SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of
the Securities Exchange Act of 1934
Check the appropriate box:
/X/ Preliminary Information Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
/ / Definitive Information Statement
WATERFORD STERLING CORPORATION
------------------------------
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
WATERFORD STERLING CORPORATION.
200 South Knowles Avenue
Winter Park, Florida 32789
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on ____________, 2002
To the stockholders of Waterford Sterling Corporation:
Notice is hereby given that a special meeting of stockholders of Waterford
Sterling Corporation will be held on _____________, 2002 at 10:00 a.m. 200 South
Knowles Avenue, Winter Park, Florida 32789 for the following purposes:
1. Amendment of the Articles of Incorporation to reverse split the shares of
the Company on a one for six basis, to reauthorize the par value at .001
per share and to increase the number of shares authorized from 25,000,000
common shares to 95,000,000 common shares and 5,000,000 preferred shares to
100,000,000 shares.
2. Amendment to Articles of Incorporation to change the name of the Company to
Eternal Technology Group, Ltd.
3. To verify the acquisition of Eternal Technologies Group, Ltd. and
subsidiaries.
Common stockholders of record on the close of business on ___________, 2002
are entitled to notice of the meeting. All stockholders are cordially
invited to attend the meeting in person.
By Order of the Board of Directors,
/s/ Jacob Nguyen
-------------------------------------
Jacob Nguyen
Chief Executive Officer and Director
October ___, 2002
WATERFORD STERLING CORPORATION
200 South Knowles Avenue
Winter Park, Florida 32789
INFORMATION STATEMENT
_____________, 2002
This Information Statement is furnished by the Board of Directors of
Waterford Sterling Corporation (the "Company") to provide notice of a special
meeting of stockholders of the Company which will be held on _____________,
2002.
The record date for determining stockholders entitled to receive this
Information Statement has been established as the close of business on
___________, 2002 (the "Record Date"). This Information Statement will be first
mailed on or about _____________, 2002 to stockholders of record at the close of
business on the Record Date. As of the Record Date, there were outstanding
20,887,815 shares of the Company's Common Stock. The holders of all outstanding
shares of Common Stock are entitled to one vote per share of Common Stock
registered in their names on the books of the Company at the close of business
on the Record Date.
The presence at the special meeting of the holders of a majority of the
outstanding shares of Common Stock entitled to vote at the annual meeting is
necessary to constitute a quorum. The Board of Directors is not aware of any
matters that are expected to come before the annual meeting other than those
referred to in this Information Statement.
Each of the matters scheduled to come before the special meeting requires
the approval of a majority of the votes of the shares outstanding. Thomas L.
Tedrow, or entities controlled by him own 14,359,000 or 68.74% of our Common
Stock, and will be able to approve the matters presented in this Information
Statement. Mr. Tedrow acquired his shares from being a founder of the Company,
from the acquisition by the Company of Waterford Florida, Inc. and through the
conversion of some of his cash advances to the Company into stock.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
Proposal 1
Amendment of the Articles of Incorporation
Amendment of the Articles of Incorporation to Reverse Split the Company's
shares on a one for six basis, reauthorize the par value of $.001 per share and
increase the authorized number of common shares from 25,000,000 to 95,000,000
shares.
The Company's amended Articles of Incorporation currently provide that the
Company is authorized to issue 25,000,000 shares of common stock with a par
value of $.001 per share. On August 23, 2002, the Company's Board of Directors
authorized an amendment to the Articles of Incorporation to reverse split the
existing shares of the Company on a one for six basis, to reauthorize the par
value of $.001 per share and to increase the number of authorized shares of
common stock from 25,000,000 (6,250,000 following the reverse split) to
95,000,000 shares. Under the proposed amendment, the first paragraph of the
Articles IV of the Articles of Incorporation would be amended to read as
follows:
The total number of shares which the Corporation shall have authority to
issue (subsequent to the one for six reverse split effected on __________, 2002)
is One-Hundred Million (100,000,000) shares, consisting of ninety-five million
(95,000,000) shares of Common Stock having a par value of $.001 per share and
five-million (5,000,000) shares of Preferred Stock having a par value of $.001
per share.
The principle purposes of the proposed amendment are as follows:
(a) The Reverse Split The current price of the Company's common stock is
extremely low. By reverse splitting the shares, the Company hopes to
increase its price per share. In addition, a reverse split is also required
by the proposed Exchange Agreement with Eternal Technologies, Inc.
("Eternal"), a transaction more fully described under Proposal 3. If the
reverse split were not to occur, six times as many shares (132,300,000
shares) would have to be issued to complete the Eternal transaction, more
fully described under Proposal 3, infra.
Any shareholder who would have less than one-hundred shares as a result of
the reverse split, would have their share balance increased to one-hundred
shares. Fractional shares will be rounded up to the next full share.
(b) The Reauthorized of the .001 par value Following the reverse split, the par
value would decrease to $.00025 per share. Since few if any companies have
such a low par value and the Nevada franchise tax would not increase by
restoring the $.001 par value, the Company wishes to restore the par value
to its original value of .001 per share.
(c) Increase in Authorized Shares The principal purpose for the authorizing of
additional shares is to increase the Company's flexibility to make
acquisitions with its shares. At present, the Company is authorized to
issue 25,000,000 common shares, of which 20,887,815 have already been
issues, leaving little flexibility for acquisitions for shares. By
increasing the authorized shares, the Company will increase its flexibility
and be able accommodate the acquisition of Eternal Technologies Group, Ltd.
and Subsidiaries.
Because of the proposed acquisition of Eternal Technologies Group, Inc., a
British Virgin Islands corporation (more fully described under propsal 3, infra)
a transaction in which requires the issuance of 22,050,000 post reverse split
common shares, the Company currently has an insufficient number of authorized,
but unissued shares to complete this transaction. By affecting the one (1) for
six (6) reverse split and increasing the authorized number of common shares, the
Company will be able to complete the proposed acquisition and have sufficient
shares available should any other opportunity arise, although none is now
contemplated.
The Board believes that the proposed acquisition of Eternal for which the
Company needs the additional authorized shares will be beneficial to the Company
for several reasons:
(1) It will provide an operating business for the Company.
(2) Because it is anticipated that Eternal will be profitable for the calendar
year, there will be earnings per shares which at a market multiple for
similar companies should increase the share price.
(3) The Company will have sufficient cash flow to pay it financial obligations,
whereas it was insolvent.
(4) The long-term outlook for agrocultural genetics is favorable.
The proposed acquisition is the result of contacts in China by the
company's principal shareholder, Thomas L. Tedrow. The proposed acquisition was
in negotiations for over three months before being concluded on or about May 24,
2002. Based on the financial information of Eternal as of June 30, 2002, there
will be an immediate increase in book value for each post reverse share of the
Company in the amount of approximately $0.77 per share.
It should be noted that an increase in authorized shares could serve as a
tool against any takeover effects. The issuance of additional shares could have
the effect of delaying, defering or preventing a change in control without
further action by the shareholders. Likewise, our Board of Directors have the
authority to issue up to 5,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. To date, no preferred stock is outstanding, and we have
no present plans to issue shares of preferred stock.
While the number of authorized shares is being increased from 25,000,000
(4,166,666 post split shares) to 95,000,000, not all of this increase is
necessary to accomplish the acquisition of Eternal. However, the Board believes
that having additional shares available for future acquisition will increase the
flexibility and timing for future acquisitions. There are at present, however,
no additional acquisitions pending or contemplated.
The affirmative vote of a majority of all outstanding shares of common
stock of the Company is required for approval of this proposal. Thomas L.
Tedrow, individually and through entities controlled by him owns14,359,000
shares or 68.74% of the shares outstanding, and will be able to approve this
proposal. Therefore, abstentions, non-votes, or votes against will have no
effect on the outcome of this proposal. The Board of Directors recommends a yes
vote on this proposal.
Proposal 2
Amendment to the Articles of Incorporation to change the name of the Company to
Eternal Technology Group, Ltd.
On August 23, 2002, the Company's Board of Directors authorized an
amendment to the Articles of Incorporation to change the name of the Company to
"Eternal Technology Group, Inc." Under the proposal amendment, Article I of the
Articles of Incorporation would be amended to read as follows:
The name of the corporation (hereinafter called "Corporation") is Eternal
Technology Group Inc.
The purpose for the proposal amendment is because of the proposal
acquisition by the Company of Eternal Technology Group Ltd., changing the name
of the Company to that of its subsidiary is required by the proposed Exchange
Agreement. For a more detailed description of this transaction, see Proposal 3,
infra.
The affirmative vote of a majority of all outstanding shares of common
stock of the Company is required for approval of this proposal. Thomas L.
Tedrow, individually and through entities controlled by him owns14,359,000
shares or 68.74% of the shares outstanding, and will be able to approve this
proposal. Therefore, abstentions, non-votes, or votes against will have no
effect on the outcome of this proposal. The Board of Directors recommends a yes
vote on this proposal.
Proposal 3
Ratification of the Acquisitions of Eternal Technology Group Ltd. and
Subsidiaries ("Eternal") in exchange for 22,050,000 shares of the Company's
post-reverse split common stock.
On August 23, 2002, the Company's Board of Directors authorized the
issuance of 22,050,000 post revers split common shares of the Company in
exchange for all of the issued and outstanding shares of Eternal Technology
Group, Ltd.
The affirmative vote of a majority of all outstanding shares of common
stock of the Company is required for approval of this proposal. Thomas L.
Tedrow, individually and through entities controlled by him owns14,359,000
shares or 68.74% of the shares outstanding, and will be able to approve this
proposal. Therefore, abstentions, non-votes, or votes against will have no
effect on the outcome of this proposal. The Board of Directors recommends a yes
vote on this proposal.
Eternal through its subsidiary Inner Mangolia Aershan Agriculture and
Husbandry Technology a People's Republic of China corporation operates a
breeding center to propogate quality meat sheep and other breeds in Inner
Mangolia. It also operates a genetics research and biopharmaceutical facility
with the support of the Chinese government. For the year ended December 31,
2001, the Company had revenue of $11,446,361 and earnings of $5,810,288, total
assets of $25,653,507 and equity of $18,534,788. The financial statements for
December 31, 2001 and June 30, 2002 are attached hereto.
Eternal Technologies, Inc. ("Eternal") was incorporated in the British
Virgin Islands with limited liability on March 3, 2000 under the name Eternal
Phoenix Company Limited. By resolution adopted on June 17, 2000, the Company
changed its name to Eternal Technology Group Ltd.
On May 16, 2000, Eternal acquired a 100% equity interest in Willsley
Company Limited ("Willsley"), a company incorporated in the British Virgin
Island with limited liability.
Willsley's principal activity is a holding company which owns a 100%
interest in Inner Mongolia Aershan Agriculture & Husbandry Technology Co., Ltd.
("Aershan").
Aershan was incorporated in the People's Republic of China ("the PRC") with
limited liability on July 11, 2000. Its principal activities are operating a
breeding center to propagate quality sheep and other livestock breeds in Inner
Mongolia.
We acquired all of the issued and outstanding shares of Eternal in exchange
for 22,050,000 post reverse split shares. Following completion of the
acquisition there will be 25,531,303 post reverse split shares of the Company
outstanding. Eternal Technology Group Limited is a major agriculture genetics
and bio-pharmaceutical R&D firm operating in China with the support of the
Chinese Government. Based on animal genetics and gene engineering, the company
will develop three principal businesses, i.e. meat, dairy products and
bio-pharmaceuticals.
Two years ago, the Company launched a project to commercialize technology
in sheep embryo production and transfer in China. After the Company carried out
"The World's First Transfer Project of Thousands of Sheep Embryos" in China, a
system of breeding better quality is taking shape. The Company has now moved
into the lamb meat production thus completing the business cycle.
The Company has also entered the dairy industry by applying its technology
of embryo transfer to the breeding of high-yielding and pure-breed dairy cattle.
The Company has also made significant progress in its research work in
bio-pharmaceuticals. The company hopes to launch gene engineered drugs in
several years.
The Farm The farm is located in Wulagai Development Area in the northeast
of Xilingol League, Inner Mongolia. The area is in one of the few naturally
preserved grassland areas in China. The United Nations Educational, Scientific,
and Cultural Organization admitted this area as a member of the Man and
Biosphere Program (MAB) in 1987. In 1997, it was designated as a State Nature
Protection Zone.
The farm is equipped with a 60-kilovolt-electricity transmission line to
ensure an adequate energy supply. Existing telephones and transportation
facilities are also adequate. A railway station is located 80 kilometers to the
south, which will facilitate the distribution of products to various places in
China. The road system inside the farm consisting of approximately 200
kilometers, connects all sub-pastures.
Embryo Transfer Center
The center comprises nearly 35,000 square feet and consists of buildings
containing operating rooms, equipment rooms, offices, conference rooms, lecture
halls and guest rooms for the scientists.
Reception Center
The reception center comprises nearly 30,000 square feet. It is used to
host scientists, customers, and guests.
Breeding Grassland
Utilizing scientific grassland management, the grassland is organized into
various breeding sub-pastures. Each sub-pasture is composed of haciendas and
sheep stables, and equipment such as wells, mowing machines and tractors. A
supply of forage grass is reserved for winter and for snowstorms. Part of the
breeding pastureland has been sown and developed. It will be expanded as the
amount of livestock increases.
Animal Genetics Technologies
The Company possesses technologies for industrialized embryo production and
transfer and has patents on the relevant technologies that guarantee the smooth
implementation of animal genetics projects. These technologies includes the
following:
Peritoneal Endoscope Technique
This is a technique of collecting sheep embryos by means of peritoneal
endoscopes without surgical operations, before transferring.
Embryo collecting and transfer has traditionally been conducted through
surgical procedures. Unfortunately, under this method a provider is usually
rendered useless after four operations, because of adhesions. The peritoneal
endoscope technique adopted by the Company may enable a provider to undergo more
than 10 embryo procedures, thus increasing the utility of providers. It can also
raise the conception rate from 20% to over 80% by deep semen deposition and
frozen semen mating, using a frozen semen consumption volume two-thirds less
than that of conventional techniques.
Vitrification Freezing Technique
Vitrification refers to the process by which concentrated antifreeze
solution is transformed into transparent colloidal solid through rapid freezing.
After experiments and selection, the Company has produced a new
anti-freezing protectant, which enables the freezing process to be operated at
room temperatures of between 20 and 25 celsius without a cooling system, which
produces increased efficiency. Internal and external fertilization blastulae (an
early embryonic form produced by cleavage of a fertilized ovum and consisting of
a spherical layer of cells surrounding a fluid-filled cavity) in cattle has a
growth rate of 95% and 83% respectively after freezing and a transfer pregnancy
rate of 58% and 36%, respectively with the pregnancy rate and farrowing rate
(the rate of the offspring that the pregnant animal gives birth to) raised by 5
to 10% or comparable to international standards.
The Techniques Of Embryo Splitting And Cleavage Ball
These are techniques for splitting embryos by microsurgery or of separating
the embryo cleavage balls in early cultivation before the half-embryos or
separated cleavage balls develop into individuals.
Currently, the average transfer rate of half-embryos in the world is about
35 to 40%, while that of newly split half-embryos (of cattle and sheep) is above
50%. This is the equivalent of a 100% embryo transfer pregnancy rate, thus
improving the embryo availability. By combining the techniques of half-embryo
transfer and embryo sex identification, we can objectively produce male or
female animals, which will exert a positive impact on the breeding of dairy and
beef cattle.
The External Fertilization Technique
In this technique, ova from the ovariums of cattle and sheep are collected
(that is, ova is collected from living animals) before being cultivated
externally. They are then cultivated with semen obtained either internally or
externally so as to complete the fertilization process before being further
cultivated to the transferable stage.
Presently, the transfer pregnancy rate of externally fertilized embryos
worldwide is 40 to 45%, while that in China is only approximately 20%. However,
our fertilized embryo transfer pregnancy rate is above 40%, or world standard.
The cost of embryos fertilized externally is only 10% of that produced
internally. When mass-produced and applied commercially to cattle and sheep,
there is significant revenue potential.
Although a shareholder vote is not required to approve this acquisition.
The Board of Directors believes that it is the best interest of the Company to
have the shareholder ratify this acquisition Thomas L. Tedrow individually and
through entities controlled by him owns 14,359,000 shares or 68.74% of the
shares outstanding and will be able to ratify this proposal. Therefore,
abstentians, non-voters or votes against will have no effect on the outcome of
this proposal. The Board of Directors recommend a yes vote on this proposal.
Management's Discussion & Analysis of Financial Condition and Results of
Operations of Eternal
Year Ended December 31, 2001 Compared to Year Ended December 31, 2001
Sales. For the year ended December 31, 2001, the Company reported sales of
$11,446,361, an increase of $2,492,894 or 27.8% from the $8,953,467 in sales for
the year ended December 31, 2000. This increase resulted primarily from the
sales of foreage grass in teh amount of $1,855,000 and increased sales of
embryo's in the amount of $637,000.
Cost of Sales. For the year ended December 31, 2001, cost of sales totalled
$3,852,386, an increase of $1,557,054 or 67.8% from the $2,295,332 of cost of
goods sold for the year ended December 31, 2000. Cost of goods sold as a
percentage of sales was 33.65% for the year ended December 31, 2001 and 25.63%
for the year ended December 31, 2000. The increase in the cost of goods sold
resulted from the costs of the purchased foreage grasses and other costs
associated with grass transplants.
Depreciation and Amortization. For the year
ended December 31, 2001, depreciation and amortization totalled $845,716, an
increase of $696,124 or 465.3% from the $149,592 of depreciation and
amortization for the year ended December 31, 2000. This increase resulted
because their was a full year of amortizing the land use rights of the farm in
the current period, as well as the addition of other depreciable assets such as
buildings, vehicles and equipment.
Selling and Administrative Expenses. For the year ended December 31, 2001,
selling and administrative expense totalled $937,971, an increase of $508,857 or
118.6% from the $429,114 for the corresponding period of of the prior year. This
increase resulted because the Company operated for a full year in 2001, but only
a partial year in 2000.
As a result of the foregoing, net income for the year ended December 31, 2001
decreased by $269,141 or 4.4% to $5,810,288 from $6,079,429 for the year ended
December 31, 2002.
Six Months Ended June 30, 2002 compared to six months ended June 30, 2001
The Company began operations in the second half of 2001. Because of this, no
comparison can be made between the result of operations between the first six
months of 2002 and the first six months of 2001. In addition, the business of
Eternal is highly seasonal with nearly all of its revenue and all of its
earnings coming during the fourth quarter (October - December ) of the year.
For the six months ended June 30, 2002, Eternal had revenues of $843,373, all
from the sale of livestock and embryos.
Cost of the livestock and embryos sold was $436,467 for the six months ended
June 30, 2002. This produced a gross profit of $406,906 or 48.24%.
Depreciation and amortization for the six months ended June 30, 2002 totalled
$436,607 representing depreciation of agricultural structures, equipment and
vehicles along with the amortization of the land use fees.
Research and development costs were $1,000,000 for the six months ended June 30,
2002 and represent funds paid to independent scientist who are researching
various embryo transplant techniques and other improvements in breeding stock.
Selling and administrative expenses totalled $428,973 for the six months ended
June 30, 2002. These costs represent the cost of operating the farm, including
salaries supplies and marketing expenses.
As a result of the foregoing, the Company incurred a loss of $1,458,674 for the
six months ended June 30, 2002.
Liquidity and Capital Resources
As of June 30, 2002, Eternal had working capital of $1,695,467 and cash of
$2,953,551. This compares with working capital of $4,253,708 and cash of
$7,753,452 as of December 31, 2001.
For the six months ended June 30, 2002, Eternal used $3,263,726 in cash from
operating activities. This use of cash was produced by the net operating loss nd
changes in the current accounts which was partially offset by depreciateion and
amortization.
