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, 2004
[ ] 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 04-06, 28/F, Block A, Innotec Tower, 235 Nanjing Road
Heping District, Tianjin, PRC 300100
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(Address of principal executive offices)
011-86-22-2721-7020
-------------------------
(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 X NO
As of May 15, 2004, 29,387,380 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, 2004 (unaudited)and
December 31, 2003 3
Unaudited Consolidated Statements of Income - For the
three months ended March 31, 2004 and 2003 4
Unaudited Consolidated Statements of Cash Flows-
For the three months ended March 31, 2004 and 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management Discussion and Analysis or Plan of Operations 9
Item 3. Controls and Procedures 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Small Business Issuers 10
Purchaser of Equity Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures
Certifications
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004
(UNITED STATES DOLLARS)
ASSETS
March 31 December 31
2004 2003
--------------- ---------------
--------------- ---------------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and Cash equivalents $ 16,471,005 $16,302,464
Inventories 1,208,582 1,214,182
Accounts receivable 215,783 -
Other receivable 3,399,995 3,399,995
Receivable due from related company 617,824 617,825
Prepayments and deposits 190,190 145,190
Property held for sale 2,138,554 2,192,071
--------------- ---------------
--------------- ---------------
TOTAL CURRENT ASSETS 24,241,933 23,871,727
FIXED ASSETS
(net of accumulated depreciation of $2,071,919 in 2004
and $1,943,831 in 2003 6,288,251 6,416,341
LAND USE RIGHTS
(net of accumulated amortization of $869,061 in 2004
and $806,961 in 2003) 5,130,940 5,193,039
--------------- ---------------
--------------- ---------------
TOTAL ASSETS $ 35,661,124 $435,481,107
=============== ===============
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable 443,366 503,857
Accounts payable and accrued expenses 1,317,145 1,133,462
Payable to related company 98,796 205,957
Amounts due to related parties 421,954 417,617
--------------- ---------------
--------------- ---------------
TOTAL CURRENT LIABILITIES 2,281,261 2,260,893
--------------- ---------------
--------------- ---------------
SHAREHOLDERS' EQUITY
Preferred shares - 5,000,000 authorized $.001 par -
none issued - -
Common shares - 95,000,000 shares authorized, at
$.001 par, 29,387,380 and 29,177,396 shares issued and
outstanding at March 31, 2004 and December 31, 2003, respectively 29,387 29,177
Paid - in capital 8,238,436 8,088,159
Stock subscription receivable (10,176) (10,176)
Retained earnings 25,122,216 25,113,054
--------------- ---------------
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 33,379,863 33,220,214
--------------- ---------------
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 35,661,124 $35,481,107
=============== ===============
See Notes to Consolidated Financial Statements
3
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNITED STATES DOLLARS)
March 31
-------------------------------
-------------------------------
2004 2003
------------- -------------
------------- -------------
(Unaudited) (Unaudited)
SALES $2,044,578 $ 28,376
COST OF SALES 1,449,937 -
------------- -------------
------------- -------------
GROSS PROFIT 594,641 28,376
DEPRECIATION AND AMORTIZATION 190,188 213,469
SELLING AND ADMINISTRATIVE EXPENSES 368,154 150,233
OTHER INCOME (EXPENSE)
Interest Income 26,380 16,223
Impairment Loss (53,517) -
------------- -------------
------------- -------------
NET INCOME BEFORE INCOME TAXES 9,162 (351,549)
INCOME TAXES - -
------------- -------------
------------- -------------
NET INCOME $ 9,162 $ (351,549)
============= =============
============= =============
EARNINGS PER SHARE
Basic and diluted
Net income (loss) $ 0.00 $ (0.01)
======= ========
Weighted average number of common
shares outstanding
Basic and diluted 29,337,381 26,079,316
=========== ===========
4
See Notes to Consolidated Financial Statements
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNITED STATES DOLLARS)
March 31
----------------------------
----------------------------
2004 2003
------------- ------------
------------- ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,162 $ (319,103)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 190,190 213,469
Stock issued for services 45,000 -
Impairment loss 53,517 -
(Increase) decrease in assets:
Inventories 5,600 -
Accounts receivable (215,783) 4,483,855
Prepayments and deposits - (2,892)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 183,679 19,682
Notes payable - 100
Amounts advanced by related parties 4,337 18,342
Account payable to related company (107,161) (4,886)
------------- --------------
------------- --------------
Net cash provided by operating activities 168,541 4,408,567
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------------- --------------
