SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported) : December 12, 2002
Commission File No. 0-27929
WATERFORD STERLING CORPORATION
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 62-1655508
- ------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
200 S. Knowles Avenue, Winter Park, FL 32789
--------------------------------------------
(Address of principal executive offices)
(407) 622-2040
--------------------------
(Issuer telephone number)
Item 1. Changes in Control of the Registrant
As a result of the acquisition of Eternal Technologies Group Ltd. and
Subsidiaries ("Eternal") as detailed in Item 2 (Acquisition or Disposition of
Assets), there was a change in control of the Company to the shareholders of
Eternal. Prior to the acquisition, Eternal had 82 shareholders, none of whom
owned ten (10) percent of more of Eternal. Following the acquisition, the former
shareholders of Eternal now own 85% of the issued and outstanding common shares
of the Company.
Item 2. Acquisition or Disposition of Assets
On December 12, 2002, Waterford Sterling Corporation completed its
acquisition of Eternal Technologies Group Ltd. and Subsidiaries ("Eternal").
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 are 25,941,176 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.
Three 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 higher-yielding and pure-breed dairy
cattle. The Company's principal facility is a farm in Inner Mongolia.
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 of relevant technologies that guarantee the
smooth implementation of animal genetics projects. These technologies include
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 celcius 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 reverse potential.
Item 5. Other Events.
To facilitate the acquisition of Eternal Technologies Group Ltd. and
Subsidiaries, the Company's common shares were reverse split on a one (1) for
six (6) basis, 95,000,000 post reverse split common shares, $.001 par value were
authorized and its name was changed to Eternal Technologies Group, Inc. These
changes were filed with the Secretary of State of Nevada on December 13, 2002.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
1. Consolidated Financial Statements for the year ended 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
September 30, 2002 (Unaudited)
Consolidated Balance Sheet as of September 30, 2002 and December
31, 2001 F-1
Consolidated Statements of Income for the nine months
ended September 30, 2002 F-2
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2002 F-3
Notes to Financial Statements F-4
Combined Statement of Operations for the nine months ended
September 30, 2002 F-5
Combined Balance Sheet as of September 30, 2002 F-6
Combined Statement of Operations for the year ended December 31, 2002 F-7
(b) Proforma Financial Information
(c) Exhibits
2.1 Exchange Agreement by and between Waterford Sterling Corporation and
Eternal Technology Group Ltd. dated December 12, 2002
3.1 Articles of Amendment to the Articles of Incorporation
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
WATERFORD STERLING CORP.
December 13, 2002
/s/ JiJun Wu
-------------------------------------
JiJun Wu
Chairman and Chief Executive Officer
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
1235 N. Loop West, Suite 907
Houston, Texas 77008-4707 (713) 868-1065; (713)869-3297
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
============
F-2
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
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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
========== ===========
F-3
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
======== ========= =========== ===========
F-4
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
=========== =========
F-5
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.
F-6
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.
F-7
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.
F-8
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.
F-9
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.
F-10
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.
F-11
(ii) Trade receivables, other receivables and amounts due from directors and
related companies Trade receivables, 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.
F-12
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% -
F-13
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.