The Company also used $1,545,000 in its investing activities through the
purchase of fixed assets and construction on the farms.
And, the Company had $9,000 of cash flow from financing activities, all from the
sale of shares.
As a result of the foregoing, the Company's cash decreased by $4,799,901 during
the six months ended June 30, 2002, to $2,953,551 from $7,753,452 as of December
31, 2002.
The operations of Eternal require significant capital. To date, the Company's
operations have been funded from the issuance of shares and earnings. To expand
the business of the Company, increase the breed stock and embryo program and
expand into the doing cattle business. Additional capital will be needed.
Therefore, it is anticipated that the company will seek to raise additional
capital during the next twelve months to fully implement its business strategy.
The following persons are the current management and members of the board
of directors of Eternal Technologies, Inc.
Name Position
Mr. Jijun Wu Chairman of the Board of Directors and President
D. Thomas E. Wagner Director
Mr. Jiansheng Wei Director/ Chief Operation Officer
Mr. Shien Zhu Director
Mr. James Q. Wang Director
Dr. Wenli Yu Chief Technology Officer
Ms. Shumei Pang Chief Veterinarian
Mr. Rutian Zhang Chief Market Inspector
Mr. Garfield Wei Hu Corporate Secretary
Mr. Jijun Wu - Chairman/ President
Mr. Wu graduated from China Central Finance & Economics University. Mr. Wu
became one of the first CPAs in China. He has significant experience in finance
and investments. He held the position of Accountant-General in a state owned
electronics company with revenues of over $1.5 billion and over 200
subsidiaries. Mr. Wu maintains business relationships with more than 20 major
banks, consortiums and funds worldwide. Mr. Wu took a lead in planning for
mainland enterprises to list on overseas stock markets. He was the consultant to
Motorola, NEC, Epson, Yamaha, AT&T, and Panasonic when they initiated
investments in China in the early 1980's. He was made an Honorary citizen of
Houston, TX.
Dr. Thomas E. Wagner - Director
Dr. Wagner is currently the Director of Oncology Research Institute at the
Greenville Hospital System and Distinguished Professor of Molecular & Cellular
Biology at Clemson University. He was trained in both the physical biochemistry
of DNA and microbiology at Princeton and Northwestern University, where he
received his PhD. He carried out research on the conformational changes in DNA
associated with gene expression since the early 1970s. His lab performs studies
of early development including embryonic microsurgery and contemporary molecular
biology including complex RT/PCR cloning. This has led to contributions
including the development of the means of producing transgenic animals in 1979,
the isolation and maintenance in culture of embryo derived stem cell populations
useful in transplantation biology and medicine, as well as vehicles for
cell-based gene therapy in 1987 and the development of a highly efficient
cytoplasmic T7 gene therapy vector in 1993. Since 1998 he has focused his
efforts as Director of the Oncology Research Institute on the application of
modern molecular and cellular biology to the development of new therapies for
the treatment of cancer. His work has been presented in 203 publications and has
filed over 30 patents and, to date, received eight patents on his work. Dr.
Wagner is also currently: Senior Examiner and Consultant, Research Grants
Council, Hong Kong; Advisor and Honorary Professor of Molecular Biology, Tsing
Hua University, Beijing; and Honorary Professor of Biology, National
Hydrobiology Institute, Chinese Academy of Sciences, Wuhan, China.
Mr. Jiansheng Wei - Director/ Chief Operation Officer
Mr. Wei graduated from Tianjin Finance & Economics College, receiving an MBA. He
has been engaged in animal husbandry practices and management for over 30 years
and has been in charge of several large farms in Inner Mongolia and Hebei
Province. He is familiar with advanced husbandry techniques and has significant
experience in management, breeding and introduction of superior agricultural
genetics, and growth and utilization of forage grass. Mr. Wei maintains close
commercial relationships with animal husbandry and business circles in Southeast
Asia, Australia, New Zealand, and South Africa.
Mr. Shien Zhu, Director
Citizen of China, post doctorate, Associate Professor and Master Director. As a
doctor from Kochi University and Ehime University in Japan, he majored in the
area of early embryo vitrification freezing and transfer and of mammal
adoscuolation in embryo biotechnology. He invented a system of freezing and
preservation, not aided by a cooling frigorimeter, which is characterized by low
cost, simple operation and a high embryo survival rate. In recent years, he has
written more than 40 articles that were published in international and domestic
periodicals. Currently, he is undertaking vital "863" projects for China and
scientific research projects under the "Ninth Five-Year Plan" period.
Mr. James Q. Wang, Director
Citizen of Canada. He received Master of Applied Science from the University of
Ottawa. Devoted to telecommunication & electronics industries and Internet world
for 10 years, James has gained exceptional expertise and experiences in
enterprise management marketing and engineering. Before joining Eternal, James
founded DNS Technologies Group Inc. (Canada) and served as its President. DNS is
specialized in Internet technologies and outsourcing between North America and
Asia. James started his career first as an engineer in NEC, where he published
his technical innovation proposal and was honored Awards of Excellence at NEC's
headquarter in Tokyo. And later, he moved to the marketing department in charge
of marketing and sales in eastern region of Mainland China.
Dr. Wenli Yu - Chief Technology Officer
Dr. Yu received her Ph.D from China Agriculture University, Biology Department,
and is a Research Fellow. She has presided over the following key projects in
the China including: "Development and Application of Bovine/Ovine Embryo
Transfer Technology", "Setting up Breeding and Production System of Purebred
Beef by Embryo Biotechnology," "Establishing a State Center for Beef Breeding,"
"Research on Ovine Artificial Insemination and Embryo Transfer with the
Application of Endoscope." Dr. Yu has published over 20 papers in renowned
professional journals, such as China Animal Husbandry, China Veterinarian
Journal, and Animal Husbandry Veterinarian Journal. She maintains good
relationships with experts in biology both at home an abroad. She has
established a reputation in academic circles for her extensive experience. She
has met with President Jiang Zemin to discuss current activities in embryo
research.
Ms. Shumei Pang - Chief VeterinarianMs. Pang received an M.A. from Tianjin
Agriculture College, Veterinarian Department. For the past 12 years, Ms. Pang
has been engaged in livestock epidemic prevention, nutrition control and feeding
management. She has participated in academic exchanges in Australia and New
Zealand and has published over 10 theses in professional journals.
Mr. Rutian Zhang - Chief Market InspectorMr. Zhang received an MBA from Inner
Mongolia University. He has been engaged in the import and export of agriculture
and husbandry products for almost 30 years. He has rich experience in marketing
and establishing sales channels at home and abroad. He has contributed to the
introduction of husbandry products of Inner Mongolia into the Middle East.
Mr. Garfield Wei Hu - Corporate SecretaryMr. Hu graduated from the Foreign
Languages Department, Tianjin Normal University. He taught at Nankai University
and worked as a translator and adviser for the largest professional IT web site
- - yesky.com. He joined Eternal Technology Group in 2000 and was appointed
Corporate Secretary in 2001 with responsibility for the coordination of internal
affairs and external contacts.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues. Revenues decreased by $593,718 or 87.5% from $678,368 for the year
ended December 31, 2000 to $84,650 for the year ended December 31, 2001. The
decrease in revenues was principally due to the absence of software sales in the
current year and a decline in interest income which was partially offset by
sales of furniture in the current year, which after costs of furniture sales
netted $7,298.
General and Administrative Expenses. General and administrative expenses
increased by $18,015 or .02% from $741,791 for the year ended December 31, 2000
to $759,806 for the year ended December 31, 2001. The increase in general and
administrative expenses resulted from general increase in prices, although less
than the inflation rate.
Depreciation and Amortization. Depreciation and amortization expense decreased
by $918 or 11.2% from $8,193 for the year ended December 31, 2000 to $7,275 for
the year ended December 31, 2001. This decrease resulted from fewer assets being
depreciated. Loss on Sale of Investment. The Company incurred a $9,825 loss on
the sale of securities during the year ended December 31, 2001. It had no gain
or loss from the sale of securities for the prior year.
Extraordinary Item. For the year-ended December 31, 2001, the Company recorded a
non temporary loss of $650,500 from its holdings of Grand Slam Treasures, Inc.
(now Asconi Corporation) common stock, writing down the value of the securities
from $650,000 to $19,500 following a 1:100 reverse split. There was no
extraordinary item for the year ended December 31, 2000.
Other Comprehensive Income. Other comprehensive income increased by $512,000
from a loss of $312,000 for the year ended December 31, 2000 to $200,000 for the
year ended December 31, 2001. This increase is attributable to an increase in
the Company's stock portfolio during the current year.
Comprehensive Loss. As a result of the foregoing, the Company incurred a net
comprehensive loss of $1,214,570 for the year ended December 31, 2001, compared
to a comprehensive loss of $387,713 for the year ended December 31, 2000. The
Company's loss before extraordinary items and comprehensive losses/income was
$784,070 for the year ended December 31, 2001 compared to $75,213 for the
year-ended December 31, 2000.
Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000
Revenues for the six months ended June 30, 2001 increased to $81,173 from
$62,059 for the six months ended June 30, 2000. This increase in revenues
resulted from the initial sales of furnitures of $77,149 which was partially
offset by a $45,000 reduction in the sales of software and a $13,035 reduction
in the interest income.
General and administrative expenses increased by $247,673 to $502,022 for the
six months ended June 30, 2001from $254,349 for the corresponding period of the
prior year. This increase resulted from entering into the furniture business and
the corresponding cost of furniture samples, shipping and costs of Hong Kong
operations.
Interest expense increased by $7,589 to $8,170 for the six months ended June 30,
2001 from $581 for the corresponding period of the prior year. The increase in
interest expense results from increased borrowings by the Company.
Depreciation and amortization expense decreased by $1,714 to $4,637 for the six
months ended June 30, 2001 from $2,923 for the corresponding period of the prior
year. The decrease in depreciation and amortization expense resulted from
decrease in software r&d and equipment purchases.
For the six months ended June 30, 2001, the Company had a net loss of $9,825 for
the sale of marketable securities. The Company had no gain or loss from the sale
of marketable securities in the corresponding period of the prior year. In
addition, for the six months ended June 30, 2001, the Company recorded an
extraordinary loss on the write-down of its Grand Slam Treasures, Inc. shares of
$630,500 and had other comprehensive income of $200,000 from unrealized gain on
securities available for sale. There were no such extraordinary items on
comprehensive income items for the corresponding period of the prior year.
As a result of the foregoing, the Company's net operating loss before
extraordinary items increased by $317,759 to $513,553 for the six months ended
June 30, 2001 from $195,794 for the corresponding period of the prior year and
to a comprehensive loss of $944,054 for the six months ended June 30, 2001.
CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the past twelve months, the Company has funded its operating losses and
capital requirements through internally generated funds, the sale of stock and
loans from its principal shareholders. As of June 30, 2001, the Company had a
cash balance of $5,765 and a deficit in working capital of $182,938. This
compares with cash of $175,599 and working capital of $340,585 for the
corresponding period of the prior year.
Net cash used in operating activities decreased to $251,703 for the six months
ended June 30, 2001 from $254,837 for the six months ended June 30, 2000. The
slight decrease in cash used in operations resulted from an increase in the net
operating loss which was offset by expenses which were paid in shares, a
non-cash loss resulted from a write-down of the Company's portfolio and moderate
change in the Company's current accounts. Cash flows used in investing
activities for the six months ended June 30, 2001 increased to $59,676 from
$3,369 for the corresponding period of the prior year. This increase is entirely
attributable to the sale of securities in the current period.
Net cash provided by financing activities increased to $185,210 from $0 for the
six months ended June 30, 2001 and 2000, respectively. For the six months ended
June 30, 2001, the Company received a loan of $185,210 from its principal
shareholder. There were no loans in the corresponding period of this prior year.
The Company has experienced significant operating losses throughout its history,
and will acquire substantial funds for the development of its business.
Therefore, the Company's ability to survive is dependent on its ability to raise
capital through the issuance of stock or borrowing of additional funds. Without
the success of one of these options, the Company will not have sufficient cash
to satisfy its working capital and investment requirements for the next twelve
months.
Attached hereto are the following:
a. The financial statements of Eternal Technology Group Ltd. for the years
ended December 31, 2001 and 2000 and the six months ended June 30, 2002.
b. The financial statements of Waterford Sterling Corporation for the years
ended December 31, 2001 and 2000 and the six months ended June 30, 2002.
c. Unaudited proforma combined financial information
d. Exchange Agreement for the acquisition of Eternal Technology Group Ltd.
Other Matters
The Board of Directors does not intend to bring any other matters before the
Special Meeting and has not been informed that any other matters are to be
presented by others.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Jacob Nguyen
--------------------------------------------------
Jacob Nguyen, Chief Executive Officer and Director
October ___, 2002
ETERNAL TECHNOLOGY GROUP LTD AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-------
December 31, 2001
Report of Independent Auditors F-2
Consolidated Balance Sheet as of December 31, 2001 F-3
Consolidated Statements of Income for the years ended
December 31, 2001 and 2000 F-4
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and 2000 F-6
Notes to Financial Statements F-7-15
June 30, 2002 (Unaudited)
Consolidated Balance Sheet as of June 30, 2002 F-16
Consolidated Statements of Income for the six months ended June 30, 2002 F-17
Consolidated Statements of Cash Flows for the six months ended June 30,
2002 F-18
Notes to Financial Statements F-19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Eternal Technology Group, LTD
We have audited the accompanying consolidated balance sheet of Eternal
Technology Group, LTD. (a British Virgin Islands corporation) and subsidiary as
of December 31, 2001, and the related consolidated statements of income, changes
in shareholders' equity, and cash flows for the year ended December 31, 2001,
and from inception (March 3, 2000) to December 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards required that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of Eternal Technology
Group, LTD. and subsidiary as of December 31, 2001, and the results of their
operations and their cash flows for the year ended December 31, 2001, and from
inception (March 3, 2000) to December 31, 2000 in conformity with accounting
principles generally accepted in the United States of American.
Thomas Leger and Co., LLP
Houston, Texas
August 19, 2002
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
(UNITED STATES DOLLARS)
ASSETS
CURRENT ASSETS
Cash and bank balances $7,753,452
Inventories 285,576
Accounts receivable 2,712,506
Receivable due from
related parties 456,052
Prepayments and deposits 164,841
------------
TOTAL CURRENT ASSETS 11,372,427
FIXED ASSETS (net of accumulated
depreciation of $680,656) 3,971,773
CONSTRUCTION IN PROGRESS 3,619,652
ESTIMATED FUTURE CONSTRUCTION COST UNDER CONTRACT 1,000,000
LAND USE RIGHTS
(net of accumulated amortization of $310,345) 5,689,655
-------------
TOTAL ASSETS $ 25,653,507
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable for construction $2,557,616
Estimated payable for construction contracts not invoiced 1,000,000
Accounts payable and accrued expenses 273,695
Payable to related company 1,715,663
Amounts due to related parties 1,571,745
------------
TOTAL CURRENT LIABILITIES 7,118,719
------------
SHAREHOLDERS' EQUITY
Capital shares - 50,000 shares authorized $1.00
par - 1,000 shares issued 1,000
Paid - in capital 6,644,071
Retained earnings 11,889,717
------------
TOTAL SHAREHOLDERS' EQUITY 18,534,788
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,653,507
============
ETERNAL TECHNOLOGY LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(UNITED STATES DOLLARS)
2001 2000
SALES $11,446,361 $8,953,467
COST OF SALES 3,852,386 2,295,332
------------ -----------
GROSS PROFIT 7,593,975 6,658,135
DEPRECIATION AND AMORTIZATION 845,716 149,592
SELLING AND ADMINISTRATIVE EXPENSES 937,971 429,114
------------ -----------
NET INCOME BEFORE INCOME TAXES 5,810,288 6,079,429
INCOME TAXES - -
------------ -----------
NET INCOME $5,810,288 $6,079,429
============ ===========
ETERNAL TECHNOLOGY GROUP LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(UNITED STATES DOLLARS)
Capital Paid - in Retained
Shares Capital Earnings Total
--------- ----------- ----------- --------
Balance, Inception March 2, 2000 $ - $ - $ - $ -
Issuance of shares 1,000 6,644,071 - 6,645,071
Net Income - - 6,079,429 6,079,429
------- ----------- ----------- ------------
Balance, December 31, 2000 1,000 6,644,071 6,079,429 12,724,500
------- ----------- ----------- ------------
Net Income - - 5,810,288 5,810,288
------- ----------- ----------- ------------
Balance, December 31, 2001 $ 1,000 $6,644,071 $11,889,717 $18,534,788
======= =========== =========== ============
ETERNAL TECHNOLOGY GROUP LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(UNITED STATES DOLLARS)
2001 2000
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,810,288 $ 6,079,429
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 845,716 149,592
(Increase) decrease in assets:
Inventories 630,087 (915,663)
Accounts receivable (2,043,136) (669,370)
Receivable due from related company 231,987 (688,039)
Prepayments and deposits (137,251) (27,590)
Increase (decrease) in liabilities:
Accounts payable for construction work 197,760 2,363,855
Accounts payable and accrued expenses 122,875 150,820
Deposit for future delivery (385,542) 385,542
Amounts advanced by related parties 967,765 603,980
Account payable to related company 1,715,663 -
Estimated payable for construction 1,000,000 -
----------- -----------
Net cash provided by operating activities 8,956,212 7,432,556
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (247,260) (4,413,475)
Purchase of land use rights - (6,000,000)
Construction in progress (83,399) (3,536,253)
Estimated future construction costs (1,000,000) -
----------- -----------
Net cash used by investing activities (1,330,659) (13,949,728)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital shares - 6,645,071
----------- -----------
NET INCREASE IN CASH AND
BANK BALANCES 7,625,553 127,899
Cash and bank balances, beginning of period 127,899 -
----------- -----------
Cash and bank balances, at end of period $ 7,753,452 $ 127,899
=========== ===========
ETERNAL TECHNOLOGY GROUP LTD AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
NOTES
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Eternal Phoenix Company Limited was incorporated in the British Virgin Islands
with limited liability on March 3, 2000. Pursuant to a resolution passed on June
17, 2000 the company changed its name to ETERNAL TECHNOLOGY GROUP LTD.,
("Company"). It is a holding company for investments in operating companies.
During the period, Eternal acquired from 100% equity interest in Willsley
Company Limited ("Willsley"), a company incorporated in the British Virgin
Island with limited liability on May 16, 2000.
Willsley's principal activity was investment holding which owned 100% interest
in Inner Mongolia Aershan Agriculture & Husbandry Technology Co., Ltd
("Aershan").
Aershan was incorporated in the People's Republic of China ("the PRC") with
limited liability on July 11, 2000 and its principal activities are to run a
breeding center to propagate quality meat sheep and other livestock breeds in
Inner Mongolia.
2. BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America. This basis of
accounting differs from that used in the statutory financial statements of the
subsidiaries which are prepared in accordance with the accounting principles
generally accepted in the relevant country.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements of the Company included the Company
and its wholly owned subsidiaries. All material Intercompany balances and
transactions have been eliminated.
Economic and political risks
The Company faces a number of risks and challenges since its main
operations are in the PRC. The financial statements have been prepared
assuming the Company will continue as a going concern.
Cash and cash equivalents
The Company considers cash and cash equivalents to include cash on hand and
demand deposits with banks with an original maturity of three months or
less. The Company maintains no accounts in the United States of America.
Accounts receivable
No allowance for doubtful accounts has been established, as management
believes all amounts are collectible.
Inventory
Inventories are measured at lower of cost and net realizable value using
the first-in first-out ("FIFO") or weighted average cost formulas.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation. Depreciation
of fixed assets is calculated on the straight-line basis to write off the
cost less estimated residual value of each asset over its estimated useful
life. The principal annual rates used for this purpose are as follows:
Buildings 2%-4%
Furniture and fixtures 20%
Office equipment 20%
Motor vehicles 20%
In accordance with the Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of", the Company examines the possibility of
decreases in the value of fixed assets when events or changes in
circumstances reflect the fact that their recorded value may not be
recoverable.
