As filed with the Securities and Exchange Commission on September 10, 2004
Registration No.333-109908
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
Pre-Effective Amendment No. 2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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Eternal Technologies Group, Inc.
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(Name of small business issuer in its charter)
Nevada 0291 62-1655508
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(State or jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number Identification No.)
Sect. D, 5/F, Block A. Innotech Tower, 235 Nanjing Rd. Heping
District, Tianjin, 300052,
011-86-22-2721-7020
(Address and telephone number of principal executive offices)
Hank Vanderkam, Esq.
1301 Travis, Suite 1200
Houston, Texas 77002
(713) 547-8900
(Name, address and telephone number of agent for service)
with a copy to:
Hank Vanderkam, Esquire
Vanderkam & Associates
1301 Travis, Suite 1200
Houston, Texas 77002
(713) 547-8900
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this registration statement.
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If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ] ______________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ] ______________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ] ______________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ] ______________
CALCULATION OF REGISTRATION FEE
====================================================================================================================
Title of Each Class of Proposed Maximum Proposed Maximum Amount of
Securities to be Amount to be Offering Price Per Aggregate Offering Price Registration Fee
Registered Registered Share (1) (1)
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Common Stock, $.001 par amount
value 2,930,293 $.90 $ 2,637,264 $ 253.60* previously paid.
====================================================================================================================
(1) Estimated pursuant to Rule 457(c) for the purpose of calculating the
registration fee. Based on the average of the bid and asked prices per
share of Common Stock on October 20, 2003 as reported on the OTC
Electronic Bulletin Board.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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2
The Information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION _____________, 2004
ETERNAL TECHNOLOGIES GROUP, INC.
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2,930,293 Shares of Common Stock
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The selling security holders, identified as "Selling Shareholders" in this
Prospectus, may offer and sell, from time to time, up to 2,798,863 shares of
Common Stock of Eternal Technologies Group, Inc., including 1,049,575 shares of
Common Stock underlying warrants held by the Selling Shareholders. The Selling
Shareholders may sell all or a portion of their shares through public or private
transactions at prevailing market prices or at privately negotiated prices. We
will not receive any part of the proceeds from the sale of these shares by the
Selling Shareholders.
Our Common Stock is traded on the OTC Electronic Bulletin Board under
the symbol "ETLT". The last reported sale price of our Common Stock on the OTC
Electronic Bulletin Board on May 3, 2004 was $.63 per share.
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Prospectus dated _______ , 2004
3
TABLE OF CONTENTS
Page
About this Prospectus.......................................................4
Prospectus Summary..........................................................5
Risk Factors................................................................6
Caution about Forward-Looking Statements....................................14
Use of Proceeds.............................................................14
Market for Registrant's Common Equity and Related Stockholder Matters.......14
Dividend Policy.............................................................15
Management's Discussion and Analysis of Financial Condition and Results
of Operations...............................................................15
Business....................................................................22
Management..................................................................30
Certain Relationships and Related Transactions..............................33
Security Ownership of Certain Beneficial Owners and Management..............34
Selling Shareholders........................................................35
Plan of Distribution........................................................36
Description of Securities...................................................38
Legal Matters...............................................................40
Experts.....................................................................40
Where You Can Find More Information.........................................41
Index to Consolidated Financial Statements.................................F-1
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. The Selling Shareholders are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in the
prospectus is accurate as of the date of this prospectus, regardless of the time
of delivery of this prospectus or of any sale of common stock.
We operate through various affiliates, all of which are located
outside of the United States. Unless otherwise indicated or the context
otherwise requires, the term Company, we or us refers collectively to Eternal
Technologies Group, Inc., where appropriate, and its subsidiaries or its
affiliates. All references to China or the PRC are to the Peoples' Republic of
China.
Our functional currency is Renminbi ("RMB"). For the convenience of
readers, unless otherwise indicated, all financial information contained herein
is presented in United States Dollars ("US$"). Translation of amounts from RMB
into US$ has been made at the unified exchange rate established by the PRC
government as quoted by the People's Bank of China of US$1.00 = RMB8.3 the rate
since January 1, 1994. Although there has been pressure from the U.S. government
to have the RMB rate uncoupled from the U.S. dollar,the Chinese government has
maintained its existing position and RMB continues to be pegged to the U.S.
dollar at the rate of US$1.00 = RMB 8.3. No representation is made that the RMB
amounts could, have been, or could be, converted into US$ at that rate or at any
other rate.
4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering appearing elsewhere in this prospectus and in our Financial Statements
and related notes and other documents incorporated herein by reference.
Our Company
Eternal Technologies Group, Inc. is an agricultural genetics and
bio-pharmaceutical research company operating in China and focused on the
development and application of advanced animal husbandry and pharmaceutical
techniques to produce improved and novel food and pharmaceutical products.
Our agricultural genetics/animal husbandry operations are focused on the
application of advanced embryonic biotechnology research to shorten the growing
or development time for animals, resulting in increased output and
profitability, and reduced use of animal feed and animal waste. Since 2000, we
have utilized our advanced breeding techniques, and have marketed genetically
engineered animal embryos, to develop larger, stronger and healthier sheep. In
the fourth quarter of 2003, we began the production and sale of lamb meat. Also,
in the fourth quarter of 2003, we began application of our advanced breeding
techniques to the breeding of higher-yielding purebred Holstein dairy cattle.
Our principal executive offices are located at Sect. D. 5/F, Block A,
Innotec Tower, 235 Nanjing Road Heping District, Tianjin, PRC 300052 and our
telephone number is 011-86-22-2721-7020.
The Offering
Common stock offered by the
selling shareholders 2,930,293, including 1,049,575 shares
underlying warrants
Common stock to be outstanding
after this offering 30,436,955 shares (1)
Use of proceeds We will not receive any proceeds from the
sale of common stock by the selling
shareholders
OTC:BB symbol ETLT
5
Risk Factors Purchase of the common stock offered hereby
involves substantial risk. See "Risk Factors."
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(1) The number of shares of common stock outstanding after this offering is
based on shares outstanding as of September 1, 2004, adjusted to
reflect the exercise of 1,049,575 warrants outstanding at that date.
RISK FACTORS
An investment in our common stock involves certain risks. Prospective
investors should carefully review the following factors, together with the other
information contained in this prospectus, prior to making a decision to invest
in our common stock. The future trading price of shares of our common stock will
be affected by the performance of our business relative to, among other things,
competition, market conditions and general economic and industry conditions.
Risks Related to Our Financial Condition and Our Business
Need for additional financing
Implementation of our business plan and growth of our business will
require substantial additional funding. Funding will be needed to acquire an
embryo facility in both China and the United States as well as the purchase of
dairy cattle for such facilities. In addition we would like to expand our lamb
meat production all of which will require additional working capital. If we are
unable to raise additional capital, our ability to implement these plans, to
grow our business and to operate profitably could be impaired. Obtaining
additional funding will be subject to a number of factors including market
conditions, operational performance and investor sentiment. These factors may
make the timing, amount, terms and conditions of additional funding
unattractive, or unavailable, to us. Any delay in such funding will reduce our
current earnings.
Our success depends on our management team and other key personnel, the loss of
any of whom could disrupt our business operations
Our future success will depend in substantial part on the continual
service of our senior management including Mr. Ji Jun Wu, our Chairman, Mr. Jian
Sheng Wei, our Chief Executive Officer, Dr. Wenli Yu, Chief Technology Officer,
Ms. Shumei Pang, our Chief Veterinarian and Mr. Rutian Xhang, our Chief Market
Inspector. The loss of the services of one or more of our key personnel could
impede implementation of our business plan and result in reduced profitability.
We do not carry key person life insurance on any of our officers or employees.
Our future success will also depend on the continued ability to attract, retain
and motivate highly qualified technical sales and marketing customer support,
financial, accounting and managerial personnel. Because of the rapid growth of
the economy in China, competition for qualified personnel in Beijing and Tianjin
is intense. We cannot assure you that we will be able to retain our key
personnel or that we will be able to attract, assimilate or retain qualified
personnel in the future.
Our management owns a significant amount of our common stock, giving them
influence or control in corporate transactions and other matters, and their
interests could differ from those of other shareholders
Our principal executive officers along with our founding shareholder ,
Shang, Jiaji own approximately 55.8 percent of our outstanding common stock. As
a result, they are in a position to significantly influence or control the
outcome of matters requiring a shareholder vote, including the election of
directors, the adoption of any amendment to our certificate of incorporation or
bylaws, and the approval of mergers and other significant corporate
transactions. Their control may delay or prevent a change of control on terms
favorable to our other shareholders and may adversely affect the voting and
other rights of our other shareholders.
6
Our Products are in Various Stages of Development and May Not Satisfy Regulatory
Requirements or Become Commercially Viable.
Our genetically engineered sheep embryos, and sheep meat from those
embryos, have only been marketed for a short time, and we only recently began
development and marketing of genetically engineered dairy cattle embryo
We Have Limited Experience in Sales and Marketing; Failure to Assemble or
Contract with an Adequate Sales Organization Could Result in a Lack of Future
Revenues.
7
We have limited experience in marketing our genetically engineered
agricultural products and no experience in pharmaceutical marketing, or
distribution. Our senior management presently carries on substantially all of
our sales and marketing activities. We may have to develop a substantial
marketing and sales force to support future sales. Alternatively, we may, for
certain products, attempt to obtain the assistance of companies with established
distributions systems and direct sales forces. We do not know if we will be able
to establish sales and distribution capabilities or if we will be able to enter
into licensing or other agreements with established companies to sell our
products.
8
We May Lose Any Technological Advantage Because Biotechnology Changes Rapidly.
The biotechnology field, is characterized by rapid technological
progress and intense competition. As a result, we may not realize the expected
benefits of our strategy. Businesses, academic institutions, governmental
agencies, and other public and private research organizations are conducting
research to develop technologies that may compete with our existing agricultural
products and our proposed pharmaceutical products. It is possible that
competitors could acquire or develop technologies that would render our
technologies obsolete or noncompetitive. We cannot be certain that we will be
able to access the same technologies at an acceptable price, or at all.
9
Intense Competition May Result in an Inability to Generate Sufficient Revenues
to Operate Profitably.
The agricultural genetics industry is highly
competitive. Numerous companies, many of which are significantly larger than us,
which have greater financial, personnel, distribution and other resources and
may be better able to withstand volatile market conditions, compete with us in
the development, manufacture and marketing of genetically engineered
agricultural products. Our principal competition in the agricultural genetics
field comes from foreign food processing companies such as Smithfield Foods,
Inc. of the United States and Sunitomo Corporation of Japan. There can be no
assurance that additional national or international companies will not seek to
enter, or increase their presence in our industries, or seek to expand their
existing markets into China. Increased competition could have a material adverse
effect on our business, as our competitors may have far greater financial and
other resources available to them and possess extensive manufacturing,
distribution and marketing capabilities far greater than ours.
We are Dependent on New Products and Continued Innovation.
The agricultural genetics industry, in general, is characterized by
rapid innovation and advances. These advances result in frequent product
introductions and short product life cycles, requiring a high level of
expenditures for research and development and the timely introduction of new
products. We believe our ability to grow and succeed is partially dependent upon
our ability to introduce new and innovative products into such markets. We are
evaluating, and expect to continue to evaluate, the development and introduction
of additional products in our existing markets and related markets. However,
there can be no assurance that we will be successful in our plans to introduce
additional products to the market.
Risks Related to Operations in China
Substantially all of our assets are located in China and substantially
all of our revenue is derived from our operations in China. Accordingly, our
results of operations and prospects are subject, to a significant extent, to the
economic, political and legal developments in China.
10
China's Economic, Political and Social Conditions, as Well as Government
Policies, could Affect our Business.
While China's economy has experienced significant growth in the past
twenty years, growth has been uneven, both geographically and among various
sectors of the economy. The Chinese government has implemented various measures
to encourage economic growth and guide the allocation of resources. Some of
these measures benefit the overall economy of China, but may also have a
negative effect on us. For example, our operating results and financial
condition may be adversely affected by the government control over capital
investments or changes in tax regulations which presently gives us a tax
holiday.
The economy of China has been transitioning from a planned economy to a
more market-oriented economy. In recent years the Chinese government has
implemented measures emphasizing the utilization of market forces for economic
reform and the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises. Still a
substantial portion of productive assets in China are owned by the Chinese
government. In addition, the Chinese government continues to play a significant
role in regulating industry development by imposing industrial policies. It also
exercises significant control over China's economic growth through the
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies.
Government Control of Currency Conversion may Adversely Affect our Operations
and Financial Results.
We receive substantially all of our revenues in Renminbi, which is not
a freely convertible currency. A portion of these revenues must be converted
into other currencies to meet our foreign currency obligations. These foreign
currency-denominated obligations include:
o payment of interest and principal on foreign currency-denominated debt;
o payment for equipment and materials purchased offshore; and
o payment of dividends declared, if any.
Under China's existing foreign exchange regulations, we will be able to
pay dividends in foreign currencies without prior approval from the State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, the Chinese government may take measures at its
discretion in the future as it has done in the past to restrict access to
foreign currencies for both current account transactions and capital account
transactions if foreign currencies become scarce in China. We may not be able to
pay dividends in foreign currencies to our shareholders if the Chinese
government restricts access to foreign currencies for current account
transactions.
Foreign exchange transactions under our capital account, including
foreign currency-denominated borrowings from Chinese or foreign banks and
principal payments in respect of foreign currency-denominated obligations,
continue to be subject to significant foreign exchange controls and require the
approval of the State Administration of Foreign Exchange. These limitations
could affect our ability to obtain foreign exchange through debt or equity
financing, or to obtain foreign exchange for capital expenditures.
11
Fluctuation of the Renminbi Could Materially Affect our Financial Condition and
Results of Operations.
The value of the Renminbi fluctuates and is subject to changes in
China's political and economic conditions. Since 1994, the conversion of
Renminbi into foreign currencies, including Hong Kong and U.S. dollars, has been
based on rates set by the People's Bank of China, which are set daily based on
the previous day's interbrain foreign exchange market rates and current exchange
rates on the world financial markets. Any devaluation of the Renminbi, however,
may adversely affect the value of, and dividends, if any, payable on, our shares
in foreign currency terms, since we will receive substantially all of our
revenues, and express our profits, in Renminbi. Our financial condition and
results of operations may also be affected by changes in the value of certain
currencies other than the Renminbi, in which our obligations are denominated. In
particular, a devaluation of the Renminbi is likely to increase the portion of
our cash flow required to satisfy our foreign currency-denominated obligations.
The PRC Legal System has Inherent Uncertainties that Could Limit the Legal
Protections Available to You.
Substantially all of our assets and operations are in China and our
principal operating subsidiaries are organized under the laws of China. The
Chinese legal system is based on written statutes. Prior court decisions may be
cited for reference but have limited precedential value. However, because these
laws and regulations are relatively new, and because of the limited volume of
published cases and their non-binding nature, interpretation and enforcement of
these laws and regulations involve uncertainties.
