Exhibit 10.1
DATED 14th May, 2003
INDUSTRIES INTERNATIONAL, INCORPORATED
and
KIT TSUI
THE SOLE SHAREHOLDER OF LI SUN POWER INTERNATIONAL LIMITED
and
LI SUN POWER INTERNATIONAL LIMITED
and
WUHAN HANHAI HIGH TECHNOLOGY LIMITED
and
WUHAN CITY PUHONG TRADING LIMITED
and
SHENZHEN CITY XING ZHICHENG INDUSTRIAL LIMITED
and
SHENZHEN KEXUNTONG INDUSTRIAL CO. LTD.
-----------------------------------------
COMPLETION DATE OF THE SALE AND PURCHASE OF SHARES IN
LI SUN POWER INTERNATIONAL LIMITED
-------------------------------------------
- --------------------------------------------------------------------------------
THIS AGREEMENT is made the 14th day of May, Two Thousand and Three.
BETWEEN:
1. INDUSTRIES INTERNATIONAL, INCORPORATED, a company incorporated in the
State of Nevada, USA and listed in the Over-the-Counter Bulletin Board
under the trading symbol of "INDI" (the "PURCHASER").
2. KIT TSUI, THE SOLE SHAREHOLDER OF LI SUN POWER INTERNATIONAL LIMITED
(Holder of Hong Kong Identity Card No. P719321(5)) of 4th Floor, Wondial
Building, Keji Road Sth 6, Shenzhen High-Tech Industrial Park, Shennan
Blvd, Shenzhen, People's Republic of China (the "VENDOR").
3. LI SUN POWER INTERNATIONAL LIMITED, a company incorporated in the
British Virgin Islands whose registered office is situated at Akara
Bldg., 24 De Castro Street Wickhams Cay I, Road Town, Tortola, British
Virgin Islands (the "BVI COMPANY").
4. WUHAN HANHAI HIGH TECHNOLOGY LIMITED), a company incorporated in the
People's Republic of China, whose registered office is situated at
Yuejiaju No. 25, Xudong Road, Wuchang District, Wuhan City, China (the
"PRC 1").
5. WUHAN CITY PUHONG TRADING LIMITED, a company incorporated in the
People's Republic of China, whose registered office is situated at Yudai
First Village No. 68, Qiaokou District, Wuhan City, China (the "PRC 2").
6. SHENZHEN CITY XING ZHICHENG INDUSTRIAL LIMITED, a company incorporated
in the People's Republic of China, whose registered office is situated
at No. 4-702, Hubei Baofeng Garden, 14 Xinzhou Third Road, Futian
District, Shenzhen City, China (the "PRC 3").
7. SHENZHEN KEXUNTONG INDUSTRIAL CO. LTD., a company incorporated in the
People's Republic of China, whose registered office is situated at 4th
Floor, Wondial Building, Keji Road Sth 6, Shenzhen High-Tech Industrial
Park, Shennan Blvd, Shenzhen, People's Republic of China (the "PRC 4").
PRC 1, PRC 2, PRC 3 and PRC 4 are collectively referred to as the ("PRC
COMPANIES").
WHEREAS:
(A) The parties entered into an Agreement for the Sale and Purchase of
Shares in the BVI Company dated 10th March 2003 (the "Agreement")
(B) The parties entered into an Supplemental Agreement for postponing the
completion date to 31st May 2003 (the "Supplemental Agreement")
NOW IT IS HEREBY AGREED AND DECLARED AS FOLLOWS:
1. In relation to the Sale and Purchase stipulated in the Agreement, and
pursuant to the terms and conditions contained therein, the Purchaser
has reviewed the audited financial statements of the BVI Company
prepared by Moores Rowland Chartered Accountants dated May 14, 2003
(Exhibit A).
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2. The Purchaser is satisfied with the result of its due diligence review
of the financial and the operational aspects of the BVI Company
3. The parties agree that all the closing conditions have been met. Both
parties agree that the Closing of the Sale and Purchase as stipulated in
the Agreement shall take place on May 14, 2003 ("Completion Date").
