SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________to__________.
Commission File No. 0-27929
ETERNAL TECHNOLOGIES GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 62-1655508
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Suite 1801-02 Jinwan Mansion, 358 Nanjing Rd. Tianjin, PRC 300100
-----------------------------------------------------------------
(Address of principal executive offices)
011-86-22-2750-1802
-------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES NO X
As of May 15, 2003, 25,531,316 shares of Common Stock of the issuer were
outstanding.
Eternal Technologies Group, Inc.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2003 and
December 31, 2002 3
Unaudited Consolidated Statements of Income - For the
three months ended March 31, 2003 and 2002 4
Unaudited Consolidated Statements of Cash Flows-
For the three months ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
Signatures 8
Certifications 10
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNITED STATES DOLLARS)
ASSETS
March 31 December 31
2003 2002
------------ -----------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and bank balances $ 11,626,012 7,135,559
Inventories 232,401 32,401
Accounts receivable - 4,483,855
Common stock subscribed 71,706 -
Receivable due from related company 518,212 518,212
Prepayments and deposits 149,607 146,715
----------- ---------
TOTAL CURRENT ASSETS 12,597,938 12,516,742
FIXED ASSETS
(net of accumulated depreciation of
$1,472,292 in 2003 and $1,320,907 in 2002 4,075,218 4,226,603
CONSTRUCTION IN PROGRESS 4,658,697 4,658,697
ESTIMATED FUTURE CONSTRUCTION COST UNDER CONTRACT 1,000,000 1,000,000
LAND USE RIGHTS
(net of accumulated amortization of $620,704
in 2003 and $558,620 in 2002) 5,379,296 5,441,380
----------- ----------
TOTAL ASSETS $ 27,711,149 $ 27,843,422
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable for construction $ 348,193 $ 348,193
Notes payable 782,833 782,733
Estimated payable for construction
contracts not invoiced 1,000,000 1,000,000
Accounts payable and accrued expenses 731,254 711,572
Payable to related company 151,379 156,265
Amounts due to related parties 309,534 291,193
----------- ----------
TOTAL CURRENT LIABILITIES 3,323,193 3,289,956
----------- ----------
SHAREHOLDERS' EQUITY
Preferred shares - 5,000,000 authorized $.001 par-
none issued - -
Common shares - 95,000,000 shares authorized, at
$.001 par, 26,079,316 and 25,531,316 shares issued
and outstanding at March 31, 2003 and December 31,
2002, respectively 26,079 25,531
Paid - in capital 5,978,779 5,825,735
Retained earnings 18,383,098 18,702,201
----------- ------------
TOTAL SHAREHOLDERS' EQUITY 24,387,956 24,553,467
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,711,149 $ 27,843,423
=========== ============
3
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNITED STATES DOLLARS)
March 31
-------------------------------------
2003 2002
--------------- ----------------
(Unaudited) (Unaudited)
SALES $ 28,376 $ 602,410
COST OF SALES - 315,986
--------------- ----------------
GROSS PROFIT 28,376 286,424
DEPRECIATION AND AMORTIZATION 213,469 148,340
SELLING AND ADMINISTRATIVE EXPENSES 134,010 67,447
--------------- ----------------
NET INCOME BEFORE INCOME TAXES (319,103) 70,637
INCOME TAXES - -
--------------- ----------------
NET INCOME $(319,103) $ 70,637
=============== ================
EARNINGS PER SHARE
Basic and diluted
Net income (loss) $ (0.01) $ 0.00
======== ======
Weighted average number of common
shares outstanding
Basic and diluted 26,079,316 25,531,316 *
=========== ===========
Note
* Number of shares outstanding the date of the merger for comparison only.
4
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNITED STATES DOLLARS)
March 31
-------------------------------
2003 2002
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (319,103) $ 70,637
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 213,469 148,340
(Increase) decrease in assets:
Inventories - 215,584
Accounts receivable 4,483,855 2,216,867
Receivable due from related parties - (554,823)
Prepayments and deposits (2,892) 26,144
Increase (decrease) in liabilities:
Accounts payable for construction work - (93,615)
Accounts payable and accrued expenses 19,682 (41,412)
Notes payable 100 -
Other payable 14,096
Amounts advanced by related parties 18,342 514,287
Account payable to related company (4,886) (1,715,663)
Estimated payable for construction (1,000,000)
------------ -------------
Net cash provided by operating activities 4,408,567 (199,558)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets 251,729
Construction in progress (144,096)
Estimated future construction costs - 1,000,000
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Net cash used by investing activities - 1,107,633
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CASH FLOWS FROM FINANCING ACTIVIES
Issuance of capital shares 81,886 9,000
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NET INCREASE IN CASH AND
BANK BALANCES 4,490,453 917,075
Cash and bank balances, beginning of period 7,135,559 7,753,452
-------------- -------------
Cash and bank balances, at end of period $11,626,012 $8,670,527
============== =============
SUPPLEMENTARY CASH FLOWS DISCLOSURES
1. Interest paid - -
Taxes paid - -
2. During the quarter ended March 31, 2003, 548,000 shares were issued.
249,000 shares were subscribed to and the proceeds of $71,706 were
collected on April 2, 2003. Cost associated with the issues were $43,687.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reporting entity
Pursuant to an exchange agreement, Eternal Technologies Group, Inc., ("Company")
formerly known as Waterford Sterling Corporation, completed its acquisition of
100% interest of Eternal Group Limited and Subsidiaries on December 12, 2002.
The Company has treated the transaction as a reverse merger for accounting
purposes. Following the acquisition, the former shareholders of Eternal
Technology Group Limited, a British Virgin Islands limited liability company,
now own approximately 85% of the issued and outstanding common shares of Eternal
Technologies Group Inc.