The direct enforcement by our shareholders of any rights of
shareholders in respect of violations of corporate governance procedures may be
limited. Unlike in the United States, under applicable laws of China,
shareholders do not have the right to sue the directors, supervisors, officers
or other shareholders on behalf of the corporation to enforce a claim against
such party or parties that the corporation has failed to enforce itself. Our
shareholders may have to rely on other means to enforce directly their rights,
such as through administrative proceedings. Chinese laws and regulations do not
distinguish among minority, affiliated and unaffiliated shareholders in terms of
their rights and protections. In addition, our minority shareholders may not
have the same protections afforded to them by companies incorporated under the
laws of the United States.
Uncertainty Relating to Chinese Regulation of Pharmaceuticals Could Impair
Introduction of Products in China.
In 2003, the Chinese government created a new Food and Drug Administration,
modeled after the U.S. government body, in an attempt to streamline unnecessary
bureaucratic functions and restructure and position the Chinese pharmaceutical
industry for entry into the World Trade Organization ("WTO"), growth and
increased competitiveness. The implementation of the new regulatory scheme is
expected to impose substantial new regulation on the approval and manufacture of
pharmaceuticals for sale in China. Because of the newness of the pharmaceutical
regulatory scheme, there is uncertainty as to the manner in which regulations
will be implemented and interpreted. Such uncertainty may result in delays in
obtaining regulatory clearance of products and introduction of products to the
Chinese market as well as potentially liability and costs associated with
compliance, or lack of compliance, with regulations.
12
The admission of China into the World Trade Organization could lead to increased
foreign competition.
As a result of China becoming a member of the WTO, import restrictions on
both agricultural products and pharmaceuticals are expected to be gradually
reduced. The WTO also requires China to lower its import tariffs as a condition
for membership. Reduced import restrictions and/or lower tariffs may lead to
increased imports of foreign products and therefore lead to increased
competition in the domestic agricultural products and pharmaceuticals markets.
Risks Related to this Offering
Our stock price has been, and is likely to continue to be, highly volatile and
could drop unexpectedly.
The trading price of our common stock has been highly volatile and may
continue to be volatile in response to the following factors:
- quarterly variations in our operating results;
- limited trading volume;
- announcements of results of product development efforts,
acquisitions and disposals of properties;
- investor perception of us, the agricultural genetics industry,
or operations in China
in general;
- changes in financial estimates by securities analysts; and
- general economic and market conditions.
Declines in the market price of our common stock could also materially
adversely affect employee morale and retention, our access to capital and other
aspects of our business.
If our stock price remains volatile, we may become subject to securities
litigation, which is expensive and could divert our resources.
In the past, following periods of market volatility in the price of a
company's securities, security holders have instituted class action litigation.
Many technology-based companies have been subject to this type of litigation. If
the market value of our stock experiences adverse fluctuations, and we become
involved in this type of litigation, regardless of the outcome, we could incur
substantial legal costs and our management's attention could be diverted,
causing our business to suffer.
Limitation on the use of our cash imposed by management
Approximately $18,174,000 of our cash (as of June 30,2004) was for the
exclusive use for operations in the Peoples' Republic of China. This limitation
has been arbitrarily imposed by management to meet its working capital needs in
the PRC. Because of the limitation, the company does not have sufficient
available funds for any expansion outside the PRC, the payment of dividends or
to pay its non-PRC professional without raising additional capital either
through borrowing or the sale of its shares. Any sale of the Company's shares to
pay non-PRC professionals or foreign expansion will dilute the holdings of the
Company's existing shareholders. Even if the Company has sufficient cash on hand
to pay its non-PRC professionals or to cover a foreign expansion, it will not
use such funds but will sell additional shares (or if possible seek commercial
loans) to pay any such obligations.
13
The sale of a substantial number of shares of our common stock after this
offering may affect our stock price.
The market price of our common stock could decline as a result of sales
of substantial amounts of common stock in the public market after the closing of
this offering or the perception that substantial sales could occur. These sales
also might make it difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate.
Our certificate of incorporation and bylaws and the Nevada corporation law
contain provisions that could discourage an acquisition or change of control of
Eternal Technologies.
Our certificate of incorporation authorizes our board of directors to
issue preferred stock and common stock without shareholder approval. If our
board of directors elects to issue preferred stock, it could be more difficult
for a third party to acquire control of us. In addition, provisions of our
certificate of incorporation and bylaws could also make it more difficult for a
third party to acquire control of us. These provisions include a denial of
cumulative voting rights, limitations on shareholder proposals at meetings of
shareholders, and restrictions on the ability of our shareholders to call
special meetings. In addition, the Nevada Revised Statutes imposes restrictions
on certain mergers and other business combinations.
These provisions of Nevada law and our certificate of incorporation and
bylaws may delay, defer or prevent a tender offer or takeover attempt that a
shareholder might consider in his best interest, including attempts that might
result in a premium over the market price for the common stock.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Business" and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in this prospectus that are not
historical facts. When used in this prospectus, the words "anticipates,"
"believes," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "seeks," "should" or the negative of these terms or similar expressions
are generally intended to identify forward-looking statements. Because these
forward-looking statements involve risks and uncertainties, although the
disclosure is accurate as filed there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including our plans, objectives, expectations and
intentions and other factors discussed under "Risk Factors."
USE OF PROCEEDS
We will not receive any proceeds from the sales, if any, of the shares
being offered by the selling shareholders. The purpose of this offering is to
register our common stock for resale by the selling shareholders.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Since the acquisition of Eternal Technologies Group Ltd. and
Subsidiaries and adoption of our current business plan in December 2002, our
Common Stock has been listed on the over-the-counter electronic bulletin board
("OTC:BB") under the symbol "ETLT". Previously, our Common Stock was listed on
the OTC:BB under the symbol "WTFD". The following table sets forth the range of
high and low bid prices for each quarter during the past two fiscal years.
14
High Low
Calendar Year 2004
Second Quarter................. $0.97 $0.48
First Quarter.................. 1.12 0.79
Calendar Year 2003
Fourth Quarter $1.25 $0.81
Third Quarter.................. 1.85 0.91
Second Quarter................. 1.25 0.90
First Quarter.................. 1.17 0.75
Calendar Year 2002
Fourth Quarter................. $1.40 $0.08
Third Quarter.................. 0.20 0.07
Second Quarter................. 0.35 0.08
First Quarter.................. 0.12 0.09
The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions. The
quotations give effect to a one-for-six reverse stock split effective December
12, 2002.
At September 1, 2004, the closing bid price of the Common Stock was
$0.47
As of May 20, 2004, we estimate that there were in excess of 2000
beneficial holders of our Common Stock.
DIVIDEND POLICY
We have not paid dividends in the past and we intend to retain
earnings, if any, and will not pay cash dividends in the foreseeable future. Any
future determination to pay cash dividends will be at the discretion of the
board of directors and will be dependent upon our financial condition, results
of operations, capital requirements, general business conditions and such other
factors as the board of directors may deem relevant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
History and Development of the Company
Our current operations are conducted through our wholly-owned
subsidiary, Eternal Technologies Group Ltd. ("Eternal Technologies - BVI"), a
British Virgin Islands company, and its subsidiaries. For a more detailed
description of our business please see "Business on page 22.
Historically, our business has been highly seasonal with nearly all of
our revenues being generated in the fourth quarter. This seasonality occurs
because the embryo sales occur only during the fourth quarter when animals are
impregnated as births occur in the Spring. While we have had sale of forage
grasses in the past, we do not expect them to continue in the future. Other
periods, other than the fourth quarter, should benefit in the future from the
sale of milk and lamb meat, thereby making our overall business less seasonal.
15
During 2001, we had a one time sale of forage grass to a third party.
We had purchased the forage grass from China Continental, Inc., a related party.
We do not expect any sales of forage grass in the future.
Critical Accounting Policies
The process of preparing financial statements requires the use of
estimates on the part of management. The estimates used by management are based
on the company's historical experiences combined with management's understanding
of current facts and circumstances. Certain of the company's accounting policies
are considered critical as they are both important to the portrayal of the
company's financial condition and results and require significant or complex
judgment on the part of management.
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe the
following criteria accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements:
Allowance for Doubtful Accounts - Our financial statements reflect no
allowance for doubtful accounts. Allowance for doubtful accounts reflects
reserves for customer receivables to reduce receivables to amounts expected to
be collected. Management uses significant judgment in estimating uncollectable
amounts. In estimating uncollectable amounts, management considers factors such
as current overall economic conditions, industry-specific economic conditions,
historical customer performance, and anticipated customer performance. While
management believes the company's processes effectively address its exposure for
doubtful accounts, changes in the economy, industry, or specific customer
conditions may require adjustment to the allowance for doubtful accounts
recorded by the company.
Inventory Valuation - Management reviews our inventory balances to
determine if inventories can be sold at amounts equal to or greater than their
carrying amounts. The review includes identification of slow moving inventories,
obsolete inventories, and discontinued products or lines of products. The
identification process includes historical performance of the inventory, current
operational plans for the inventory, as well as industry and customer specific
trends. If our actual results differ from management expectations with respect
to the selling of our inventories at amounts equal to or greater than their
carrying amounts, we would be required to adjust our inventory balances
accordingly.
Impairment of Long-Lived Assets (including property, plant and
equipment), Goodwill and Identifiable Intangible Assets - In accordance with
applicable accounting literature, we reduce the carrying amounts of long-lived
assets, goodwill and identifiable intangible assets to their fair values when
the fair value of such assets is determined to be less than their carrying
amounts (i.e., assets are deemed to be impaired). Fair value is typically
estimated using a discounted cash flow analysis, which requires us to estimate
the future cash flows anticipated to be generated by the particular asset(s)
being tested for impairment as well as select a discount rate to measure the
present value of the anticipated cash flows. When determining future cash flow
estimates, we consider historical results adjusted to reflect current and
anticipated operating conditions. Estimating future cash flows requires
significant judgment by us in such areas as future economic conditions,
industry-specific conditions, product pricing and necessary capital
expenditures. The use of different assumptions or estimates for future cash
flows could produce different impairment amounts (or none at all) for long-lived
assets, goodwill and identifiable intangible assets.
16
Among our long-lived assets subject to review for impairment are our
land lease rights in Mainland China that are 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 amortization is 4%.
Contingencies
We account for contingencies in accordance with SFAS No. 5, "Accounting
for Contingencies". SFAS No. 5 requires that we record an estimated loss from a
loss contingency when information available prior to issuance of our financial
statements indicates that it is probable that an asset has an asset has been
impaired or a liability has been incurred at the date of the financial
statements and the amount of the loss can be reasonably estimated.
Revenue recognition
Revenue is recorded when persuasive evidence of an arrangement exist;
the price to the buyer is fixed or determinable; the merchandise is delivered to
the customer and title passes; and collectibility is reasonably assured.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues -
Revenues increased by $2,855,002 or 22.58% to $15,495,966 for the year ended
December 31, 2003 from $12,640,964 for the year ended December 31, 2002. The
increase was primarily due to the introduction of several new product lines,
namely the sale of lamb meat and the expansion of embryo transplants to dairy
cattle.
Cost of Sales
- -Cost of sales increased by $3,797,771 or 138% from $2,752,811 for the year
ended December 31, 2002 to $6,550,582 for the year ended December 31, 2003. The
increase in cost of sales is attributable to the collecting and processing of
lamb meat and the expansion of embryo transplants to dairy cattle. Gross profit
as a percent of sales decreased to 57.7% for the year ended December 31, 2003
from 78.2% for the year ended December 31, 2002. The decrease in the gross
profit margins is attributable to the reduction of sheep embryo transfers as a
percentage of total revenues which have a higher profit margin. The market for
sheep embryo transfers is decreasing. The Company began to sell lamb meat and
transfer dairy cattle embryos in 2003. These two new projects partially offset
the decline from sheep embryo transfers.
Depreciation and Amortization
17
- - Depreciation and amortization increased by $12,365 or 1.43% to $874,417 during
2003 from $862,052 during 2002. The increase is caused by additional buildings
and equipment that was put in service in 2003.
General, Selling and Administrative Expenses
- - General, Selling and administrative expenses increased by $187,864 or 15.60%
to $1,391,945 during 2003 as compared to $1,204,081 during 2002. The increase is
primarily attributable to an increase in public relations fees of approximately
$110,000, and an increase of salaries expense of approximately $240,000 which
were partially offset by a decrease in professional fees and consulting fees of
approximately $93,000 and $64,000, respectively.
Research and Development Costs
- - During 2002, we incurred $1,000,000 of research and development costs. No
material additional costs were incurred during 2003. We did not conduct
research, but contracted with two outside parties who perform research on our
behalf.These contracts were terminated in 2004. During 2002, $400,000 was
incurred and paid to Towering International, and $600,000 was incurred and paid
to the Chinese Science Bureau.
Other Income (Expense)
Interest income increased by $81,840 from $1,432 during 2002 to $83,272 during
2003 due to a significant increase in amounts of cash held in interest-bearing
accounts.Interest expense increased by $40,473 from $10,968 during 2002 to
$51,441 during 2003 due to having more debt outstanding during 2003. During the
fourth quarter of 2003, we recorded an impairment charge of $300,000 based on
our evaluation of our reception center which we plan to sell during 2004.
Net Income (Loss) - As a result of the foregoing, the net income decreased by
$401,631 or 5.9% to $6,410,853 for the year ended December 31, 2003 from
$6,812,484 for the year ended December 31, 2002.
18
Liquidity and Capital Resources
The Company had $16,302,464 in cash at December 31, 2003 compared to $7,135,559
at December 31, 2002. The Company's working capital was $21,610,834 at December
31, 2003 compared to $10,226,786 at December 31, 2002.
Cash provided by operating activities totaled $8,188,875 for the year ended
December 31, 2003. This compares with cash provided by operating activities of
$1,201,865 for the year ended December 31, 2002. The increase in cash provided
by operating activities is primarily due to the collection of trade receivables
of $4,483,855 during 2003 (offset by an increase in inventory of $981,781 and
other receivables of $3,399,995) and an overall increase in liabilities in 2003
of $500,001. During 2002 there were increases in receivables of $1,833,509 and
overall decreases in liabilities of $4,710,463.
Cash used in investing activities during 2003 was $649,087, which was for the
remaining payment to complete construction work on the farmhouses. During 2002
the Company used $1,893,365 in investing activities for the purchase of fixed
assets and for construction costs. The construction was a one-time project to
build fences and make additional roads to the buildings and reception center
located on the Company's farm.
Cash flows from financing activities totaled $1,627,117 during 2003 compared to
$73,607 during 2002. All cash flows from financing activities for 2003 were from
the sale of the Company's common stock. A total of 3,646,080 shares of common
stock and 1,049,575 warrants for the purchase of common stock were issued during
2003. The exercise prices on these warrants are $1.34 and $1.54 per share. The
warrants are exercisable for a period of five years with the expiration dates
ranging from September 4, 2008 to October 8, 2008. The warrants include certain
registration rights and have a cashless exercise provision.