4. Pursuant to the Agreement, as at the Completion Date, the Vendor shall
sell to the Purchaser 100% of the capital stock of the BVI Company for
the consideration of 15,765,432 shares of the common stock of the
Purchaser, based on share price of US$0.486 per share; and cash of
USD7,662,000, which shall be in form of a promissory note payable in
cash or common stock of the Purchaser.
5. On Completion, the Vendor and the BVI Company shall deliver and produce
to the Purchaser the documents as stipulated in Clause 6.2 of the
Agreement.
All the representations, undertakings, covenants and warranties made by the
Vendor and the BVI Company shall remain effective at the Closing of the Sale and
Purchase.
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As witness the hands of the parties hereto the day and year first above written.
SIGNED BY INDUSTRIES INTERNATIONAL, )
INCORPORATED by its director )
)
(Holder of )
No. ) in the presence of : )
SIGNED BY TSUI KIT, THE SOLE )
SHAREHOLDER OF LI SUN POWER )
INTERNATIONAL LIMITED )
(Holder of Hong Kong Identity Card )
No. P719321(5)) in the presence of : )
SIGNED BY LI SUN POWER INTERNATIONAL )
LIMITED by its director )
)
(Holder of )
No. ) in the presence of : )
SIGNED BY WUHAN HANHAI HIGH )
TECHNOLOGY LIMITED by its director )
(Holder of )
No. ) in the presence of : )
SIGNED BY WUHAN CITY PUHONG )
TRADING LIMITED by its director )
(Holder of )
No. ) in the presence of : )
SIGNED BY SHENZHEN CITY XING )
ZHICHENG INDUSTRIAL LIMITED )
by its director )
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(Holder of )
No. ) in the presence of : )
SIGNED BY SHENZHEN KEXUNTONG )
INDUSTRIAL CO. LTD. by its director )
)
(Holder of )
No. ) in the presence of : )
SIGNED BY COMPANY by its director )
)
(Holder of )
No. ) in the presence of : )
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Exhibit A
AUDITORS' REPORT
To the Directors and Stockholders
LI SUN POWER INTERNATIONAL LIMITED
(Incorporated in the British Virgin Islands)
We have audited the accompanying consolidated balance sheets of Li Sun Power
International Limited (the "Company") and its subsidiaries (the "Group") as of
December 31, 2001 and 2002, and the related consolidated statements of
operations, consolidated statements of changes in stockholder's equity and
consolidated statements of cash flows for the years ended December 31, 2001 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 auditing standards generally accepted
in the United States of America. 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 the Group as of
December 31, 2001 and 2002 and the results of their operations and cash flows
for the years ended December 31, 2001 and 2002 in conformity with accounting
principles generally accepted in the United States of America.
Moores Rowland
Chartered Accountants
Certified Public Accountants
Hong Kong
Date: May 14, 2003
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LI SUN POWER INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
As of December 31, 2001 and 2002
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(amount in thousands, except share data)
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2001 2002 2002
NOTE RMB RMB USD
OPERATING REVENUE
Net sales 70,217 159,455 19,241
Government grant 12,000 300 36
--------------- ---------------- --------------
82,217 159,755 19,277
--------------- ---------------- --------------
OPERATING EXPENSES
Manufacturing and other costs of sales (42,682) (98,607) (11,899)
Sales and marketing (2,256) (6,445) (778)
General and administrative (4,176) (6,341) (765)
Research and development (4,096) (3,868) (467)
Depreciation and amortization (754) (1,139) (137)
Write down of assets to be disposed of - (2,078) (251)
Other operating costs and expenses (810) (443) (53)
--------------- ---------------- --------------
Total operating expenses (54,774) (118,921) (14,350)
--------------- ---------------- --------------
OPERATING INCOME 27,443 40,834 4,927
Interest expenses (2,112) (3,172) (383)
Other income, net 903 567 69
--------------- ---------------- --------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 26,234 38,229 4,613
Provision for income taxes 14 (1,658) (4,521) (546)
--------------- ---------------- --------------
INCOME BEFORE MINORITY INTEREST 24,576 33,708 4,067
Minority interest in income of consolidated subsidiaries (10,810) (12,539) (1,513)
--------------- ---------------- --------------
NET INCOME 13,766 21,169 2,554
=============== ================ ==============
The accompanying notes are an integral part of these consolidated
financial statements.