F-14
ETERNAL TECHNOLOGY GROUP LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
(UNITED STATES DOLLARS)
ASSETS
September 30, December 31,
2002 2001
------------- ------------
CURRENT ASSETS
Cash and bank balances $ 3,104,761 $ 7,753,452
Inventories 735,855 285,576
Accounts receivable 712,506 2,712,506
Receivable due from
related parties 385,449 456,052
Prepayments and deposits 712,107 164,841
TOTAL CURRENT ASSETS 5,650,678 11,372,427
FIXED ASSETS (net of accumulated
depreciation) 4,408,762 3,971,773
CONSTRUCTION IN PROGRESS 4,583,257 3,619,652
ESTIMATED FUTURE CONSTRUCTION COST UNDER CONTRACT 1,000,000 1,000,000
LAND USE RIGHTS
(net of accumulated amortization) 5,471,292 5,689,655
TOTAL ASSETS $21,113,989 $ 25,653,507
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable for construction $ 324,098 $ 2,557,616
Estimated payable for construction contracts not invoiced 1,000,000 1,000,000
Accounts payable and accrued expenses 438,208 273,695
Payable to related company - 1,715,663
Amounts due to related parties 1,627,285 1,571,745
Prepayment for services 970,361 -
TOTAL CURRENT LIABILITIES 4,359,952 7,118,719
SHAREHOLDERS' EQUITY
Capital shares - 50,000 shares authorized $1.00
par - 10,000 shares issued 10,000 1,000
Paid - in capital 6,644,071 6,644,071
Retained earnings 10,099,966 11,889,717
TOTAL SHAREHOLDERS' EQUITY 16,754,037 18,534,788
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,113,989 $ 25,653,507
============ ===========
F-1
ETERNAL TECHNOLOGY LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(UNITED STATES DOLLARS)
For Quarter Ended For Nine Months Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2002 2001 2002 2001
SALES OF LIVESTOCK AND EMBRYOS $ - $ - $ 843,373 $ 639,133
COST OF SALES - - 436,467 679,353
GROSS PROFIT (LOSS) - - 406,906 (40,220)
DEPRECIATION AND AMORTIZATION 250,432 205,350 687,039 616,050
RESEARCH AND DEVELOPMENT COSTS - - 1,000,000 -
SELLING AND ADMINISTRATIVE EXPENSES 80,645 194,086 509,618 731,237
NET LOSS BEFORE INCOME TAXES (331,077) (399,436) (1,789,751) (1,387,507)
INCOME TAXES - - - -
NET LOSS $ (331,077) $ (399,436) $ (1,789,751) $ (1,387,507)
========== ========== ============ ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC AND DILUTED 10,000 1,000 8,300 1,000
========== ========== ============ ==========
BASIC NET INCOME PER SHARE
BASIC AND DILUTED $ 33 $ 399 $ 216 $ 1,388
========== ========== ============ ==========
F-2
ETERNAL TECHNOLOGY GROUP LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(UNITED STATES DOLLARS)
Nine Months Ended
September 30,
2002 2001
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,789,751) $ (1,387,507)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 687,039 616,050
(Increase) decrease in assets:
Inventories (450,279) 428,241
Accounts receivable 2,000,000 572,406
Receivable due from related company 70,603 (235,215)
Prepayments and deposits (547,266) (93,007)
Increase (decrease) in liabilities:
Accounts payable for construction work (2,233,518) -
Accounts payable and accrued expenses 164,513 321,603
Amounts advanced by related parties 55,540 293,028
Account payable to related company (1,715,663) 45,621
Prepayment for services 970,361 217,856
Net cash provided by operating activities (2,788,421) 779,076
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (905,665) (145,893)
Construction in progress (963,605) (110,989)
Cash flows used from investing activities (1,869,270) (256,882)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of capital shares 9,000 -
NET DECREASE IN CASH AND
BANK BALANCES (4,648,691) 522,194
Cash and bank balances, beginning of period 7,753,452 127,899
Cash and bank balances, at end of period $ 3,104,761 $ 650,093
=========== =========
F-3
ETERNAL TECHNOLOGY LTD AND SUBSIDIARIES
FOR THE NINE MONTHS ENDED SEPTEMBER 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 filed with Form 14C on November 8, 2002.
F-4
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 September 30, 2002, assuming that the merger occurred on September
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 nine month period ended
September 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.
F-5
ETERNAL TECHNOLOGY GROUP LTD AND
WATERFORD STERLING CORPORATION (A DEVELOPMENT STAGE COMPANY)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 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 - 509,618 - 509,618
Depreciation and amortization - 687,039 - 687,039
Merger costs - - - -
Research and development - 1,000,000 - 1,000,000
Net income from continuing
operations (1,789,751) (1,789,751)
Loss from discontinued
operations (239,028) - 239,028 3 -
Net income $ (239,028) $ (1,789,751) $ 239,028 $ (1,789,751)
=========== ============ ========= ============
Income (loss) per common share
Basic and diluted
Income from continuing
operations $ - $ (0.07)
Loss from discontinued
operations (0.01) -
Net income $ (0.01) $ (0.07)
=========== ============
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.
F-6
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.