19
At December 31, 2003, the Company had notes payable of $503,857 that are due
December 11, 2005. Interest on the notes shall be payable semi-annually
commencing 180 days after the date of the note (December 11, 2002) at 8% per
annum. The notes are payable from the first dollars received from any proceeds
of any offering subsequent to the acquisition of Eternal Technologies Group Ltd.
or at the option of the lender, convertible into post reverse split common
shares at a rate equal to the mean of the high and low share price as of the
first date that the shares begin trading subsequent to the acquisition. At
December 31, 2002, the principal balances on the notes were $782,733 and during
2003, the Company issued 507,229 common shares which reduced the balance on the
notes $278,876. Although these notes are recorded at $503,857, the Company and
its attorney's are conducting a separate review to determine if all amounts
accrued are properly chargeable to the Company.
Although the Company has a cash and bank balance of $16,302,464, all but
$1,018,226 is arbitrarily restricted by management for certain uses 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. Unless
it is able to either borrow funds or sell additional shares, it will have
insufficient resources to carry out its business objectives outside the PRC for
the next twelve (12) months.
Capital Expenditures and Commitments
At December 31, 2003, we had total contractual commitments of $1,600,000 related
to research and development projects.
Our only material contractual obligations requiring determinable future payments
on our part are a note payable to our former shareholder and our lease relating
to our executive offices.
The following table details our contractual obligations as of December 31, 2003:
Payments due by period
-------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 Thereafter
Long-term debt $ 0 - - - - - -
Capital lease obligations 0
Operating lease commitments 16,385 11,566 4,819
Other contractual obligations 1,600,000 1,600,000
Other liabilities 503,857 503,857
----------
Total $2,120,242
==========
Other contractual obligations include our commitments related to research and
development projects. These were our commitments at December 31, 2003. However
on July 2, 2004, our Board of Directors agreed to cancel the research and
development projects and we no longer have these obligations.
Management anticipates that our current financing strategy of private debt and
equity offerings, combined with an expected increase in revenues, will meet our
anticipated objectives and business operations for the next 12 months. Subject
to our ability to obtain adequate financing at the applicable time, we may enter
into definitive agreements on one or more of those projects.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements or guarantees of third party
obligations at December 31, 2003.
20
Inflation
We believe that inflation has not had a significant impact on our operations
since inception.
Six Months Ended June 30, 2004 As compared to the Six Months Ended June 30,
2003
Revenues -
Revenues for the six months ended June 30, 2004 increased by $6,021,371 or
5040.5% to 6,140,831 from $119,460 for the corresponding period of the prior
year. This increase is attributable to an increase in the sale of lamb meat of
$3,436,012 and an increase in cattle embryo transfer fees of $2,585,359.
Cost of Sales -
Cost of sales for the six months ended June 30, 2004 increased to $3,950,498
from $0 for the corresponding period of the prior year. This increase resulted
from the costs incurred in the sale of lamb meat of $2,453,530 and the cost
incurred in cattle embryo transfers of $1,496,968. The gross profit margin on
the sale of lamb meat was 28.6% and the gross profit margin from cattle embryo
transfers was 44.7%.
Depreciation and Amortization -
Depreciation and amortization expenses for the six months ended June 30, 2004
decreased by $46,583 or 10.9% to $380,355 from $426,938 for the corresponding
period of the prior year. This decrease resulted from certain equipment being
fully depreciated in a prior period and accordingly no charge to depreciation
was made against such equipment during the six months ended June 30, 2004.
Selling and Administrative Expenses -
Selling and administrative expenses for the six months ended June 30, 2004
increased by $494,806 or 167.6% to $789,963 from $295,157 for the corresponding
period of the prior year. This increase resulted from an increase in salaries of
$247,160 marketing expenses of $86,469, penalties of $145,219 and miscellaneous
expenses of $42,390 which were partially offset by a decrease in professional
expenses of $26,430.
Other Income (Expense)
Other income increased by $54,850 for the six months ended June 30, 2004 to
$54,850 from $0 for the corresponding period of the prior year. All of the other
income for the six months ended June 30, 2004 is attributable to interest
income. Other expense increased by $53,517 for the six months ended June 30,
2004 to $53,517 from $0 for the corresponding period of the prior year. All of
the other expense is an impairment loss which resulted from the anticipated loss
from the sale of the reception center and certain equipment located on the
Company's farm in Inner Mongolia.
As a result of the foregoing, the Company had net income of $1,021,348 or $.03
per share for the six months ended June 30, 2004 compared to a net loss of
$602,635 or $.02 per share for the corresponding period of the prior year.
Liquidity and Capital Resources
As of June 30, 2004, the Company had cash and cash equivalents of $19,067,185
and working capital of $23,241,700. This compares with cash and cash equivalents
of $16,302,464 and working capital of $21,610,824 as of December 31, 2003.
Cash flows from operating activities totaled $2,445,087 for the six months ended
June 30, 2004. This compares with cash flows from operating activities of
$4,404,856 for the corresponding period of the prior year. This decrease
resulted from an increase in non-cash expense of $96,934 which consists of
$53,517 of impairment losses and $90,000 of stock issued for services which was
partially offset by a decrease in depreciation and amortization of $46,583; a
change in the net current accounts of $4,580,553 for the six months ended June
30, 2003 (of which 4,483,855 is attributable to a decrease in receivables for
the six months ended June 30, 2003) compared to a change in net current accounts
of $382,619 for the six months ended June 30, 2004; which was partially offset
by a net increase in earnings of $1,623,983.
Cash flows from investing activities totaled $240,964 for the six months ended
June 30,2004 compared to $0 for the six months ended June 30, 2003. All of the
cash from investing activities during the six months ended June 30, 2004 was
from the sale of property.
Cash flows from financing activities for the six months ended June 30, 2004,
totaled $78,670 all from capital contributed. This compares with cash flows from
financing activities of $187,236 for the six months ended June 30, 2003. All of
the cash from financing activities for the six months ended June 30, 2003 was
from the sale of shares.
At June 30, 2004, the Company had notes payable of $443,366 that are due
December 11, 2005. Interest on the notes shall be payable semi-annually
commencing 180 days after the date of the note (December 11, 2002) at 8% per
annum. The notes are payable from the first dollars received from any proceeds
of any offering subsequent to the acquisition of Eternal Technologies Group Ltd.
or at the option of the lender, convertible into post reverse split common
shares at a rate equal to the mean of the high and low share price as of the
December 31, 2003, the principal balances on the notes was $503,587 and during
2004, the Company issued 109,984 shares which reduced the balance on the notes
to $443,366. Although these notes are recorded at $443,366, an outside review
was conducted to determine if all amounts accrued are properly chargeable to the
Company. These findings have been forwarded to outside counsel for resolution.
Although the Company has a cash and bank balance of $19,067,185, all but
$893,185 is to be exclusively used 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. Unless
it is able to either borrow funds or sell additional shares, it will have
insufficient resources to carry out its business objectives outside the PRC for
the next twelve (12) months.
21
BUSINESS
General
Eternal Technologies Group, Inc. is an agricultural genetics and
research bio-pharmaceutical company operating in China and focused on the
development and application of advanced animal husbandry and pharmaceutical
techniques to produce improved and novel food and pharmaceutical products.
Our agricultural genetics/animal husbandry operations are focused on
the application of advanced embryonic biotechnology techniques with the
objective to shorten the development time for animals resulting in increased
output and profitability and reduced use of animal feed and animal waste. Since
2000, we have utilized our advanced breeding techniques, and have marketed
genetically engineered animal embryos, breeding stock and breeding services to
develop larger, stronger and healthier sheep. In the fourth quarter of 2003, we
began production and sale of lamb meat. Also, in the fourth quarter of 2003, we
began application of our advanced breeding techniques to the breeding of
higher-yielding purebred Holstein dairy cattle.
22
Our pharmaceutical operations are focused on the application of our
gene engineering capabilities in the research, development and production of
biological drugs. Research and development of our initial pharmaceutical
products is ongoing. Introduction of our pharmaceutical products to the market
is expected to require at least two years of additional product research and
testing. Assuming our testing and research results in commercial products, we
anticipate that our pharmaceutical products will be initially marketed
exclusively in China.
Our principal executive offices are located at
Sect. D, 5/F, Block A. Innotech Tower, 235 Nanjing Rd. Heping District, Tianjin,
300052, and our telephone number is 011-86-22-2721-7020.
History and Development of the Company
Our current operations are conducted through our wholly-owned
subsidiary, Eternal Technologies Group Ltd. ("Eternal Technologies - BVI"), a
British Virgin Islands company, and its subsidiaries.
We acquired Eternal Technologies - BVI in December 2002 (the
"Reorganization") pursuant to the terms of an Exchange Agreement. Under the
terms of the Exchange Agreement, we issued 22,050,000 shares of our common stock
to the shareholders of Eternal Technologies - BVI in exchange for all of the
issued and outstanding shares of Eternal Technologies - BVI. In conjunction with
the Reorganization, we carried out a 1-for-6 reverse split of our common stock,
changed our name from Waterford Sterling Corporation to Eternal Technologies
Group, Inc., ceased our prior operations and caused to officers and directors of
Eternal Technologies - BVI to be appointed as officers and directors in place of
the pre-Reorganization officers and directors. As a result of the
Reorganization, we adopted as our primary business operations the operations of
Eternal Technologies - BVI and the shareholders of Eternal Technologies - BVI
acquired approximately 85% of our post-Reorganization outstanding shares.
Prior to the Reorganization, we pursued a number of acquisitions of
operating businesses, each of which proved unsuccessful. We operated under the
name Waterford Sterling Corporation, from January 2001 to December 2002. During
that time, our operations were principally focused on the sourcing and marketing
of furniture and accessories to the hospitality and fine store markets. From
March 1999 to January 2001, we operated under the name Skreem.com Corporation
developing and marketing computer and internet related software. We were
originally incorporated in the State of Delaware under the name Commerce Centers
Corporation. In 2000, we reincorporated in the State of Nevada.
Eternal Technologies - BVI was incorporated in the British Virgin
Islands in March 2000. In May 2000, Eternal Technologies - BVI acquired 100% of
Willsley Company Limited. Willsley is a holding company that owns 100% of Inner
Mongolia Aershan Agriculture & Husbandry Technology Co., Ltd. ("Aershan
Agriculture"). Aershan Agriculture operates a breeding center focused on the
propagation of superior breeds of sheep and livestock in the Inner Mongolia
region of China.
In January, 2003, we supplemented our research and development and embryo
transfer capabilities by establishing a relationship with Beijing AnBo Embryo
Biotech Center ("AnBo Biotech Center"), a biotech research and development and
embryo transfer center located in Beijing. This relationship was initially going
to be a joint venture, but because the parties were unable to reach agreement on
several key terms of the proposed joint venture, it was not consummated.
Instead, agreement was reached for the organization to provide services to us.
23
Our operations are focused on developing superior livestock breeds in
order to improve the quality and yield of livestock in China and the
profitability of livestock operations. We initially imported embryos from
Australia and the United States. We are utilizing our facilities and expertise
to develop a herd of "carrier animals" in order to produce a domestic supply of
embryos, eliminating our dependence on third party foreign embryo suppliers and
reducing our cost of embryos. Under that program, we (1) breed, own and manage a
herd of sheep on our farm and (2) purchase dairy cattle, inject our
bio-engineered embryo into the "host animals", and, after birth, retain the
offspring to serve as breeder stock and sell the "host animal" back to the
original owner.
We utilize our genetically engineered livestock embryos and our
breeding and biotech expertise to offer a range of livestock breeding services
and products, including sale of embryos, artificial insemination and embryo
transplant services, both at our facilities and on-site, and related products
and services designed to improve production, quality and profitability of
Chinese livestock operators.
Our initial operations focused on the production and sale of
bio-engineered embryo and services targeted to sheep growers. In 2003, we
expanded our operations to include the dairy cattle market.
In late 2003, we began implementation of a mutton production and sale
program focused on the processing and sale of mutton from our higher yielding,
higher quality genetically-engineered stock. In implementing our mutton
production and sales strategy, we utilize our farm in Inner Mongolia to raise a
herd of sheep for ultimate processing and sale. Because of changes in government
policy relating to plowing in Inner Mongolia, we have determined that we may
have impediments to the ongoing economic use of our farm for grazing. Pending a
final determination with respect to the economic viability of using our farm for
grazing, we continue to carry out our mutton production and sale strategy
supplemented through purchases from our clients of sheep raised from our
genetically-engineered embryo, with meat processing contracted to slaughter
houses and sale of processed meat to wholesale purchasers in and around Beijing.
Depending on the outcome of our evaluation of the economic viability of our
farm, we may attempt to sell the farm and rely on purchases of sheep from
clients to support mutton production or evaluate other best-economic uses of the
farm.
Historically, our business has been highly seasonal with nearly all of
our revenues being generated in the fourth quarter. While our business will
remain seasonal because embryo sales occur during the fourth quarter, other
periods should benefit in the future from the sale of milk and lamb meat, and
embryo implantation in diary cattle thereby making our overall business less
seasonal.
Agricultural Genetics / Animal Husbandry Operations
Our core operations are focused in the agricultural genetics / animal
husbandry fields. Our principal objectives in our animal husbandry operations
are to utilize genetic engineering to produce improved breeds of sheep and
livestock with a goal of increasing food yield and reducing growing time, waste
by-product and cost associated with herd management.
Animal Husbandry in China. Spurred in part by China's entry into the
World Trade Organization, the Chinese government has identified improved animal
husbandry as a key to meeting the nutritional needs of its population -- the
worlds' largest, minimizing the potential adverse environmental impact of its
domestic agricultural industry and improving China's position in the
import/export of agricultural products.
24
The Chinese agricultural industry has historically lagged behind
Western countries in the adoption of advanced breeding techniques. As a result,
by world standards, Chinese breeding rates, size, health and meat yield have all
been low and growing periods have been high. These factors have made quality
meat difficult to supply within China without relying on imports, resulted in
higher feed costs and waste production as a result of longer growing cycles and
adversely impacted the competitive position of Chinese producers.
By encouraging the adoption of advanced animal husbandry techniques, in
particular the transplant of genetically engineered animal embryo, the Chinese
government is positioning Chinese agricultural businesses to bring the quality
and yield of meat production in line with world standards, improving the living
standards of the Chinese people, while minimizing the environmental impact of
operations and improving the industry's competitive position in world markets.
Key markets that we have targeted in China are mutton and dairy
production. China ranks first in the world in both production and consumption of
mutton with 2001 production of approximately 2.55 million tons. With China's
entry into the WTO and the adoption of advanced animal husbandry techniques, we
believe that China can be positioned as a world leader in the production and
export of high quality low-cost mutton while meeting its growing internal
demand.
Chinese dairy production and consumption has lagged substantially
behind levels in Western countries. With an improving standard of living and a
growing emphasis on health, milk consumption is rising in China and we expect
the increase in milk consumption to accelerate. In order to meet the expected
growth in demand for dairy products without relying disproportionately on
imports, dairy production must be increased in China. Historical yields from
China's dairy herd are believed to be approximately 50% of the yields produced
by U.S. dairy herds. With the adoption of advanced animal husbandry techniques,
we believe that the quality and yield of the Chinese dairy herd can be increased
to Western standards allowing the Chinese dairy industry to meet the growing
internal demand for dairy products while reducing the cost of production.