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LI SUN POWER INTERNATIONAL LIMITED
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2002
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(amount in thousands, except share data)
AS OF DECEMBER 31,
--------------------------------------------------
2001 2002 2002
Note RMB RMB USD
ASSETS
CURRENT ASSETS
Cash and cash equivalents 62,790 67,400 8,133
Trade and other receivable 5 87,842 82,522 9,957
Due from related parties 16 727 2,204 266
Inventories 6 9,379 17,129 2,067
Assets to be disposed of - 429 52
Guaranteed investment contract 7 - 10,000 1,207
------------- --------------- --------------
Total current assets 160,738 179,684 21,682
NON-CURRENT ASSETS
Property, plant and equipment, net 8 39,635 39,877 4,812
Goodwill 591 591 71
------------- --------------- --------------
TOTAL ASSETS 200,964 220,152 26,565
============= =============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Trade and other payables 9 66,297 64,012 7,724
Debts maturing within one year 11 41,000 26,000 3,137
Due to related parties 16 32,213 33,179 4,003
Income tax payable 1,389 3,088 373
------------- --------------- --------------
Total current liabilities 140,899 126,279 15,237
------------- --------------- --------------
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 46,299 58,938 7,112
------------- --------------- --------------
STOCKHOLDER'S EQUITY:
Common stock and paid-in capital, USD 1.00 par value:
50,000 authorized
1 issued and outstanding 12 - - -
Statutory reserves 13 2,512 5,881 710
Retained earnings 11,254 29,054 3,506
------------- --------------- --------------
Total stockholder's equity 13,766 34,935 4,216
------------- --------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 200,964 220,152 26,565
============= =============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
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LI SUN POWER INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2001 and 2002
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(amount in thousands, except share data)
COMMON STOCK
----------------------------------
STATUTORY RETAINED
NO OF SHARES AMOUNT RESERVES EARNINGS TOTAL
-------------- ------------- ----------------- -------------- ----------------
RMB RMB RMB
Balance as of January 1, 2001 - - - - -
Issuance of share on
February 23, 2001 1 - - - -
Net income - - - 13,766 13,766
Transfer to statutory
reserves - - 2,512 (2,512) -
-------------- ------------- ----------------- -------------- ----------------
Balance as of December 31,
2001 1 - 2,512 11,254 13,766
Net income - - - 21,169 21,169
Transfer to statutory
reserves - - 3,369 (3,369) -
-------------- ------------- ----------------- -------------- ----------------
BALANCE AS OF DECEMBER 31,
2002 1 - 5,881 29,054 34,935
============== ============= ================= ============== ================
Balance as of December 31,
2002 (in USD) - 710 3,506 4,216
============= ================= ============== ================
The accompanying notes are an integral part of these consolidated
financial statements.