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 Eternal Phoenix Company Limited changed its name to ETERNAL TECHNOLOGY
GROUP LTD., ("Eternal"). Eternal is a holding company for investments in
operating companies.
Eternal acquired a 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 is investments and owns 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, transplant embryos, and to propagate quality meat sheep and
other livestock breeds in Inner Mongolia.
Condensed financial statements and footnotes
The interim consolidated financial statements presented herein have been
prepared by the Company and include the unaudited accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in the consolidation.
These condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-QSB and Item 310 (b) Regulation S-B. Certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the disclosures made are adequate to
make the information presented not misleading. The condensed consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 2002 and notes
thereto included in the Company's Form 10-KSB.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of March 31, 2003, the results of operations for the three months ended March
31, 2003 and 2002, respectively. Interim results are not necessarily indicative
of full year performance because of the impact of seasonal and short-term
variations.
Segment reporting
The Company currently is engaged in only one business segment.
Cash
Approximately $11,622,000 of cash is restricted by the company for use in the
PRC
6
Item 2. Management Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended March 31, 2003 compared to the Three Months Ended March 31,
2002
Revenues
Revenues for the three months ended March 31, 2003 decreased by
$574,034 or 95.3% to $28,376 from $602,410 for the corresponding period of the
prior year. As a general rule, because of the seasonality of the Company's
business it has little or no revenue in the quarterly period ended March 31.
However, in the quarterly period ended March 31, 2002, the Company reported
revenues of $602,410 all of which was from a sale made during calendar year
2001, but on which delivery did not occur until the first quarter of 2002.
Without this aberration, there would have been an increase in revenue in the
quarterly period ended March 31, 2003 when compared to the quarterly period
ended March 31, 2002.
Cost of Sales
There were no cost of sales for the three months ended March 31, 2003.
Because delivery on a sale made in calendar year 2001 did not occur until the
first quarter of 2002, there were $315,986 of cost of sales for the quarterly
period ended March 31, 2002.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March
31, 2003 increased by $65,129 or 43.9% to $213,469 from $148,340 for the
corresponding period of the prior year. The increase in depreciation and
amortization resulted because of additional improvements to the form which are
being amortized.
Selling and Administrative Expenses
Selling and administrative expenses for the three months ended March
31, 2003 increased by $66,563 or 98.7% to $134,010 from $67,447 for the
corresponding period of the prior year. The increase in the selling and
administrative expenses is attributable to expenses incurred for financial
public relations and professional expenses required for a U.S. reporting
company.
Net Income (Loss)
As a result of the foregoing, the Company incurred a net operating loss
of $319,103 for the three months ended March 31, 2003 compared to net income of
$70,637 for the three months ended March 31, 2002. There were no income taxes
recorded for either three month period.
Liquidity and Capital Resources
As of March 31, 2003, the Company had cash of $11,626,012 and working
capital of $9,274,748. This compares with cash of $7,135,559 and working capital
of $9,226,786 at December 31, 2002.
Cash flows from operating activities totaled $4,408,567 for the three
months ended March 31, 2003. This compares with cash used in operating
activities of $199,558 for the three months ended March 31, 2002. Although there
was a decline in earnings for the three months ended March 31, 2003 from the
corresponding period of the prior year, this was more than offset by an increase
in depreciation and amortization and positive net charges in the current
accounts.
There were no investing activities by the Company during the three
months ended March 31, 2003. During the corresponding period of the prior year,
the Company used $1,107,633 in investing activities for the purchase of fixed
assets and for construction costs.
Cash flows from financing activities totaled $81,886 for the three
months ended March 31, 2003 compared to $9,000 for the corresponding period of
the prior year. All of the cash flows from financing activities for both three
month periods were from the sale of the Company's common stock.
7
Although the Company has a cash and bank balance of $11,626,012 all but
$4,000 is restricted for certain uses within the People's Republic of China.
Therefore, if the Company is to expand in the PRC, as it anticipates doing, or
pay its non-PRC obligation, it will have to sell additional shares of its stock
or borrow funds from third parties. Unless it is able to either borrow funds or
sell additional shares, it will have insufficient resources to carry out its
business objectives for the next twelve (12) months.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our chief
executive officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a
date (the "Evaluation Date") within 90 days before the filing date of this
quarterly report, have concluded that as of the Evaluation Date, our disclosure
controls and procedures were adequate and designed to ensure that material
information relating to us and our consolidated subsidiaries would be made known
to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in
our internal controls or to our knowledge, in other factors that could
significantly affect our disclosure controls and procedures subsequent to the
Evaluation Date.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities
None
Item. 3. Defaults Upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
During the three months ended March 31, 2003, the Company issued
548,000 shares of its common stock. $71,706 of net proceeds from 249,000 of
these shares were received by the Company on April 2, 2003.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
Signature
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.
8
ETERNAL TECHNOLOGIES GROUP, INC.
/s/ JiJun Wu
-------------------------------------
May 16, 2003 JiJun Wu, Chief Executive Officer
/s/ Xingjian Ma
May 16, 2003 -------------------------------------
Xingjian Ma, Chief Financial Officer
9
CERTIFICATIONS
I, JiJun Wu, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Eternal Technologies
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 16, 2003
By: /s/ JiJun Wu
---------------------
JiJun Wu
Chief Executive Officer
10
I, Xingjian Ma, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Eternal Technologies
Group, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 16, 2003
By: /s/ Xingjian Ma
--------------------
Xingjian Ma
Chief Financial Officer