Embryo Transfer and Breeding Services. Our initial commercial efforts
were focused on the development and sale of embryo genetically engineered to
produce stronger, larger, healthier and more nutritious sheep, and associated
breeding services. In 2000, we imported 10,000 bred animal embryos out of a
total of 13,000 embryos permitted to be imported by the Chinese government. We
have utilized our initial embryo supply to develop a herd of high-quality
breeding sheep as well as a supply of embryo for sale to clients.
We supply our clients, consisting primarily of large commercial and
government farms in China, with superior breeding stock, embryos, semen and
related technology and consulting services, all designed to increase production
yield and quality, reduce growing costs and increase income.
In the fourth quarter of 2003, we expanded our embryo transfer and
breeding services to include, in addition to sheep, high-yielding pure-bread
dairy cattle. In our dairy cattle breeding and embryo transfer operations, we
purchase dairy cattle, inject our bio-engineered embryo into the "host animals",
and, after birth, retain the offspring to serve as breeder stock and sell the
"host animal" back to the original owner.
25
Food Production. In the fourth quarter of 2003, we commenced the
production and sale of mutton. We selectively cull a portion of our genetically
engineered sheep for sale to slaughterhouses for processing and sale of mutton.
Animals processed for mutton sale are generally those that are not candidates
for future breeding. We supplement our stock of sheep, as needed, with
genetically engineered sheep purchased from our clients. We continuously
evaluate our farm operations and supplies of sheep for mutton production to
assure the economic viability of our meat supplies in light of changing land use
regulations in China. We do not presently own slaughterhouse or processing
facilities but intend to purchase such facilities in the future.
Genetic Technologies. We utilize a variety of technologies for
industrial embryo production and transfer, all design to produce superior
breeding stock. The primary techniques we presently employ are (1) peritoneal
endoscope technique, (2) vitrification freezing technique, (3) embryo splitting
and cleavage ball techniques, and (4) external fertilization technique.
-- Peritoneal Endoscope Technique. Peritoneal endoscope technique
involves the collection of sheep embryo by means of peritoneal endoscopes
without surgical operations. Traditional embryo collection and transfer
techniques, using surgical procedures, have generally limited to four operations
after which the provider is rendered useless as a result of adhesions left by
the surgical procedures. We believe that the peritoneal endoscope technique, a
less invasive procedure, may be used ten or more times, increasing the
utilization of providers. Additionally, we believe that use of endoscopic
techniques combined with deep semen deposition and frozen semen mating can
markedly increase conception rates.
-- Vitrification Freezing Technique. Vitrification is a process by
which a concentrated anti-freeze solution is transformed into a transparent
colloidal solid through rapid freezing. We have developed an anti-freezing
protectant that enables the freezing process to be carried out at room
temperature without a cooling system, increasing the efficiency of the process.
Livestock implanted with a frozen fertilized ovum have been shown to produce
increased pregnancy and farrowing rates.
-- Embryo Splitting and Cleavage Ball Techniques. Embryo splitting and
cleavage ball techniques involve the splitting of embryos by microsurgery or the
separation of embryo cleavage balls in early cultivation before the half-embryos
or separate cleavage balls develop into individuals. Newly split half-embryos
have shown an average transfer rate of above 50% -- the equivalent of a 100%
transfer pregnancy rate -- exceeding the average transfer rate of half-embryos
of between 35% and 40%. Embryo splitting, combined with embryo sex
identification, allows for better management of the male/female population of a
herd.
-- External Fertilization Technique. External fertilization technique
involves the collection of ova from live farm animals, fertilization of the ova
and cultivation of the fertilized ova until the ova reaches a transferable stage
at which time fertilized ova is transferred to a host animal. External
fertilization has been shown to increase pregnancy rates at a lower cost than
internal fertilization. While pregnancy rates of externally fertilized embryo in
China has been only approximately 20%, our fertilized embryo transfer pregnancy
rate has been above 40%, approximately the world standard.
26
Breeding Facilities. Our breeding operations are conducted on land and
in facilities consisting, generally, of approximately 2.8 million acres of
farmland, an embryo transfer center and a reception center and at the AnBo
Biotech Center in Beijing.
Land use rights with respect to our farm were purchased from the
Chinese government for $6,000,000. Such rights extend through 2025. The farm is
located in Wulagai Development Area in Inner Mongolia. The farm, one of the few
naturally preserved grassland areas in China, is organized into various breeding
sub-pastures. Each sub-pasture includes haciendas, stables and farm equipment
such as wells, mowing machines and tractors. A supply of forage grass is
reserved for winter and for snowstorms.
The farm is equipped with a 60-kilovolt electric transmission line,
telephone and transportation facilities, including a 200 kilometer road system
connecting all sub-pastures. A railway station is located 80 kilometers south of
the farm, facilitating distribution of products throughout China.
Also located on the farm is a 35,000 square foot embryo transfer center
including operating rooms, equipment rooms, offices, conference rooms, lecture
halls and guest rooms. Substantially all research and embryo transfer operations
occur in our embryo transfer center.
Our farm and associated facilities are believed to be adequate to meet
our operating needs for the foreseeable future.
Because of recent changes in Chinese land use regulation, which may
prohibit any plowing on the farm because of past dust storms which affected
Beijing. Although we have not plowed our acreage to plant grain crops or forage
grasses, the pasturing of a large number of animals on the farms would require
plowing to plant the crops necessary to maintain the livestock. Because we had
considered keeping additional livestock on the farms, these plans are no longer
viable and diminish our need for the facility. Despite these new regulations,
the value of the farm has not diminished as it had not been plowed prior to or
subsequent to our purchase and the value paid reflects the value of unplowed
acreage. We are evaluating the economic viability of the continued operations of
the farm and may, if determined to be in our best economic interests, consider
selling some or all of the grazing land on our farm.
The AnBo Biotech Center is a 6,450 square foot facility located in
Beijing and housing laboratory, operating and relating facilities to support
advanced biotech and embryo research and development activities.
Marketing. Sales and marketing for our animal husbandry products and
services is handled by our senior management team. Our management team maintains
regular communications with farm operators, meat processors and governmental
agriculture officials to assure that potential clients are aware of our
capabilities and services. We may evaluate the adoption of more formal
marketing, advertising and sales programs as necessary in the future.
27
Potential Acquisitions
We intend to evaluate various potential acquisitions of companies and
facilities in order to expand the scope of our operations and accelerate our
growth. Specifically, in addition to the potential acquisition of an established
pharmaceutical company, we intend to evaluate the acquisition of companies or
facilities to provide feedlot, dairy processing, slaughterhouse and meat
processing, animal fattening and similar capabilities.
We have no definitive agreements with respect to potential acquisitions
and there is no assurance that we will be successful in our efforts to make any
such acquisitions.
Competition
The agriculture industries are highly competitive. While animal
genetics is a relatively new field in China several large foreign companies such
as Smithfield Foods, Inc of the United states and Sumitomo Corporation of Japan
have, entered the market and compete with us in the development and delivery of
advanced animal husbandry products and services. These companies have a
substantial advantage due to the size and the name recognition each enjoys.\
28
Increased competition in the agriculture industry could have a
material adverse effect on us, as our competitors may have far greater financial
and other resources available to them and possess extensive manufacturing,
distribution and marketing capabilities far greater than those we possess.
Governmental Regulation
Our business in the agriculture industry in general are subject to
extensive laws and regulations, including environmental laws and regulations. As
such, we may be required to make large expenditures to comply with environmental
and other governmental regulations.
Under these laws and regulations, we could be liable for personal
injuries, property damage, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. Failure to comply with these
laws and regulations also may result in the suspension or termination of our
operations and subject us to administrative, civil and criminal penalties.
Moreover, these laws and regulations could change in ways that substantially
increase our operating costs.
29
Chinese laws impacting our animal husbandry operations relate primarily
to health and safety regulations covering food products and environmental
regulations covering waste products and other land use regulations. Food product
regulations generally govern the safety of products in the food chain and the
handling of those products. We believe that we are in compliance with all
existing food and environmental regulations applicable to our animal husbandry
operations. Because many of those regulations are new and evolving, we must
continually monitor the interpretation, enforcement and modification to those
regulations to assure ongoing compliance.
Employees
As of September 1, 2004, we had 35 full-time employees, including
employees performing administrative functions, animal husbandry services and
farming functions. Bioscience research and related services (including
pharmaceutical research and development) are performed by third parties on a
contract basis. The employees are not covered by a collective bargaining
agreement, and we do not anticipate that any of our future employees will be
covered by such agreement.
Legal proceedings
There are presently no legal proceedings pending against the Company.
MANAGEMENT
The following table sets forth the names, ages and offices of the
present executive officers and directors of the Company. Each director serves a
one-year term or until the next annual meeting of the shareholders. Each officer
serves at the discretion of the board of directors, but generally for a one-year
term. The periods during which such persons have served in such capacities are
indicated in the description of business experience of such persons below.
30
Name Age Position
Jijun Wu 67 Chairman of the Board
Jiansheng Wei 51 President, Chief Operation Officer and Director
XingJian Ma 57 Chief Financial Officer
Dr. Wenli Yu 39 Chief Technology Officer
Garfield W. Hu 29 Secretary
Shien Zhu 48 Director
James Q. Wang 34 Director
Genghang Li 65 Director
Shicheng Fu 40 Director
The following is a biographical summary of the business experience of
the present directors and executive officers of the Company. Each officer of the
Company devotes fulltime to their respective positions. The outside directors
devote as much time as is necessary to fulfill their board responsibilities.
Jijun Wu has served as our Chairman of the Board since
the acquisition of Eternal Technologies Group Ltd. and Subsidiaries (the
"Reorganization") in December 2002. From March 2000 to the Reorganization, Mr.
Wu served as Chairman and President of Eternal Technologies Group Ltd. From 1997
to 2000 he was the President of Sky Dragon Foundation. Previously, Mr. Wu served
as Accountant - General of a PRC state-owned electronics company with revenues
in excess of $1.5 billion and as a consultant to various multinational
corporations entering the PRC market. Mr. Wu is a graduate of China Central
Finance & Economics University and holds the designation of CPA in China.
Jiansheng Wei has served as our Chief Operation Officer and a
Director since the Reorganization and President since July 30, 2004. From March
2000 to the Reorganization, Mr.Wei served as Chief Operation Officer of Eternal
Technologies Group Ltd. From 1998 to 2000, Mr. Wei was the vice-general manager
of Towering Industrial Group Ltd. He has been engaged in animal husbandry
practices and management for over 30 years and has been responsible for
operations of several large farms in Inner Mongolia and Hebei Province.
Xiangjian Ma has served as our Chief Financial Officer since the
Reorganization. From 2000 to the Reorganization, Mr. Ma served as Chief
Financial Officer of Eternal Technologies Group, Ltd. From 1990 to 2000 Mr. Ma
served as Chief of the Financial Department of Tianjin Electronic Instrument
Corporation.
Dr. Wenli Yu has served as our Chief Technology Officer since the
Reorganization. From 2000 to the Reorganization, Dr. Yu served as Chief
Technology Officer of Eternal Technologies Group Ltd. From 1998 to 2000 he was
the Senior Technician for Inner Mongolia Livestock Improvement Center.
Previously, Dr. Yu served as a lead research scientist for various Chinese
government agriculture projects presiding over key projects in 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," and "Research
on Ovine Artificial Insemination and Embryo Transfer with the Application of
Endoscope." Dr. Yu has published over 20 papers in professional journals, such
as China Animal Husbandry, China Veterinarian Journal, and Animal Husbandry
Veterinarian Journal. Dr. Yu received her Ph.D from China Agriculture
University, Biology Department, and is a Research Fellow.
31
Garfield W. Hu has served as our Secretary since the
Reorganization. From 2001 to the Reorganization, Mr. Hu was employed by Eternal
Technologies Group, Ltd. as a manager. From 1997 to 2001, Mr. Hu was an
instructor at Tianjin Normal University and at Nankai University and a
translator and advisor for the largest Chinese professional IT web site,
yesky.com. Mr. Hu is responsible for coordination of our internal affairs and
external contacts.
Shien Zhu has served as a Director since the Reorganization. From
2000 to 2002 he was employed by Eternal Technology Group Ltd as a director. He
was an associate professor at China Agricultural University from 1996 to 2001
and a full professor there since 2001. Mr. Zhu, a citizen of China, is Associate
Professor and Master Director, involved in post doctorate studies at 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.
James Q. Wang has served as a Director since the Reorganization.
Mr. Wang founded, and serves as President of, DNS Technologies Group Inc.
(Canada), a position he has held since 1999, an Internet technologies company
involved in outsourcing between North America and Asia. Mr. Wang began his
professional career as an engineer with NEC where he published a technical
innovation proposal and was honored Awards of Excellence at NEC's headquarters
in Tokyo. Mr. Wang was transferred to the marketing department of NEC where he
was in charge of marketing and sales in eastern region of Mainland China. Mr.
Wang is a Canadian citizen and received his Master of Applied Science from the
University of Ottawa.
Mr. Genchang Li is an experienced researcher with Tianjin Social Science
Academy. Mr. Li is a pioneer in the development and operation of China's stock
market. When he was working for the municipal government , he was in charge of
the review and administration of reorganizations of assets and going public of
state owned enterprises. He is engaged in the research of the policies for
China's stock market. He was involved in the publication of various instructive
essays and books. He was Section Chief in Econmic System Reform Commission of
Tianjin Municipal Government from 1985 to 1993 and Vice General Manager of
Investment Banking Department of Junan Securities Company fropm 1994 to 1999. He
is a researcher with Tianjin Social Science Academy since 2000.
Prof. Fu is a lawyer, Dean of Law Dept., Nankai University, and Supervisor for
graduate students. His other professional activities include Director Director
of China Law Institiute Administrative Law Research Society, Guest Researcher of
Peking University Public Law Research Center, Adjunct Researcher of State
Administrative College Institute Administrative Law Research Center, Consultant
to he Standing Committee of Tianjin Municipal People's Congress for legal
affairs, Legal Consultant to Tianjin Municipal Government, and Arbitrator of
Tianjin Arbitrator Committee, etc.
Prof. Fu attended Nankai University, Law Department from September 1981 to July
1985. Durint the last year of Law Department, the University decided to retain
him as a teacher and sent him to China Politics and Law Univeristy, Graduate
School for course study in administrative laws. His advisor was Prof. Ying
Songnian, a distinguished legal sholar. He has been teaching at Nankai
University since 1985. He has been to Japan and Republic of Korea for
international academic exchanges since 1998
Executive Compensation
During the three years ended December 31, 2003, no executive officer
was paid compensation in excess of $100,000. The compensation earned by Mr.
Jijun Wu, who is the functional equivalent of our Chief Executive Officer, is
detailed in the chart below .
Summary Compensation Table
Annual Compensation Long-term Compensation
------------------- ----------------------
Awards Payout
------ ------
Name and Securities
Principal Other Annual Restricted Underlying LTIP All Other
Position Year Salary Bonus Compensation Stock Awards Options/Sars Payouts Compensation
- -------------- ---- ------ ----- ------------ ------------ ------------ ------- -------------
Wu, JiJun 2003 27,299 0 0 80,000(1) 0 0 0
2002 7,299 0 0 0 0 0 0
2001 7,299 0 0 0 0 0 0
(1) Mr. Wu will be paid such number of shares of stock as equals $80,000 of the
Company's stock as of the date the shares are actually issued.