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LI SUN POWER INTERNATIONAL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001 and 2002
- --------------------------------------------------------------------------------
(amount in thousands)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2001 2002 2002
NOTE RMB RMB USD
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 13,766 21,169 2,554
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,467 5,157 622
(Reversal) Provision for doubtful accounts - 325 39
Minority interest in income of consolidated subsidiaries 10,810 12,539 1,513
Loss (gain) sales or disposal of property, plant and
equipment, net 350 (3) -
Provision for inventories - 318 38
Write down of assets to be disposed of - 2,078 251
Changes in assets and liabilities:
Trade and other receivable (16,807) 5,195 627
Due from related parties (727) (1,477) (178)
Inventories, net 8,778 (8,067) (973)
Trade and other payables 9,394 (2,285) (276)
Due to related parties 557 (34) (4)
Tax payable 773 1,699 205
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,361 36,614 4,418
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale investments - (200) (24)
Purchase of guaranteed investment contract - (10,000) (1,207)
Sales proceeds from property, plant and equipment - 15 2
Purchase of property, plant and equipment and addition of
construction in progress, net (6,708) (7,918) (955)
Acquisition of subsidiaries, net of cash disbursed 41,035 - -
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES 34,327 (18,103) (2,184)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contribution by minority stockholders - 100 12
Borrowings of short-term debts - 3,000 362
Repayment of short-term debts (900) (18,000) (2,172)
Advance from a related party 1 1,000 120
------------- ------------- -------------
NET CASH USED IN FINANCING (899) (13,900) (1,678)
------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 62,789 4,611 556
CASH AND CASH EQUIVALENTS AT BEGINNING OF FISCAL PERIOD - 62,789 7,577
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF FISCAL PERIOD 62,789 67,400 8,133
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the fiscal
period for:
Interest paid (2,408) (3,187) (384)
Income tax (885) (2,823) (340)
============= ============= =============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisitions of subsidiary 15 (48,405) - -
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
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LI SUN POWER INTERNATIONAL LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
As of December 31, 2001 and 2002
- --------------------------------------------------------------------------------
(amount in thousands, except share data and ratio)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Li Sun Power International Limited ("the Company") was incorporated in the
British Virgin Islands (the "BVI") on September 19, 2000 as company with
limited liability. The former name of the Company was Million Star
International Limited which was changed on March 2, 2001 to Li Sun Power
International Limited.
As of December 31, 2002, the authorized capital of the Company is US$50
consisting of 50,000 shares of common stock, par value USD1.00 each.
On February 23, 2001, 1 share of common stock par value USD1.00 each was
allotted to Mr. Tsui Kit.
The Company is an investment holding company, and the principal activities
of its subsidiaries are the manufacturing and sales of battery testing
equipment and batteries. The head office of its subsidiaries is located at
No. 7 of Guandong Science Park, East Lake Technology Development Zone,
Wuhan, Hubei Province, the People's Republic of China ("PRC").
2. BASIS OF CONSOLIDATION
Pursuant to the share transfer agreement entered into between the Company
and a shareholder of Wuhan Lixing Power Sources Co. Ltd. ("WLPS") in June
2001, the Company acquired 60.25% interest in WLPS for a consideration of
RMB35,000. On July 1, 2001, the Company appointed the existing directors to
exercise the control in WLPS.
In December 2001, the Company entered into share transfer agreements with
Mr. Tsui Kit, the sole stockholder of the Company, and acquired an
additional 12.59% interest in WLPS for an aggregate consideration of
RMB13,405.
As of December 31, 2001 and 2002, the Company owns 72.84% interest in WLPS.
The Company acts as an investment holding company and is designated by its
sole stockholder and director, Mr. Tsui Kit, to hold his interest in WLPS.
As the Company had not commenced operation as of December 31, 2000, no
statement of operation for the period from September 19, 2000 (date of
incorporation) to December 31, 2000 is presented in these consolidated
financial statements.
The consolidated financial statements have been prepared using the purchase
accounting method incorporating the consolidated results of WLPS from July
1, 2001, the effective date of acquisition. The summary of effect of
acquisitions of subsidiaries is disclosed as follows:
YEAR ENDED
DECEMBER 31, 2001
------------------
RMB
ACQUISITION IN JUNE 2001
Assets acquired
Cash and cash equivalents 41,035
Trade and other receivables 71,034
Inventories 18,158
Property, plant and equipment, net 48,147
--------
178,374
--------
Liabilities assumed
Trade and other payables (40,153)
Debts maturing within one year (41,900)
Income tax payable (616)
--------
(82,669)
--------
Minority interest (17,033)
--------
Net assets acquired 78,672
Shared by minority interest (31,270)
Negative goodwill (Note) (12,402)
--------
Consideration 35,000
--------
ACQUISITION IN DECEMBER 2001
Net assets acquired 12,814
Goodwill arising 591
--------
Consideration 13,405
--------
Total consideration of the acquisitions (note 15) 48,405
========
Note: Negative goodwill is recorded as a reduction of the cost of leasehold land
and buildings
The following unaudited pro forma consolidated results of operations reflect the
results of operations for the year ended December 31, 2001, as if the
aforementioned acquisitions had occurred on January 1, 2001 and after giving
effect to purchase accounting adjustments. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what operating results would have been had the acquisitions actually taken place
on January 1, 2001 and may not be indicative of future operating results.