CASH FLOWS FROM FINANCING ACTIVIES
Issuance of capital shares - 81,886
------------- --------------
------------- --------------
NET INCREASE IN CASH AND
BANK BALANCES 168,541 4,490,453
Cash and bank balances, beginning of period 16,302,464 7,135,559
------------- --------------
------------- --------------
Cash and bank balances, at end of period $16,471,005 $11,626,012
============= ==============
============= ==============
SUPPLEMENTARY CASH FLOWS DISCLOSURES
1. Interest paid - -
Taxes paid - -
2. During the quarter ended March 31, 2003, 548,000 shares were issued.
249,000 of these shares were subscribed to and the related proceeds of
$71,706 were collected on April 2, 2003. Offering cost associated with the
total issues were $43,687.
3. During the quarter ended March 31, 2004, 109,984 shares were issued for the
payment of notes payable of $60,491. 100,000 shares were issued related to
services and prepaid services totaling $90,000.
5
See Notes to Consolidated Financial Statements
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
- --------------------------------------------------------------------------------
NOTES
1. 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 owns 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.
6
2. 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, 2003 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, 2004, the
results of operations for the three months ended March 31, 2004
and 2003, respectively. Interim results are not necessarily
indicative of full year performance because of the impact of
seasonal and short-term variations.
3. Cash
At March 31, 2004, approximately $15,549,752 of cash is arbitrarily
restricted by management for operations in the PRC.
4. Public relations agreement
During January 2004, the Company entered into a six-month public
relations agreement with PMR and Associates, LLC (PMR). As
consideration for public relations services, the Company shall
compensate PMR the equivalent of $90,000 in shares subject to Rule
144. During February 2004, the Company issued 100,000 shares to PMR
for these services. For the three months ended March 31, 2004, the
Company expensed $45,000 associated with this agreement and
recorded $45,000 as prepaid consulting expense at March 31, 2004.
7
5. Notes payable
The Company's promissory notes payable are in default at March 31,
2004 and the holder of the notes has made demand for payment of the
notes and has threatened litigation. The Company and its attorneys are
performing an additional detailed review of all expenditures prior to
the merger. The balances of the notes are subject to change pending
the outcome of the review of these expenditures. The Company believes
it has meritorious defenses to portions of the promissory notes.
6. Contingencies
In conjunction with certain subscription agreements entered into
during 2003, the Company has agreed to register the shares issued
under a Form SB-2 registration statement. There are penalties for
not timely meeting filing and effectiveness deadlines, and the
Company has received claims related to these penalties. For the
three months ended March 31, 2004, the Company has accrued expenses
for penalties of $52,361.
7. Subsequent event
On April 30, 2004, the Company and a local government entity
reached an agreement on the final purchase price and terms related
to the Company's reception center and certain equipment that is
recorded as "Property held for Sale" at December 31, 2003 and March
31, 2004. At December 31, 2003, the Company had recorded an
estimated impairment loss of $300,000. At March 31, 2004, the
Company recorded an additional impairment loss of $53,517 based on
the amount the Company had recorded of $2,192,071 and the final
purchase price of $2,138,554. The agreement calls for cash payments
of $620,482 and the remainder will be paid in livestock of
$1,518,073. The Company accounts for non-monetary transactions in
accordance with APB Opinion No. 29.
8
Item 2. Management Discussion and Analysis or Plan of Operation
The Company's business is highly seasonal, with most of the Company's revenue
and income being earned during the fourth quarter of the calendar year.
Accordingly, the results of operations for the calendar quarter ended March 31,
are not indicative of the results for any other quarter or for the fiscal year.
Three Months Ended March 31, 2004 compared to the Three Months Ended March 31,
2003
Revenues
Revenues for the three months ended March 31, 2004 increased by $2,016,202 to
$2,044,578 from $28,376 for the corresponding period of the prior year. This
increase in revenue occurred because the Company purchased and sold processed
lamb meat for food processing in the first quarter of 2004 while the Company had
no such business in the first quarter of 2003.