Land lease rights and amortization
Land lease rights in Mainland China were stated at cost less accumulated
amortization. Amortization of land lease rights was calculated on the
straight-line basis over the lesser of its estimated useful life or the
lease term. The principal annual rate used for this purpose is 2%.
Income taxes
Income taxes are determined under the liability method as required by
Statement by Statement of Financial Accounting Standard No.109, "Accounting
for Income Taxes". The Company's current operations are currently exempt
from taxation.
Foreign currency translation
The Company maintains no accounts in currency of the United States of
America.
Translation of amounts from Hong Kong dollars ("HK$") into United States
dollars ("US$") has been made at the single rate of exchange on December
31, 2001 of US$1.00:HK$7.75. No representation is made the HK$ amounts
could have been, or could be, converted into US$ at that rate on December
31, 2001 or at any other date.
One of the subsidiaries maintains their books and accounts in Peoples
Republic of China currency, which is called Renminbi ("RMB$"). Translation
of all assets and liabilities of amounts from RMB$ into US$ has been made
at the single rate of exchange on December 31, 2001 of US$1.00:RMB$8.30.
Income and expense items were translated at the average rates as quoted by
the PRC. No representation is made the RMB$ amounts could have been, or
could be, converted into US$ at that rate on December 31, 2001 or at any
other date.
On January 1, 1994, the PRC government introduced a single rate of exchange
as quoted daily by the People's Bank of China (the "Unified Exchange
Rate").
The quotation of the exchange rates does not imply free convertibility of
RMB to other foreign currencies. All foreign exchange transactions continue
to take place either through the Bank of China or other banks authorized to
buy and sell foreign currencies at the exchange rates quoted by the
People's Bank of China. Approval of foreign currency payments by the Bank
of China or other institutions requires submitting a payment application
form together with invoices, shipping documents and signed contracts.
Revenue recognition
Revenue from the sale of livestock, forage grasses and raw materials is
recognized when the merchandise is delivered to the customer and title
passes.
Use of estimates
The preparation of consolidated financial statements requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
4. FIXED ASSETS
Fixed assets are comprised of the following:
December 31, 2001
Infrastructure $ 81,928
Buildings 2,519,277
Equipment 1,225.200
Other 826,024
-----------
4,652,429
Accumulated Depreciation (680,656)
-----------
$ 3,971,773
5. INCOME TAXES
The companies operate in several jurisdictions and may be subject to those
jurisdictions.
It is management's intention to reinvest all the income attributable to the
Company earned by its operations outside of the United States of America.
Accordingly, no United States corporate taxes have been provided in these
financial statements.
Under current law of the British Virgin Islands, any dividends and capital
gains arising form the Company's investments are not subject to income tax
in the British Virgin Islands.
A company carrying on operations in Hong Kong is subject to Hong Kong
profits tax on their income arising in or derived from Hong Kong after
adjusting for income and expense items which are not assessable or
deductible for profits tax purposes. No company has assessable income in
Hong Kong as of December 31, 2001. Accordingly no Hong Kong corporate taxes
have been provided in these financial statements.
Companies with operations in the Peoples Republic of China may be subject
to taxes for income therein. The Income Tax Law of the Peoples Republic of
China for Enterprises with Foreign Investment and Foreign Enterprises
provide certain exemptions from taxation. Aershan should be exempt from
taxation for the first two years of operation and should be allowed a fifty
per cent reduction in the third to fifth years. Accordingly, no PRC
corporate taxes have been provided in these financial statements.
6. CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject the Group to a
concentration of credit risk principally consist of cash deposits, trade
receivables, long-term receivable and the amounts due from and to directors
and related companies.
(i) Cash deposits
The Group places it cash deposits with an international bank.
(ii) Amounts due from related companies The Company does not
have a policy of requiring collateral.
(iii) Amounts due from and to directors (See "Additional related party
balances and transactions")
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments are set out as follows
(i) Cash deposits The cash deposits are stated at cost, which approximates
market value.
(ii) Trade receivables, other receivables and amounts due from directors and
related companies
Tradereceivables, other receivables and the amounts due from related
companies and directors are stated at their book value less provision for
doubtful debts, which approximates the fair value.
(iii)Accounts payable and amounts due to related companies and directors are
stated at their book value which approximates their fair value.
8. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are conducted in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC,
and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special considerations
and significant risks not typically associated with companies 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 adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
9. ADDITIONAL RELATED PARTY BALANCES AND TRANSACTIONS
The Company's amounts due from/(to) directors, related parties, and related
company are unsecured, interest-free and are repayable on demand. China
Continental, Inc. ("CCI") is a related company. One of the Company's
officers, directors and major shareholder (Shang Jia Ji) owns approximately
more than 10% of CCI and Towering International Trad (US) Corp.
CCI acquired 2,000 goat embryos and services from the Company for
US$425,000 in December, 2000. CCI's 2,000 goats with implanted embryos were
sold in March, 2001 for approximately US$1,687,000.
CCI had sales of forage grass to the Company for approximately US$1,735,000
during 2001. These purchases were at the same price as to third parties.
The forage grass was sold to a third party for $1,855,000.
The Company acquired 100% interest in Aershan in a transaction valued at
$6,000,000 from Shang Jia Ji. The $6,000,000 represents Shang Jia Ji's
cost.
The Company entered into various construction contracts with companies
controlled by Shang Jai Ji. The contracts totaled approximately $985,530.
This amount was paid in full by June 30, 2002.
The Company entered into a contract with Towering International Trad (US)
Corp during 2001 for a research and development project totaling
$1,400,000. No payments were made in 2001. During the first six months of
2002, $400,000 was paid on this contract.
10. MAJOR CUSTOMERS
The Company purchases and sells livestock whose purchases and sales exceed
10% of total purchases and sales.
Purchases: 2001 2000
---- ----
Company A 16% 58%
Company B 31% 42%
Company C 43% -
Sales:
Company D 84% 94%
Company E 16% -
11. CONTINGENCIES AND COMMITMENTS
The Company is committed to various entities for certain research and
development projects. These commitments totaled $2,600,000 at December 31,
2001.
12. SUBSEQUENT EVENTS
These financials statements should be read in conjunction with the June 30,
2002 interim financial statements.
ETERNAL TECHNOLOGY GROUP LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 2002
(UNITED STATES DOLLARS)
ASSETS
CURRENT ASSETS
Cash and bank balances $ 2,953,551
Inventories 475,614
Accounts receivable 736,602
Receivable due from
related parties 387,834
Prepayments and deposits 146,649
-----------
TOTAL CURRENT ASSETS 4,700,250
FIXED ASSETS (net of accumulated
depreciation of $993,124) 4,564,968
CONSTRUCTION IN PROGRESS 4,259,162
ESTIMATED FUTURE CONSTRUCTION COST UNDER CONTRACT 1,000,000
LAND USE RIGHTS
(net of accumulated amortization of $434,484) 5,565,517
-----------
TOTAL ASSETS $ 20,089,897
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable for construction $ -
Estimated payable for construction contracts
not invoiced 1,000,000
Accounts payable and accrued expenses 368,538
Payable to related company -
Amounts due to related parties 1,636,245
----------
TOTAL CURRENT LIABILITIES 3,004,783
----------
SHAREHOLDERS' EQUITY
Capital shares - 50,000 shares authorized $1.00
par - 10,000 shares issued 10,000
Paid - in capital 6,644,071
Retained earnings 10,431,043
-----------
TOTAL SHAREHOLDERS' EQUITY 17,085,114
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,089,897
===========
ETERNAL TECHNOLOGY LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
(UNITED STATES DOLLARS)
SALES OF LIVESTOCK AND EMBRYOS $ 843,373
COST OF SALES 436,467
---------
GROSS PROFIT 406,906
DEPRECIATION AND AMORTIZATION 436,607
RESEARCH AND DEVELOPMENT COSTS 1,000,000
SELLING AND ADMINISTRATIVE EXPENSES 428,973
---------
NET LOSS BEFORE INCOME TAXES (1,458,674)
INCOME TAXES -
NET LOSS $ (1,458,674)
=========
ETERNAL TECHNOLOGY GROUP LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
(UNITED STATES DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,458,674)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 436,607
(Increase) decrease in assets:
Inventories (190,038)
Accounts receivable 1,975,904
Receivable due from related company 68,218
Prepayments and deposits 18,192
Increase (decrease) in liabilities:
Accounts payable for construction work (2,557,615)
Accounts payable and accrued expenses 94,843
Amounts advanced by related parties 64,500
Account payable to related company (1,715,663)
------------
Net cash provided by operating activities (3,263,726)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (905,665)
Construction in progress (639,510)
------------
Cash flows used from investing activities (1,545,175)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital shares 9,000
------------
NET DECREASE IN CASH AND
BANK BALANCES (4,799,901)
Cash and bank balances, beginning of period 7,753,452
------------
Cash and bank balances, at end of period $ 2,953,551
============
ETERNAL TECHNOLOGY LTD AND SUBSIDIARIES
FOR THE SIX MONTHS ENDED JUNE 30, 2002
NOTE 1. - BASIS OF PRESENTATION
The accompanying unaudited financial statements of Eternal Technology LTD and
subsidiaries have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10QSB and Item 310(b) of
Regulation S-B. They do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation, have been included in the accompanying
unaudited financial statements. Operating results for the periods presented are
not necessarily indicative of the results that may be expected for the full
year.
These financial statements should be read in conjunction with the financial
statements and footnotes, which are included as part of financial statements for
the year ended December 31, 2001.
WATERFORD STERLING CORPORATION
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
December 31, 2001
ASSETS
CURRENT ASSETS:
Cash $ 18,192
Prepaid expense (Note 4) 57,479
------------
Total current assets 75,671
EQUIPMENT:
Office equipment 40,761
Accumulated depreciation (20,144)
------------
20,617
OTHER ASSETS:
Organization costs net of amortization 390
------------
$ 96,678
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses $ 14,423
Notes payable - related parties (Note 6) 480,660
------------
Total current liabilities 495,083
STOCKHOLDERS EQUITY (Deficit):
Common stock, par value $.01;
authorized 30,000,0000 shares; issued
and outstanding 20,887,815 shares 208,878
Capital in excess of par 1,353,049
Deficit accumulated during the
development stage (1,960,332)
------------
Total stockholders' deficit (398,405)
------------
$ 96,678
============
WATERFORD STERLING CORPORATION
(A Development Stage Company)
Consolidated Statements of Operations
Years Ended December 31, 2001 and 2000
And May 17, 1989 (Date of Inception) to December 31, 2001
Inception
To
December 31, December 31, December 31,
2001 2000 2001
-------------- ------------- ---------------
REVENUE:
Sales of software $ - $ 652,458 $ 652,458
Sales of furniture 77,370 - 77,370
Interest income 7,280 25,910 58,225
--------- ---------- -----------
84,650 678,368 788,053
COST AND EXPENSES:
Cost of furniture sold 70,072 - 70,072
Selling, general and
administrative 759,806 741,791 1,988,632
Interest 21,742 3,597 25,339
Depreciation and
amortization 7,275 8,193 24,016
Loss on sale of
investments 9,825 - 9,825
--------- ---------- -----------
Total expenses 868,720 753,581 2,117,884
LOSS BEFORE
EXTRAORDINARY ITEM
(784,070) (75,213) (1,329,831)
--------- ---------- -----------
EXTRAORDINARY ITEM
Non-temporary loss on
securities (630,500) - (630,500)
--------- ---------- -----------
NET LOSS (1,414,570) (75,213) (1,960,331)
COMPREHENSIVE
LOSS
Unrealized gain (loss) on
available for sale securities 200,000 (312,000) -
--------- ---------- -----------
COMPREHENSIVE
LOSS $ (1,214,570) $(387,713) $(1,960,331)
========== ========== ===========
Loss per common share
before extraordinary item $ (.04) $ (.01)
Extraordinary loss per
common share (.03) -
--------- ----------
Net loss per common share $ (.07) $ (.01)
========= ==========
Weighted average shares
outstanding 20,293,294 13,653,630
========== ==========
WATERFORD STERLING CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001 and 2000
May 17, 1989 (Date of Inception) To December 31, 2001
Inception
To
Dec. 31, Dec. 31, Dec. 31,
2001 2000 2001
---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,414,571) $ (75,214) $(1,960,333)
Adjustment to reconcile net loss to
net cash used by operating activities:
Loss on sale of investments 9,824 - 9,824
Depreciation and amortization 9,462 8,381 20,691
(Increase)in accounts receivable - 6,058 -
Bad debt - 12,074 12,074
Decrease in prepaid expenses 113,074 - 113,074
Increase (decrease) in accounts payable (52,413) 43,780 14,424
Revenue in non-cash transaction - (650,000) (650,000)
Nontemporary loss on securities 630,500 - 630,500
Expenses paid and debts settled
with common stock 263,082 68,846 443,348
Loss on exchange of notes receivable
for prepaid rent - 45,200 45,200
Other expenses incurred in
non-cash transactions - 44,248 44,248
----------- ----------- -----------
Net cash (Used) by operations (441,042) (496,627) (1,276,950)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of securities available for sale 59,676 - 59,676
Issuance of notes receivable - (62,075) (290,733)
Collections on notes receivable - 78,658 78,658
Purchase of marketable securities - - (50,000)
Purchase of equipment - (27,381) (40,761)
Increase in organization costs - - (936)
----------- ----------- -----------
Net cash provided (used)
by investing activities 59,676 (10,798) (244,096)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock for cash - - 1,009,344
Loans from related parties 386,894 143,000 529,894
----------- ----------- -----------
Net cash provided from
financing activities 386,894 143,000 1,539,238
----------- ----------- -----------
NET INCREASE IN CASH 5,528 (364,425) 18,192
Cash, beginning 12,664 377,089 -
----------- ----------- -----------
Cash, ending $ 18,192 $ 12,664 $ 18,192
=========== =========== ===========
See (Note 8) for supplemental disclosures.
WATERFORD STERLING CORPORATION
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
Period From May 17, 1989 (Date of Inception) To December 31, 2001
Unrealized
Common Common Capital In Receivable Gain On
Stock Stock Excess Of On Shares Securities
Available Accumulated
Shares Amount Par Value Issued For Sale (Deficit) Total
-------- -------- ------------ ------------ ------------ ------------- -------
Issuance of shares
of common stock on
May 17, 1989 for
professional services
rendered at $.02 1,200,057 $ 12,001 $ 7,999 $ - $ - - $ 20,000
Issuance of shares of
common stock during 1966:
for cash at $.33 30,000 300 9,700 - - - 10,000
for services at $.33 105,000 1,050 33,950 - - - 35,000
Issuance of shares of
common stock during 1998:
for professional
services at $.02 1,315,258 13,152 8,768 - - - 21,920
for commitment to
provide future
capital at $.02 270,000 2,700 1,800 (4,500) - - -
Issuance of shares of
common stock during
1999 to acquire wholly
owned subsidiary at $.00 9,600,000 96,000 (86,000) - - - 10,000
Issuance of common stock
during 1999 for cash at $.99 1,000,000 10,000 984,344 - - - 994,344
Commitment to provide
capital satisfied with
payment of expenses - - - 4,500 - - 4,500
Issuance of shares for
services during 1999 at $1.00 25,000 250 24,750 - - - 25,000
Net change in unrealized
gain on securities available
for sale - - - - 112,500 - 112,500
Accumulated loss- period
May 17, 1989 to
December 31, 1999 - - - - - (470,547) (470,547)
------------- ---------- ------------ ----------- ------------ ------------ -----------
Balance December 31, 1999 13,545,315 $135,453 $985,311 $ - $112,500 $(470,547) $ 762,717
------------- ---------- ------------ ----------- ------------ ------------ -----------
Unrealized
Common Common Capital In Receivable Gain On
Stock Stock Excess Of On Shares Securities
Available Accumulated
Shares Amount Par Value Issued For Sale (Deficit) Total
--------- -------- ------------ ----------- ------------ ------------- -------
Balance December 31, 1999 13,545,315 $135,453 $985,311 $ - $112,500 $(470,547) $762,717
Issuance of common stock
during 2000:
Settle note payable and
accrued interest at $.67 75,000 750 49,831 - - - 50,581
For prepaid legal services
at $.30 200,000 2,000 58,000 - - - 60,000
For services at $1.00 67,500 675 66,825 - - - 67,500
Net change in unrealized
gain (Loss) on securities
available for sale - - - - (312,500) - (312,500)
Net loss year ended
December 31, 2000 - - - - - (75,214) (75,214)
Balance December 31, 2000 13,887,815 138,878 1,159,967 - (200,000) (545,761) 553,084
------------ ------------ ------------ ----------- ------------ ------------ -----------
Issuance of common stock
during 2001:
Debts settled and expenses
paid at $.04 7,000,000 70,000 193,082 - - - 263,082
Net change in unrealized
gain (Loss) on securities
available for sale - - - - 200,000 - 200,000
Net loss year ended
December 31, 2001 - - - - - (1,414,571) (1,414,571)
------------- ------------ ------------ ------------ ------------- ----------- -----------
Balance December 31, 2001 20,887,815 $208,878 $1,353,049 $ - $ - $(1,960,332) $ (398,405)
============= ============ ============ ============ ============= =========== ===========
WATERFORD STERLING CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY
Business activity
The Company, a Delaware corporation was incorporated on May 17, 1989, and is
currently in the development stage. The Company sought to acquire and develop
high technology software firms, and to engage in the sourcing and marketing of
furniture and accessories to the hospitality and time share market. Currently
the Company is exploring other business possibilities.
In April 1999 the Company changed its name from Commerce Centers Corporation to
Skreem.com Corporation and approved a reverse stock split of 3 shares of
outstanding stock for 5 shares. The report has been prepared as if the stock
split had occurred at inception.
In January 2001 the Company changed its name from Skreem.com Corporation to
Waterford Sterling Corporation.
Accounting method
The Company's financial statements are prepared using the accrual method of
accounting.
Principles of consolidation
The consolidated financial statements include the accounts of Skreem.com
Corporation and Waterford Florida, Inc., both Nevada corporations. All material
intercompany transactions have been eliminated.
Computer software costs
The Company expenses research and development costs related to software
development that has not reached technological feasibility and started
production for sale. Thereafter costs are capitalized and amortized over a
maximum of five years or expected life of the product, whichever is less.
Income (loss) per share
The computation of income (loss) per share of common stock is based on the
weighted average number of shares outstanding, after the stock split.
Statement of cash flows
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents for purposes of the
statement of cash flows.
WATERFORD STERLING CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY
(continued)
Financial instruments
The Company estimates that the fair value of all financial instruments at
December 31, 2001 do not differ materially from the aggregate carrying values of
its financial instruments recorded in the accompanying balance sheets.
Dividend policy
The Company has not yet adopted a policy regarding payment of dividends.
Estimates and assumptions
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of the assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing these financial statements.
Marketable securities:
Certain equity securities are classified as available for sale as defined by
SFAS 115. In accordance with that Statement, they are reported at aggregate fair
value with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity.
2. INCOME TAXES
The Company complies with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. At December 31, 2001 the Company had a net
operating loss ("NOL") carry forward for United States income tax purposes of
approximately $1,304,000. The NOL carryforward expires in increments beginning
in 2004. The Company also had a net capital loss carryover of approximately
$640,000. The Company's ability to utilize its net NOL carryforward is subject
to the realization of taxable income in future years, and under certain
circumstances, the Tax Reform Act of 1986 restricts a corporation's use of its
NOL carryforward. The Company believes that there is at least a 50% chance that
the carryforward will expire unused, therefore, any tax benefit from the loss
carryforward has been fully offset by a valuation reserve.