YEAR ENDED
DECEMBER 31, 2001
------------------
RMB
PRO FORMA
Revenue 121,560
Net income 22,020
The subsidiaries incorporated in the consolidated financial statements are as
follows:
a) WLPS was incorporated in the PRC on April 15, 1993 as a company with
limited liability. As of December 31, 2001 and 2002, the capital of WLPS
was RMB36,787.
WLPS principally engages in manufacturing and sales of battery related
testing equipment and investment holding. WLPS operates in the PRC.
b) Wuhan Lixing (Torch) Power Sources Company Limited ("WLTP") is a
Sino-foreign equity joint venture established by WLPS and another foreign
investor on September 12, 1995 in Wuhan, the PRC. WLPS owns 70.7% equity
interest in WLTP which has a total registered capital of RMB60,000. The
joint venture period is 30 years from the date of issue of the business
licence on September 12, 1995.
The principal activity of WLTP is manufacturing and sales of lithium
batteries and lithium-ion batteries. WLTP commenced operation in 1995.
c) Shenzhen Chuang Lixing Power Sources Company Limited ("SCLP") was
established on March 28, 2002 in Shenzhen, the PRC as a company with
limited liability.
The total registered capital of SCLP is RMB1,000. The business operation
period is 20 years from the date of issue of the business licence on March
28, 2002. WLPS owns 90% equity interest in SCLP.
The principal activity of SCLP is trading of lithium batteries and
lithium-ion batteries. As of December 31, 2002, SCLP had not yet commenced
operation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES
The consolidated financial statements and accompanying notes are presented
in Renminbi ("RMB") and prepared in accordance with generally accepted
accounting principles in the United States of America ("USGAAP").
PRINCIPLE OF CONSOLIDATION
The accompanying consolidated financial statements include the financial
statements of the Company and its subsidiaries in which the Company has a
controlling financial interest.
All material intercompany balances and transactions have been eliminated on
consolidation.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS
No. 141 requires all business combinations to be accounted for under the
purchase method of accounting; the pooling of interest method is no longer
permitted, except for the transaction between entities under common
control. In addition, SFAS No. 141 requires that at the date of
acquisition, identifiable intangible assets should be recognized separate
and apart from goodwill if the intangible assets meet certain criteria.
SUBSIDIARY
A subsidiary is an enterprise controlled by an entity directly, or
indirectly through one or more intermediaries. The term control (including
the terms controlling, controlled by and under common control with) means
the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting shares, by contract, or otherwise.
REVENUE RECOGNITION
Net sales represent the invoiced value of goods, net of value-added tax
("VAT") and returns. The Group generally recognizes product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the
fee is fixed or determinable, and collectibility is probable. The Group
adopts a policy of including handling costs incurred for finished goods in
the sales and marketing expenses. The handling costs for the years ended
December 31, 2001 and 2002 were RMB495 and RMB884 (USD107) respectively.
RESEARCH AND DEVELOPMENT
All costs of research and development activities are expensed as incurred.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs are expensed when the advertisement or
commercial appears in the selected media. Advertising and promotion
expenses for the years ended December 31, 2001 and 2002 were RMB744 and
RMB2,315 (USD279) respectively and are included in sales and marketing
expense in the consolidated statements of operations.
