Cao Tian Cosmetic Holdings Limited and Subsidiaries
Unaudited Interim Financial Statements
Contents
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Pages
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Accountant's Disclaimer of Opinion 1
Unaudited Statements of Income and Expenses for the
three months ended December 31, 1996 and 1995 2
Unaudited Balance Sheets as of December 31, 1996, and
September 1995 3
Unaudited Statements of Cash Flows for the three months
ended December 31, 1996, and 1995 4
Notes to the unaudited interim financial statements 5-8
Unaudited
LEE & BERG
CERTIFIED PUBLIC ACCOUNTANTS
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U S 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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Accountants Disclaimer of Opinion
Cao Tian Cosmetic Holdings Limited
Stockholders and Board of Directors
We have made a review of the balance sheet of Cao Tian Cosmetic Holdings
Limited as of December 31, 1996, which is the end of the first quarter of
the 1997 fiscal year, and the related statements of income and expenses, and
cash flows for the three-month period then ended, in accordance with
standards established by the American Institute of Certified Public
Accountants. The Company's 1997 fiscal year starts on October 1, 1996 and
ends on September 30, 1997. These interim financial statements are the
responsibility of the Company's management.
A review of interim financial information consists principally of
obtaining an understanding of the system for the preparation of interim
financial information, applying analytical procedures to financial data, and
making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an examination in
accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
On the basis of our review, we are not aware of any material
modifications that should be made to the accompanying financial statements
for them to be in conformity with generally accepted accounting principles.
/s/ Lee & Berg CPAs, LLP
Lee & Berg CPAs, LLP
Glen Cove, New York
March 20. 1997
Cao Tian Cosmetic Holdings Limited and Subsidiaries
Unaudited Statements of Income and Expenses
For the Quarter ended December 31, 1996 and 1995
December 31 December 31
1996 1995
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Sales $5,701,384 $4,536,673
Cost of sales 3,880,591 3,256,536
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Gross profit 1,820,793 1,280,137
Selling expenses 540,727 314,431
General & administration expenses 249,641 171,448
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Operating profit 1,030,425 794,258
Financial expenses 167,879 105,173
Other Income / (expense) 227,234 (27,193)
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Income before tax 1,089,780 661,892
Tax (Note 3) 163,467 99,284
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Net Income $926,313 $562,608
==============================
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
Unaudited Balance Sheets
For the Quarter Ended December 31, 1996 and 1995
Assets December 31 December 31
1996 1995
------------------------------
Current assets
Cash and cash equivalents (Note 2) $65,568 $146,693
Accounts receivable (Net)(Note 2) 4,101,255 2,275,856
Inventories loss allowances (Notes 2,4) 1,788,080 2,651,750
Deposits, other receivables 667,591 20,220
------------------------------
Total current assets 5,822,494 5,094,519
Fixed assets (Note 2)
Land & buildings 10,357,446 9,106,764
Machine & others 2,441,191 2,062,952
Less: Acc depreciation 1,797,772 1,127,675
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Fixed assets (net) 11,000,865 10,042,041
Other Assets
Construction in Progress (Note 2) 75,615 417,687
------------------------------
Total assets $17,698,974 $15,554,247
==============================
Liabilities & owners' equity
Current liabilities
Short term loans (Note 5) $3,703,071 $3,358,759
Other payables 3,240,844 2,274,757
------------------------------
Total current liabilities 6,943,915 5,633,516
Minority interest 341,501 128,879
Long Term Liabilities 1,474,012 1,888,192
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Total Liabilities 8,759,428 7,650,587
Owners' equity
Stock (Note 6) 7,481,695 7,481,695
Retained earnings 1,457,851 421,965
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Total owners' equity 8,939,546 7,903,660
Total Liabilities ------------------------------
and Owners' Equity $17,698,974 $15,554,247
==============================
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
Unaudited Statements of Cash Flows
For the Quarter Ended December 31, 1996 and 1995
December 31 December 31
1996 1995
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Cash flows from operating activities:
Net income $926,313 $562,608
Depreciation 670,097 557,518
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1,596,410 1,120,126
Changes in operating assets and liabilties:
Accounts receivable (1,825,399) 193,664
Deposits, prepayments and other receivables (647,371) 76,379
Inventories (net) 863,670 (9,505)
Other payable and charges 965,087 (1,210,732)
Minority interest 212,622 38,665
Long term liabilities (414,180) 1,526,746
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Subtotal (844,571) 615,217
Cash flows from investing activities:
Land, buildings, machinery & other acquired (net) (958,824) (5,159,242)
Construction in progress 342,072 (105,582)
------------------------------
Subtotal (616,752) (5,264,824)
Cash flows from financing activities:
Proceeds from bank loans 344,312 915,205
Repayments of bank loans 0 0
Capital increase 0 3,200,190
Profit distribution (560,524) (575,673)
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Subtotal (216,212) 3,539,722
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Total cash increase (81,125) 10,241
Cash and cash equivalents at beginning of
the period (October 1) 146,693 138,452
Cash and cash equivalents at end of the
period (December 31) 65,568 146,693
------------------------------
Net increase in cash and cash equivalents ($81,125) $10,241
==============================
The notes on pages 5 to 8 form an integral part of these financial
statements.
Cao Tian Cosmetic Holdings Limited
Notes to the unaudited interim financial statements - December 31, 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.
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
Cao Tian Cosmetic Holdings Limited
Notes to the unaudited financial statements - December 31, 1996
2 Principal Accounting Policies (cont'd)
(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)
(c) Accounts Receivable
A provision has been made against accounts receivable to the extent which
they are considered to be doubtful. Provisions for Bad debts in the amount
of $49,872 and $36,527 were made for the first quarter's of the fiscal year
of 1997 and 1996. Accounts receivable on the balance sheet are stated net
of such provisions.
(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.
Refer to report on page 1
Cao Tian Cosmetic Holdings Limited
Notes to the unaudited interim financial statements - December 31, 1996
2 Principal Accounting Policies (cont'd)
(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.
(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.
(l) Fiscal Year
The Company adopts the fiscal year which ends on September 30 for its
financial reporting purposes. The first quarter of 1997 operates from
October 1 to December 31 of 1996.
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 the first quarter of fiscal year 1997, 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.
Refer to report on page 1
Cao Tian Cosmetic Holdings Limited
Notes to the unaudited interim financial statements - December 31, 1996
4 Inventories
In addition to the information stated in the Note 2(b), the components of
inventories are as follows.
Decembre 31 December 31
1996 1995
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Raw materials $1,225,468 $1,203,802
Work in process 60,553 240,964
Finished goods 502,059 1,206,984
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$1,788,080 $2,651,750
5 Short Term Bank Loans
For interest rate control purposes, it is the PRC banking practice to give
customer loans for a period normally less than one year. However, the loan
upon maturity can be automatically rolled-over on a revolving basis in the
following year, upon re-application of the same loans.
6 Stock
There are 200,000,000 shares of common stock with par value US$.10/share
authorized, and 74,816,950 shares are issued in the first quarter's of
fiscal year 1997 and 1996.
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.
Refer to report on page 1