Director Compensation
We reimburse our directors for expenses incurred in connection with
attending board meetings but do not otherwise compensate our directors for
serving in such capacity.
32
Board Committees
We do not presently maintain an audit committee or any other committee
of our board of directors. Because we do not presently maintain an audit
committee, we have no audit committee financial expert.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We, as well as our predecessor Eternal Technologies Group Ltd., have
periodically entered into transactions with various persons and/or entities that
may be deemed to be affiliates. In particular, our predecessor, Eternal
Technologies Group Ltd., entered into a number of transactions with Shang Jiaji,
or entities controlled by Shang Jiaji, including China Continental, Inc.. Shang
Jiaji is one of our principal shareholders (see "Security Ownership of Certain
Beneficial Owners and Management," expenses). All amounts that are due to or
from officers, directors or affiliated parties are unsecured, interest-free and
are payable on demand.
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 more than 10% of CCI and
Towering International Trade (US) Corp.
Eternal sold 3,000 goat embryos and services to a subsidiary of CCI for
approximately US$600,000 during 2002.
Eternal acquired 100% interest in Willsley Company Limited, which had a 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.
Eternal entered into various construction contracts with companies controlled by
Shang Jia Ji. The contracts totaled approximately $985,530. This amount was paid
in full by December 31, 2002.
The Company entered into a contract with Towering International Trade (US) Corp
during 2001 for a research and development project totaling $1,400,000. No
payments were made in 2001. During 2002, $400,000 was paid on this contract.
The Company has a receivable from CCI of approximately $618,000 at December 31,
2003 and 2002. The balance represents payments made by the Company on behalf of
CCI in previous year for various operating expenses.This receivable was repaid
during the third quarter of 2004.
The Company has a payable to a former employee of approximately $160,000 at
December 31, 2003 and 2002. The balance represents advances made to the Company
for various expenses in previous years and was repaid during the third quarter
of 2004.
The Company has a payable to Ji Jun Wu, Chairman of the Board and President, of
approximately $106,000 at December 31, 2003 and 2002. The balance represents
advances made to the Company for various expenses in previous years.
The Company has a net payable to Shang Jia Ji of approximately $120,000 and
$117,000 at December 31, 2003 and 2002, respectively. In addition the Company
has payables of approximately $210,000 and $156,000, respectively at December
31, 2003 and 2002 to other entities controlled by Shang Jia Ji. These balances
represent advances made to the Company for various operating expenses.
During 2002 the Company entered into an investor relations agreement with
Stoneside Development Limited ("Stoneside"). Stoneside is controlled by Thomas
L. Tedrow a former principal shareholder and former officer of the Company. The
agreement was for $10,000 per month for twenty-four months commencing June 2002.
Thomas L. Tedrow also received a $90,000 fee from the Company. During January
2003, the investor relations agreement with Stoneside Limited was terminated and
the Company entered into a consulting agreement with Market Management, LLC
pursuant to which consulting services were to be provided over a 24 month
period. Payments for those services total $10,000 per month. Market Management,
LLC is also controlled by Thomas L. Tedrow. The total amount expensed in 2003
related to the contract with Market Management, LLC is $120,000.
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of September 1, 2004,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of the Company's Common Stock held by (i) each
person known by the Company to be the owner of more than 5% of the outstanding
shares of the Company's Common Stock, (ii) each director, (iii) each named
executive officer, and (iv) all executive officers and directors as a group:
Name and Address Number of Shares Percentage
of Beneficial Owner (1) Beneficially Owned (2) of Class
- ----------------------- ---------------------- ----------
Shang Jiaji 9,190,190 31.3%
Tianjin, PRC
Jijun Wu (3) 2,205,000 7.5%
James Q. Wang (3) 2,182,950 7.4%
Jiansheng Wei (3) 1,102,500 3.75%
Dr. Wenli Yu (3) 15,000 *
Shien Zhu (3) 9,000 *
XingJian Ma (3) 100 *
Garfield W. Hu 0 --
Beijing, PRC
All executive officers and directors
as a group (7 persons) 5,514,550 18.8%
- ---------
* Less than 1%.
(1) Unless otherwise indicated, each beneficial owner has both sole voting and
sole investment power with respect to the shares beneficially owned by such
person, entity or group.
(2) The percentages of beneficial ownership as to each person, entity or group
assume the exercise or conversion of all options, warrants and convertible
securities held by such person, entity or group which are exercisable or
convertible within 60 days, but not the exercise or conversion of options,
warrants and convertible securities held by others shown in the table.
(3) Address is Sect. D, 5/F, Block A. Innotech Tower, 235 Nanjing Rd. Heping
District, Tianjin, 300052,
34
SELLING SHAREHOLDERS
The selling shareholders are the holders of 2,930,293 shares of common
stock and 1,049,575 warrants purchased in September and October 2003 for
$1,530,625. Pursuant to the terms of the sale of those shares and warrants, we
entered into a Subscription Agreements with each of the selling shareholders
wherein we agreed to register for resale the shares purchased, including the
shares underlying the warrants.
The following table sets forth the number of shares owned by each of
the selling shareholders. Other than their purchase and ownership of the shares
offered herein, none of the selling shareholders has had any material
relationship with us within the past three years. We cannot give an estimate as
to the amount of shares that will be held by the selling shareholders after
completion of this offering because the selling shareholders may offer all or
some of the shares and because, to our knowledge, there currently are no
agreements, arrangements or understandings with respect to the sale of any of
the shares. The shares offered by this prospectus may be offered from time to
time by the selling shareholders named below.
Number of
Shares
Name and Relationship Number of Shares Registered for
of Selling Shareholder Beneficially Owned (1) Sale Hereby
- ---------------------- ---------------------- -----------
Alpha Capital Aktiengesellschaft (2) 1,097,145 1,097,145
Greenwich Growth Fund Limited (3) 127,500 127,500
Bristol Investment Fund Ltd. (4) 457,145 457,145
Stonestreet LP (5) 525,000 525,000
Platinum Partners Value Arbitrage
Fund LP (6) 274,287 274,287
Goldplate Investment Partners Ltd. (7) 182,858 182,858
Congregation Mishkan Sholom,
Panorama City, VA 91,429 91,429
Max Povolotsky 59,038 59,038
Ernest Pellegrino 54,039 54,039
First Montauk Financial Corp. 43,589 43,589
Edward Craig Pitlake 13,263 13,263
Shrirang Jeurkar 5,000 5,000
- ---------------
(1) Shares indicated as beneficially owned include all warrants held by
such person, entity or group that are exercisable or convertible within
60 days of October 17, 2003. Warrants are held by each of the Selling
Shareholders to purchase the following shares of common stock, which
shares are included in the shares registered for sale hereby: Alpha
Capital Aktiengesellschaft - 411,430; Greenwich Growth Fund Limited -
42,500; Bristol Investment Fund Limited - 171,430; Platinum Partners
Value Arbitrage Fund LP - 102,858; Goldplate Investment Partners Ltd. -
68,572; Stonestreet LP - 175,000; Congregation Mishkan Sholom - 34,286;
Max Povolotsky - 59,038; Ernest Pellegrino - 54,039; First Montauk
Financial Corp. - 43,589; Edward Craig Pitlake - 13,263; and Shrirang
Jeukar - 5,000.
35
(2) A private investment fund based in Licthenstein and managed by Konrad
Ackerma.
(3) A private investment fund based in Bermuda managed by Evan Schemenauer.
(4) A private investment fund based in the Cayman Islands managed by Paul
Kessler.
(5) A private investment fund based in Toronto, Ontario managed by Michael
Finkelstein and Elizabeth Leonard.
(6) A private investment fund based in New York and managed by Mark
Novdlicht.
(7) A private investment fund based in Panama and managed by____________.
PLAN OF DISTRIBUTION
We are registering shares of our common stock on behalf of certain
selling shareholders. We will receive no proceeds from this offering. The
selling shareholders named in this prospectus or pledges, donees, transferees or
other successors-in-interest selling shares received from a named selling
shareholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus may sell some or all of the shares
from time to time. REGISTRATION OF THE SHARES DOES NOT MEAN, HOWEVER, THAT THE
SHARES NECESSARILY WILL BE OFFERED OR SOLD. The selling shareholders will act
independently of us in making decisions with respect to the timing, manner and
size of each sale. The sales may be made on one or more exchanges or in the
over-the-counter market or otherwise, at prices and at terms then prevailing or
at prices related to the then current market price, or in negotiated
transactions. The selling shareholders may effect such transactions by selling
the shares to or through broker-dealers. The shares may be sold by one or more
of, or a combination of, the following:
- a block trade in which the broker-dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction,
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this prospectus,
- an exchange distribution in accordance with the rules of such exchange,
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers, and
- in privately negotiated transactions.
To the extent required, this prospectus may be amended or supplemented
from time to time to describe a specific plan of distribution. In effecting
sales, broker-dealers engaged by the selling shareholders may arrange for other
broker-dealers to participate in the resales.
The selling shareholders may enter into hedging transactions with
broker-dealers in connection with distributions of the shares or otherwise. In
such transactions, broker-dealers may engage in short sales of the shares in the
course of hedging the positions they assume with selling shareholders. The
selling shareholders also may sell shares short and redeliver the shares to
close out such short positions. The selling shareholders may enter into option
or other transactions with broker-dealers that require the delivery to the
broker-dealer of the shares. The broker-dealer may then resell or otherwise
transfer such shares pursuant to this prospectus. The selling shareholders also
may loan or pledge the shares to a broker-dealer. The broker-dealer may sell the
shares so loaned, or upon a default the broker-dealer may sell the pledged
shares pursuant to this prospectus.
36
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders. Broker-dealers
or agents may also receive compensation from the purchasers of the shares for
whom they act as agents or to whom they sell as principals, or both.
Compensation as to a particular broker-dealer might be in excess of customary
commissions and will be in amounts to be negotiated in connection with the sale.
Broker-dealers or agents and any other participating broker-dealers or the
selling shareholders may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act of 1933 in connection with sales of the
shares. Accordingly, any such commission, discount or concession received by
them and any profit on the resale of the shares purchased by them may be deemed
to be underwriting discounts or commissions under the Securities Act. Because
selling shareholders may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, the selling shareholders will be subject to
the prospectus delivery requirements of the Securities Act. In addition, any
securities covered by this prospectus that qualify for sale pursuant to Rule 144
promulgated under the Securities Act may be sold under Rule 144 rather than
pursuant to this prospectus. To our knowledge, the selling shareholders have not
entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their securities.
The shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states the shares may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities and
Exchange Act of 1934, any person engaged in the distribution of the shares may
not simultaneously engage in market making activities with respect to our common
stock for a period of two business days prior to the commencement of such
distribution. In addition, each selling shareholder will be subject to
applicable provisions of the Exchange Act and the associated rules and
regulations under the Exchange Act, including Regulation M, which provisions may
limit the timing of purchases and sales of shares of our common stock by the
selling shareholders. We will make copies of this prospectus available to the
selling shareholders and we have informed them of the need for delivery of
copies of this prospectus to purchasers at or prior to the time of any sale of
the shares.
We will file a supplement to this prospectus, if required, pursuant to
Rule 424(b) under the Securities Act upon being notified by a selling
shareholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares through a block trade, special offering,
exchange distribution or secondary distribution or a purchase by a broker or
dealer. Such supplement will disclose:
- the name of each such selling shareholder and of the participating
broker-dealer(s),
37
- the number of shares involved,
- the price at which such shares were sold,
- the commissions paid or discounts or concessions allowed to such broker-
dealer(s), where applicable,
- that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this prospectus,
and
- other facts material to the transaction.
We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling shareholders will bear all commissions
and discounts, if any, attributable to the sales of the shares. The selling
shareholders may agree to indemnify any broker-dealer or agent that participates
in transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
DESCRIPTION OF SECURITIES
General
Our authorized capital stock consists of 95,000,000 shares of common
stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par
value $0.001 per share. The following summary of the material matters relating
to our common stock is qualified in its entirety by reference to our certificate
of incorporation and bylaws.
Common Stock
As of September 1, 2004, there were 29,387,380 shares of our common
stock outstanding.
The holders of our common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of our shareholders, including
the election of directors, and do not have cumulative voting rights. Holders of
our common stock are entitled to receive ratably such dividends, if any, as may
be declared by our board of directors out of legally available funds. Upon our
liquidation, dissolution or winding up, the holders of our common stock will be
entitled to share ratably in the net assets legally available for distribution
to our shareholders after the payment of all our debts and other liabilities.
The holders of our common stock have no preemptive or conversion rights or other
subscription rights and there are no redemption or sinking fund provisions
applicable to our common stock. All outstanding shares of our common stock are
fully paid and nonassessable.
Preferred Stock
Our board of directors has the authority, without further action by our
shareholders, to provide for the issuance of our preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers and
relative, participating, optional or other special rights and the qualifications
or restrictions on such rights. The preferences, powers, rights and restrictions
of different series of our preferred stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and purchase funds and other
matters. The issuance of a series of our preferred stock could decrease the
amount of earnings and assets available for distribution to holders of our
common stock or affect adversely the rights and powers, including voting rights,
of the holders of our common stock, and may have the effect of delaying,
deferring or preventing a change in control of us.
38
As of September 1, 2004, no shares of our preferred stock were
outstanding.
Warrants
As of September 1, 2004, we had outstanding 1,049,575 warrants to
purchase shares of our Common Stock. Each of the warrants is exercisable to
purchase one share of Common Stock at a price of $1.34 per share. The warrants
are exercisable for a period of five years with expiration dates ranging from
September 4, 2008 to October 8, 2008 and may be exercised in full or in part.
The warrants include certain registration rights and a cashless exercise
provision.
The cashless exercise is effective if any only if, the shares
underlying the warrants have not been registered as of the date of exercise. If
the shares underlying the warrants have been registered, the holder of the
warrant can only purchase the shares underlying the warrant for cash. Since the
company is registering the shares underlying the warrants, it anticipates all
shares underlying the warrants will be purchased for cash only.
The shares being included in this Registration Statement were sold
privately through First Mutual Financial Corp. ("First Mutual") to various
institutions in September and October, 2003. For each share sold the purchaser
was also entitled to one-half warrant. Each warrant authorized the holder to
purchase one share of the Company's common stock at $1.34 per share. The
subscription agreement for the shares also required that the shares sold and the
shares underlying the warrants be registered at the expense of the company.
Provisions Having Possible Anti-Takeover Effects
Our articles of incorporation and the bylaws contain provisions that
could have an anti-takeover effect. These provisions may discourage certain
types of transactions that may involve an actual or threatened change of control
of Eternal Technologies Group, Inc.
