Cao Tian Cosmetic Holdings Limited and Subsidiaries
Audited financial statements
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Periods from October 1, 1993 to September 30,1996
Contents Pages
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Audit report on financial statements..................................1
Statements of Income and Retained Earnings............................2
Balance Sheet.........................................................3
Statement of cash flows...............................................4
Notes to the financial statements....................................5-8
LEE & BERG
CERTIFIED PUBLIC ACCOUNTANTS
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US Address: 16 Soundview Road, Glen Cove, New York 11542. U.S.A.
Tel: (718) 274-8375 Fax: (718) 274 8453
Hong Kong Office: Room 1003, 39 Chatham Road South, TST, Kowloon, Hong Kong.
Tel: (852)2882-5699, 2301-4388 Fax (852) 2504-5336
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Report on the Audited Financial Statements
To the Board of Directors of
Cao Tian Cosmetic Holdings Limited and Subsidiaries
We have audited the accompanying balance sheet Of Cao Tian Cosmetic Holdings
Limited as of September 30, 1996, 1995 and 1994, and the related statements
of income, shareholders' equity for each of the three years in the period
ended September 30, 1996, and and cash flows for each of the two years for
1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 principals used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cao Tian Cosmetic
Holdings Limited as of September 30, 1996, 1995, and 1994 and the results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1996 in conformity with generally accepted accounting
principles.
/s/ Lee & Berg CPAs LLP
Lee & Berg CPAs, LLP
Glen Cove, New York
November 4,1996
Page 1
Cao Tian Cosmetic Holdings Limited and Subsidiaries
Statements of Income and Expenses
Fiscal years ended September 30
1996 1995 1994
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Statement of Income
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Sales $18,146,691 $13,089,193 $ 8,246,286
Cost of sales 13,026,144 9,124,960 5,737,013
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Gross profit 5,120,547 3,964,233 2,509,273
Selling expenses 1,257,725 843,542 1,203,825
General and administration expenses 685,790 797,990 45,374
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Operating profit 3,177,032 2,322,701 1,260,074
Financial expenses 420,690 475,496 208,387
Other income/(expense) (108,770) 1,212 (1,663)
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Income before tax 2,647,572 1,848,417 1,050,024
Tax (Note 3) 397,136 - -
--------------------------------------
Net Income $2,250,436 $ 1,848,417 $ 1,050,024
======================================
Statements of Retained Earnings
Statement of Retained Earnings
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Retained Earnings, October 1 $129,615 $242,359 $129,016
Net Income 2,250,436 1,848,417 1,050,024
Less: Distribution (1,081,035) (1,961,161) (936,681)
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Retained Earnings, September 30 $1,299,016 $129,615 $242,359
======================================
The notes on pages 5 to 8 form an integral part of these financial
statements.
Page 2
Unaudited
Cao Tian Cosmetic Holdings Limited and Subsidiaries
Balance Sheets
For the periods ended September 30,
Assets
1996 1995 1994
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Current assets
Cash and cash equivalents (Note 2) $146,693 $136,452 $80,802
Accounts receivable (Net)(Note 2) 2,275,856 2,469,520 1,593,355
Inventories loss allowances (Notes 2,4) 2,651,750 2,642,245 1,344,714
Deposits, other receivables 20,220 96,599 29,014
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Total current assets 5,094,519 5,344,816 3,047,885
Fixed assets (Note 2)
Land & buildings 9,483,815 3,902,964 2,979,108
Machine & others 2,562,952 1,802,095 1,575,135
Less: Acc depreciation 1,127,676 570,157 455,157
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Fixed assets (net) 10,919,092 5,134,902 4,099,066
Other Assets
Construction in Progress (Note 2) 417,687 312,105 102,853
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Total assets $16,431,298 $10,791,823 $7,249,824
===========================================
Liabilities & owners' equity
Current liabilities
Short term loans (Note 5) $3,358,759 $2,443,554 $2,145,940
Other payables 2,274,757 3,485,489 2,004,118
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Total current liabilities 5,633,516 5,929,043 4,150,068
Minority interest 128,879 90,214 63,505
Long Term Liabilities 1,888,192 361,446 0
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Total Liabilities 7,850,587 6,380,703 4,213,561
Owners' equity
Stock (Note 6) 7,481,695 4,281,505 2,793,904
Retained earnings 1,299,016 129,615 242,359
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Total owners' equity 8,780,711 4,411,120 3,036,263
Total Liabilities -------------------------------------------
and Owners' Equity $16,431,298 $10,791,823 $7,249,824
===========================================
The notes on pages 5 to 8 form an integral part of these financial
statements.