INCOME TAXES
Income tax expense is computed based on pre-tax income included in the
consolidated statement of operation. Income taxes have been provided, using
the liability method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and tax bases assets and
liabilities and their reported amounts. The tax consequences of those
differences are classified as current or non-current based upon the
classification of the related assets or liabilities in the consolidated
financial statements.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments, generally with
original maturities of three months or less that are readily convertible to
known amount of cash and are so near maturity that they represent
insignificant risk of changes in value because of changes in interest
rates.
INVENTORIES
All Inventories are stated at the lower of weighted average cost or market.
Potential losses from obsolete and slow-moving inventories are provided for
when identified. Costs of work-in-progress and finished goods are composed
of direct materials, direct labor and an attributable portion of
manufacturing overheads.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated at original cost less accumulated
depreciation and amortization.
The cost of an asset comprises its purchase price and any directly
attributable costs of bringing the asset to its present working condition
and location for its intended use. Expenditures incurred after the assets
have been put into operation, such as repairs and maintenance, overhaul and
minor renewals and betterments, are normally charged to operating expenses
in the period in which they are incurred. In situations where it can be
clearly demonstrated that the expenditure has resulted in an increase in
the future economic benefits expected to be obtained from the use of the
assets, the expenditure is capitalized.
When assets are sold or retired, their costs and accumulated depreciation
are eliminated from the consolidated financial statements and any gain or
loss resulting from their disposal is recognized in the year of disposition
as an element of other income, net.
Depreciation is provided to write off the cost of property, plant and
equipment using straight-line method at rates based on their estimated
useful lives of assets from the date on which they become fully operational
and after taking into account their estimated residual values.
CONSTRUCTION IN PROGRESS
Construction in progress is stated at cost, less provision for impairment
loss, which includes all construction expenditure and other direct costs,
including interest costs, attributable to such projects. Costs on completed
construction works are transferred to the appropriate asset category.
GOODWILL ON CONSOLIDATION
Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at date of acquisition and is evaluated at
lease annually for impairment.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 requires that goodwill be tested for impairment using a
two-step process. The first step is to identify a potential impairment, and
the second step measures the amount of the impairment loss, if any.
Goodwill is deemed to be impaired if the carrying amount of a reporting
unit exceeds its estimated fair value. SFAS No. 142 requires that
indefinite-lived intangible assets be tested for impairment using a
one-step process, which consists of a comparison of the fair value to the
carrying value of the intangible asset. Intangible assets are deemed to be
impaired if the net book value exceeds the estimated fair value.
The estimates of future cash flows, based on reasonable and supportable
assumptions and projections, require management's judgment. Any changes in
key assumptions about the Company's businesses and their prospects, or
changes in market conditions, could result in an impairment change. No
impairment loss was recognized as of December 31, 2002.
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
The long-lived assets held and used by the Group are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. It is reasonably possible
that these assets could become impaired as a result of technology or other
industry changes. Determination of recoverability of assets to be held and used
is by comparing the carrying amount of an asset to the future net undiscounted
cash flows to be generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
FOREIGN CURRENCIES TRANSLATION
The Group considers RMB as its functional currency as a substantial portion
of the Group's business activities are based in RMB.
Transactions in currencies other than functional currency during the year
are translated into the functional currency at the applicable rates of
exchange prevailing at the time of the transactions. Monetary assets and
liabilities denominated in currencies other than functional currency are
translated into functional currency at the applicable rates of exchange in
effect at the balance sheet date. Exchange gains and losses are dealt with
in the consolidated statement of operation.
For the convenience of the readers of these consolidated financial
statements, translation of amounts from RMB into USD has been made at the
exchange rate of RMB1.00 = US$0.12067 as of December 31, 2002. No
representation is made that the RMB amounts could have been or could be
converted into the United States dollars at the rate or at any other rates
on December 31, 2002.
GOVERNMENT GRANTS
Government grants, including non-monetary grants at fair value, are
recognized when there are no restrictions or conditions attaching to them,
and the grants will be received.