WATERFORD STERLING CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
3. ACQUISITION OF SUBSIDIARIES
In April 1999 the Company, Skreem.com Corporation, a Delaware corporation
("SCD") acquired all of the outstanding stock of Skreem.com Corporation, a
Nevada corporation ("SCN") through a stock for stock exchange in which the
stockholders of SCN received 9,600,000 post stock split
common shares of the SCD in exchange for all of the stock of the SCN.
Skreem.com Corporation ("SCN") was incorporated in Nevada on January 29, 1999
for the purpose of developing high technology software.
For reporting purposes, the acquisition is treated as an acquisition of the
Company ("SCD") by Skreem.com Corporation of Nevada ("SCN") (reverse
acquisition) and a recapitalization of SCN with its historical financial
statements being combined with the Company's. No proforma statements have been
included since the acquisition is considered to be a reverse acquisition.
On January 31, 2001, the Company executed and Exchange Agreement for the
acquisition of all of the issued and outstanding shares of Waterford Florida,
Inc. in exchange for 7,000,000 share of the Company's common stock. Waterford
Florida, Inc. is currently engaged in the sourcing and marketing of furniture
and accessories to the hospitality and time share market, however, at the date
of acquisition it had not commenced this activity.
4. PREPAID EXPENSE
The Company leases office space under a noncancellable operating lease agreement
effective January 1, 2001 which expires December 31, 2002. The Company prepaid
the rent for the two years specified in the lease agreement. Consideration for
the prepayment was based on the present value of 24 months at $5,000 per month,
discounted at 8% or $110,553. Prepaid rent expense at December 31, 2001 was
$57,479.
5. MARKETABLE SECURITIES
The Company owned 650, 000 shares of Grand Slam Treasures with an original cost
of $650,000 based on the market value of the stock at the date of acquisition.
During the period ended March 31, 2001 Grand Slam Treasures changed its name and
adopted a reverse stock split of 100 to 1 for its common shares. The approximate
market value of this security at March 31, 2001 was $19,500. The Company
considered this change in value to be of a non-temporary nature and accordingly
recorded a loss of $630,500, thereby establishing a new cost basis of $19,500.
The Company sold the shares during May and June for $46,438 resulting in a
realized gain of $26,938.
Proceeds from the sale of securities available for sale totaled $59,676 for the
year ended December 31, 2001, on which gross losses of $9,825 were realized.
6. RELATED PARTY TRANSACTIONS
During February 1998, the Company issued 1,585,258 post stock split shares to
five major stockholders and two persons who were both officers and directors.
The consideration for the issuance was assumption of the Company's accrued
liabilities in the amount of $21,920 by the above mentioned shareholders, and
the agreement by them to fund future Company expenditures in the amount of
$4,500.
The shares issued pursuant to the acquisition agreement as described in note 3
were issued to four individuals who collectively represent a controlling
interest of the Company.
During May 2000, the Company borrowed $50,000 from its President payable on
demand at 8%.
On September 26, 2000, the Company issued 75,000 shares of its common stock in
settlement of the $50,000 note including accrued interest.
The Company has borrowed additional funds from related parties resulting in 8%
demand notes secured by the Company's assets and treasury securities as follows
at December 31, 2001:
Notes payable - Stockholder of the Company $150,955
Notes payable - Market Management International,
a company is which a major stockholder has
an interest. 329,705
-------
$480,660
=======
7. GOING CONCERN
The Company has suffered recurring operating losses from its inception. The
Company intends to acquire interests in various business opportunities which, in
the opinion of management, will provide a profit for the Company, however, there
is insufficient working capital to service its debt and for any future planned
activity. Continuation of the Company as a going concern is dependent upon
obtaining additional working capital for any future planned activity and
management of the Company will be required to develop a strategy which will
accomplish this objective.
8. SUPPLEMENTAL CASH FLOW DISCLOSURES
Inception to
Dec. 31, Dec. 31, Dec. 31,
2001 2000 2001
-------- --------- -----------
Non-cash operating and financing activities:
Non-cash sales $ - $650,000 $650,000
========= ======= ========
Other non-cash operating expenses $ - $ 89,448 $ 89,448
========= ======= ========
Issuance of common stock for expenses $263,082 $ 68,846 $443,348
========= ======= ========
Issuance of common stock for note payable $ - $ 50,000 $ 50,000
========= ======= ========
9. COMMITMENTS
The Company leases office space under a noncancellable operating lease agreement
effective January 1, 2001 which expires December 31, 2002. Minimum lease
payments of $60,000 per year for 2001 and 2002 are required. The Company has
prepaid this obligation (refer to note 4).
WATERFORD STERLING CORPORATION
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
June 30, 2002
ASSETS
CURRENT ASSETS:
Prepaid expense (Note 4) $ 29,312
------------
Total current assets 29,312
EQUIPMENT:
Office equipment 40,761
Accumulated depreciation (23,309)
------------
17,452
OTHER ASSETS:
Business acquisition costs (Note 9) 21,700
Organization costs net of amortization 297
------------
$ 68,761
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses $ 24,386
Account payable related party (Note 5) 127,725
Notes payable - related parties (Note 5) 480,660
------------
Total current liabilities 632,771
STOCKHOLDERS EQUITY (Deficit):
Common stock, par value $.01;
authorized 30,000,0000 shares; issued
and outstanding 20,887,815 shares 208,878
Capital in excess of par 1,353,049
Deficit accumulated during the
development stage (2,125,937)
------------
Total stockholders' deficit (564,010)
------------
$ 68,761
============
See accompanying notes to financial statements
WATERFORD STERLING CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 2002 and 2001
May 17, 1989 (Date of Inception) To June 30, 2002
Inception
To
June 30, June 30, June 30,
2002 2001 2002
-------- -------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(165,604) $(1,144,054) $(2,125,937)
Adjustment to reconcile net loss to
net cash used by operating activities:
Loss on sale of investments - 9,824 9,824
Depreciation and amortization 3,258 4,731 23,949
Bad debt - - 12,074
Decrease in prepaid expenses 28,167 26,008 141,241
Increase (decrease) in accounts payable 9,963 (41,876) 24,387
Revenue in non-cash transaction - - (650,000)
Nontemporary loss on securities - 630,500 630,500
Expenses paid and debts settled
with common stock - 263,082 443,348
Loss on exchange of notes receivable
for prepaid rent - - 45,200
Other expenses incurred in
non-cash transactions - - 44,248
---------- ---------- -----------
Net cash (Used) by operations (124,216) (251,785) (1,401,166)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of securities available for sale - 59,676 59,676
Issuance of notes receivable - - (290,733)
Collections on notes receivable - - 78,658
Purchase of marketable securities - - (50,000)
Purchase of equipment - - (40,761)
Increase in organization costs - - (936)
Increase in business acquisition costs (21,700) - (21,700)
---------- ---------- -----------
Net cash provided (used)
by investing activities (21,700) 59,676 (265,796)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock for cash - - 1,009,344
Loans from related parties 127,725 185,210 657,618
----------- ---------- -----------
Net cash provided from
financing activities 127,725 185,210 1,666,962
----------- ---------- -----------
NET INCREASE IN CASH (18,191) (6,899) -
Cash, beginning 18,191 12,664 -
----------- ---------- -----------
Cash, ending $ - $ 5,765 $ -
=========== ========== ===========
See (Note 8) for supplemental disclosures.
See accompanying notes to financial statements
WATERFORD STERLING CORPORATION
(A Development Stage Company)
Consolidated Statements Of Operations
For The Three Months Ended June 30, 2002 and 2001
For The Six Months Ended June 30, 2002 and 2001
And May 17, 1989 (Date Of Inception) To June 30, 2002
Inception
Three Months Ended Six Months Ended To
June 30, June 30, June 30, June 30, June 30,
2002 2001 2002 2001 2002
--------- --------- ---------- ---------- ------------
REVENUE:
Sales of software $ - $ - $ - $ - $ 652,458
Sales of furniture - 6,756 - 77,14977,370
Interest income 776 1,871 1,833 4,024 60,058
---------- --------- --------- --------- -------------
776 8,627 1,833 81,173 789,886
COST AND EXPENSES:
Cost of furniture sold - 11,828 - 70,072 70,072
Selling, general and
administrative 48,794 140,911 143,594 502,022 2,132,228
Interest 10,971 5,920 20,584 8,170 45,923
Depreciation and
amortization 1,676 2,319 3,259 4,637 27,275
Loss (gain) on sale of
investments - (26,938) - 9,825 9,825
----------- ---------- ---------- --------- ------------
Total expenses 61,441 134,040 167,437 594,726 2,285,323
----------- ---------- ---------- --------- ------------
LOSS BEFORE
EXTRAORDINARY ITEM (60,665) (125,413) (165,604) (513,553) (1,495.427)
----------- ---------- ---------- ---------- ------------
EXTRAORDINARY ITEM
Non-temporary loss
on securities - - - (630,500) (630,500)
----------- --------- ---------- ---------- ------------
NET LOSS (60,665) (125,413) (165,604) (1,144,053) (2,125,937)
OTHER COMPREHENSIVE
INCOME
Unrealized gain on available
for sale securities - - - 200,000 -
----------- --------- ---------- ---------- ------------
COMPREHENSIVE LOSS $(60,665) $(125,413) $(165,604) $(994,053) $(2,125,937)
=========== ========= ========== ========== ============
Loss per common share before
extraordinary item $ (.00) $ (.01) $ (.01) $ (.03)
Extraordinary loss per
common share - - - (.03)
----------- --------- ---------- ----------
Net less per common share $ (.00) $ (.01) $ (.01) $ (06)
=========== ========= ========== ==========
Weighted average
shares outstanding 20,887,815 20,887,815 20,887,815 19,688,920
============ ============= =========== ============
See accompanying notes to financial statements
WATERFORD STERLING CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITY
Business activity
- -----------------
The Company, a Delaware corporation was incorporated on May 17, 1989, and is
currently in the development stage. The Company sought to acquire and develop
high technology software firms, and to engage in the sourcing and marketing of
furniture and accessories to the hospitality and time share market. Currently
the Company is exploring other business possibilities.
In April 1999 the Company changed its name from Commerce Centers Corporation to
Skreem.com Corporation and approved a reverse stock split of 3 shares of
outstanding stock for 5 shares. The report has been prepared as if the stock
split had occurred at inception.
In January 2001 the Company changed its name from Skreem.com Corporation to
Waterford Sterling Corporation.
Accounting method
- -----------------
The Company's financial statements are prepared using the accrual method of
accounting.
Principles of consolidation
- ---------------------------
The consolidated financial statements include the accounts of Skreem.com
Corporation and Waterford Florida, Inc., both Nevada corporations. All material
intercompany transactions have been eliminated.
Computer software costs
- -----------------------
The Company expenses research and development costs related to software
development that has not reached technological feasibility and started
production for sale. Thereafter costs are capitalized and amortized over a
maximum of five years or expected life of the product, whichever is less.
Income (loss) per share
- -----------------------
The computation of income (loss) per share of common stock is based on the
weighted average number of shares outstanding, after the stock split.
Statement of cash flows
- -----------------------
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents for purposes of the
statement of cash flows.
Financial instruments
- ---------------------
The Company estimates that the fair value of all financial instruments at June
30, 2002 do not differ materially from the aggregate carrying values of its
financial instruments recorded in the accompanying balance sheets.
WATERFORD STERLING CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
Dividend policy
- ---------------
The Company has not yet adopted a policy regarding payment of dividends.
Estimates and assumptions
- -------------------------
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of the assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing these financial statements.
Marketable securities:
- ---------------------
Certain equity securities are classified as available for sale as defined by
SFAS 115. In accordance with that Statement, they are reported at aggregate fair
value with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity.
1. INCOME TAXES
The Company complies with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. At June 30, 2002 the Company had a net operating
loss ("NOL") carry forward for United States income tax purposes of
approximately $1,469,603. The NOL carryforward expires in increments beginning
in 2004. The Company also had a net capital loss carryover of approximately
$640,000. The Company's ability to utilize its net NOL carryforward is subject
to the realization of taxable income in future years, and under certain
circumstances, the Tax Reform Act of 1986 restricts a corporation's use of its
NOL carryforward. The Company believes that there is at least a 50% chance that
the carryforward will expire unused, therefore, any tax benefit from the loss
carryforward has been fully offset by a valuation reserve.
2. ACQUISITION OF SUBSIDIARIES
In April 1999 the Company, Skreem.com Corporation, a Delaware corporation
("SCD") acquired all of the outstanding stock of Skreem.com Corporation, a
Nevada corporation ("SCN") through a stock for stock exchange in which the
stockholders of SCN received 9,600,000 post stock split common shares of the SCD
in exchange for all of the stock of the SCN. Skreem.com Corporation ("SCN") was
incorporated in Nevada on January 29, 1999 for the purpose of developing high
technology software.
For reporting purposes, the acquisition is treated as an acquisition of the
Company ("SCD") by Skreem.com Corporation of Nevada ("SCN") (reverse
acquisition) and a recapitalization of SCN with its historical financial
statements being combined with the Company's. No proforma statements have been
included since the acquisition is considered to be a reverse acquisition.
On January 31, 2001, the Company executed and Exchange Agreement for the
acquisition of all of the issued and outstanding shares of Waterford Florida,
Inc. in exchange for 7,000,000 share of the Company's common stock. Waterford
Florida, Inc. is currently engaged in the sourcing and marketing of furniture
and accessories to the hospitality and time share market, however, at the date
of acquisition it had not commenced this activity.
WATERFORD STERLING CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
3. PREPAID EXPENSE
The Company leases office space under a noncancellable operating lease agreement
effective January 1, 2001 which expires December 31, 2002. The Company prepaid
the rent for the two years specified in the lease agreement. Consideration for
the prepayment was based on the present value of 24 months at $5,000 per month,
discounted at 8% or $110,553. Prepaid rent expense at June 30, 2002 was $29,312.
5. RELATED PARTY TRANSACTIONS
During February 1998, the Company issued 1,585,258 post stock split shares to
five major stockholders and two persons who were both officers and directors.
The consideration for the issuance was assumption of the Company's accrued
liabilities in the amount of $21,920 by the above mentioned shareholders, and
the agreement by them to fund future Company expenditures in the amount of
$4,500.
The shares issued pursuant to the acquisition agreement as described in note 3
were issued to four individuals who collectively represent a controlling
interest of the Company.
During May 2000, the Company borrowed $50,000 from its President payable on
demand at 8%. On September 26, 2000, the Company issued 75,000 shares of its
common stock in settlement of the $50,000 note including accrued interest.
The Company has borrowed additional funds from related parties resulting in 8%
demand notes secured by the Company's assets and treasury securities, and other
unsecured amounts as follows at June 30, 2002:
Notes payable - Stockholder of the Company $150,955
Notes payable - Market Management International,
a company is which a major stockholder has
an interest. 329,705
---------
$480,660
Unsecured amounts borrowed form Market
Management International $127,725
=========
6. GOING CONCERN
The Company has suffered recurring operating losses from its inception. The
Company intends to acquire interests in various business opportunities which, in
the opinion of management, will provide a profit for the Company, however, there
is insufficient working capital to service its debt and for any future planned
activity. Continuation of the Company as a going concern is dependent upon
obtaining additional working capital for any future planned activity and
management of the Company will be required to develop a strategy which will
accomplish this objective.
7. SUPPLEMENTAL CASH FLOW DISCLOSURES
Inception to
June 30, June 30, June 30,
2002 2001 2002
-------- ------- ------------
Non-cash operating and financing activities:
Non-cash sales $ - $ - $ 650,000
======== ========= ==========
Other non-cash operating expenses $ - $ - $ 89,448
======== ========= ==========
Issuance of common stock for expenses $ - $ 263,082 $ 443,348
======== ========= ==========
Issuance of common stock for note payable $ - $ - $ 50,000
======== ========= ==========
8. COMMITMENTS
The Company leases office space under a noncancellable operating lease agreement
effective January 1, 2001 which expires December 31, 2002. Minimum lease
payments of $60,000 for 2002 are required. The Company has prepaid this
obligation (refer to note 4).
9. BUSINESS ACQUISITION COSTS
The Company as incurred direct and incremental costs associated with a pending
merger of $21,700.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001
Revenues for the three months ended June 30, 2002 decreased to $776 from
$8,627 for the three months ended June 30, 2001. This decrease in revenues
resulted from the absence of furniture sales in the current quarter compared to
$6,756 of furniture sales during the corresponding quarter of the prior year and
a reduction in interest income of $1,095.
Cost of furniture sold decreased to $0 from $11,828 for the corresponding
period of the prior year as the Company is no longer engaged in the furniture
business.
Selling, general and administrative expenses decreased by $92,117 to
$48,794 for the three months ended June 30, 2002 from $140,911 for the
corresponding period of the prior year. This decrease principally resulted from
decreases in staff payroll.
Interest expense increased by $5,051 to $10,971 for the three months ended
June 30, 2002 from $5,920 for the corresponding period of the prior year. The
increase in interest expense resulted from increased borrowings by the Company.
Depreciation and amortization expense decreased to $1,676 for the three
months ended June 30, 2002 from $2,319 for the corresponding period of the prior
year. The decrease in depreciation and amortization expense resulted from a
reduction in depreciable assets.
For the three months ended June 30, 2001, the Company had a net of $26,938
on the sale of marketable securities. The Company had no gain or loss from the
sale of securities in the corresponding period of the current year.
As a result of the foregoing, the Company's net operating loss decreased by
$64,748 to $60,665 for the three months ended June 30, 2002 from $125,413 for
the corresponding period of the prior year.
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Revenues for the six months ended June 30, 2002 decreased to $1,833 from
$81,173 for the six months ended June 30, 2001. This decrease in revenues
resulted from the absence of sales of furniture in the current period compared
to $77,149 in the prior year and a reduction in the interest income of $2,191.
Cost of furniture sold decreased to $0 from $70,072 for the corresponding
period of the prior year as the Company is no longer engaged in the furniture
business.
Selling, general and administrative expenses decreased by $358,428 to
$143,594 for the six months ended June 30, 2001from $502,022 for the
corresponding period of the prior year. This decrease resulted from exiting the
furniture business and the corresponding cost of furniture samples, shipping and
costs of Hong Kong operations as well as reduced staff levels.
Interest expense increased by $12,414 to $20,584 for the six months ended
June 30, 2002 from $8,170 for the corresponding period of the prior year. The
increase in interest expense results from increased borrowings by the Company.
Depreciation and amortization expense decreased by $1,378 to $3,259 for the
six months ended June 30, 2002 from $4,637 for the corresponding period of the
prior year. The decrease in depreciation and amortization expense resulted from
a decrease in depreciable assets.
For the six months ended June 30, 2001, the Company had a net loss of
$9,825 from the sale of marketable securities. The Company had no gain or loss
from the sale of marketable securities in the current year. In addition, for the
six months ended June 30, 2001, the Company recorded an extraordinary loss on
the write-down of its Grand Slam Treasures, Inc. shares of $630,500 and had
other comprehensive income of $200,000 from unrealized gain on securities
available for sale. There were no such extraordinary items or comprehensive
income items for the current year.
As a result of the foregoing, the Company's net operating loss including
extraordinary items decreased by $828,449 to $165,604 for the six months ended
June 30, 2002 from $994,053 for the corresponding period of the prior year.
CHANGES IN FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the past twelve months, the Company has funded its operating losses and
capital requirements through loans from its principal shareholder. As of June
30, 2002, the Company had no cash and a deficit in working capital of $603,459.
This compares with cash of $5,765 and a working capital deficit of $182,938 for
the corresponding period of the prior year.
Net cash used in operating activities decreased to $124,216 for the six
months ended June 30, 2001 from $251,785 for the six months ended June 30, 2001.