Page 3
Unaudited
Cao Tian Cosmetic Holdings Limited and Subsidiaries
Statement of Cash Flows
Periods from October 1 to September 30
1996 1995
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Cash flows from operating activities:
Net income $2,250,436 $1,848,417
Depreciation 557,518 115,000
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2,807,954 1,963,417
Changes in operating assets and liabilities:
Accounts receivable 193,664 (876,165)
Deposits, prepayments and other receivables 76,379 (67,585)
Inventories (net) (9,505) (1,297,531)
Other payable and charges (1,210,732) 1,796
Minority interest 38,665 26,709
Long term liabilities 1,526,746 361,446
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Subtotal 616,217 (1,851,330)
Cash flows from investing activities:
Land, buildings, acquired (4,368,384) (923,856)
Machinery & others acquired (760,857) (226,960)
Construction in progress (105,582) (209,252)
------------------------------
Subtotal (5,234,823) (1,360,068)
Cash flows from financing activities:
Proceeds from bank loans 915,205 297,614
Repayments of bank loans (1,210,732) 1,481,373
Capital increase 3,200,190 1,487,601
Profit distribution (1,081,035) (1,961,161)
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Subtotal 1,823,628 1,305,427
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Total cash increase 10,241 55,650
Cash and cash equivalents at beginning of
the period (October 1) 136,452 80,802
Cash and cash equivalents at end of the
period (December 31) 146,693 136,452
------------------------------
Net increase in cash and cash equivalents $10,241 $55,650
==============================
The notes on pages 5 to 8 form an integral part of these financial
statements.
Cao Tian Cosmetic Holdings Limited and Subsidiaries
Notes to the financial statements - September 30, 1996
1. General
Cao Tian Cosmetic Holdings Limited (called CTC Holdings Limited) is a leader
in the cosmetic industry in the People's Republic of China (PRC). The
Company was founded by Mr. Paul K. Tso and his family members under the name
CTC Holdings Limited in 1992. Mr. Paul Tso is a British Hong Kong
entrepreneur, who devoted all his energy in developing PRC's cosmetic
industry.
The Company is a Sino-foreign equity joint venture incorporated in PRC with
headquarters located in Shanghai, the largest city in China. The Company
engages in the manufacture and sale of cosmetic products and cosmetic
related chemical ingredients. Products are also being sold to other Asian
countries to meet the growing demand of personal beauty care needs. In
1996, to accelerate its growth, the Company invited Joe Allen Holdings
Limited, a British Virgin Islands (BVI) company, to be its shareholder with
a 30% equity interest.
The Company has two (2) main factories. One is located in the Pu Dong
District of Shanghai (called CTC), which manufactures various cosmetic
products, including skin care cream, perfumes, shampoo, lipsticks, and
tonics. The other factory located at Zang Zha Gang Township, , 60 miles
away from Shanghai (called ZAAF). ZAAF manufactures cosmetic ingredients
including Igepon A, Igepon T-12, ASEA, cleanser, softener, and other
chemical by-products. Currently the Company employs approximately 500 staff
and workers. The Company has established 27 regional marketing offices in
PRC for its sales and distribution network. It also has real estate
investments in Macao, and Shanghai. The Company also maintains a marketing
office in Hong Kong for overseas sales.
The Company has signed an agreement with a French cosmetic company;
Innopharm S.A.R.L., to manufacture and distribute KORI beauty cream and
other products for the PRC market.
To anticipate growing market demand, the Company has strengthened its
management team and invited a senior executive from a well-known Hong Kong
public listed company, to be its shareholder and President. The new
President will be responsible for the receipt of international ISO-9002
quality certificates in 1997.
2. Principal Accounting Policies
(a) Property, plant and equipment
Fixed assets are recorded at cost. Depreciation is calculated to write off
their cost (after deducting the scrap value) on the straight line basis over
their expected useful lives. The useful lives used for this purpose are:
Buildings 30 years
Machinery, equipment and others 8 years
(b) Inventories
Inventories are stated at the lower of cost or market value. Cost includes
direct materials, direct labor and an appropriate proportion of
manufacturing overhead. (Refer to Note 4 for details)
Refer to report on page 1
Page 5
Cao Tian Cosmetic Holdings Limited and Subsidiaries
Notes to the financial statements - September 30, 1996
2. Principal Accounting Policies (cont'd)
(c) Accounts Receivable
Provision has been made against accounts receivable to the extent which they
are considered to be doubtful. Provisions of Bad debt in the amount of US
$49,872, $36,527, $25,689 were made for 1996, 1995 and 1994. Accounts
receivable in the balance sheet are stated net of such a provision.
