,000 and Rmb 19,745,000 (equivalent to US$3,583,000 and
US$2,386,000) for the years ended December 31, 1998 and 1999,
respectively, and had accumulated losses amounting to approximately
Rmb33,876,000 and Rmb 53,621,000 (equivalent to US$4,089,000 and
US$6,475,000) as of December 31, 1998 and 1999, respectively. The
Group's operations are subject to all the risks inherent in an
emerging business enterprise. These include, but are not limited to
competition from other fertilizer manufacturers, the need to expand
production and distribution, and slow settlement of billings to new
customers. Realization of the Group's investment in assets is
dependent on the success of its future operations.
b) Dependence strategic relationship
The Group conducts its operations in the PRC through an equity joint
venture with BOBF as described in Note 1. Any deterioration of this
strategic relationship could have an adverse effect on the operations
and financial position of the Group.
F-28
<PAGE>
26. OPERATING RISKS (Continued)
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 :
1997 1998 1999
------ ------ ------
Agriculture and Production
Information Company, a related
party 38.9% - -
Heng Yang Agriculture and Technology
Development Company 11.6% - -
Yunnan Xing Long Agriculture and
Trade Development Centre 11.4% 13.0% -
Xin Jiang Agriculture and Science
Institute 8.2% - -
Gansu Nong Ken Technological
Development Company 5.2% - -
Xiamen Station of Soil and Fertilizer Work - 12.5% -
Zhejiang Jiangshan Group - 8.4% -
Hunan Dalong Group - 15.5% 42.2%
Hainan Global Industry Company Ltd. - 15.0% -
Shaoguan Agricultural Assocation - 7.7% -
Wulong Group - 5.5% -
Foshan Couty Enterprises Co. - - 18.8%
Shanghai Yong Dao Trading Company - - 15.1%
F-29
<PAGE>
26. OPERATING RISKS (Continued)
c) Concentration of credit risk (Continued)
Concentration of accounts receivable as of December 31, 1998 and 1999 is as
follows :
1998 1999
------ ------
Five largest accounts receivable 54.4% 53.7%
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, 1999, the Group maintained a specific provision of
approximately Rmb18,000,000 representing 88% of its trade receivables. The
Directors, in their opinion, consider that the risk of recoverability of
the unprovided receivable is minimal.
d) Concentration of suppliers
The Group purchases raw material from a number of suppliers. Details of
individual suppliers accounting for more than 5% of the Group's purchases
are as follows :
1997 1998 1999
------ ------ ------
Purchases from :
Agriculture and Production
Information Company 15.9% 71.6% 13%
Shun Yi County Chemical Fertilizer
Factory 63.7% - -
Shengli Plastic Factory - 11.6% -
Bestalong 9.8% - -
Nuclear Industry Xi Feng Hong Tai
Chemical Factory - - 10%
Tianjing Da Fang Chemical Limited
Company - - 6%
Yunnan Province Chemical Company - - 5%
Miyun Carton Box Factory - - 13%
Neimenggu Yikezhaomeng Tax Bureau - - 15%
F-30
<PAGE>
26. OPERATING RISKS (Continued)
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.
27. SUBSEQUENT EVENTS
a) Increase of authorised common stock
On January 25, 2000, the authorized common stock of the Company was
increased from 100,000,000 shares, par value of US$0.001 each to
200,000,000 shares, par value of US$0.001 each.
b) Common stock purchase warrant
On January 10, 2000, the Company entered into a common stock purchase
warrant agreement with LB Asia Limited in respect of issuance of two
warrants to LB Asia Limited for the purchases of common stock: the
first warrant for the purchases of 6,250,000 common stocks at a price
of US$0.15 per stock exercisable any time on or before January 10,
2002 and the second warrant for the purchases of 6,250,000 common
stocks at a price of US$0.2 per stock exercisable any time on or
before January 10, 2003.
F-31
<PAGE>
27. SUBSEQUENT EVENTS (Conintued)
c) Convertible note
On April 7, 2000, the Company issued to Marlborough Gold Limited, (a
wholly owned subsidiary of United Power Investment Limited, a company
listed in Hong Kong, "the Holder") US$10,000,000 of 4% convertible
note (the "Note") due on April 9, 2003. The Holder is entitled to
convert the original principal amount of the Note into fully paid and
non-assessable shares of common stock, par value US$0.001 each, at a
conversion price equal to US$0.20 at any time after 10 October 2000
provided that the Company shall be required to convert no less than
US$1,000,000 of the original amount. Interest is payable quarterly in
arrears.
F-32