The decrease in cash used in operations resulted from a decrease in the net
operating loss which was offset by expenses which were paid in shares, a
non-cash loss resulted from a write-down of the Company's portfolio and moderate
changes in the Company's current accounts.
Cash flows used in investing activities for the six months ended June 30,
2001 increased to $21,700 from net cash provided from investing activities of
$59,676 for the corresponding period of the prior year. This increase is
attributable to the absense of the sale of securities in the current period and
an increase in business acquisition costs.
Net cash provided by financing activities decreased to $127,725 from
$185,210 for the six months ended June 30, 2002 and 2001, respectively. For each
six month period the Company received a loan of $185,210 from its principal
shareholder.
The Company has experienced significant operating losses throughout its
history, and will acquire substantial funds for the development of its business.
Therefore, the Company's ability to survive is dependent on its ability to raise
capital through the issuance of stock or borrowing of additional funds. Without
the success of one of these options, the Company will not have sufficient cash
to satisfy its working capital and investment requirements for the next twelve
months.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements give effect to
the merger using the purchase method of accounting as prescribed by Statement of
Financial Accounting Standards No. 141 "Business Combinations." The following
unaudited pro forma combined financial statements and the accompanying notes
should be read in conjunction with the historical financial statements and
related notes of Waterford Sterling Corporation (Waterford) and Eternal
Technology Group Ltd (Eternal) which are included elsewhere in this document.
The unaudited pro forma combined financial statements are provided for
information purposes only and does not purport to represent what the combined
financial position and results of operations would have been had the merger in
fact occurred on the dates indicated. The following unaudited pro forma combined
balance sheet represents the combined financial position of Waterford and
Eternal as of June 30, 2002, assuming that the merger occurred on June 30, 2002.
The unaudited proforma combined statements of operations give effect to the
proposed merger of Waterford and Eternal by combining the results of operations
for the year ended December 31, 2001 and the six month period ended June 30,
2002. The unaudited proforma combined financial statements are presented for
illustrative purposes only. The proforma adjustments are based upon available
information and assumptions that management believes are reasonable.
ETERNAL TECHNOLOGY GROUP LTD AND
WATERFORD STERLING CORPORATION (A DEVELOPMENT STAGE COMPANY)
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 2002
WATERFORD ETERNAL
STERLING TECHNOLOGY PRO FORMA
ASSETS (Unaudited) (Unaudited) ADJUSTMENTS PRO FORMA
CURRENT ASSETS
Cash and cash equivalents $ - $ 2,953,551 $ - $ 2,953,551
Trade receivables - 736,602 - 736,602
Inventories - 475,614 - 475,614
Prepaid expenses 51,309 146,649 - 197,958
Related party receivables - 387,834 - 387,834
Total current assets 51,309 4,700,250 - 4,751,559
PROPERTY AND EQUIPMENT, NET 17,452 9,824,130 - 9,841,582
LAND USE RIGHTS - 5,565,517 - 5,565,517
$ 68,761 $ 20,089,897 $ - $ 20,158,658
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
expenses $ 24,386 $ 1,368,538 $ - $ 1,392,924
Related party payables 127,725 1,636,245 (127,725)2 1,636,245
Note payable-related parties 480,660 - (480,660)2 -
Total current liabilities 632,771 3,004,783 (608,385) 3,029,169
Shareholders' equity
Common stock 208,878 10,000 (192,937)1, 25,941
Paid-in capital 1,353,049 6,644,071 (1,324,615)1,2 6,672,505
Retained earings(deficit) (2,125,937) 10,431,043 2,125,937 1 10,431,043
$ 68,761 $ 20,089,897 $ - $ 20,158,658
============ ============ ============= ===========
Notes to Pro Forma Financial Statements
1. Adjustment to record changes for additional stock issued and recapitalize
Waterford Sterling Corporation with the capital structure of Eternal
Technology Group Ltd and to reflect the 6 to 1 reverse stock split.
2. To convert outstanding related party payables into shares of common stock.
3. Eliminate loss from discontinued operations.
ETERNAL TECHNOLOGY GROUP LTD AND
WATERFORD STERLING CORPORATION (A DEVELOPMENT STAGE COMPANY)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
WATERFORD ETERNAL
STERLING TECHNOLOGY PRO FORMA
(Unaudited) (Unaudited) ADJUSTMENTS PRO FORMA
Gross revenue $ - $ 11,446,361 $ - $ 11,446,361
Cost of sales - 3,852,386 - 3,852,386
Gross profit - 7,593,975 - 7,593,975
Selling, general and
administrative expenses - 937,971 - 937,971
Depreciation and amortization - 845,716 - 845,716
Merger costs - - - -
Net income from
continuing operations - 5,810,288 - 5,810,288
Loss from discontinued
operations (1,414,570) - 1,414,570 3 -
Net income $ (1,414,570) $ 5,810,288 $ 1,414,570 $ 5,810,288
============ ============ ========== =============
Income (loss) per common share
Basic and diluted
Income from continuing
operations $ 0.22
Loss from discontinued
operations $ (0.42) -
Net income $ (0.42) $ 0.22
============= =============
Weighted average number of common
shares outstanding
Basic 3,382,216 25,941,176
Notes to Pro Forma Financial Statements
1. Adjustment to record changes for additional stock issued and recapitalize
Waterford Sterling Corporation with the capital structure of Eternal
Technology Group Ltd and to reflect the 6 to 1 reverse stock split.
2. To convert outstanding related party payables into shares of common stock.
3. Eliminate loss from discontinued operations.
ETERNAL TECHNOLOGY GROUP LTD AND
WATERFORD STERLING CORPORATION (A DEVELOPMENT STAGE COMPANY)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTH PERIOD ENDED JUNE 30, 2002
WATERFORD ETERNAL
STERLING TECHNOLOGY PRO FORMA
(Unaudited) (Unaudited) ADJUSTMENTS PRO FORMA
Gross revenue $ - $ 843,373 - $ 843,373
Cost of sales - 436,467 - 436,467
Gross profit - 406,906 - 406,906
Selling, general and
administrative expenses - 428,973 - 428,973
Depreciation and amortization - 436,607 - 436,607
Research and development - 1,000,000 - 1,000,000
Net income from continuing
operations (1,458,674) (1,458,674)
Loss from discontinued
operations (165,604) - 165,604 3 -
Net income $ (165,604) $(1,458,674) $ 165,604 $(1,458,674)
=========== ============= ========== ===========
Income (loss) per common share
Basic and diluted
Income from continuing
operations $ - $ (0.06)
Loss from discontinued
operations (0.05) -
Net income $ (0.05) $ (0.06)
=========== ==========
Weighted average number of common
shares outstanding
Basic and diluted 3,481,303 25,941,176
Notes to Pro Forma Financial Statements
1. Adjustment to record changes for additional stock issued and recapitalize
Waterford Sterling Corporation with the capital structure of Eternal
Technology Group Ltd and to reflect the 6 to 1 reverse stock split.
2. To convert outstanding related party payables into shares of common stock.
3. Eliminate loss from discontinued operations.
EXCHANGE AGREEMENT
Between
WATERFORD STERLING CORPORATION
and
ETERNAL TECHNOLOGIES, INC.
Dated May ___, 2002
TABLE OF CONTENTS
ARTICLE I REPRESENTATIONS, COVENANTS, AND WARRANTIES OF ETERNAL TECHNOLOGIES
GROUP LTD.
1.01 Organization 4
1.02 Capitalization 5
1.03 Subsidiaries and Predecessor Corporations 5
1.04 Financial Statements 5
1.05 Information 6
1.06 Options and Warrants 6
1.07 Absence of Certain Changes or Events 6
1.08 Title and Related Matters 7
1.09 Litigation and Proceedings 8
1.10 Contracts 8
1.11 Material Contract Defaults 8
1.12 No Conflict With Other Instruments 9
1.13 Governmental Authorizations 9
1.14 Compliance With Laws and Regulations 9
1.15 Insurance 9
1.16 Approval of Agreement 9
1.17 Material Transactions or Affiliations 9
1.18 Labor Relations 9
1.19 Eternal Concepts Schedules 10
1.20 Bank Accounts; Power of Attorney 11
1.21 Valid Obligation 11
ARTICLE II REPRESENTATIONS, COVENANTS, AND WARRANTIES OF WATERFORD STERLING
CORPORATION
2.01 Organization 11
2.02 Capitalization 12
2.03 Subsidiaries and Predecessor Corporations 12
2.04 Securities Filings; Financial Statements 12
2.05 Information 13
2.06 Options and Warrants 13
2.07 Absence of Certain Changes or Events 13
2.08 Title and Related Matters 14
2.09 Litigation and Proceedings 15
2.10 Contracts 15
2.11 Material Contract Defaults 16
2.12 No Conflict With Other Instruments 16
2.13 Governmental Authorizations 16
2.14 Compliance With Laws and Regulations 16
2.15 Insurance 16
2.16 Approval of Agreement 16
2.17 Continuity of Business Enterprises 17
2.18 Material Transactions or Affiliations 17
2.19 Labor Relations 17
2.20 Waterford Schedules 17
2.21 Bank Accounts; Power of Attorney 18
2.22 Valid Obligation 18
ARTICLE III PLAN OF EXCHANGE
3.01 The Exchange 19
3.02 Anti-Dilution 19
3.03 Closing 19
3.04 Closing Events 19
3.05 Termination 20
ARTICLE IV SPECIAL COVENANTS
4.01 Access to Properties and Records 22
4.02 Delivery of Books and Records 22
4.03 Third Party Consents and Certificates 22
4.04 Name Change and State of Incorporation 22
4.05 Atlantic Shareholder Meeting 22
4.06 Consent of Digital Shareholders 22
4.07 Designation of Directors and Officers 22
4.08 Exclusive Dealing Rights 23
4.09 Actions Prior to Closing 23
4.10 Sales Under Rule 144 or 145, If Applicable 25
4.11 Indemnification 25
ARTICLE V CONDITIONS PRECEDENT TO OBLIGATIONS OF WATERFORD WEB ADVISORS
5.01 Accuracy of Representations and Performance of Covenants 26
5.02 Officer's Certificates 26
5.03 No Material Adverse Change 26
5.04 Good Standing 26
5.05 Approval by Eternal Shareholders 26
5.06 No Governmental Prohibitions 26
5.07 Consents 27
5.08 Other Items 27
ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF ETERNAL TECHNOLOGIES GROUP,
INC. AND THE ETERNAL SHAREHOLDERS
6.01 Accuracy of Representations and Performance of Covenants 27
6.02 Officer's Certificate 27
6.03 No Material Adverse Change 28
6.04 Good Standing 28
6.05 No Governmental Prohibition 28
6.06 Consents 28
6.07 Other Items 28
ARTICLE VII MISCELLANEOUS
7.01 Brokers 28
7.02 Governing Law 28
7.03 Notices 29
7.04 Attorney's Fees 29
7.05 Confidentiality 29
7.06 Public Announcements and Filings 30
7.07 Schedules; Knowledge 30
7.08 Third Party Beneficiaries 30
7.09 Expenses 30
7.10 Entire Agreement 30
7.11 Survival; Termination 30
7.12 Counterparts 30
7.13 Amendment or Waiver 30
7.14 Best Efforts
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT (hereinafter referred to as this "Agreement") is
entered into as of this day of April 2002 by and between WATERFORD STERLING
CORPORATION a Nevada corporation (hereinafter referred to as ("Waterford")
ETERNAL TECHNOLOGIES GROUP LTD., a British Virgin Islands corporation
(hereinafter referred to as "Eternal"), upon the following premises:
Premises
WHEREAS, Waterford is a publicly held corporation organized under the laws
of the State of Nevada;
WHEREAS, Eternal Technologies is a privately held corporation organized
under the laws of the British Virgin Islands;
WHEREAS, management of the constituent corporations have determined that it
is in the best interest of the parties that Waterford acquire 100% of the issued
and outstanding securities of Eternal in exchange for the issuance of certain
shares of Waterford (the "Exchange") and Eternal agreed to use its best efforts
to cause its shareholders (the "Eternal Shareholders") to exchange their
securities of Eternal on the terms described herein; and
WHEREAS, Waterford and Eternal desire to set forth the terms of the
Exchange, which is intended to constitute a tax-free reorganization pursuant to
the provisions of Section 368(a)(1)(B) of the Internal Revenue Code of 1986.
Agreement
NOW THEREFORE, on the stated premises and for and in consideration of the
mutual covenants and agreements hereinafter set forth and the mutual benefits to
the parties to be derived herefrom, it is hereby agreed as follows:
ARTICLE I
REPRESENTATIONS, COVENANTS, AND WARRANTIES OF Eternal
As an inducement to, and to obtain the reliance of Waterford, except as set
forth on the Eternal Schedules (as hereinafter defined), Eternal represents and
warrants as follows:
Section 1.01 Organization. Eternal is a corporation duly organized, validly
existing, and in good standing under the laws of the British Virgin Islands and
has the corporate power and is duly authorized, qualified, franchised, and
licensed under all applicable laws, regulations, ordinances, and orders of
public authorities to own all of its properties and assets and to carry on its
business in all material respects as it is now being conducted, including
qualification to do business as a foreign corporation in the states or countries
in which the character and location of the assets owned by it or the nature of
the business transacted by it requires qualification, except where failure to be
so qualified would not have a material adverse effect on its business. Included
in the Eternal Schedules are complete and correct copies of the articles of
incorporation, and bylaws of Eternal as in effect on the date hereof. The
execution and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby will not, violate any provision of Eternal's
Memorandum and Articles of Association. Eternal has taken all actions required
by law, its articles of incorporation, or otherwise to authorize the execution
and delivery of this Agreement. Eternal has full power, authority, and legal
right and has taken all action required by law, its articles of incorporation,
and otherwise to consummate the transactions herein contemplated.
Section 1.02 Capitalization. The authorized capitalization of Eternal
consists of 50,000 shares of common stock, $1.00 par value, of which 10,000
shares are currently issued and outstanding. All issued and outstanding shares
are legally issued, fully paid, and non-assessable and not issued in violation
of the preemptive or other rights of any person.
Section 1.03 Subsidiaries and Predecessor Corporations. Eternal does
not have any predecessor corporation(s) or subsidiaries, and does not own,
beneficially or of record, any shares of any other corporation, except as
disclosed in Schedule 1.03. For purposes hereinafter, the term "Eternal" also
includes those subsidiaries, if any, set forth on Schedule 1.03.
Section 1.04 Financial Statements.
--------------------
(a) Included in the Eternal Schedules are (i)the audited
balance sheets of Eternal as successor in interest as of December 31,
2000 and 2001, and the related audited statements of operations,
stockholders' equity and cash flows for the two fiscal years ended
December 31, 2000 and 2001 together with the notes to such statements
and the opinion of Thomas Leger & Co. independent certified public
accountants, with respect thereto.
(b) All such financial statements have been prepared in
accordance with generally accepted accounting principles. The Eternal
balance sheets present a true and fair view as of the dates of such
balance sheets of the financial condition of Eternal. Eternal did not
have, as of the dates of such balance sheets, except as and to the
extent reflected or reserved against therein, any liabilities or
obligations (absolute or contingent) which should be reflected in the
balance sheets or the notes thereto, prepared in accordance with
generally accepted accounting principles, and all assets reflected
therein are properly reported and present fairly the value of the
assets of Eternal in accordance with generally accepted accounting
principles.
(c) Eternal has no liabilities with respect to the payment of
any federal, state, county, local or other taxes (including any
deficiencies, interest or penalties), except for taxes accrued but not
yet due and payable.
(d) Eternal has filed all state, federal or local income
and/or franchise tax returns required to be filed by it from inception
to the date hereof. Each of such income tax returns reflects the taxes
due for the period covered thereby, except for amounts which, in the
aggregate, are immaterial.
(e) The books and records, financial and otherwise, of Eternal
are in all material respects complete and correct and have been
maintained in accordance with good business and accounting practices.
(f) All of Eternal' assets are reflected on its financial
statements, and, except as set forth in the Eternal Schedules or the
financial statements of Eternal or the notes thereto, Eternal has no
material liabilities, direct or indirect, matured or unmatured,
contingent or otherwise.
Section 1.05 Information. The information concerning Eternal set forth
in this Agreement and in the Eternal Schedules is complete and accurate in all
material respects and does not contain any untrue statement of a material fact
or omit to state a material fact required to make the statements made, in light
of the circumstances under which they were made, not misleading. In addition,
Eternal has fully disclosed in writing to Waterford (through this Agreement or
the Eternal Schedules) all information relating to matters involving Eternal or
its assets or its present or past operations or activities which (i) indicated
or may indicate, in the aggregate, the existence of a greater than $25,000
liability or diminution in value, (ii) have led or may lead to a competitive
disadvantage on the part of Eternal or (iii) either alone or in aggregation with
other information covered by this Section, otherwise have led or may lead to a
material adverse effect on the transactions contemplated herein or on Eternal,
its assets, or its operations or activities as presently conducted or as
contemplated to be conducted after the Closing Date, including, but not limited
to, information relating to governmental, employee, environmental, litigation
and securities matters and transactions with affiliates.
Section 1.06 Options or Warrants. There are no existing options,
warrants, calls, or commitments of any character relating to the authorized and
unissued Eternal common stock, except options, warrants, calls or commitments,
if any, to which Eternal is not a party and by which it is not bound.
Section 1.07 Absence of Certain Changes or Events. Except as
set forth in this Agreement or the Eternal Schedules, since December 31, 2001:
(a) there has not been (i) any material adverse change in the
business, operations, properties, assets, or condition of Eternal or
(ii) any damage, destruction, or loss to Eternal (whether or not
covered by insurance) materially and adversely affecting the business,
operations, properties, assets, or condition of Eternal;
(b) Eternal has not (i) amended its articles of incorporation
or bylaws; (ii) declared or made, or agreed to declare or make, any
payment of dividends or distributions of any assets of any kind
whatsoever to stockholders or purchased or redeemed, or agreed to
purchase or redeem, any of its capital stock; (iii) waived any rights
of value which in the aggregate are outside of the ordinary course of
business or material considering the business of Eternal; (iv) made any
material change in its method of management, operation or accounting;
(v) entered into any other material transaction other than sales in the
ordinary course of its business; (vi) made any accrual or arrangement
for payment of bonuses or special compensation of any kind or any
severance or termination pay to any present or former officer or
employee; (vii) increased the rate of compensation payable or to become
payable by it to any of its officers or directors or any of its
salaried employees whose monthly compensation exceeds $1,000; or (viii)
made any increase in any profit sharing, bonus, deferred compensation,
insurance, pension, retirement, or other employee benefit plan,
payment, or arrangement made to, for, or with its officers, directors,
or employees;
(c) Eternal has not (i) borrowed or agreed to borrow any funds
or incurred, or become subject to, any material obligation or liability
(absolute or contingent) except as disclosed herein and except
liabilities incurred in the ordinary course of business; (ii) paid or
agreed to pay any material obligations or liability (absolute or
contingent) other than current liabilities reflected in or shown on the
most recent Eternal balance sheet, and current liabilities incurred
since that date in the ordinary course of business and professional and
other fees and expenses in connection with the preparation of this
Agreement and the consummation of the transactions contemplated hereby;
(iii) sold or transferred, or agreed to sell or transfer, any of its
assets, properties, or rights (except assets, properties, or rights not
used or useful in its business which, in the aggregate have a value of
less than $1,000), or canceled, or agreed to cancel, any debts or
claims (except debts or claims which in the aggregate are of a value of
less than $1,000); (iv) made or permitted any amendment or termination
of any contract, agreement, or license to which it is a party if such
amendment or termination is material, considering the business of
Eternal; or (v) issued, delivered, or agreed to issue or deliver any
stock, bonds or other corporate securities including debentures
(whether authorized and unissued or held as treasury stock); and
(d) to the best knowledge of Eternal, Eternal has not become
subject to any law or regulation which materially and adversely
affects, or in the future may adversely affect the business,
operations, properties, assets, or condition of Eternal.