Our board of directors has broad powers to fix by resolution the
powers, preferences and rights of any new series of preferred stock. This power
could be used to create a class of preferred stock that, because of its rights,
could discourage a potential takeover. Additionally, our bylaws give the board
of directors power to fill vacancies on the board, other than vacancies created
by removal without cause, without shareholder approval. As a result, an
incumbent board, not a potential bidder, would have control over board positions
in the period between annual meetings of shareholders.
Description of Material Contracts
1. Exchange Agreement by and between Waterford Sterling Corporation and
Eternal Technology Group Ltd., all of the issued and outstanding
shares of Eternal Technology Group Ltd. was acquired by Waterford
Sterling Corporation for 22,050,000 shares of post-reverse split
(1.6) common stock;
39
2. Research contract with Shen Yang Institute of Applied Ecology of the
Chinese Academy of Science (Academy) dated January 6, 2001 whereby the
Academy is to conduct medical research on the cloning of certain snake
venom for treatment of thrombosis. The contract is for a period of four
years and requires total payments to the Academy of $1,200,000.
3. Agreement by and between Eternal Technology Group Limited and Shang JiaJi
dated July 15, 2000. By this agreement Eternal Technology agreed to
acquire all of the issued and outstanding shares of Willsley Company
Limited for Shang JiaJi for $47,108,346.
4. Agreement by and between Eternal Technology Group Limited and Slang JiaJi
dated May 4, 2003 changing the price for the purchase of the shares of
Willsley Company Limited from $47,108,346 to $6,000,000.
5. Dairy Cow Purchase Contract by and between Inner Mongolia Aeirshan
Agricultural Technologies Limited Company and Xinjiang Bayinguoleng
Husbandry Center dated August 5, 2003 whereby we purchased 2000 Holstein
cows for $5,500,000.
6. Consulting Agreement by and between Eternal Technologies Group, Inc. and
Market management LLC dated January 1, 2003 for the preparation of due
diligence information and consultation with broker, investment bankers and
investors to anticipate market needs and trends for the company. The
contract is for two years and requires monthly payments to Market
Management LLC of $10,000 per month.
7. Public Relations Agreement dated January 23, 2004 by and between the
Company and PMR and Associate LLC for investor public relations. The
contract runs for six months. The compensation payable to PMR and
Associates LLC was 100,000 shares of restricted stock of the Company.
8. Consulting Contract dated June 13, 2003 by and between Eternal
Technologies Group, Inc. and Paranna, Inc. The contract was for six months
and required payment of 250,000 freely tradable shares of the company's
common stock.
9. The Placement Agreement with First Mutual Securities, Inc. provides for
the payment of a 10% sale commission or 3% non-accountable expense
allowance and warrants for the purchase of common stock at 1.34 per share
for a period of five years.
10. Dairy Cattle Buy Back Contract dated April 26, 2004 by and between Inner
Mongolia Aersha Agricultural Technologies Co. Ltd and Xinjiang
Bayinguoleng Husbandry Center spelling out the terms of the dairy cattle
but back program.
Transfer Agent
The transfer agent for our common stock is OTC Stock Transfer, Inc., of
Salt Lake City, Utah.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
us by Vanderkam & Associates, Houston, Texas. Hank Vanderkam, a principal of
Vanderkam & Associates owns, directly or indirectly, 707,000 shares of our
common stock.
EXPERTS
Our audited consolidated financial statements included in this
prospectus and elsewhere in the registration statement to the extent and for the
periods indicated in their reports have been audited by Thomas Leger & Co.,
L.L.P., independent public accountants, and are included herein in reliance upon
the authority of said firm as experts giving said reports.
40
On January 10, 2003, our auditors, Andersen Andersen & Strong, LC
advised us that they would be unable to continue to act as our independent
accounting firm.
Andersen Andersen & Strong's audit report on our financial
statements as of December 31, 2001, and for the two years ended December 31,
2001, contained no adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope, or accounting principles
although it did contain a going concern qualification.
During our two most recent fiscal years and any subsequent interim
period preceding the resignation of Andersen Andersen & Strong, there were no
disagreements with Andersen Andersen & Strong on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s) if not resolved to the satisfaction of Andersen
Andersen & Strong, would have caused Andersen Andersen & Strong to make
reference to the subject matter of the disagreement(s) in connection with its
report.
During our two most recent fiscal years and any subsequent interim
period preceding the resignation of Andersen Andersen & Strong, there have been
no reportable events of the type required to be disclosed by Item 304(a)(1)(v)
of Regulation S-K.
On January 10, 2003, we engaged Thomas Leger & Co. L.L.P. as our new
independent accountants. Prior to the engagement of Thomas Leger, we did not
consult with such firm regarding the application of accounting principles to a
specific completed or contemplated transaction, or any matter that was either
the subject of a disagreement or a reportable event. Further, we did not consult
with Thomas Leger regarding the type of audit opinion that might be rendered on
our financial statements and no oral or written report was provided by Thomas
Leger.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2. This
prospectus, which forms a part of the registration statement, does not contain
all the information included in the registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. We are required to file annual, quarterly and other
information with the SEC. You may read and copy any document we file with the
SEC at the SEC's public reference facilities in Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the SEC's public reference facilities by calling the SEC at
1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, such as us, that file electronically with the SEC.
We intend to furnish each holder of our common stock annual reports
containing audited financial statements and a report thereon by independent
certified accountants. We will also furnish to each holder of our common stock
such other reports as may be required by law.
41
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
As permitted by the Nevada Revised Statutes, our articles of
incorporation include, subject to the limitations described below, a provision
that would limit or eliminate our directors' liability for monetary damages for
breaches of their fiduciary duties. A director's liability cannot be limited or
eliminated for:
o breaches of the duty of loyalty;
o acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
o the payment of unlawful dividends or expenditure of funds
for unlawful stock purchases or redemptions; or
o transactions from which the director derived an improper
personal benefit.
In addition, the limitation of liability provisions may not restrict a
director's liability for violation of, or otherwise relieve the corporation or
its directors from, the necessity of complying with federal or state securities
laws or affect the availability of nonmonetary remedies such as injunctive
relief or rescission.
Our articles of incorporation provide that we shall, to the extent
legally permissible, indemnify each of our former or present directors or
officers against all liabilities and expenses imposed upon or incurred by any of
them in connection with, or arising out of, the defense or disposition of any
action, suit or other proceeding, civil or criminal, in which he may be
threatened or involved, by reason of his having been a director or officer, if
it is determined that he acted in good faith and reasonably believed:
o in the case of conduct in his official capacity on our
behalf that his conduct was in our best interests;
o in all other cases, that his conduct was not opposed to
our best interests; and
o with respect to any proceeding which is a criminal action,
that he had no reasonable cause to believe his conduct was
unlawful.
The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself be determinative of whether the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to our best
interests, and, with respect to any proceeding which is a criminal action, had
no reasonable cause to believe that his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Eternal
Technologies Group pursuant to the foregoing provisions, or otherwise, we are
aware that, in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable
Item 25. Other Expenses of Issuance and Distribution.
The following is a list of the estimated expenses to be incurred, all
of which will be paid by the Registrant, in connection with the preparation and
filing of this Registration Statement.
SEC Registration Fee $ 253.60
Printing and Engraving 1,000.00
Accountants' Fees and Expenses 10,000.00
Legal Fees and Expenses 40,000.00
Other Offering Expenses 746.40
-----------
TOTAL $ 52,000.00
===========
Item 26. Recent Sales of Unregistered Securities.
The Registrant has sold the following securities within the past three
years that were not registered under the Securities Act of 1933:
In January 2001, we issued 7,000,000 shares of common stock to Thomas
Tedrow as consideration for the acquisition of Waterford Florida, Inc.
In December 2002, we issued an aggregate of 22,050,000 shares of common
stock to the 38 shareholders of Eternal Technologies Group, Ltd. as
consideration for the acquisition of Eternal Technologies Group, Ltd.
Between March 2003 and August 2003, we issued 979,505 shares of common
stock to various non-U.S. investors for $277,304.84.
In September and October 2003, we issued 1,749,288 shares of common
stock and 874,644 warrants to seven accredited investors for $1,316,643.75.
On January 3, 2004, we issued 108,984 shares of common stock to Mr.
Thomas Tedrow in exchange for $60,491 of his promissory notes, and we issued
100,000 Shares of common stock to PMR and Associates on February 10, 2004 for
financial Public relations services.
The issuances of shares between March 2003 and August 2003 were made
exclusively to foreign persons with no U.S. selling efforts pursuant to the
provisions of Regulation S.
The issuance of all other shares of our common stock described above
was pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended and related state private offering
exemptions. All of the investors were Accredited Investors as defined in the
Securities Act who took their shares for investment purposes without a view to
distribution and had access to information concerning the Company and its
business prospects, as required by the Securities Act.
In addition, there was no general solicitation or advertising for the
purchase of our shares. All certificates for our shares issued pursuant to
Section 4(2) contain a restrictive legend. Finally, our stock transfer agent has
been instructed not to transfer any of such shares, unless such shares are
registered for resale or there is an exemption with respect to their transfer.
42
Commissions in the amount of $198,981 were paid, and warrants to
purchase 174,931 shares of our common stock were issued, to First Montauk
Securities Corp. in connection with the issuances described above.
Item 27. Exhibits.
Number Description of Exhibit
2.1* Exchange Agreement by and between Waterford Sterling
Corporation and Eternal Technology Group Ltd. dated December
12, 2002 (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated December 12,
2002, filed with the SEC on December 18, 2002).
3.1* Articles of Incorporation.
3.2* Articles of Amendment, dated December 31, 2002, to the
Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K
dated December 12, 2002, filed with the SEC on December 18,
2002).
3.3* Bylaws of Eternal Technologies Group, Inc. adopted
December 12, 2002.
5.1* Form of Opinion and Consent of Vanderkam & Associates,
regarding legality of shares issued.
10.1* Research Contract with Shen Yang Institute of Applied
Ecology of the Chinese Academy of Science. (incorporated
by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2002)
10.2* Research Contract with Tower International Trade Corp.
(incorporated by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 2002)
10.3* Purchase Agreement with Shang JaiJi dated July 15, 2000 for
the purchase of the Shares of Willsley Company Limited
(incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
2002)
10.4* Amendment to the Purchase Agreement with Shang Jai Ji dated
July 15, 2000 for the Purchase of the Shares of Willsley
Company Limited
10.5* Dairy Cow Purchase Contract dated August 5, 2003 by and
between Inner Mongolia Aeirshan Agricultural Technologies
Limited and Xinjiang Bajinquoleng Husbandry Center
10.6* Consulting Agreement dated January 1, 2003 by and between
the Company and Market Management LLC
10.7* Public Relations Agreement dated January 23, 2004 by and
between the Company and PMR and Associates LLC
10.8* Contract dated June 13, 2003 by and between Eternal
Technologies Group, Inc. and Paranna, Inc
43
10.9* Form of Subscription Agreement relating to 2003 Placement of
Common Stock.
10.10* Form of Placement Agreement with First Montauk Securities Corp.
10.11* Form of Warrant Agreement.
10.12** Dairy Cattle Buy-Back Contract
23.1** Consent of Thomas Leger & Co., LLP
23.2** Consent of Vanderkam & Associates (included in Exhibit 5.1)
- -----------------
* Previously filed
** Filed herewith
Item 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Act;
(ii) Reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement; and
(iii) Include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under
the Act, each post-effective amendment to the registration
statement shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
44
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tianjin, China, on the
____ of September, 2004.
ETERNAL TECHNOLOGIES GROUP, INC.
By: /s/ JIJUN WU
-------------------------
JIJUN WU, Chairman
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
Signatures Title Date
/s/ Jijun Wu Chairman of the Board September 10, 2004
- --------------------
Jijun Wu
/s/ Jiansheng Wei President,Chief Executive Officer September 10, 2004
- -------------------- and Director
Jiansheng Wei
/s/ XingJian Ma Chief Financial Officer (Principal September 10, 2004
- --------------------
XingJian Ma Financial and Accounting Officer)
/s/ Shien Zhu Director September 10, 2004
- --------------------
Shien Zhu
/s/ James Q. Wang Director September 10, 2004
- --------------------
James Q. Wang
/s/ Ganchang Li Director September 10, 2004
Ganchang Li
/s/ Shicheng Fu Director September 10, 2004
Shicheng Fu
45
ETERNAL TECHNOLOGIES GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors Report.............................................. F- 2
Consolidated Balance Sheets as of December 31, 2003 and 2002............. F- 3
Consolidated Statements of Income For the Years ended December 31,
2003 and 2002............................................................ F- 4
Consolidated Statements of Changes in Shareholders' Equity For the
Years ended December 31, 2003 and 2002................................... F- 5
Consolidated Statements of Cash Flows For the Years Ended December 31,
2003 and 2002............................................................ F- 6
Notes to Consolidated Financial Statements............................... F- 7
Consolidated Balance Sheets as of
June 30, 2004 (unaudited) and December 31, 2003 (audited)............... F- 15
Consolidated Statements of Income (loss)
for Three and Six Months Ended June 30, 2004 and 2003 (unaudited)...... F- 16
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and 2003 (unaudited).................. . F- 17
Notes to Consolidated Financial Statements (unaudited).............. .... F- 18
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Eternal Technologies Group, Inc.
We have audited the accompanying consolidated balance sheets of Eternal
Technologies Group, Inc. and Subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years ended December 31, 2003 and 2002. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require 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 Technologies
Group, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for the years ended December 31, 2003
and 2002 in conformity with accounting principles generally accepted in the
United States of America.
As disclosed in Note 7. to the consolidated financial statements, the
consolidated financial statements as of December 31, 2002 have been restated to
reverse the previously recorded estimated future construction costs under
contract and the related offsetting liability of estimated payable for
construction under contract not invoiced.
/s/ Thomas Leger & Co., L.L.P.
Thomas Leger & Co., L.L.P.
Houston, Texas
March 15, 2004
F-2
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(UNITED STATES DOLLARS)
ASSETS
2003 2002
(Restated)
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 16,302,464 $ 7,135,559
Accounts receivable - 4,483,855
Inventories 1,214,182 232,401
Other receivable 3,399,995 -
Receivable due from related company 617,825 617,825
Prepayments and deposits 145,190 146,715
Property held for sale 2,192,071 -
-------------- --------------
TOTAL CURRENT ASSETS 23,871,727 12,616,355
FIXED ASSETS (net of accumulated depreciation) 6,416,341 4,226,603
CONSTRUCTION IN PROGRESS - 4,658,697
LAND USE RIGHTS
(net of accumulated amortization of $806,961
in 2003 and $558,620 in 2002) 5,193,039 5,441,381
-------------- --------------
TOTAL ASSETS $ 35,481,107 $ 26,943,036
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable for construction $ - $ 348,193
Notes payable 503,857 782,733
Accounts payable and accrued expenses 1,133,462 711,572
Payable to related companies 205,957 156,265
Amounts due to related parties 417,617 390,806
-------------- --------------
TOTAL CURRENT LIABILITIES 2,260,893 2,389,569
-------------- --------------
SHAREHOLDERS' EQUITY
Preferred shares - 5,000,000 authorized $.001 par -
none issued - -
Common shares - 95,000,000 authorized at $.001
par - 29,177,396 and 25,531,316 shares issued
and outstanding at December 31, 2003 and 2002
respectively 29,177 25,531
Paid - in capital 8,088,159 5,825,735
Stock subscription receivable (10,176) -
Retained earnings 25,113,054 18,702,201
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 33,220,214 24,553,467
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 35,481,107 $ 26,943,036
============== ==============
The accompanying notes are an integral part of
these financial statements.
