U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-22749
CTC COSMETICS HOLDINGS COMPANY, INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 87-0415594
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
No. 80 Liu Tuang Road Pudong, Shanghai, China
(Address of principal executive offices)
Registrant's telephone no., including area code: (021) 525-30574
Securities registered pursuant to Section 12(b) of the
Exchange Act: None
Securities registered pursuant to Section 12(g) of the
Exchange Act: Common Stock, $0.004 par value
Check whether the Issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 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 90 days. Yes X No
Common Stock outstanding at July 17, 1997 - 10,157,987
shares of $.004 par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
FORM 10-QSB
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
CTC COSMETICS HOLDINGS COMPANY, INC.
For the quarter ended May 31, 1997
The following financial statements and schedules of the
registrant and its consolidated subsidiaries are submitted
herewith:
PART I - FINANCIAL INFORMATION
Page of
Form 10-QSB
Item 1. Financial Statements;
Condensed Consolidated Balance Sheets--
May 31, 1997 and August 31, 1996 3-4
Condensed Consolidated Statements of
Operations -- for the three months
and nine months ended May 31,
1997 and 1996 5
Condensed Consolidated Statements of
Cash Flows -- for the
nine months ended May 31,
1997 and 1996 6-7
Notes to Condensed Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION
Page
Item 1. Legal Proceedings 15
Item 2. Changes in the Rights of Security Holders 15
Item 3. Defaults on Senior Securities 15
Item 4. Results of Votes on Securities Holders 15
Item 5. Other Information 15
Item 6(a). Exhibits 15
Item 6(b). Reports on Form 8-K 15
2
CTC COSMETICS HOLDINGS COMPANY, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
May 31, August 31,
1997 1996
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 301,964 $ 143,759
Accounts receivable (net) (Note 2) 2,032,618 2,230,339
Inventories less allowance (Note 2) 3,534,237 2,598,715
Deposits, other receivables 883,733 19,816
----------- -----------
Total Current Assets 6,752,552 4,992,629
FIXED ASSETS (Note 2)
Land & buildings 10,707,446 9,294,139
Machines & others (Note 2) 3,093,591 2,511,693
Less Acc depreciation 2,224,748 1,105,122
----------- -----------
Fixed Assets (net) 11,576,289 10,700,710
OTHER ASSETS
Construction In
Progress (Note 2) 290,591 409,333
----------- -----------
Total Assets 18,619,432 16,102,672
Note: The balance sheet at August 31, 1996 has been taken from the
Unaudited financial statements at that date and condensed.
The accompanying notes are an integral part of these consolidated
financial statements.
3
CTC COSMETICS HOLDINGS COMPANY, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31, August 31,
1997 1996
------------ ------------
CURRENT LIABILITIES:
Short Term Loans (Note 4) 4,280,687 3,141,950
Other Payables 2,541,473 2,229,262
------------ ------------
Total Current Liabilities 6,822,160 5,371,212
------------ ------------
Minority Interest 375,651 126,301
Long term liabilities 1,574,974 1,850,428
------------ ------------
Total Liabilities 8,772,785 7,347,941
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 7,481,695 7,481,695
Retained Earnings 2,364,952 1,273,036
------------ ------------
Total Stockholders' Equity 9,846,647 8,754,731
------------ ------------
Total Liabilities and
Stockholders' Equity 18,619,432 16,102,672
------------ ------------
Note: The balance sheet at August 31, 1996 has been taken from the
Unaudited financial statements at that date and condensed.
The accompanying notes are an integral part of these consolidated
financial statements.
4
CTC COSMETICS HOLDINGS COMPANY, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended For the Nine Months Ended
----------------------- ---------------------------
May 31, May 31, May 31, May 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUE:
Sales $5,728,651 $4,445,939 $14,127,819 $13,610,018
----------- ----------- ----------- -----------
Total Revenue 5,728,651 4,445,939 14,127,819 13,610,018
----------- ----------- ----------- -----------
COSTS OF SALES 3,608,192 3,191,405 9,138,304 9,769,608
----------- ----------- ----------- -----------
GROSS PROFIT
(LOSS) 2,120,459 1,254,534 4,989,515 3,840,410
----------- ----------- ----------- -----------
SELLING EXPENSES 705,748 308,143 1,553,706 943,294
----------- ----------- ----------- -----------
OPERATING EXPENSE:
General and
administrative 313,619 168,019 704,743 514,343
----------- ----------- ----------- -----------
Operating Profit 1,101,092 778,373 2,731,066 2,382,774
Financial Expenses 238,233 103,069 487,375 315,518
Other Income
(Expense) (2,187) (26,649) 49,522 (81,578)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES 860,672 648,655 2,293,213 1,985,679
----------- ----------- ----------- -----------
INCOME TAXES: 129,101 97,298 343,982 297,852
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ 731,571 $ 551,357 $1,949,231 $1,687,827
----------- ----------- ----------- -----------
INCOME (LOSS) PER
COMMON SHARE $0.08 $0.07 $0.24 $0.23
----------- ----------- ----------- -----------
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 9,515,065 7,422,768 8,127,864 7,422,768
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated
financial statements.