Cost of Sales
There were no cost of sales for the three months ended March 31, 2003, but costs
of sales totalled $1,449,937 for the three months ended March 31, 2004 from the
purchase of the processed lamb meat.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31,
2004 decreased by $23,281 or 10.9% to $190,188 from $213,469 for the
corresponding period of the prior year. The decrease in depreciation and
amortization primarily resulted from the fact that certain equipment was fully
depreciated as of December 31, 2003.
Selling and Administrative Expenses
Selling and administrative expenses for the three months ended March 31,
2004 increased by $217,921 or 145.1% to $368,154 from $150,233 for the
corresponding period of the prior year. The increase in the selling and
administrative expenses is principally attributable to an increase in salaries
of $102,939 an increase in marketing expenses of $45,520, the penalty for the
delay in the registration of $52,361 an increase in the interest expense of
$9,500, and an increase in research and development.
Net Income (Loss)
As a result of the foregoing, the Company reported earnings of $9,162 for
the three months ended March 31, 2004 compared to a loss of $351,549 for the
three months ended March 31, 2003. There were no income taxes recorded for
either three month period.
Liquidity and Capital Resources
As of March 31, 2004, the Company had cash of $16,471,005 and working
capital of $21,960,672. This compares with cash of $16,302,464 and working
capital of $21,610,834 at December 31, 2003.
Cash flows from operating activities totaled $168,541 for the three months
ended March 31, 2004. This compares with cash used in operating activities of
$4,408,567 for the three months ended March 31, 2003. The decrease in cash flows
resulted from changes in the current accounts, particularly accounts receivable
($4,699,638) and reduced depreciation of $23,281 which was partially offset by
an increase in earnings of $328,265 the issuance of shares for services
($45,000) and a non-cash charge for an impairment loss of $53,517.
There were no investing activities by the Company during either the three
months ended March 31, 2004 or 2003.
There were no financing activities for the three months ended March 31,
2004. Cash flows from financing activities for the three months ended March 31,
2003 totaled $81,886 All of the cash flows from the financing activity was from
the sale of the Company's common stock.
9
Although the Company has a cash and bank balance of $16,471,005,
$15,549,752 is arbitrarily restricted by management for operations within the
People's Republic of China. Therefore, if the Company is to expand outside 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.
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
During the quarter ended March 31, 2003, 548,000 shares were issued,
249,000 of these shares were subscribed to and the related proceeds of
$71,706 were collected on April 2, 2003. Cost associated with the total
issues were $43,687. During the quarter ended March 31, 2004, 109,984
shares were issued for the payment of notes payable of $60,491. 100,000
shares were also issued related to services and prepaid services totaling
$90,000.
Item. 3. Defaults Upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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.
10
ETERNAL TECHNOLOGIES GROUP, INC.
/s/ JiJun Wu
-------------------------------------
May 12, 2004 JiJun Wu, Chief Executive Officer
/s/ Xingjian Ma
May 12, 2004 -------------------------------------
Xingjian Ma, Chief Financial Officer
11
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 12, 2004
By: /s/ JiJun Wu
---------------------
JiJun Wu
Chief Executive Officer
12
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 12, 2004
By: /s/ Xingjian Ma
--------------------
Xingjian Ma
Chief Financial Officer
13
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT
TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF TEHE SARBANES-OXLEY ACT OF 2002
- --------------------------------------------------------------------------------
I, JiJun Wu, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of
Eternal Technologies Group, Inc. on Form 10-QSB for the quarterly period ended
March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form
10-QSB fairly presents in all material respects the financial condition and
results of operations of Eternal Technologies Group, Inc.
By: /s/ JiJun Wu
- --------------------------
Name: JiJun Wu
Title: Chief Financial Officer
May 12, 2004
14
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT
TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF TEHE SARBANES-OXLEY ACT OF 2002
- --------------------------------------------------------------------------------
I, Xingjian Ma, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of
Eternal Technologies Group, Inc. on Form 10-QSB for the quarterly period ended
March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form
10-QSB fairly presents in all material respects the financial condition and
results of operations of Eternal Technologies Group, Inc.
By: /s/ Xingjian Ma
- --------------------------
Name: Xingjian Ma
Title: Chief Financial Officer
May 12, 2004
15