F-3
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(UNITED STATES DOLLARS)
2003 2002
------------ -------------
SALES $ 15,495,966 $ 12,040,964
RELATED PARTY SALES - 600,000
------------- --------------
TOTAL SALES 15,495,966 12,640,964
COST OF SALES 6,550,582 2,752,811
------------- --------------
GROSS PROFIT 8,945,384 9,888,153
DEPRECIATION AND AMORTIZATION 874,417 862,052
GENERAL,SELLING, AND ADMINISTRATIVE EXPENSES 1,391,945 1,204,081
RESEARCH AND DEVELOPMENT COST
(including $400,000 to a related party) - 1,000,000
OTHER INCOME (EXPENSE)
Interest income 83,272 1,432
Interest expense ( 51,441) ( 10,968)
Impairment loss (300,000) -
------------- --------------
NET INCOME BEFORE INCOME TAXES 6,410,853 6,812,484
INCOME TAXES - -
------------- ---------------
NET INCOME $ 6,410,853 $ 6,812,484
============= ===============
EARNINGS PER SHARE
Basic and diluted
Net income $ 0.24 $ 0.27
============= ===============
Weighted average number of common
shares outstanding
Basic and diluted 26,968,121 25,289,600
============= ===============
The accompanying notes are an integral part of these financial statements.
F-4
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(UNITED STATES DOLLARS)
Capital Shares Common Stock
------------------------ -------------------- Stock
Paid - in Subscription Retained
Share Amount Shares Amount Capital Receivable Earnings Total
---------- ---------- --------- ----------- ----------- -------------- ---------- -------
Balance, December
31, 2001 1,000 $ 1 - $ - $ 6,645,070 $ - $ 11,889,717 $18,534,788
Issuance of Capital
Shares 9,000 9 - - 73,598 - - 73,607
Capitalization
for merger December
12, 2002 (10,000) (10) 25,531,316 25,531 (892,933) - - (867,412)
Net income year
ended December
31, 2002 - - - - - - 6,812,484 6,812,484
--------- ------------ ----------- ------------ ------------ ---------- -------------- ----------
Balance December
31, 2002 - - 25,531,316 25,531 5,825,735 - 18,702,201 24,553,467
Notes payable
converted to stock - - 507,229 507 278,469 - - 278,976
Accrued liabilities
converted to stock - - 172,000 172 349,629 - - 349,801
Stock issued for cash
and commissions - - 2,934,581 2,935 1,624,182 - - 1,627,117
Stock subscribed for - - 32,270 32 10,144 (10,176) - -
Net Income - - - - - 6,410,853 6,410,853
--------- ----------- ---------- ----------- ------------ ----------- ------------- ------------
Balance December
31, 2003 - $ - 29,117,396 $ 29,177 $ 8,088,159 $ (10,176) $25,113,054 $33,220,214
========= =========== =========== =========== ============ =========== ============= ============
The accompanying notes are an integral part of these
financial statements.
F-5
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
(UNITED STATES DOLLARS)
2003 2002
(Restated)
------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,410,853 $ 6,812,484
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 874,417 862,052
Impairment loss 300,000 -
(Increase) decrease in assets:
Accounts receivable 4,483,855 (1,771,349)
Inventories (981,781) 53,175
Receivable due from related company - (518,212)
Other receivable (3,399,995) -
Receivable due from related parties - 456,052
Prepayments and deposits 1,525 18,126
Increase (decrease) in liabilities:
Accounts payable for construction work (348,193) (2,209,423)
Accounts payable and accrued expenses 771,693 338,910
Amounts advanced by related parties 26,809 (1,280,552)
Account payable to related company 49,692 (1,559,398)
------------- ---------------
Net cash provided by operating activities 8,188,875 1,201,865
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets - (854,320)
Construction in progress (649,087) (1,039,045)
------------- ---------------
Net cash used in investing activities (649,087) (1,893,365)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,627,117 -
Proceeds from issuance of capital shares - 73,607
------------- --------------
Net cash provided by financing activities 1,627,117 73,607
------------- --------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 9,166,905 (617,893)
Cash and cash equivalents, beginning of period 7,135,559 7,753,452
------------- ---------------
Cash and cash equivalents, at end of period $16,302,464 $ 7,135,559
============= ===============
SUPPLEMENTARY CASH FLOWS DISCLOSURES
1. Interest paid - -
Taxes paid - -
The accompanying notes are an integral part of these
financial statements.
F-6
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
-----------------------------------------------------------------------------
NOTES
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Pursuant to an exchange agreement, Eternal Technologies Group, Inc., ("Company")
formerly known as Waterford Sterling Corporation, completed its acquisition of
100% interest of Eternal Technology Group LTD. and Subsidiaries on December 12,
2002. The Company has treated the transaction as a reverse merger for accounting
purposes. To facilitate the reverse merger, the Company's common shares were
reverse split on a one for six basis, and 95,000,000 post reverse split common
shares, $.001 par value were authorized. Following the acquisition, the former
shareholders of Eternal Technology Group LTD., 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")on July 15, 2000. Willsley was 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 sheep meat 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 PRC. There were no material adjustments to reconcile
the subsidiary statutory financials statements to U.S. GAAP. The reconciliation
of the subsidiary statutory financial statements to the accounting principles
generally accepted in the United States of America was audited by our
independent accountants.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements of the Company include 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.
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.
At December 31, 2003 the Company maintains bank accounts in the PRC of
approximately $16,082,000, of which approximately $15,284,000 is to be
exclusively used for operations in the PRC.
Accounts receivable, other receivable, and related party receivable No allowance
for doubtful accounts has been established, as management believes all amounts
are collectible.
F-7
Inventory
Livestock inventories that are purchased for embryo transplanting, resale, or
meat processing are recorded at historical cost. Estimated costs of raised
livestock prior to use for embryo transplanting, sale,or meat processing are
accumulated and capitalized as inventory at the balance sheet date. Embryo
inventories are recorded at historical cost. Inventories are measured at lower
of cost and net realizable value using the first-in first-out ("FIFO") or
weighted average cost formulas. The Company reviews its inventory quarterly to
identify slow moving, obsolete or otherwise impaired inventory. The
identification process includes historical performance of the inventory, current
operational plans for the inventory, as well as industry and customer specific
trends. If actual results differ from management expectations with respect to
the selling of inventories at amounts equal to or greater than their carrying
amounts, an adjustment to inventories would be made.
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 4%
Furniture and fixtures 20%
Office equipment 20%
Motor vehicles 20%
In accordance with the Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", 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 the amount of the prepayment
less accumulated amortization. Amortization of land lease rights was calculated
on the straight-line basis over the term of the lease of approximately 25 years.
The land lease rights with respect to the Company's farm were originally
purchased from the Chinese government for $6,000,000 and such rights extend
through 2025. The farm is located in Wulagai Development Area in Inner Mongolia.
Intangible assets
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," at the
beginning of 2002. There are no material identifiable intangible assets recorded
as of December 31, 2003 and 2002.
Income taxes
Income taxes are determined under the liability method as required by Statement
of Financial Accounting Standard No.109, "Accounting for Income Taxes". The
Company's current operations are currently exempt from taxation.
Foreign currency translation
The Company's reporting currency is the US$. The Company maintains no material
accounts in currency of the United States of America. One of the subsidiaries
maintains their books and accounts in the People's Republic of China currency,
which is called Renminbi ("RMB"). Translation of the financial statements of
amounts from RMB into US$ has been made at the single rate of exchange on
December 31, 2003 and 2002 of US 1.00: RMB 8.30. No representation is made the
RMB amounts could have been, or could be, converted into US$ at that rate on
December 31, 2003 or 2002 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, embryos, and raw materials is recognized
when persuasive evidence of an arrangement exists; the price to the buyer is
fixed or determinable; the merchandise is delivered to the customer and title
passes; and collectibility is reasonably assured.
Research and development
Research and development costs are charged to operations as incurred.
F-8
Stock-based compensation
Stock compensation expense for stock granted to non-employees has been
determined in accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging
Task Force consensus in Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in conjunction with Selling
Goods or Services ("EITF 96-18"), as the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measured.
Employees' benefits
Mandatory contributions are made to the Government's health, retirement benefit
and unemployment schemes at the statutory rates in force during the period,
based on gross salary payments. The cost of these payments is charged to the
statement of income in the same period as the related salary cost.
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.
Earnings per share
The Company adopted SFAS No. 128, "Earnings Per Share" effective December
31,1997. Under SFAS 128, basic earnings per share is computed by dividing income
available to common shareholders by the weighted-average number of common shares
assumed to be outstanding during the period of computation. Diluted earnings per
share is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been issued and
if the additional common shares were dilutive.
Per share amounts and shares have been adjusted for the 6 to 1 reverse stock
split on December 12, 2002.
Recent accounting pronouncements
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." The provisions of SFAS No. 143 will be effective for financial
statements for fiscal years beginning after June 15, 2002. The statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs.
The statement is effective for the Company in fiscal 2003. The Company does not
expect the adoption of SFAS 143 to have a material impact on the Company's
future result of operations or financial position.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123 "Accounting
for Stock-Based Compensation," to provide alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148 is
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The adoption
of SFAS 148 did not have a material effect on our financial position, results of
operations, or cash flows.
In January 2003,(as revised in December 2003) the Financial Accounting Standards
Board ("FASB") issued Interpretation No.46 ("FIN 46") "Consolidation of Variable
Interest Entities." Until this interpretation, a company generally included
another entity in its consolidated financial statements only if it controlled
the entity through voting interest. FIN 46 requires a variable interest entity,
as defined, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns. Certain
provisions of FIN 46 were deferred until the period ending after March 15, 2004.
The adoption of FIN 46 for provisions effective during 2003 did not have a
material impact on the Company's financial position, cash flows or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends SFAS
133 for certain decisions made by the FASB Derivatives Implementation Group, In
Particular, SFAS 149: (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component, (3) amends the definition of
an underlying to conform it to language used in FASB Interpretation No. 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," and (4) amends certain other
existing pronouncements. This Statement is effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, most provisions of SFAS 149 are to be applied
prospectively. The adoption of SFAS 149 did not have a material impact on the
Company's financial position, cash flows or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments that under
previous guidance issuers could account for as equity. It requires that those
instruments be classified as liabilities in balance sheets. The guidance in SFAS
150 is generally effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective on July 1, 2003. The
adoption of SFAS 150 did not have a material impact on the Company's financial
position, cash flows or results of operations.
Reclassification
Certain reclassifications have been made to the December 31, 2002 financial
statements in order to conform to the classification in the current year.
4. INVENTORY
Inventory consists of the following at December 31:
2003 2002
------ ------
Sheep and cows $ 76,193 $ 192,241
Sheep and cow embryos 1,137,989 40,160
--------- ----------
Total inventory $ 1,214,182 $ 232,401
========== ==========
5. DAIRY COW PURCHASE AGREEMENT AND OTHER RECEIVABLE
During August 2003, the Company entered into a contract with Xinjiang
Bayinguoleng Husbandry Center (Xinjiang) for the purchase of 2000 dairy cows at
a cost of $2,750 each or a total cost of $5,500,000. The dairy cows were
purchased under an agreement to sell them back to Xinjiang during 2004. The cows
were used during the fourth quarter of 2003 for the production of dairy cow
embryos. Both parties have agreed to a buy back amount of at least approximately
$1,700 per cow and at December 31, 2003, the Company has recorded approximately
$3,400,000 as "Other receivable" which represents the total estimated buy back
amount of the cows during 2004. The total cost allocated to the embryos was
approximately $2,100,000, which is the difference between the total cost of the
cows of $5,500,000 and the total buy back amount of approximately $3,400,000.
6. PROPERTY HELD FOR SALE AND IMPAIRMENT
During the fourth quarter, the Company began formal negotiations with a local
government entity for the sale of the Company's reception center and certain
equipment. The Company had included the reception center and equipment as
"CONSTRUCTION IN PROGRESS" as construction of the building and installation of
the equipment has not been completed. On February 29, 2004, the Company and a
local government entity signed a letter of intent to sell the reception center
to the local government entity no later than April 30, 2004. A final purchase
price has not been reached, however management estimates a 10-15% loss based on
the book value of the property. The Company recorded an impairment loss of
approximately or $300,000 and reclassified the remaining "CONSTRUCTION IN
PROGRESS" of $2,192,071 to "Property held for sale" for the year ended December
31, 2003, based on the book value of the reception center and equipment of
approximately $2,492,000.
7. FIXED ASSETS AND RESTATEMENT
Fixed assets are comprised of the
following at December 31:
2003 2002
------ ------
Infrastructure $ 226,506 $ 226,506
Buildings 6,244,561 3,428,537
Equipment 1,262,598 1,265,961
Other 626,506 626,506
---------- ----------
8,360,171 5,547,510
Accumulated Depreciation (1,943,830) (1,320,907)
----------- -----------
$ 6,416,341 $ 4,226,603
=========== ===========
At December 31, 2002 the Company had recorded $1,000,000 as estimated future
construction cost under contract with an offsetting liability of estimated
payable for construction under contract not invoiced. During 2003 the Company
reversed these amounts as all construction contracts were completed or
incomplete projects are held for sale. These amounts at December 31, 2002 have
also been restated to properly reflect construction in progress and the related
liability and to conform with the current year presentation.
F-9
8. NOTES PAYABLE
Notes payable consisted of the following at December 31, 2003 and 2002:
2003 2002
------ ------
Promissory note to Market Management LLC,
due December 11, 2005, interest
payments are due semi-annually commencing
180 days after the date of the note
(December 11, 2002)
at 8% per annum. $ 462,433 $ 616,753
Promissory note to Thomas I. Tedrow due
December 11, 2005, interest payments are
due semi- Annually commencing 180 days
after the date of the note (December 11,
2002) at 8% per annum. 41,424 165,980
------------ ------------
$503,857 $ 782,733
============ ============
Each of the notes listed above are repayable from the first dollars received
from any proceeds of any offering subsequent to the acquisition of Eternal
Technologies Group Ltd. or at the option of the Lender, convertible into post
reverse split common shares at a rate equal to the mean of the high and low
share price as of the first date that the shares begin trading subsequent to the
acquisition.
The Company is performing 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.
9. COMMON STOCK AND WARRANTS
During 2003, pursuant to subscription agreements with various investors, the
Company received a total of $1,627,117, net of associated offering costs for the
issuance of 2,934,581 shares of common stock. In conjunction with certain
subscription agreements, the Company and certain investors executed stock
purchase warrant agreements, which provided 1,049,575 warrants with exercise
prices ranging from $1.34 to $1.54 per share. The warrants are exercisable for a
period of five years with expiration dates ranging from September 4, 2008 to
October 8, 2008 and may be exercised in full or in part. The warrants include
certain registration rights and a cashless exercise provision.