Section 1.08 Title and Related Matters. Eternal has good and marketable
title to all of its properties, inventory, interests in properties, and assets,
real and personal, which are reflected in the most recent Eternal balance sheet
or acquired after that date (except properties, inventory, interests in
properties, and assets sold or otherwise disposed of since such date in the
ordinary course of business) free and clear of all liens, pledges, charges, or
encumbrances except (a) statutory liens or claims not yet delinquent; (b) such
imperfections of title and easements as do not and will not materially detract
from or interfere with the present or proposed use of the properties subject
thereto or affected thereby or otherwise materially impair present business
operations on such properties; and (c) as described in the Eternal Schedules.
Except as set forth in the Eternal Schedules, Eternal owns, free and clear of
any liens, claims, encumbrances, royalty interests, or other restrictions or
limitations of any nature whatsoever, any and all products it is currently
manufacturing, including the underlying technology and data, and all procedures,
techniques, marketing plans, business plans, methods of management, or other
information utilized in connection with Eternal' business. Except as set forth
in the Eternal Schedules, no third party has any right to, and Eternal has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any product, technology, data, trade secrets, know-how,
propriety techniques, trademarks, service marks, trade names, or copyrights
which, individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a materially adverse effect on the
business, operations, financial condition, income, or business prospects of
Eternal or any material portion of its properties, assets, or rights.
Section 1.09 Litigation and Proceedings. Except as set forth in the
Eternal Schedules, there are no actions, suits, proceedings, or investigations
pending or, to the knowledge of Eternal after reasonable investigation,
threatened by or against Eternal or affecting Eternal or its properties, at law
or in equity, before any court or other governmental agency or instrumentality,
domestic or foreign, or before any arbitrator of any kind. Eternal does not have
any knowledge of any material default on its part with respect to any judgment,
order, injunction, decree, award, rule, or regulation of any court, arbitrator,
or governmental agency or instrumentality or of any circumstances which, after
reasonable investigation, would result in the discovery of such a default.
Section 1.10 Contracts.
---------
(a) Except as included or described in the Eternal Schedules,
there are no "material" contracts, agreements, franchises, license
agreements, debt instruments or other commitments to which Eternal is a
party or by which it or any of its assets, products, technology, or
properties are bound other than those incurred in the ordinary course
of business (as used in this Agreement, a "material" contract,
agreement, franchise, license agreement, debt instrument or commitment
is one which (i) will remain in effect for more than six (6) months
after the date of this Agreement or (ii) involves aggregate obligations
of at least fifty thousand dollars ($50,000));
(b) All contracts, agreements, franchises, license agreements,
and other commitments to which Eternal is a party or by which its
properties are bound and which are material to the operations of
Eternal taken as a whole are valid and enforceable by Eternal in all
respects, except as limited by bankruptcy and insolvency laws and by
other laws affecting the rights of creditors generally;
(c) Eternal is not a party to or bound by, and the properties
of Eternal are not subject to any contract, agreement, other commitment
or instrument; any charter or other corporate restriction; or any
judgment, order, writ, injunction, decree, or award which materially
and adversely affects, the business operations, properties, assets, or
condition of Eternal; and
(d) Except as included or described in the Eternal Schedules
or reflected in the most recent Eternal balance sheet, Eternal is not a
party to any oral or written (i) contract for the employment of any
officer or employee which is not terminable on 30 days, or less notice;
(ii) profit sharing, bonus, deferred compensation, stock option,
severance pay, pension benefit or retirement plan, (iii) agreement,
contract, or indenture relating to the borrowing of money, (iv)
guaranty of any obligation, other than one on which Eternal is a
primary obligor, for the borrowing of money or otherwise, excluding
endorsements made for collection and other guaranties of obligations
which, in the aggregate do not exceed more than one year or providing
for payments in excess of $25,000 in the aggregate; (vi) collective
bargaining agreement; or (vii) agreement with any present or former
officer or director of Eternal.
Section 1.11 Material Contract Defaults. Eternal is not in default in
any material respect under the terms of any outstanding contract, agreement,
lease, or other commitment which is material to the business, operations,
properties, assets or condition of Eternal and there is no event of default in
any material respect under any such contract, agreement, lease, or other
commitment in respect of which Eternal has not taken adequate steps to prevent
such a default from occurring.
Section 1.12 No Conflict With Other Instruments. The execution of this
Agreement and the consummation of the transactions contemplated by this
Agreement will not result in the breach of any term or provision of, constitute
an event of default under, or terminate, accelerate or modify the terms of any
material indenture, mortgage, deed of trust, or other material contract,
agreement, or instrument to which Eternal is a party or to which any of its
properties or operations are subject.
Section 1.13 Governmental Authorizations. Except as set forth in the
Eternal Schedules, Eternal has all licenses, franchises, permits, and other
governmental authorizations that are legally required to enable it to conduct
its business in all material respects as conducted on the date hereof. Except
for compliance with federal and state securities and corporation laws, as
hereinafter provided, no authorization, approval, consent, or order of, or
registration, declaration, or filing with, any court or other governmental body
is required in connection with the execution and delivery by Eternal of this
Agreement and the consummation by Eternal of the transactions contemplated
hereby.
Section 1.14 Compliance With Laws and Regulations. Except as set forth
in the Eternal Schedules, to the best of its knowledge Eternal has complied with
all applicable statutes and regulations of any federal, state, or other
governmental entity or agency thereof, except to the extent that noncompliance
would not materially and adversely affect the business, operations, properties,
assets, or condition of Eternal or except to the extent that noncompliance would
not result in the occurrence of any material liability for Eternal.
Section 1.15 Insurance. All of the properties of Eternal are
fully insured for their full replacement cost.
Section 1.16 Approval of Agreement. The board of directors of Eternal
has authorized the execution and delivery of this Agreement by Eternal and has
approved this Agreement and the transactions contemplated hereby, and will
recommend to the Eternal Shareholders that the Exchange be accepted by them.
Section 1.17 Material Transactions or Affiliations. Set forth in the
Eternal Schedules is a description of every contract, agreement, or arrangement
between Eternal and any predecessor and any person who was at the time of such
contract, agreement, or arrangement an officer, director, or person owning of
record, or known by Eternal to own beneficially, 5% or more of the issued and
outstanding common stock of Eternal and which is to be performed in whole or in
part after the date hereof or which was entered into not more than three years
prior to the date hereof. Except as disclosed in the Eternal Schedules or
otherwise disclosed herein, no officer, director, or 5% shareholder of Eternal
has, or has had since inception of Eternal, any known interest, direct or
indirect, in any transaction with Eternal which was material to the business of
Eternal. There are no commitments by Eternal, whether written or oral, to lend
any funds, or to borrow any money from, or enter into any other transaction
with, any such affiliated person.
Section 1.18 Labor Relations. Eternal has not had work stoppage
resulting from labor problems. To the knowledge of Eternal, no union or other
collective bargaining organization is organizing or attempting to organize any
employee of Eternal.
Section 1.19 Eternal Schedules. Eternal has delivered to Waterford the
following schedules, which are collectively referred to as the "Eternal
Schedules" and which consist of separate schedules dated as of the date of
execution of this Agreement, all certified by the chief executive officer of
Eternal as complete, true, and correct as of the date of this Agreement in all
material respects:
(a) a schedule containing complete and correct copies
of the articles of incorporation, and bylaws of Eternal in effect as of
the date of this Agreement;
(b) a schedule containing the financial statements of
Eternal identified in paragraph 1.04(a);
(c) a Schedule 1.19(c) containing a list indicating
the name and address of each shareholder of Eternal together with
the number of shares owned by him, her or it;
(d) a schedule containing a description of all real property
owned by Eternal, together with a description of every mortgage, deed
of trust, pledge, lien, agreement, encumbrance, claim, or equity
interest of any nature whatsoever in such real property;
(e) copies of all licenses, permits, and other governmental
authorizations (or requests or applications therefor) pursuant to which
Eternal carries on or proposes to carry on its business (except those
which, in the aggregate, are immaterial to the present or proposed
business of Eternal);
(f) a schedule listing the accounts receivable and notes and
other obligations receivable of Eternal as of December 31, 2001, or
thereafter other than in the ordinary course of business of Eternal,
indicating the debtor and amount, and classifying the accounts to show
in reasonable detail the length of time, if any, overdue, and stating
the nature and amount of any refunds, set offs, reimbursements,
discounts, or other adjustments, which are in the aggregate material
and due to or claimed by such debtor;
(g) a schedule listing the accounts payable and notes and
other obligations payable of Eternal as of December 31, 2001, or that
arose thereafter other than in the ordinary course of the business of
Eternal, indicating the creditor and amount, classifying the accounts
to show in reasonable detail the length of time, if any, overdue, and
stating the nature and amount of any refunds, set offs, reimbursements,
discounts, or other adjustments, which in the aggregate are material
and due to or claimed by Eternal respecting such obligations;
(h) a schedule setting forth a description of any material
adverse change in the business, operations, property, inventory,
assets, or condition of Eternal since December 31, 2001, required to be
provided pursuant to section 1.07 hereof; and
(i) a schedule setting forth any other information, together
with any required copies of documents, required to be disclosed in the
Eternal Schedules by Sections 1.01 through 1.18.
Eternal shall cause the Eternal Schedules and the instruments and data
delivered to Waterford hereunder to be promptly updated after the date hereof up
to and including the Closing Date.
It is understood and agreed that not all of the schedules referred to above
have been completed or are available to be furnished by Eternal. Eternal shall
have until April 30, 2002 to provide such schedules. If Eternal cannot or fails
to do so, or if Waterford acting reasonably finds any such schedules or updates
provided after the date hereof to be unacceptable according to the criteria set
forth below, Waterford may terminate this Agreement by giving written notice to
Eternal within five (5) days after the schedules or updates were due to be
produced or were provided. For purposes of the foregoing, Waterford may consider
a disclosure in the Eternal Schedules to be "unacceptable" only if that item
would have a material adverse impact on the financial statements listed in
Section 1.04(a), taken as a whole.
Section 1.20 Bank Accounts; Power of Attorney. Set forth in Schedule 1.20
is a true and complete list of (a) all accounts with banks, money market mutual
funds or securities or other financial institutions maintained by Eternal within
the past twelve (12) months, the account numbers thereof, and all persons
authorized to sign or act on behalf of Eternal, (b) all safe deposit boxes and
other similar custodial arrangements maintained by Eternal within the past
twelve (12) months, and (c) the names of all persons holding powers of attorney
from Eternal or who are otherwise authorized to act on behalf of Eternal with
respect to any matter, other than its officers and directors, and a summary of
the terms of such powers or authorizations.
Section 1.21 Valid Obligation. This Agreement and all agreements and other
documents executed by Eternal in connection herewith constitute the valid and
binding obligation of Eternal, enforceable in accordance with its or their
terms, except as may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting the enforcement of creditors' rights generally and
subject to the qualification that the availability of equitable remedies is
subject to the discretion of the court before which any proceeding therefor may
be brought.
ARTICLE II
REPRESENTATIONS, COVENANTS, AND WARRANTIES OF WATERFORD
As an inducement to, and to obtain the reliance of Eternal and the Eternal
Shareholders, except as set forth in the Waterford Schedules (as hereinafter
defined), Waterford represents and warrants as follows:
Section 2.01 Organization. Waterford is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Nevadaand
has the corporate power and is duly authorized, qualified, franchised, and
licensed under all applicable laws, regulations, ordinances, and orders of
public authorities to own all of its properties and assets, to carry on its
business in all material respects as it is now being conducted, and except where
failure to be so qualified would not have a material adverse effect on its
business, there is no jurisdiction in which it is not qualified in which the
character and location of the assets owned by it or the nature of the business
transacted by it requires qualification. Included in the Waterford Schedules are
complete and correct copies of the certificate of incorporation and bylaws of
Waterford as in effect on the date hereof. The execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated hereby
will not, violate any provision of Waterford's certificate of incorporation or
bylaws. Waterford has taken all action required by law, its certificate of
incorporation, its bylaws, or otherwise to authorize the execution and delivery
of this Agreement, and Waterford has full power, authority, and legal right and
has taken all action required by law, its certificate of incorporation, bylaws,
or otherwise to consummate the transactions herein contemplated.
Section 2.02 Capitalization. Waterford's authorized capitalization
consists of 50,000,000 shares of common stock, par value $.001 of which
__________ shares are issued and outstanding (the " Waterford Shares"). These
shares will be reverse split so that as of the date of Closing there will be
__________ shares issued and outstanding. All issued and outstanding shares are
legally issued, fully paid, and non-assessable and not issued in violation of
the preemptive or other rights of any person.
Section 2.03 Subsidiaries and Predecessor Corporations. Waterford does
not have any predecessor corporation(s) or subsidiaries, and does not own,
beneficially or of record, any shares of any other corporation, except as
disclosed in Schedule 2.03. For purposes hereinafter, the term "Waterford" also
includes those subsidiaries, if any, set forth on Schedule 2.03.
Section 2.04 Securities Filings; Financial Statements.
(a) For at least the past twelve months Waterford has timely
filed all forms, reports and documents required to be filed with the
Securities and Exchange Commission, and has heretofore delivered to
Eternal, in the form filed with the Commission, (i) all quarterly and
annual reports on Forms 10-QSB and 10-KSB filed since December 31,
2000, (ii) all other reports filed by Waterford with the Securities and
Exchange Commission since December 31, 2000 (collectively, the "SEC
Reports") and (iii) all comment letters from the Securities and
Exchange Commission with respect to the SEC Reports. The SEC Reports
(i) were prepared in accordance with the requirements of the Securities
Exchange Act of 1934 or the Securities Act of 1933, as appropriate, and
(ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(b) Included in the Waterford Schedules are (i) the audited
balance sheets of Waterford as of December 31, 2000 and 2001, and the
related audited statements of operations, stockholders' equity and cash
flows for the two fiscal years ended December 31, 2000 and December 31,
2001, together with the notes to such statements and the opinion of
Mantyla McReynolds, independent certified public accountants, with
respect thereto, all as set forth in the SEC Reports.
(c) All such financial statements have been prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods involved. The Waterford balance sheets
present fairly as of their respective dates the financial condition of
Waterford. As of the date of such balance sheets, except as and to the
extent reflected or reserved against therein, Waterford had no
liabilities or obligations (absolute or contingent) which should be
reflected in the balance sheets or the notes thereto prepared in
accordance with generally accepted accounting principles, and all
assets reflected therein are properly reported and present fairly the
value of the assets of Waterford, in accordance with generally accepted
accounting principles. The statements of operations, stockholders'
equity and cash flows reflect fairly the information required to be set
forth therein by generally accepted accounting principles.
(d) Waterford has no liabilities with respect to the payment
of any federal, state, county, local or other taxes (including any
deficiencies, interest or penalties), except for taxes accrued but not
yet due and payable.
(e) Waterford has timely filed all state, federal or local
income and/or franchise tax returns required to be filed by it from
inception to the date hereof. Each of such income tax returns reflects
the taxes due for the period covered thereby, except for amounts which,
in the aggregate, are immaterial.
(f) The books and records, financial and otherwise, of
Waterford are in all material aspects complete and correct and have
been maintained in accordance with good business and accounting
practices.
(g) All of Waterford's assets are reflected on its financial
statements, and, except as set forth in the Waterford Schedules or the
financial statements of Waterford or the notes thereto, Waterford has
no material liabilities, direct or indirect, matured or unmatured,
contingent or otherwise.
Section 2.05 Information. The information concerning Waterford set
forth in this Agreement and the Waterford Schedules is complete and accurate in
all material respects and does not contain any untrue statements of a material
fact or omit to state a material fact required to make the statements made, in
light of the circumstances under which they were made, not misleading. In
addition, Waterford has fully disclosed in writing to Eternal (through this
Agreement or the Waterford Schedules) all information relating to matters
involving Waterford or its assets or its present or past operations or
activities which (i) indicated or may indicate, in the aggregate, the existence
of a greater than $25,000 liability or diminution in value, (ii) have led or may
lead to a competitive disadvantage on the part of Waterford or (iii) either
alone or in aggregation with other information covered by this Section,
otherwise have led or may lead to a material adverse effect on the transactions
contemplated herein or on Waterford, its assets, or its operations or activities
as presently conducted or as contemplated to be conducted after the Closing
Date, including, but not limited to, information relating to governmental,
employee, environmental, litigation and securities matters and transactions with
affiliates.
Section 2.06 Options or Warrants. There are no existing options,
warrants, calls, or commitments of any character relating to the authorized and
unissued stock of Waterford.
Section 2.07 Absence of Certain Changes or Events. Except as disclosed
in Exhibit 2.07, or permitted in writing by Eternal, since the date of the most
recent Waterford balance sheet:
(a) there has not been (i) any material adverse change in the
business, operations, properties, assets or condition of Waterford or
(ii) any damage, destruction or loss to Waterford (whether or not
covered by insurance) materially and adversely affecting the business,
operations, properties, assets or condition of Waterford;
(b) Waterford has not (i) amended its certificate of
incorporation or bylaws; (ii) declared or made, or agreed to declare or
make any payment of dividends or distributions of any assets of any
kind whatsoever to stockholders or purchased or redeemed, or agreed to
purchase or redeem, any of its capital stock; (iii) waived any rights
of value which in the aggregate are outside of the ordinary course of
business or material considering the business of Waterford; (iv) made
any material change in its method of management, operation, or
accounting; (v) entered into any transactions or agreements other than
in the ordinary course of business; (vi) made any accrual or
arrangement for or payment of bonuses or special compensation of any
kind or any severance or termination pay to any present or former
officer or employee; (vii) increased the rate of compensation payable
or to become payable by it to any of its officers or directors or any
of its salaried employees whose monthly compensation exceed $1,000; or
(viii) made any increase in any profit sharing, bonus, deferred
compensation, insurance, pension, retirement, or other employee benefit
plan, payment, or arrangement, made to, for or with its officers,
directors, or employees;
(c) Waterford has not (i) granted or agreed to grant any
options, warrants, or other rights for its stock, bonds, or other
corporate securities calling for the issuance thereof; (ii) borrowed or
agreed to borrow any funds or incurred, or become subject to, any
material obligation or liability (absolute or contingent) except
liabilities incurred in the ordinary course of business; (iii) paid or
agreed to pay any material obligations or liabilities (absolute or
contingent) other than current liabilities reflected in or shown on the
most recent Waterford balance sheet and current liabilities incurred
since that date in the ordinary course of business and professional and
other fees and expenses in connection with the preparation of this
Agreement and the consummation of the transaction contemplated hereby;
(iv) sold or transferred, or agreed to sell or transfer, any of its
assets, properties, or rights (except assets, properties, or rights not
used or useful in its business which, in the aggregate have a value of
less than $1000), or canceled, or agreed to cancel, any debts or claims
(except debts or claims which in the aggregate are of a value less than
$1000); (v) made or permitted any amendment or termination of any
contract, agreement, or license to which it is a party if such
amendment or termination is material, considering the business of
Waterford; or (vi) issued, delivered or agreed to issue or deliver, any
stock, bonds, or other corporate securities including debentures
(whether authorized and unissued or held as treasury stock), except in
connection with this Agreement; and
(d) to the best knowledge of Waterford, it has not become
subject to any law or regulation which materially and adversely
affects, or in the future, may adversely affect, the business,
operations, properties, assets or condition of Waterford.