(d) Foreign Currency Translation
The company maintains its books and records in PRC currency (RMB) and
translates the RMB currency into United States dollars. Foreign currency
transactions are translated into United states dollars at the applicable
rates of exchange prevailing at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies are translated into
United States dollars at the applicable rates prevailing at the balance
sheet date. Exchange differences resulting from the above translation
policy are included in the statement of income.
(e) Income Taxes
Current income tax is provided at the applicable tax rates on the estimated
taxable income of the company determined in accordance with the relevant
imcome tax laws and regulations pertinent to Sino-foreign joint venture
companies.
Deferred income taxes are provided using the liability method under
Statement of Financial Accounting Standards No. 109. "Accounting for Income
Taxes". Under the liability method, deferred income taxes are recognized for
all significant temporary differences between the tax and financial
statement basis of assets and liabilities. The tax consequences of these
differences are classified as current or non-current based on the
classification of the related asset or liability for financial reporting.
(f) Cash and Cash Equivalents
Cash and short-term highly liquid investments which are readily convertible
into cash and have an original maturity of three months or less at the date
of acquisition, are classified as cash and cash equivalents.
(g) Banking Practice
It is a general banking practice in PRC that banks grant loans to customers
on a revolving basis. Normally, each loan term is for a period of less than
one year. (Refer to Note 5)
(h) Due to market demand, Company has been in expansion mode by building
office. Construction when completed is re-classified as a building under
Fixed assets.
Refer to report on page 1
Page 6
Cao Tian Cosmetic Holdings Limited and Subsidiaries
Notes to the financial statements - September 30, 1996
2. Principal Accounting Policies (cont'd)
(i) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
CTC and its subsidiary ZAAF. CTC owns 90% of ZAAF. For the consolidated
financial statements purposes, all significant inter company balances and
transactions have been eliminated in the consolidation. ZAAF's 10% minority
interest in CTC is disclosed as a liability and the related profit is
deducted as other expenses, which is in accordance with FASB-94.
(j) Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(k) Revenue Recognition
Product sales revenue is recognized upon transfer of title to goods.
3 Income Tax
In accordance with the relevant income tax laws applicable to foreign joint
venture companies established in the PRC, the company is entitled to full
exemption from income tax for two years from the first profit-making year of
operations, followed by 50% reduction in tax rate for the next three years.
In 1996, the company has recorded a 15% tax (50% of 30% of tax rate) for
income tax purposes. The company is also exempt from paying the local tax
of 3% on the taxable income for the period.
4 Inventories
In addition to the information stated in the Note 2(b), the components of
inventories are as follows.
1996 1995 1994
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Raw materials $1,203,802 $1,152,019 $629,326
Work in process 240,964 295,931 168,089
Finished goods 1,206,984 1,194,295 547,299
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$2,651,750 $2,642,245 $1,344,714
Refer to report on page 1
Page 7
Cao Tian Cosmetic Holdings Limited and Subsidiaries
Notes to the financial statements - September 30, 1996
5 Short Term Bank Loans
For interest rate control purposes, it is the PRC banking practice to give
customer loans for a period normally less than one year. However, the loan
upon maturity can be automatically rolled-over on a revolving basis in the
following year, upon re-application of the same loans.
6 Stock
There are 200,000,000 shares of common stock with par value US$.10/share
authorized, and 74,816,950 shares, 42,815,050 shares, and 27,939,040 shares
are issued in 1996, 1995 and 1994 respectively.
7 Commitments and Contingencies
(a) The company owns its buildings and therefor has no rental commitments.
(b) Some of the export sales, less than 10% of total ZAAF sales, are made
through government agencies: the import and export companies. The
percentage of export sales through government export agencies is being
reduced, because of the companies own marketing effort. This is being done
by the establishment of a sales office in Hong Kong.
8 Infomation by Industry Segment and Geographic Region.
Currently, all of the company's sales are made in Asia with a majority of
these sales in the PRC. Although products made by the ZAAF factory are
intended as CTC raw material, some ZAAF by-products are sold to the PRC
chemical industry or exported. Management has signed contracts in the
amount of US$3 millions for cosmetics with three Southeast Asian dealers for
export of the company's cosmetics to Malaysia, Thailand and Singapore in
October and November 1996. Management has advised that export sales are
expected to increase in the coming years.
9 Related Party Transactions
All related party transactions are reviewed and disclosed in accordance with
FASB-57.
Page 8