In July 2001, the Group received a lump sum of unconditional grant
amounting to RMB12,000 from the PRC government to subsidize spendings on
certain qualified capital and revenue expenditures of on-going research and
development projects in lithium and lithium-ion batteries. The Group
recognized the grant as revenue when it was received.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
USGAAP requires the Company's management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the reported
periods. Actual amounts could differ from those estimates. Estimates are
used for, but not limited to, the accounting for certain items such as
allowance for doubtful accounts, depreciation and amortization, inventory
allowance, taxes and contingencies.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Group provides an allowance for doubtful accounts equal to the
estimated uncollectable amounts. The Group's estimate is based on
historical collection experience and a review of the current status of
trade accounts receivable. It is reasonably possible that the Group's
estimate of the allowance for doubtful accounts will change. Accounts
receivable are presented net of an allowance for doubtful accounts of
RMB9,036 and RMB9,361 (USD1,130) as of December 31, 2001 and 2002
respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OPERATING LEASES
Leases where substantially all the rewards and risks of ownership of assets
remain with the leasing company are accounted for as operating leases.
Rental payables under operating leases are recognized as expenses
respectively on the straight-line basis over the lease terms.
RELATED PARTIES
Parties are considered to be related if one party has the ability, directly
or indirectly, to control the other party or exercise significant influence
over the other party in making financial and operating decisions. Parties
are also considered to be related if they are subject to common control or
common significant influence.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements. The Group is required to adopt SFAS No. 145
during the first quarter of 2003. Adoption will not have a material impact
on the combined financial statements of the Company.
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities".
SFAS No. 146 requires that a liability for a cost that is associated with
an exit or disposal activity be recognized when the liability is incurred.
This standard nullifies the guidance of EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)".
Under EITF Issue No. 94-3, an entity recognized a liability for an exit
cost on the date that the entity committed itself to an exit plan. Under
SFAS No. 146, the FASB concludes that an entity's commitment to an exit
plan does not, by itself, create a present obligation to other parties that
meets the definition of a liability. SFAS No. 146 also establishes that
fair value is the objective for the initial measurement of the liability.
SFAS No. 146 will be effective for exit or disposal activities that are
initiated after December 31, 2002. The Group does not expect that this
standard will have a material effect on its consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123". This Statement amends SFAS No. 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, this Statement amends the disclosure
requirements of SFAS No. 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. Certain provisions of SFAS No. 148 are effective for
fiscal years
ending after December 15, 2002 and other provisions are effective for
fiscal years beginning after December 15, 2002. The adoption of SFAS No.
148 will not have a material impact on the Group's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". The SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
Subject to certain exception, this statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
relationships designated after June 30, 2003 and all provisions of this
Statement should be applied prospectively. The adoption of SFAS No. 149 has
no impact on the Group's consolidated financial statement.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). The disclosure requirements
of FIN 45 are effective for the Group's combined financial statements for
the year ended December 31, 2002. For applicable guarantees issued after
January 1, 2003, FIN 45 requires that a guarantor recognize a liability for
the fair value of obligations undertaken in issuing guarantees. The Group
does not expect that this standard will have any significant effect on its
combined financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable to financial
statements to be issued after 2002; however, disclosures are required
currently if any variable interest entities are expected to be combined.
The Group currently has no interests in variable interest entities, and
therefore does not expect the adoption of FIN 46 to have an impact on the
Group's consolidated financial statements.
4. OPERATING RISK
(A) COUNTRY RISKS
The Group may be exposed to the risks as a result of its sales operation
being related in the PRC. These include risks associated with, among
others, the political, economic and legal environmental and foreign
currency exchange. The Group's results may be adversely affected by change
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. The Company's management
does not believe these risks to be
significant. There can be no assurance, however, those changes in political
and other conditions will not result in any adverse impact.
The Group's result may also be adversely affected by the change in the
trend of economic condition and growth in the PRC as a result of the recent
outbreak of Severe Acute Respiratory Syndrome in certain areas in the PRC.