5
CTC COSMETICS HOLDINGS COMPANY, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
------------ ------------
May 31, May 31,
1997 1996
------------ ------------
Cash Flows From (To) Operating Activities:
Net income (loss) $ 1,949,231 $ 1,687,827
Depreciation 1,119,626 418,138
------------ ------------
3,068,857 2,105,965
------------ ------------
Changes in Operating
Assets and Liabilities
Accounts Receivable 197,721 145,248
Deposits, Prepayments
and Other Receivables (863,917) 57,284
Inventories (Net) (935,522) (7,129)
Other Payables
and Charges 312,211 (908,049)
Minority Interest 249,350 28,998
Long Term Liabilities (275,454) 1,145,059
------------ ------------
Subtotal (1,315,611) 461,411
Cash Flows From (To) Investing
Activities:
Land and Building
Acquired (1,413,307) (4,185,638)
Machinery & Others
Acquired (581,898) (570,643)
Construction In
Progress 118,742 (79,186)
------------ ------------
Subtotal (1,876,463) (4,835,467)
Cash Flows From (To) Financing Activities:
Proceeds from
Bank Loans 1,138,737 686,403
Repayment of Bank
Loans 0 0
Capital Increase 0 2,400,142
Profit Distribution (857,315) (810,773)
------------ ------------
Subtotal 281,422 2,275,772
Total Cash Increase 158,205 7,681
Cash and Cash Equivalents
at the beginning of the period 143,759 102,339
Cash and Cash Equivalents
at the end of the period 301,964 110,020
------------ ------------
Net Increase in Cash and Cash
Equivalents 158,205 7,681
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
6
CTC COSMETICS HOLDINGS COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of CTC
Cosmetics Holdings Company, Inc. and its wholly-owned subsidiaries
(collectively, the "Company") which are CTC Cosmetics Holding (BVI) Co. Ltd.
and Cao Tian Cosmetic Holdings Limited (the "Operating Subsidiary" or
"Cao Tian").
The accompanying financial statements have been prepared by the Company
without audit. In the opinion of management, all adjustments (which
included only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and changes in financial position
for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in the accompanying interim
financial statements.
7
CTC COSMETICS HOLDINGS COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cao Tian 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 Operating Subsidiary is a Sino-foreign equity joint venture incorporated
in PRC with headquarters located in Shanghai, the largest city in China. Cao
Tian 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.
Cao Tian 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
publicly listed company, to be its shareholder and President.
NOTE 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.
8
CTC COSMETICS HOLDINGS COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(c) 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.
(d) 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
income 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.
(e) 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.
(f) 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 4)
(g) 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.
(h) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its majority owned and controlled subsidiaries. For the
consolidated financial statements purposes, all significant inter company
balances and transactions have been eliminated in the consolidation. Cao
Tian owns 90% of ZAAF, a Sino-foreign joint venture. ZAAF's 10% minority
interest in Cao Tian is disclosed as a liability and the related profit is
deducted as other expenses, which is in accordance with FASB-94.
9
CTC COSMETICS HOLDINGS COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(i) 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.
(j) Revenue Recognition
Product sales revenue is recognized upon transfer of title to goods.
NOTE 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.
NOTE 4. 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.
NOTE 5. STOCK
There are 50,000,000 shares of common stock with par value US$.004 per share
authorized, of which approximately 10,157,987 shares have been issued and
outstanding, with an estimated public float of 1,157,987 shares.
NOTE 6. 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.
NOTE 7. INFORMATION 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 advised that export sales are
expected to increase in the coming years.
10
CTC COSMETICS HOLDINGS COMPANY, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. RELATED PARTY TRANSACTIONS
All related party transactions are reviewed and disclosed in accordance with
FASB-57.
NOTE 9. FISCAL YEAR CHANGE
The date of the fiscal year end of the Operating Subsidiary was changed to
August 31 from September 30 to make the financial information reporting on a
more consistent basis with CTC Cosmetics Holdings Company, Inc. and to more
accurately reflect the Company's fiscal results.
11
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Prior to March 21, 1997, the Company was engaged in the business of
financing, producing and distributing quality, lower and medium budget
motion pictures.
Effective March 21, 1997, the Company effected the corporate reorganization
described below. The financial statements included herewith and the
discussion concerning the results of the quarter and nine months ended May
31, 1997 relate to the Company's operation after such corporate
reorganization.
Corporate Reorganization
In March 1997, the Company negotiated the acquisition of a privately
held cosmetic company named CTC Cosmetics Holding (BVI) Co., Ltd., a British
Virgin Islands corporation (hereafter "CTC") in a stock-for-stock exchange
whereby the Company issued shares of its common stock to the shareholders of
CTC in exchange for their shares of CTC. A condition of the transaction was
the discontinuance of the Company's film operations, a reverse stock split,
a change of the Company's name and a change of the Company's management.