10. INCOME TAXES
The companies operate in several jurisdictions and may be subject to taxation in
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 from the Company's investments are not subject to income tax in the
British Virgin Islands.
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. Under current PRC law, Aershan the operating company
is exempt from taxation. Accordingly, no PRC corporate taxes have been provided
in these financial statements.
F-10
11. CONSULTING AGREEMENT
During June 2003, the Company entered into a six month public relations
agreement (the "Agreement") with Piranha, Inc. (the "Consultant"). The services
of the Consultant included assisting the Company in providing information
concerning the company's business to the investing public by the use of internet
and many other media tools to bring the Company exposure. As consideration for
these services, the Company agreed to issue 250,000 freely tradable and
unrestricted shares of the Company's common stock. A shareholder of the Company
transferred 250,000 shares to the Consultant during 2003 and the Company will
reimburse the shareholder for these shares during 2004. In accordance with SFAS
123 and EITF 96-18, the Company has accounted for the Agreement based on the
fair market value of the Company's stock at the commencement date of the
Agreement. For the year ended December 31, 2003, the Company recorded an expense
with an offsetting liability to the shareholder of $250,000.
12. CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject the Group to a concentration of
credit risk principally consist of cash deposits, trade receivables, other
receivables and the amounts due from related companies. The Company performs
ongoing evaluations of its cash position and credit evaluations at the
subsidiary level to ensure collections and minimize losses.
(i) Cash deposits. The Group places its cash deposits with banks in the PRC.
(ii) Other receivables and amounts due from related companies. The Company does
not have a policy of requiring collateral.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values 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
related companies. Trade receivables, other receivables and
the amounts due from related companies are stated at their
book value less provision for doubtful debts, which
approximates the fair value.
(iii) Accounts payable, accrued expenses, and amounts due to related
companies and directors are stated at their book value which
approximates their fair value.
14. 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.
15. 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 more than 10% of CCI and
Towering International Trade (US) Corp.
Eternal sold 3,000 goat embryos and services to a subsidiary of CCI for
approximately US$600,000 during 2002.
F-11
Eternal acquired 100% interest in Willsley Company limited, which had a 100%
interst in Aershan in a transaction valued at $6,000,000 from Shang Jia Ji. The
$6,000,000 represents Shang Jia Ji's cost.
Eternal entered into various construction contracts with companies controlled by
Shang Jia Ji. The contracts totaled approximately $985,530. This amount was paid
in full by December 31, 2002.
The Company entered into a contract with Towering International Trade (US) Corp
during 2001 for a research and development project totaling $1,400,000. No
payments were made in 2001. During 2002, $400,000 was paid on this contract.
The Company has a receivable from CCI of approximately $618,000 at December 31,
2003 and 2002. The balance represents payments made by the Company on behalf of
CCI in previous year for various operating expenses.
The Company has a payable to a former employee of approximately $160,000 at
December 31, 2003 and 2002. The balance represents advances made to the Company
for various expenses in previous years.
The Company has a payable to Ji Jun Wu, Chairman of the Board and President, of
approximately $106,000 at December 31, 2003 and 2002. The balance represents
advances made to the Company for various expenses in previous years.
The Company has a net payable to Shang Jia Ji of approximately $120,000 and
$117,000 at December 31, 2003 and 2002, respectively. In addition the Company
has payables of approximately $210,000 and $156,000, respectively at December
31, 2003 and 2002 to other entities controlled by Shang Jia Ji. These balances
represent advances made to the Company for various operating expenses.
During 2002 the Company entered into an investor relations agreement with
Stoneside Development Limited ("Stoneside"). Stoneside is controlled by Thomas
L. Tedrow a former principal shareholder and former officer of the Company. The
agreement was for $10,000 per month for twenty-four months commencing June 2002.
Thomas L. Tedrow also received a $90,000 fee from the Company. During January
2003, the investor relations agreement with Stoneside Limited was terminated and
the Company entered into a consulting agreement with Market Management, LLC
pursuant to which consulting services were to be provided over a 24 month
period. Payments for those services total $10,000 per month. Market Management,
LLC is also controlled by Thomas L. Tedrow. The total amount expensed in 2003
related to the contract with Market Management, LLC is $120,000.
16. MAJOR CUSTOMERS AND SUPPLIERS
The Company purchases and sells livestock whose purchases and sales exceed 10%
of total purchases and sales.
Purchases: 2003 2002
------ ------
Company A 53% -
Company B 21% 40%
Company C 17% -
Company D - 40%
Sales:
Company E 25% 49%
Company F 31% -%
Company G 31% 44%
Company H 13% -
F-12
17. WATERFORD STERLING CORPORATION FINANCIAL STATEMENTS
Presented below is the condensed Balance Sheet as of December 12, 2002 and the
condensed Statement of Loss of Waterford Sterling Corporation for the period
January 1, 2002 through December 12, 2002 at the merger date discussed in Note
1.
WATERFORD STERLING CORPORATION
CONDENSED BALANCE SHEET
DECEMBER 12, 2002
Office equipment, net $ 14,286
Business acquisition cost -
----------
Total assets $ 14,286
==========
Accrued expenses $ 98,965
Notes payable 782,733
Stockholders deficit (867,412)
----------
Total liabilities and stockholders deficit $ 14,286
==========
WATERFORD STERLING CORPORATION
CONDENSED STATEMENT OF LOSS
FOR THE PERIOD JANUARY 1, 2002 THROUGH DECEMBER 12, 2002
Revenue
Interest income $ 2,521
----------
Expenses
Business acquisition cost 104,783
General and administrative 240,769
Interest expense 49,294
Depreciation 6,721
-----------
Total expenses 401,567
-----------
NET LOSS $ (399,046)
===========
18. CONTINGENCIES AND COMMITMENTS
Research and Development Contracts
On January 6, 2001, the Company entered into a research and development contract
with Towering International Trade Corp., (Towering) which is controlled by Shang
Jia Ji, a former company officer and former director and major shareholder.
According to the contract entered into with Towering, there are two stages.
Stage I of the contract with Towering began and was completed during 2002, and
the Company expensed $400,000 in connection with the research and development
work performed. The contract with Towering calls for the remainder of the
research and development services to be performed during 2002, however there
were delays in research work and no further research and development work was
performed during 2002 and 2003. On February 27, 2001, the Company entered into a
four year research and development contract with Shen Yang Institute of Applied
Ecology of Chinese Academy of Science (Shen Yang). According to the contract
entered into with Shen Yang, there are two stages. Stage I of the contract with
Shen Yang began during 2002 but was not complete. The Company expensed $600,000
in connection with the contract with Shen Yang during 2002 and no further work
was performed during 2003. The commitments related to the research and
development projects totaled $1,600,000 at December 31, 2003.
F-13
Other Contingencies
The Company is subject to other contingencies not mentioned elsewhere, including
various claims for compensation and reimbursement submitted by third parties.
The Company's Board of Directors have received these claims and the Company does
not believe it has any obligations to compensate or reimburse for any of these
claims. There have been no lawsuits against the Company related to these claims.
The ultimate outcome of this matter cannot be predicted with certainty, however
the Company believes based on advice from legal counsel, these matters will not
have a material adverse effect on the Company's consolidated financial
statements.
19. NON-CASH INVESTING AND FINANCING ACTIVITIES
For the year ended December 31, 2003, there were issuances of common stock for
the payment of notes payable and accrued liabilities of $278,976 and $175,031,
respectively. For the year ended December 31, 2003 there were accrued
liabilities of $174,770 converted to paid-in capital.
For the year ended December 31, 2002, there was stock issued pursuant to an
exchange agreement and there were accrued expenses and notes payable of $98,967
and $782,733, respectively which represent the non-cash portion of the
transaction.
20. SEGMENT REPORTING
The Company has identified two reportable segments: Agricultural Genetics/
Animal Husbandry and Pharmaceutical Operations. The Agricultural Genetics/
Animal Husbandry segment activities include a breeding center, embryo
transplantation, and propagating quality sheep meat and other livestock breeds
in Inner Mongolia, PRC. Pharmaceutical operations include research and
development in the PRC and there have been no revenues.
Agricultural Genetics/ Animal Husbandry Pharmaceutical Total
Year ended December 31, 2003
Revenue $ 15,495,966 $ - $ 15,495,966
Operating income (loss) 6,684,540 (5,518) 6,679,022
Research and development - 5,518 5,518
Depreciation expense 874,417 - 874,417
Identifiable assets 35,481,107 - 35,481,107
Capital expenditures 649,087 - 649,087
Year ended December 31, 2002
Revenue $ 12,640,964 $ - $ 12,640,964
Operating income (loss) 7,822,020 (1,000,000) 6,822,020
Research development - 1,000,000 1,000,000
Depreciation expense 862,052 - 862,052
Identifiable assets 26,943,036 - 26,943,036
Capital expenditures 1,893,365 - 1,893,365
21. SUBSEQUENT EVENTS
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 as compensation for these services.
F-14
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004
(UNITED STATES DOLLARS)
ASSETS
June 30 December 31
2004 2003
------------------------ -------------------------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and Cash equivalents $ 19,067,185 $ 16,302,464
Inventories 696,937 1,214,182
Other receivable 3,279,513 3,399,995
Receivable due from related company 617,824 617,825
Receivable - Property sold 1,897,590 -
Prepayments and deposits 143,976 145,190
Property held for sale - 2,192,071
------------------------ -------------------------
TOTAL CURRENT ASSETS 25,703,025 23,871,727
FIXED ASSETS
(net of accumulated depreciation of $2,199,987 in 2004
and $1,943,831 in 2003) 6,160,183 6,416,341
LAND USE RIGHTS
(net of accumulated amortization of $931,160 in 2004
and $806,961 in 2003) 5,068,840 5,193,039
------------------------ -------------------------
TOTAL ASSETS $ 36,932,048 $ 35,481,107
======================== =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 443,366 $ 503,857
Accounts payable and accrued expenses 1,504,624 1,133,462
Payable to related company 103,373 205,957
Amounts due to related parties 409,962 417,617
------------------------ -------------------------
TOTAL CURRENT LIABILITIES 2,461,325 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 June 30, 2004 and December 31, 2003, respectively 29,387 29,177
Paid - in capital 8,317,110 8,088,159
Stock subscription receivable (10,176) (10,176)
Retained earnings 26,134,402 25,113,054
------------------------ -------------------------
TOTAL SHAREHOLDERS' EQUITY 34,470,723 33,220,214
------------------------ -------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 36,932,048 $ 35,481,107
======================== =========================
The accompanying notes are an integral part of
these financial statements.
F-15
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNITED STATES DOLLARS)
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- -----------------------------------
2004 2003 2004 2003
-------------- --------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
SALES $4,096,253 $ 91,084 $6,140,831 $ 119,460
COST OF SALES 2,500,561 - 3,950,498 -
-------------- --------------- --------------- ----------------
GROSS PROFIT 1,595,692 91,084 2,190,333 119,460
DEPRECIATION AND AMORTIZATION 190,167 213,469 380,355 426,938
SELLING AND ADMINISTRATIVE EXPENSES 421,809 161,147 789,963 295,157
OTHER INCOME (EXPENSE)
Interest Income 28,470 - 54,850 -
Impairment Loss - - (53,517) -
-------------- --------------- --------------- ----------------
NET INCOME (LOSS) BEFORE INCOME TAXES 1,012,186 (283,532) 1,021,348 (602,635)
INCOME TAXES - - - -
-------------- --------------- --------------- ----------------
NET INCOME (LOSS) $1,012,186 $ (283,532) $1,021,348 $ (602,635)
============== =============== =============== ================
EARNINGS PER SHARE
Basic and diluted
Net income (loss) $ 0.03 $ (0.01) $ 0.03 $ (0.02)
Weighted average number of common
shares outstanding
Basic and diluted 29,387,380 26,119,233 29,362,380 25,892,971
The accompanying notes are an integral part of
these financial statements.
F-16
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNITED STATES DOLLARS)
June 30
--------------------------------------------------
2004 2003
--------------------- ----------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,021,348 $ (602,635)
Adjustments to reconcile net income to
net cash provided by operating activities:
Impairment of reception center 53,517 -
Depreciation and amortization 380,358 426,938
Stock issued for service 90,000 -
(Increase) decrease in assets:
Inventories 517,245 -
Accounts receivable - 4,483,855
Other receivable 120,482 -
Amounts due from related parties - (4,000)
Prepayments and deposits 1,214 (2,892)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 371,162 78,086
Amounts due to related parties (7,655) 30,390
Account payable to related company (102,584) (4,886)
--------------------- ----------------------
Net cash provided by operating activities 2,445,087 4,404,856
--------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVIES
Cash received from sale of property held for sale 240,964 -
--------------------- ----------------------
CASH FLOWS FROM FINANCING ACTIVIES
Proceeds from issuance of common stock - 187,236
Capital contributed 78,670 -
--------------------- ----------------------
Net cash provided by financing activities 78,670 187,236
--------------------- ----------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 2,764,721 4,592,092
Cash and cash equivalents, beginning of period 16,302,464 7,135,559
--------------------- ----------------------
Cash and cash equivalents, at end of period $ 19,067,185 $ 11,727,651
===================== ======================
SUPPLEMENTARY CASH FLOWS DISCLOSURES
1. Interest paid - -
Taxes paid - -
2. During the six months ended June 30, 2004, 109,984 shares were issued for the
payment of notes payable of $60,491 and 100,000 shares were issued related to
services totaling $90,000.
The accompanying notes are an integral part of
these financial statements.
F-17
ETERNAL TECHNOLOGIES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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.
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.
F-18
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 June 30, 2004, the results
of operations for the three and six months ended June 30, 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 June 30, 2004, approximately $18,174,000 of cash is to be
exclusively used for operations in the Peoples' Republic of China.
4. Receivable - Property sold
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
$1,518,072. The Company accounts for non-monetary transactions in
accordance with APB Opinion No. 29. During the three months ended
June 30, 2004, a cash payment of $240,964 was received in
accordance with this agreement.
5. 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 six months ended June 30, 2004, the
Company expensed $90,000 associated with this agreement.
6. Notes payable
The Company's promissory notes payable are in default at June 30,
2004. 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.
7. 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 six
months ended June 30, 2004, the Company has accrued expenses for
penalties of $145,219.
F-19
8. Segment reporting
The Company has identified two reportable segments: Agricultural
Genetics/Animal Husbandry and Pharmaceutical Operations. The
amounts reported at June 30, 2004 and for the three and six month
periods ended June 30, 2004 and 2003 related to our Agricultural
Genetics/Animal Husbandry segment.
9. Subsequent events
On August 1, 2004, the Company entered into a six-month public
relations agreement with Empire Relations Group, Inc. ("Empire").
As consideration for public relations services, the Company shall
compensate Empire 100,000 shares of Eternal subject to Rule 144 as
follows: 50,000 shares upon the execution of this agreement and
10,000 shares per month beginning with the second month of the
contract and extending through the six months.
On July 27, 2004, the annual shareholder meeting approved the
adoption of "Year 2004 Stock Option Plan".
F-20