Section 2.08 Title and Related Matters. Waterford has good and
marketable title to all of its properties, inventory, interest in properties,
and assets, real and personal, which are reflected in the most recent Waterford
balance sheet or acquired after that date (except properties, inventory,
interest in properties, and assets sold or otherwise disposed of since such date
in the ordinary course of business), free and clear of all liens, pledges,
charges, or encumbrances except (a) statutory liens or claims not yet
delinquent; (b) such imperfections of title and easements as do not and will not
materially detract from or interfere with the present or proposed use of the
properties subject thereto or affected thereby or otherwise materially impair
present business operations on such properties; and (c) as described in the
Waterford Schedules. Except as set forth in the Waterford Schedules, Waterford
owns, free and clear of any liens, claims, encumbrances, royalty interests, or
other restrictions or limitations of any nature whatsoever, any and all products
it is currently manufacturing, including the underlying technology and data, and
all procedures, techniques, marketing plans, business plans, methods of
management, or other information utilized in connection with Waterford's
business. Except as set forth in the Waterford Schedules, no third party has any
right to, and Waterford has not received any notice of infringement of or
conflict with asserted rights of others with respect to any product, technology,
data, trade secrets, know-how, propriety techniques, trademarks, service marks,
trade names, or copyrights which, individually or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a materially
adverse effect on the business, operations, financial condition, income, or
business prospects of Waterford or any material portion of its properties,
assets, or rights.
Section 2.09 Litigation and Proceedings. There are no actions, suits,
proceedings or investigations pending or, to the knowledge Waterford after
reasonable investigation, threatened by or against Waterford or affecting
Waterford or its properties, at law or in equity, before any court or other
governmental agency or instrumentality, domestic or foreign, or before any
arbitrator of any kind except as disclosed in Schedule 2.09. Waterford has no
knowledge of any default on its part with respect to any judgement, order, writ,
injunction, decree, award, rule or regulation of any court, arbitrator, or
governmental agency or instrumentality or any circumstance which after
reasonable investigation would result in the discovery of such default.
Section 2.10 Contracts.
----------
(a) Waterford is not a party to, and its assets, products,
technology and properties are not bound by, any material contract,
franchise, license agreement, agreement, debt instrument or other
commitments whether such agreement is in writing or oral, except as
disclosed in Schedule 2.10.
(b) All contracts, agreements, franchises, license agreements,
and other commitments to which Waterford is a party or by which its
properties are bound and which are material to the operations of
Waterford taken as a whole are valid and enforceable by Waterford in
all respects, except as limited by bankruptcy and insolvency laws and
by other laws affecting the rights of creditors generally;
(c) Waterford is not a party to or bound by, and the
properties of Waterford are not subject to any contract, agreement,
other commitment or instrument; any charter or other corporate
restriction; or any judgment, order, writ, injunction, decree, or award
which materially and adversely affects, the business operations,
properties, assets, or condition of Waterford; and
(d) Except as included or described in the Waterford Schedules
or reflected in the most recent Waterford balance sheet, Waterford is
not a party to any oral or written (i) contract for the employment of
any officer or employee which is not terminable on 30 days, or less
notice; (ii) profit sharing, bonus, deferred compensation, stock
option, severance pay, pension benefit or retirement plan, (iii)
agreement, contract, or indenture relating to the borrowing of money,
(iv) guaranty of any obligation, other than one on which Waterford is a
primary obligor, for the borrowing of money or otherwise, excluding
endorsements made for collection and other guaranties of obligations
which, in the aggregate do not exceed more than one year or providing
for payments in excess of $25,000 in the aggregate; (vi) collective
bargaining agreement; or (vii) agreement with any present or former
officer or director of Waterford.
Section 2.11 Material Contract Defaults. Waterford is not in default in
any material respect under the terms of any outstanding contract, agreement,
lease, or other commitment which is material to the business, operations,
properties, assets or condition of Waterford and there is no event of default in
any material respect under any such contract, agreement, lease, or other
commitment in respect of which Waterford has not taken adequate steps to prevent
such a default from occurring.
Section 2.12 No Conflict With Other Instruments. The execution of this
Agreement and the consummation of the transactions contemplated by this
Agreement will not result in the breach of any term or provision of, constitute
a default under, or terminate, accelerate or modify the terms of, any indenture,
mortgage, deed of trust, or other material agreement or instrument to which
Waterford is a party or to which any of its assets or operations are subject.
Section 2.13 Governmental Authorizations. Waterford has all licenses,
franchises, permits, and other governmental authorizations, that are legally
required to enable it to conduct its business operations in all material
respects as conducted on the date hereof. Except for compliance with federal and
state securities or corporation laws, as hereinafter provided, no authorization,
approval, consent or order of, of registration, declaration or filing with, any
court or other governmental body is required in connection with the execution
and delivery by Waterford of this Agreement and the consummation by Waterford of
the transactions contemplated hereby.
Section 2.14 Compliance With Laws and Regulations. To the best of its
knowledge, Waterford has complied with all applicable statutes and regulations
of any federal, state, or other applicable governmental entity or agency
thereof, except to the extent that noncompliance would not materially and
adversely affect the business, operations, properties, assets or condition of
Waterford or except to the extent that noncompliance would not result in the
occurrence of any material liability. This compliance includes, but is not
limited to, the filing of all reports to date with federal and state securities
authorities.
Section 2.15 Insurance. All of the properties of Waterford are
fully insured for their full replacement cost.
Section 2.16 Approval of Agreement. The board of directors of Waterford
has authorized the execution and delivery of this Agreement by Waterford and has
approved this Agreement and the transactions contemplated hereby and will
recommend to its shareholders that they approve this Agreement and the
transactions contemplated hereby.
Section 2.17 Continuity of Business Enterprises. Waterford has no
commitment or present intention to liquidate Eternal or sell or otherwise
dispose of a material portion of Eternal' business or assets following the
consummation of the transactions contemplated hereby.
Section 2.18 Material Transactions or Affiliations. Except as disclosed
herein and in the Waterford Schedules, there exists no contract, agreement or
arrangement between Waterford and any predecessor and any person who was at the
time of such contract, agreement or arrangement an officer, director, or person
owning of record or known by Waterford to own beneficially, 5% or more of the
issued and outstanding common stock of Waterford and which is to be performed in
whole or in part after the date hereof or was entered into not more than three
years prior to the date hereof. Neither any officer, director, nor 5%
shareholder of Waterford has, or has had since inception of Waterford, any known
interest, direct or indirect, in any such transaction with Waterford which was
material to the business of Waterford. Waterford has no commitment, whether
written or oral, to lend any funds to, borrow any money from, or enter into any
other transaction with, any such affiliated person.
Section 2.19 Labor Relations. Waterford has not had work stoppage
resulting from labor problems. To the knowledge of Waterford, no union or other
collective bargaining organization is organizing or attempting to organize any
employee of Waterford.
Section 2.20 Waterford Schedules. Waterford has delivered to Eternal
the following schedules, which are collectively referred to as the "Waterford
Schedules" and which consist of separate schedules, which are dated the date of
this Agreement, all certified by the chief executive officer of Waterford to be
complete, true, and accurate in all material respects as of the date of this
Agreement:
(a) a schedule containing complete and accurate copies
of the certificate of incorporation and bylaws of Waterford as in effect as
of the date of this Agreement;
(b) a schedule containing the financial statements of
Waterford identified in paragraph 2.04(b);
(c) a Schedule 2.20(c) containing a list indicating the
name and address of each shareholder of Waterford together with the number
of shares owned by him, her or it;
(d) a schedule containing a description of all real property
owned by Waterford, together with a description of every mortgage, deed
of trust, pledge, lien, agreement, encumbrance, claim, or equity
interest of any nature whatsoever in such real property;
(e) copies of all licenses, permits, and other governmental
authorizations (or requests or applications therefor) pursuant to which
Waterford carries on or proposes to carry on its business (except those
which, in the aggregate, are immaterial to the present or proposed
business of Waterford);
(f) a schedule listing the accounts receivable and notes and
other obligations receivable of Waterford as of December 31, 2001, or
thereafter other than in the ordinary course of business of Waterford,
indicating the debtor and amount, and classifying the accounts to show
in reasonable detail the length of time, if any, overdue, and stating
the nature and amount of any refunds, set offs, reimbursements,
discounts, or other adjustments which are in the aggregate material and
due to or claimed by such debtor;
(g) a schedule listing the accounts payable and notes and
other obligations payable of Waterford as of December 31, 2001, or that
arose thereafter other than in the ordinary course of the business of
Waterford, indicating the creditor and amount, classifying the accounts
to show in reasonable detail the length of time, if any, overdue, and
stating the nature and amount of any refunds, set offs, reimbursements,
discounts, or other adjustments, which in the aggregate are material
and due to or claimed by Waterford respecting such obligations;
(h) a schedule setting forth a description of any material
adverse change in the business, operations, property, inventory,
assets, or condition of Waterford since December 31, 2001 required to
be provided pursuant to section 2.07 hereof; and
(i) a schedule setting forth any other information, together
with any required copies of documents, required to be disclosed in the
Waterford Schedules by Sections 2.01 through 2.19.
Waterford shall cause the Waterford Schedules and the instruments and
data delivered to Eternal hereunder to be promptly updated after the date hereof
up to and including the Closing Date.
It is understood and agreed that not all of the schedules referred to
above have been completed or are available to be furnished by Waterford.
Waterford shall have until April 30, 2002 to provide such schedules. If
Waterford cannot or fails to do so, or if Eternal acting reasonably finds any
such schedules or updates provided after the date hereof to be unacceptable
according to the criteria set forth below, Eternal may terminate this Agreement
by giving written notice to Waterford within five (5) days after the schedules
or updates were due to be produced or were provided. For purposes of the
foregoing, Eternal may consider a disclosure in the Waterford Schedules to be
"unacceptable" only if that item would have a material adverse impact on the
financial statements listed in Section 2.04(b), taken as a whole.
Section 2.21 Bank Accounts; Power of Attorney. Set forth in Schedule
2.21 is a true and complete list of (a) all accounts with banks, money market
mutual funds or securities or other financial institutions maintained by
Waterford within the past twelve (12) months, the account numbers thereof, and
all persons authorized to sign or act on behalf of Waterford, (b) all safe
deposit boxes and other similar custodial arrangements maintained by Waterford
within the past twelve (12) months, and (c) the names of all persons holding
powers of attorney from Waterford or who are otherwise authorized to act on
behalf of Waterford with respect to any matter, other than its officers and
directors, and a summary of the terms of such powers or authorizations.
Section 2.22 Valid Obligation. This Agreement and all agreements and
other documents executed by Waterford in connection herewith constitute the
valid and binding obligation of Waterford, enforceable in accordance with its or
their terms, except as may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the enforcement of creditors' rights generally and
subject to the qualification that the availability of equitable remedies is
subject to the discretion of the court before which any proceeding therefor may
be brought.
ARTICLE III
PLAN OF EXCHANGE
Section 3.01 The Exchange. On the terms and subject to the conditions
set forth in this Agreement, on the Closing Date (as defined in Section 3.03),
each Eternal Shareholder who shall elect to accept the exchange offer described
herein (the "Accepting Shareholders"), shall assign, transfer and deliver, free
and clear of all liens, pledges, encumbrances, charges, restrictions or known
claims of any kind, nature, or description, the number of shares of common stock
of Eternal set forth on Schedule 1.19(c) attached hereto, in the aggregate
constituting 100% of the issued and outstanding shares of common stock of
Eternal held by each of such shareholders; the objective of such Exchange being
the acquisition by Waterford of 100% of the issued and outstanding common stock
of Eternal. In exchange for the transfer of such securities by the Eternal
Shareholders, Waterford shall issue to the Eternal Shareholders (1) an aggregate
of ___________ of common stock of Waterford (the "Initial Shares"). At the
Closing, each Eternal Shareholder shall, on surrender of his certificate or
certificates representing such Eternal shares to Waterford or its registrar or
transfer agent, be entitled to receive a certificate or certificates evidencing
his proportionate interest in the Initial Shares. Upon consummation of the
transaction contemplated herein, assuming participation by all of the Eternal
Shareholders, all of the shares of capital stock of Eternal shall be held by
Waterford.
Section 3.02 Anti-Dilution. The number of shares of Waterford common
stock issuable upon exchange pursuant to Section 3.01 shall be appropriately
adjusted to take into account any other stock split, stock dividend, reverse
stock split, recapitalization, or similar change in the Waterford common stock
which may occur (i) between the date of the execution of this Agreement and the
Closing Date, as to the Initial Shares, and (ii) between the date of the
execution of this Agreement and the release date, as to the Additional Shares.
Section 3.03 Closing. The closing ("Closing") of the transactions
contemplated by this Agreement shall be on a date and at such time as the
parties may agree ("Closing Date") but not later than July 31, 2002, subject to
the right of Waterford or Eternal to extend such Closing Date by up to an
additional sixty (60) days. Such Closing shall take place at a mutually
agreeable time and place.
Section 3.04 Closing Events. At the Closing, Waterford, Eternal and
each of the Accepting Shareholders shall execute, acknowledge, and deliver (or
shall ensure to be executed, acknowledged, and delivered) any and all
certificates, opinions, financial statements, schedules, agreements,
resolutions, rulings or other instruments required by this Agreement to be so
delivered at or prior to the Closing, together with such other items as may be
reasonably requested by the parties hereto and their respective legal counsel in
order to effectuate or evidence the transactions contemplated hereby. Among
other things, Waterford shall provide an opinion of counsel acceptable to
Eternal as to such matters as Eternal may reasonably request, which shall
include, but not be limited to, a statement, to the effect that (i) to such
counsel's best knowledge, after reasonable investigation, from inception until
the Closing Date, Waterford has complied with all applicable statutes and
regulations of any federal, state, or other applicable governmental entity or
agency thereof, except to the extent that noncompliance would not materially and
adversely affect the business, operations, properties, assets or condition of
Waterford or except to the extent that noncompliance would not result in the
occurrence of any material liability (such compliance including, but not being
limited to, the filing of all reports to date with federal and state securities
authorities) and
Section 3.05 Termination.
(a) This Agreement may be terminated by the board of directors of
either Waterford or Eternal at any time prior to the Closing Date if:
(i) there shall be any actual or threatened action or proceeding
before any court or any governmental body which shall seek to restrain,
prohibit, or invalidate the transactions contemplated by this Agreement and
which, in the judgement of such board of directors, made in good faith and
based upon the advice of its legal counsel, makes it inadvisable to proceed
with the Exchange; or
(ii) any of the transactions contemplated hereby are disapproved by
any regulatory authority whose approval is required to consummate such
transactions (which does not include the Securities and Exchange
Commission) or in the judgement of such board of directors, made in good
faith and based on the advice of counsel, there is substantial likelihood
that any such approval will not be obtained or will be obtained only on a
condition or conditions which would be unduly burdensome, making it
inadvisable to proceed with the Exchange.
In the event of termination pursuant to this paragraph (a) of Section 3.05,
no obligation, right or liability shall arise hereunder, and each party
shall bear all of the expenses incurred by it in connection with the
negotiation, drafting, and execution of this Agreement and the transactions
herein contemplated in accordance with the Expense Sharing Agreement
attached hereto as Exhibit "B".
(b) This Agreement may be terminated by the board of directors of
Waterford at any time prior to the Closing Date if:
(i) there shall have been any change after the date of the latest
balance sheet of Eternal in the assets, properties, business, or financial
condition of Eternal, which could have a materially adverse effect on the
financial statements of Eternal listed in Section 1.04(a) taken as a whole,
except any changes disclosed in the Eternal Schedules;
(ii) the board of directors of Waterford determines in good faith that
one or more of Waterford's conditions to Closing has not occurred, through
no fault of Waterford.
(iii) Waterford takes the termination action specified in Section 1.18
as a result of Eternal Schedules or updates thereto which Waterford finds
unacceptable;
(iv) on or before March 15, 2002, Waterford notifies Eternal that
Waterford's investigation pursuant to Section 4.01 below has uncovered
information which it finds unacceptable by the same criteria set forth in
Section 1.19; or
(v) Eternal shall fail to comply in any material respect with any of
its covenants or agreements contained in this Agreement or if any of the
representations or warranties of Eternal contained herein shall be
inaccurate in any material respect, where such noncompliance or inaccuracy
has not been cured within ten (10) days after written notice thereof.
If this Agreement is terminated pursuant to this paragraph (b) of Section
3.05, this Agreement shall be of no further force or effect, and no
obligation, right or liability shall arise hereunder, except that Eternal
shall bear its own costs as well as the reasonable costs of Waterford in
connection with the negotiation, preparation, and execution of this
Agreement and qualifying the offer and sale of securities to be issued in
the Exchange under the registration requirements, or exemption from the
registration requirements, of state and federal securities laws.
(c) This Agreement may be terminated by the board of directors of
Eternal at any time prior to the Closing Date if:
(i) there shall have been any change after the date of the latest
balance sheet of Waterford in the assets, properties, business or financial
condition of Waterford, which could have a material adverse effect on the
financial statements of Waterford listed in Section 2.04(b) taken as a
whole, except any changes disclosed in the Waterford Schedules;
(ii) the board of directors of Eternal determines in good faith that
one or more of Eternal' conditions to Closing has not occurred, through no
fault of Eternal;
(iii) Eternal takes the termination action specified in Section 2.20
as a result of Waterford Schedules or updates thereto which Eternal finds
unacceptable;
(iv) on or before March 15, 2002 Eternal notifies Waterford that
Eternal' investigation pursuant to Section 4.01 below has uncovered
information which it finds unacceptable by the same criteria set forth in
Section 2.20; or
(v) Waterford shall fail to comply in any material respect with any of
its covenants or agreements contained in this Agreement or if any of the
representations or warranties of Waterford contained herein shall be
inaccurate in any material respect, where such noncompliance or inaccuracy
has not been cured within ten (10) days after written notice thereof.
If this Agreement is terminated pursuant to this paragraph (c) of Section
3.05, this Agreement shall be of no further force or effect, and no
obligation, right or liability shall arise hereunder, except that Waterford
shall bear its own costs as well as the reasonable costs of Eternal and its
principal shareholders incurred in connection with the negotiation,
preparation and execution of this Agreement.
ARTICLE IV
SPECIAL COVENANTS
Section 4.01 Access to Properties and Records. Waterford and Eternal will
each afford to the officers and authorized representatives of the other full
access to the properties, books and records of Waterford or Eternal, as the case
may be, in order that each may have a full opportunity to make such reasonable
investigation as it shall desire to make of the affairs of the other, and each
will furnish the other with such additional financial and operating data and
other information as to the business and properties of Waterford or Eternal, as
the case may be, as the other shall from time to time reasonably request.
Without limiting the foregoing, as soon as practicable after the end of each
fiscal quarter (and in any event through the last fiscal quarter prior to the
Closing Date), each party shall provide the other with quarterly internally
prepared and unaudited financial statements.
Section 4.02 Delivery of Books and Records. At the Closing, Eternal shall
deliver to Waterford the originals of the corporate minute books, books of
account, contracts, records, and all other books or documents of Eternal now in
the possession of Eternal or its representatives.
Section 4.03 Third Party Consents and Certificates. Waterford and Eternal
agree to cooperate with each other in order to obtain any required third party
consents to this Agreement and the transactions herein contemplated.
Section 4.04 Name Change & State of Incorporation. At or prior to the
Closing Date, Waterford's Board of Directors shall have approved an amendment to
the certificate of incorporation to change the name of Waterford to
"BIOENGINEERING , INC." and to change the state of incorporation from Utah to
Nevada. Such amendment shall be carried out promptly upon approval of the same
by the shareholders of Waterford.
Section 4.05 Waterford Shareholder Meeting. Waterford shall call a special
shareholders meeting to be held on or prior to the Closing Date at which meeting
the shareholders of Waterford shall be requested to approve, and Waterford's
Board of Directors shall recommend approval of, the terms of this Agreement,
including the name change and the change in the state of incorporation described
in Section 4.04 and such other matters as shall require shareholder approval
hereunder.