On March 21, 1997, the acquisition of CTC was effected and in
connection therewith, the following action was taken:
1. The Company effected a 1-for-12.93
reverse stock split reducing the number of
shares of the Company's common stock issued
and outstanding from 7,422,768 to 502,431;
(after cancellation of certain shares of the
former directors; see item 3 below).
2. The Company issued 9,000,000 shares of
its common stock, calculated on a post-split
basis, to the shareholders of CTC in exchange
for all of their shares of CTC.
3. The Company effected a divisive
reorganization wherein it transferred all of
its shares of its wholly-own subsidiaries,
Westwind Productions, Inc. and Westwind
Releasing, Inc. to its former directors
William Webb and James Webb.
4. The Company amended its Certificate of
Incorporation to change its name from The
Westwind Group, Inc. to CTC Cosmetics Holdings
Company, Inc.
5. The Company accepted the resignations of
its then officers and directors and appointed
new officers and directors of the Company.
12
Liquidity and Capital Resources.
- --------------------------------
Due to continuous growth and increase of the company's fixed assets,
as of May 31, 1997, the Company had total assets of $18,619,432
compared to $16,102,672 as of August 31, 1996, an increase of $2,516,760. As
of May 31, 1997, the Company's cash totaled $301,964 as compared to $143,759
as of August 31, 1996. The increase was the result of strong sales growth.
Inventory increased from $2,598,715 at August 31, 1996 to $3,534,237 at May
31, 1997 due primarily to increase of production and gradual build up of
inventory for expected sales demands.
Total current liabilities increased to $6,822,160 at May 31, 1997 from
$5,371,212 at August 31, 1996 as a result of additional short term borrowings.
Shareholders' equity at May 31, 1997 was $9,846,647 compared to
$8,754,731 at August 31, 1996.
Results of Operations
- ---------------------
The Company manufactures, distributes, and sells cosmetic products and
cosmetic related chemical ingredients primarily in the PRC and other Asian
countries. The Company revenues are derived from sales of its cosmetic
products and cosmetic related chemical ingredients.
The Company has two main manufacturing centers; one located in the PuDong
District of Shanghai, which manufactures various cosmetic products including
skin care creams, perfumes, shampoos and make-up products, and the other center
located at Zang Zha Gang Township which manufactures various cosmetic
ingredients and chemical by-products.
The Company has established 27 regional marketing offices in the PRC for
its sales and distribution network. The Company also maintains a marketing
office in Hong Kong for its overseas sales.
The Company signed an agreement with a French cosmetic company, Innopharm
S.A.R.L., to manufacture and distribute a beauty cream "KORI" and other products
for the PRC market.
Revenue and Expenses.
- ---------------------
The Company had total revenue of $5,728,651 for the three month period
ended May 31, 1997, compared to $4,445,939 for the three month period ended
May 31, 1996. The Company had total revenue of $14,127,819 for the nine
month period ended May 31, 1997, compared to $13,610,018 for the nine month
period ended May 31, 1996.
Costs of sales for the three month period ended May 31, 1997 were
$3,608,192 compared to $3,191,405 for the three month period ended May 31,
1996. Costs of sales for the nine month period ended May 31, 1997 were
$9,138,304 compared to $9,769,608 for the nine month period ended May 31,
1996. Cost of sales are related to manufacture of the Company's cosmetic
products which include manufacturing related labor costs, wages, material and
overhead. Selling expenses were $705,748 and $1,553,706 for the three month
and nine month periods ended May 31, 1997 compared to $308,143 and $943,294
for the three month and nine month periods ended May 31, 1996. Marketing
costs were slightly reduced because of marketing efficiency and establishment
of solid customer base which lead to repeated sales with less expenses.
The Company had a net income of $731,571 for the three months ended May
31, 1997 compared to a net income of $551,357 for the three months ended May
31, 1996. The Company had a net income of $1,949,231 for the nine months
ended May 31, 1997 compared to a net income of $1,687,827 for the nine
months ended May 31, 1996.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. To the best
knowledge of the Company, it did not become a
party to any pending or threatened litigation
or proceeding material to the Company during
the three month period ended May 31, 1997.
Item 2. Changes in the Rights of the
Company's Security Holders. None.
Item 3. Defaults by the Company on its
Senior Securities. None.
14
Item 4. Submission of Matters to a Vote of
Security Holders.
On March 21, 1997, the Company's stockholders approved by a majority vote
by a written consent the change of the Company's name to "CTC Cosmetics
Holdings Company, Inc."
Item 5. Other Information. None.
Item 6(a). Exhibits. None.
Item 6(b). Reports on Form 8-K.
The Company filed Form 8-K (Items 1 and 2) on April 3, 1997 and on
April 5, 1997 (Item 9 of Form 8-K).
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 23, 1997 CTC COSMETICS HOLDINGS COMPANY, INC.
By /s/ Paul K.W. Tso
Paul K.W. Tso
Chief Executive Officer/Chairman
Principal Executive Officer
By /s/ Joanne Leung
Joanne Leung
Chief Financial Officer
Principal Financial Officer
16