Section 4.06 Consent of Eternal Shareholders. Eternal shall use its best
efforts to obtain the consent of all Eternal Shareholders to participate in the
Exchange. Section 4.07 Designation of Directors and Officers. On or before the
Closing Date, Waterford shall increase its board of directors to _____(__)
persons. _________ shall be designated as Chairman of the Board of Waterford and
________, __________, _____________, shall be designated as additional board
members at the Closing. The existing officers and directors of Waterford shall
submit their resignation.
Section 4.08 The Exclusive Dealing Rights. Until 5:00 P.M. Eastern Daylight
Time on June 30, 2002.
(a) In recognition of the substantial time and effort which
Waterford has spent and will continue to spend in investigating Eternal
and its business and in addressing the matters related to the
transactions contemplated herein, each of which may preempt or delay
other management activities, neither Eternal, nor any of its officers,
employees, representatives or agents will directly or indirectly
solicit or initiate any discussions or negotiations with, or, except
where required by fiduciary obligations under applicable law as advised
by counsel, participate in any negotiations with or provide any
information to or otherwise cooperate in any other way with, or
facilitate or encourage any effort or attempt by, any corporation,
partnership, person or other entity or group (other than Waterford and
its directors, officers, employees, representatives and agents)
concerning any merger, sale of substantial assets, sale of shares of
capital stock, (including without limitation, any public or private
offering of the common stock of Eternal) or similar transactions
involving Eternal (all such transactions being referred to as "Eternal
Acquisition Transactions"). If Eternal receives any proposal with
respect to a Eternal Acquisition Transaction, it will immediately
communicate to Waterford the fact that it has received such proposal
and the principal terms thereof.
(b) In recognition of the substantial time and effort which
Eternal has spent and will continue to spend in investigating Waterford
and its business and in addressing the matters related to the
transactions contemplated herein, each of which may preempt or delay
other management activities, neither Waterford, nor any of its
officers, employees, representatives or agents will directly or
indirectly solicit or initiate any discussions or negotiations with,
or, except where required by fiduciary obligations under applicable law
as advised by counsel, participate in any negotiations with or provide
any information to or otherwise cooperate in any other way with, or
facilitate or encourage any effort or attempt by, any corporation,
partnership, person or other entity or group (other than Eternal and
its directors, officers, employees, representatives and agents)
concerning any merger, sale of substantial assets, sale of shares of
capital stock, (including without limitation, any public or private
offering of the common stock of Waterford or similar transactions
involving Waterford (all such transactions being referred to as
"Waterford Acquisition Transactions"). If Waterford receives any
proposal with respect to a Waterford Acquisition Transaction, it will
immediately communicate to Eternal the fact that it has received such
proposal and the principal terms thereof.
Section 4.09 Actions Prior to Closing.
(a) From and after the date of this Agreement until the
Closing Date and except as set forth in the Waterford Schedules or
Eternal Schedules or as permitted or contemplated by this Agreement,
Waterford (subject to paragraph (d) below) and Eternal respectively,
will each:
(i) carry on its business in substantially the same manner as it has
heretofore;
(ii) maintain and keep its properties in states of good repair and
condition as at present, except for depreciation due to ordinary wear and
tear and damage due to casualty;
(iii) maintain in full force and effect insurance comparable in amount
and in scope of coverage to that now maintained by it;
(iv) perform in all material respects all of its obligations under
material contracts, leases, and instruments relating to or affecting its
assets, properties, and business;
(v) use its best efforts to maintain and preserve its business
organization intact, to retain its key employees, and to maintain its
relationship with its material suppliers and customers; and
(vi) fully comply with and perform in all material respects all
obligations and duties imposed on it by all federal and state laws and all
rules, regulations, and orders imposed by federal or state governmental
authorities.
(b) From and after the date of this Agreement until the Closing Date,
neither Waterford nor Eternal will:
(i) make any changes in their articles or certificate of incorporation
or bylaws;
(ii) take any action described in Section 1.07 in the case of Eternal,
or in Section 2.07, in the case of Waterford (all except as permitted
therein or as disclosed in the applicable party's schedules);
(iii) enter into or amend any contract, agreement, or other instrument
of any of the types described in such party's schedules, except that a
party may enter into or amend any contract, agreement, or other instrument
in the ordinary course of business involving the sale of goods or services;
or
(iv) sell any assets or discontinue any operations (other than the
Divestiture), sell any shares of capital stock or conduct any similar
transactions other than in the ordinary course of business.
(C) In light of the fact that Eternal' shareholders will control Waterford
as a result of the Exchange, from and after the date of this Agreement until the
Closing Date, Waterford shall take no action which is material to its business
without the prior written approval of Eternal, which Eternal may give or
withhold in its sole discretion after consultation with Waterford.
Section 4.10 Sales Under Rule 144 or 145,If Applicable.
(a) Waterford will use its best efforts to at all times comply
with the reporting requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), including timely filing of all
periodic reports required under the provisions of the Exchange Act and
the rules and regulations promulgated thereunder.
(b) Upon being informed in writing by any such person holding
restricted stock of Waterford that such person intends to sell any
shares under Rule 144, Rule 145 or Regulation S promulgated under the
Securities Act (including any rule adopted in substitution or
replacement thereof), Waterford will certify in writing to such person
that it has filed all of the reports required to be filed by it under
the Exchange Act to enable such person to sell such person's restricted
stock under Rule 144, 145 or Regulation S, as may be applicable in the
circumstances, or will inform such person in writing that it has not
filed any such report or reports.
(c) If any certificate representing any such restricted stock
is presented to Waterford's transfer agent for registration of transfer
in connection with any sale theretofore made under Rule 144, 145 or
Regulation S, provided such certificate is duly endorsed for transfer
by the appropriate person(s) or accompanied by a separate stock power
duly executed by the appropriate person(s) in each case with reasonable
assurances that such endorsements are genuine and effective, and is
accompanied by an opinion of counsel satisfactory to Waterford and its
counsel that the stock transfer has complied with the requirements of
Rule 144, 145 or Regulation S, as the case may be, Waterford will
promptly instruct its transfer agent to register such shares and to
issue one or more new certificates representing such shares to the
transferee and, if appropriate under the provisions of Rule 144, 145 or
Regulation S, as the case may be, free of any stop transfer order or
restrictive legend. The provisions of this Section 4.11 shall survive
the Closing and the consummation of the transactions contemplated by
this Agreement.
Section 4.11 Indemnification.
(a) Eternal hereby agrees to indemnify Waterford and each of
the officers, agents and directors of Waterford as of the date of
execution of this Agreement against any loss, liability, claim, damage,
or expense (including, but not limited to, any and all expense
whatsoever reasonably incurred in investigating, preparing, or
defending against any litigation, commenced or threatened, or any claim
whatsoever), to which it or they may become subject arising out of or
based on any inaccuracy appearing in or misrepresentations made under
Article I of this Agreement. The indemnification provided for in this
paragraph shall survive the Closing and consummation of the
transactions contemplated hereby and termination of this Agreement.
(b) Waterford hereby agrees to indemnify Eternal and each of
the officers, agents, and directors of Eternal and each of the Eternal
Shareholders as of the date of execution of this Agreement against any
loss, liability, claim, damage, or expense (including, but not limited
to, any and all expense whatsoever reasonably incurred in
investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever), to which it or they
may become subject arising out of or based on any inaccuracy appearing
in or misrepresentation made under Article II of this Agreement. The
indemnification provided for in this paragraph shall survive the
Closing and consummation of the transactions contemplated hereby and
termination of this Agreement.
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS OF WATERFORD
The obligations of Waterford under this Agreement are subject to the
satisfaction, at or before the Closing Date, of the following conditions:
Section 5.01 Accuracy of Representations and Performance of Covenants.
The representations and warranties made by Eternal in this Agreement were true
when made and shall be true at the Closing Date with the same force and effect
as if such representations and warranties were made at and as of the Closing
Date (except for changes therein permitted by this Agreement). Eternal shall
have performed or complied with all covenants and conditions required by this
Agreement to be performed or complied with by Eternal prior to or at the
Closing. Waterford shall be furnished with a certificate, signed by a duly
authorized executive officer of Eternal and dated the Closing Date, to the
foregoing effect.
Section 5.02 Officer's Certificate. Waterford shall have been furnished
with a certificate dated the Closing Date and signed by a duly authorized
officer of Eternal to the effect that no litigation, proceeding, investigation,
or inquiry is pending, or to the best knowledge of Eternal threatened, which
might result in an action to enjoin or prevent the consummation of the
transactions contemplated by this Agreement, or, to the extent not disclosed in
the Eternal Schedules, by or against Eternal, which might result in any material
adverse change in any of the assets, properties, business, or operations of
Eternal.
Section 5.03 No Material Adverse Change. Prior to the Closing Date,
there shall not have occurred any change in the financial condition, business,
or operations of Eternal nor shall any event have occurred which, with the lapse
of time or the giving of notice, is determined to be unacceptable using the
criteria set forth in Section 1.19.
Section 5.04 Good Standing. Waterford shall have received a certificate
of good standing from the British Virgin Islands, dated as of a date within ten
days prior to the Closing Date certifying that Eternal is in good standing as a
corporation in the British Virgin Islands.
Section 5.05 Approval by Eternal Shareholders. The Exchange shall have
been approved, and shares delivered in accordance with Section 3.01, by the
holders of not less than ninety percent (90%) of the outstanding common stock of
Eternal, unless a lesser number is agreed to by Waterford.
Section 5.06 No Governmental Prohibition. No order, statute, rule,
regulation, executive order, injunction, stay, decree, judgment or restraining
order shall have been enacted, entered, promulgated or enforced by any court or
governmental or regulatory authority or instrumentality which prohibits the
consummation of the transactions contemplated hereby.
Section 5.07 Consents. All consents, approvals, waivers or amendments
pursuant to all contracts, licenses, permits, trademarks and other intangibles
in connection with the transactions contemplated herein, or for the continued
operation of Waterford and Eternal after the Closing Date on the basis as
presently operated shall have been obtained.
Section 5.08 Other Items.
------------
(a) Waterford shall have received a list of Eternal'
shareholders containing the name, address, and number of shares held by
each Eternal shareholder as of the date of Closing, certified by an
executive officer of Eternal as being true, complete and accurate; and
(b) Waterford shall have received such further opinions,
documents, certificates or instruments relating to the transactions
contemplated hereby as Waterford may reasonably request.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF ETERNAL
AND THE ETERNAL SHAREHOLDERS
The obligations of Eternal and the Eternal Shareholders under this
Agreement are subject to the satisfaction, at or before the Closing Date, of the
following conditions:
Section 6.01 Accuracy of Representations and Performance of Covenants.
The representations and warranties made by Waterford in this Agreement were true
when made and shall be true as of the Closing Date (except for changes therein
permitted by this Agreement) with the same force and effect as if such
representations and warranties were made at and as of the Closing Date.
Additionally, Waterford shall have performed and complied with all covenants and
conditions required by this Agreement to be performed or complied with by
Waterford and shall have satisfied the conditions described below prior to or at
the Closing:
(a) Immediately prior to the Closing, Waterford shall have no
more than an aggregate of _________ shares of common stock issued and
outstanding.
(b) The shareholders of Waterford shall have approved
the Exchange and the related transactions described herein.
Eternal shall have been furnished with certificates, signed by duly authorized
executive officers of Waterford and dated the Closing Date, to the foregoing
effect.
Section 6.02 Officer's Certificate. Eternal shall have been furnished
with certificates dated the Closing Date and signed by duly authorized executive
officers of Waterford, to the effect that no litigation, proceeding,
investigation or inquiry is pending, or to the best knowledge of Waterford
threatened, which might result in an action to enjoin or prevent the
consummation of the transactions contemplated by this Agreement or, to the
extent not disclosed in the Waterford Schedules, by or against Waterford, which
might result in any material adverse change in any of the assets, properties or
operations of Waterford.
Section 6.03 No Material Adverse Change. Prior to the Closing Date,
there shall not have occurred any change in the financial condition, business or
operations of Waterford nor shall any event have occurred which, with the lapse
of time or the giving of notice, is determined to be unacceptable using the
criteria set forth in Section 2.20.
Section 6.04 Good Standing. Eternal shall have received a certificate
of good standing from the Secretary of State of the State of Nevada or other
appropriate office, dated as of a date within ten days prior to the Closing Date
certifying that Waterford is in good standing as a corporation in the State of
Utah and has filed all tax returns required to have been filed by it to date and
has paid all taxes reported as due thereon.
Section 6.05 No Governmental Prohibition. No order, statute, rule,
regulation, executive order, injunction, stay, decree, judgment or restraining
order shall have been enacted, entered, promulgated or enforced by any court or
governmental or regulatory authority or instrumentality which prohibits the
consummation of the transactions contemplated hereby.
Section 6.06 Consents. All consents, approvals, waivers or amendments
pursuant to all contracts, licenses, permits, trademarks and other intangibles
in connection with the transactions contemplated herein, or for the continued
operation of Waterford and Eternal after the Closing Date on the basis as
presently operated shall have been obtained.
Section 6.07 Other Items. Eternal shall have received further opinions,
documents, certificates, or instruments relating to the transactions
contemplated hereby as Eternal may reasonably request.
ARTICLE VII
MISCELLANEOUS
Section 7.01 Brokers. Waterford and Eternal agree that, except as set
out on Schedule 7.01 attached hereto, there were no finders or brokers involved
in bringing the parties together or who were instrumental in the negotiation,
execution or consummation of this Agreement. Waterford and Eternal each agree to
indemnify the other against any claim by any third person other than those
described above for any commission, brokerage, or finder's fee arising from the
transactions contemplated hereby based on any alleged agreement or understanding
between the indemnifying party and such third person, whether express or implied
from the actions of the indemnifying party.
Section 7.02 Governing Law. This Agreement shall be governed by,
enforced, and construed under and in accordance with the laws of the United
States of America and, with respect to the matters of state law, with the laws
of the State of Nevada without giving effect to principles of conflicts of law
thereunder. Each of the parties (a) irrevocably consents and agrees that any
legal or equitable action or proceedings arising under or in connection with
this Agreement shall be brought exclusively in the federal courts of the United
States, (b) by execution and delivery of this Agreement, irrevocably submits to
and accepts, with respect to any such action or proceeding, generally and
unconditionally, the jurisdiction of the aforesaid court, and irrevocably waives
any and all rights such party may now or hereafter have to object to such
jurisdiction.
Section 7.03 Notices. Any notice or other communications required or
permitted hereunder shall be in writing and shall be sufficiently given if
personally delivered to it or sent by telecopy, overnight courier or registered
mail or certified mail, postage prepaid, addressed as follows:
If to Waterford, to: WATERFORD STERLING CORPORATION
201 S. Knowles Avenue
Winter Park, FL 32789
With copies to:
If to Eternal, to: ETERNAL TECHNOLOGIES GROUP LTD.
1808-1802 Evening Newspaper Mansion,
358 Nanjing Road, Tianjin P.R.C.
With copies to: Vanderkam & Sanders
440 Louisiana, #475
Houston, Texas 77002
or such other addresses as shall be furnished in writing by any party in the
manner for giving notices hereunder, and any such notice or communication shall
be deemed to have been given (i) upon receipt, if personally delivered, (ii) on
the day after dispatch, if sent by overnight courier, (iii) upon dispatch, if
transmitted by telecopy and receipt is confirmed by telephone and (iv) three (3)
days after mailing, if sent by registered or certified mail.
Section 7.04 Attorney's Fees. In the event that either party institutes
any action or suit to enforce this Agreement or to secure relief from any
default hereunder or breach hereof, the prevailing party shall be reimbursed by
the losing party for all costs, including reasonable attorney's fees, incurred
in connection therewith and in enforcing or collecting any judgement rendered
therein.
Section 7.05 Confidentiality. Each party hereto agrees with the other
that, unless and until the transactions contemplated by this Agreement have been
consummated, it and its representatives will hold in strict confidence all data
and information obtained with respect to another party or any subsidiary thereof
from any representative, officer, director or employee, or from any books or
records or from personal inspection, of such other party, and shall not use such
data or information or disclose the same to others, except (i) to the extent
such data or information is published, is a matter of public knowledge, or is
required by law to be published; or (ii) to the extent that such data or
information must be used or disclosed in order to consummate the transactions
contemplated by this Agreement. In the event of the termination of this
Agreement, each party shall return to the other party all documents and other
materials obtained by it or on its behalf and shall destroy all copies, digests,
work papers, abstracts or other materials relating thereto, and each party will
continue to comply with the confidentiality provisions set forth herein.
Section 7.06 Public Announcements and Filings. Unless required by
applicable law or regulatory authority, none of the parties will issue any
report, statement or press release to the general public, to the trade, to the
general trade or trade press, or to any third party (other than its advisors and
representatives in connection with the transactions contemplated hereby) or file
any document, relating to this Agreement and the transactions contemplated
hereby, except as may be mutually agreed by the parties. Copies of any such
filings, public announcements or disclosures, including any announcements or
disclosures mandated by law or regulatory authorities, shall be delivered to
each party at least one (1) business day prior to the release thereof.
Section 7.07 Schedules; Knowledge. Each party is presumed to have full
knowledge of all information set forth in the other party's schedules delivered
pursuant to this Agreement.
Section 7.08 Third Party Beneficiaries. This contract is strictly
between Waterford and Eternal, and, except as specifically provided, no
director, officer, stockholder (other than the Eternal Shareholders), employee,
agent, independent contractor or any other person or entity shall be deemed to
be a third party beneficiary of this Agreement.
Section 7.09 Expenses. Subject to Sections 3.05 and 7.04 above, whether
or not the Exchange is consummated, each of Waterford and Eternal will bear
their own respective expenses, including legal, accounting and professional
fees, incurred in connection with the Exchange or any of the other transactions
contemplated hereby.
Section 7.10 Entire Agreement. This Agreement represents the entire
agreement between the parties relating to the subject matter thereof and
supersedes all prior agreements, understandings and negotiations, written or
oral, with respect to such subject matter.
Section 7.11 Survival; Termination. The representations, warranties,
and covenants of the respective parties shall survive the Closing Date and the
consummation of the transactions herein contemplated for a period of two years.
Section 7.12 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.
Section 7.13 Amendment or Waiver. Every right and remedy provided
herein shall be cumulative with every other right and remedy, whether conferred
herein, at law, or in equity, and may be enforced concurrently herewith, and no
waiver by any party of the performance of any obligation by the other shall be
construed as a waiver of the same or any other default then, theretofore, or
thereafter occurring or existing. At any time prior to the Closing Date, this
Agreement may by amended by a writing signed by all parties hereto, with respect
to any of the terms contained herein, and any term or condition of this
Agreement may be waived or the time for performance may be extended by a writing
signed by the party or parties for whose benefit the provision is intended.
Section 7.14 Best Efforts. Subject to the terms and conditions herein
provided, each party shall use its best efforts to perform or fulfill all
conditions and obligations to be performed or fulfilled by it under this
Agreement so that the transactions contemplated hereby shall be consummated as
soon as practicable. Each party also agrees that it shall use its best efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective this Agreement and the transactions contemplated
herein.
IN WITNESS WHEREOF, the corporate parties hereto have caused this
Agreement to be executed by their respective officers, hereunto duly authorized,
as of the date first-above written.
ATTEST: WATERFORD STERLING CORPORATION
BY:
- ----------------------------------- ---------------------------------------
Secretary or Assistant Secretary President
ATTEST: ETERNAL TECHNOLOGIES GROUP LTD.
BY:
------------------------------- ---------------------------------------
Secretary or Assistant Secretary President
The undersigned shareholders of ETERNAL TECHNOLOGIES GROUP LTD. hereby
agree to participate in the Exchange on the terms set forth above. Subject to
Section 7.11 above, each of the undersigned hereby represents and affirms that
he has read each of the representations and warranties of ETERNAL TECHNOLOGIES
GROUP LTD. set out in Article I hereof and that, to the best of his knowledge,
all of such representations and warranties are true and correct.
__________________, individually
__________________, individually
__________________, individually