(B) FOREIGN EXCHANGE RISK
The Group's major sales and purchases are made in RMB. In addition, the
Group had no significant monetary assets and liabilities held in currencies
other than RMB and USD. As the exchange rate of RMB and USD was steady in
previous years and is not expected to fluctuate in the foreseeable future,
no hedging is considered necessary.
(C) INTEREST RATE RISK
The Group does not incur any significant interest rate risk as the Group
had no monetary financial liabilities with floating interest rate at the
balance sheet dates.
(D) CREDIT RISK
The carrying amounts of cash and bank deposits, trade and other
receivables, and amount due from related party represented the Group's
maximum exposure to credit risk in relation to financial assets.
YEARS ENDED DECEMBER 31,
----------------------------------------------
2001 2002 2002
RMB RMB USD
Major customers with revenues of more than 10% of
the Group's sales
Sales to major customers - 18,528 2,238
Percentage of sales - 12% 12%
Number - 1 1
============= ============ ============
The major concentrations of credit risk arise from the Group's trade
receivables. The Group generally does not require collateral on trade
receivables. The Group maintains a provision for doubtful debts and actual
losses have been within management's expectation. Trade receivables related to
the Group's major customer were 11% of all trade receivables, net of allowance
as of December 31, 2002. No other financial asset carries a significant exposure
to credit risk.
(E) CASH AND TIME DEPOSITS
The Group maintains its cash balances and investments in time deposits with
various banks and financial institutions located in the PRC. In common with
local practice, such amounts are not insured or otherwise protected should
the financial institutions be unable to meet their liabilities. There has
been no history of credit losses. There are neither material commitment
fees nor compensating balance requirements for all outstanding loans of the
Group.
5. TRADE AND OTHER RECEIVABLES
AS OF DECEMBER 31,
---------------------------------------------------
2001 2002 2002
RMB RMB USD
TRADE RECEIVABLES, NET OF ALLOWANCE 73,208 69,642 8,403
OTHER RECEIVABLES
Prepaid expenses and other current assets 14,634 12,880 1,554
--------------- --------------- --------------
87,842 80,322 9,957
=============== =============== ==============
6. INVENTORIES
AS OF DECEMBER 31,
---------------------------------------------------
2001 2002 2002
RMB RMB USD
Raw materials 5,668 9,462 1,142
Work-in-progress 1,948 4,707 568
Finished goods 1,763 2,960 357
--------------- --------------- --------------
9,379 17,129 2,067
=============== =============== ==============
All inventories, apart from those fully provided for of RMB1,261 and
RMB1,688 (USD204) as of December 31, 2001 and 2002 respectively, are
stated at cost.
7. GUARANTEED INVESTMENT CONTRACT
In September 2002, the Group entered into a guaranteed investment contract
(the "contract") with a financial institution. The amount of the contract
is RMB10,000, with a minimum guaranteed return rate of 8% per annum and a
repayment term of one year. As of December 31, 2002, the contract is stated
at cost.
8. PROPERTY, PLANT AND EQUIPMENT, NET
ESTIMATED
USEFUL LIVES AS OF DECEMBER 31,
-------------------------------------------------------------------
2001 2002 2002
RMB RMB USD
COST
Leasehold land and buildings 30 16,259 14,823 1,789
Plant and machinery 8-10 33,792 40,537 4,891
Furniture, fixtures and office equipment 8-10 1,986 2,348 283
Motor vehicles 5-8 2,226 2,545 307
Construction in progress -NA- 1,117 305 37
--------------- --------------- --------------
55,380 60,558 7,307
ACCUMULATED DEPRECIATION (15,745) (20,681) (2,495)
--------------- --------------- --------------
39,635 39,877 4,812
=============== =============== ==============
The net book value of property, plant and equipment pledged as security
for liabilities amounted to RMB20,321 and RMB15,209 (USD1,835) as of
December 31, 2001 and 2002 respectively.
9. TRADE AND OTHER PAYABLES
AS OF DECEMBER 31,
------------------------
2001 2002 2002
RMB RMB USD
TRADE PAYABLES 36,773 33,108 3,995
OTHER PAYABLES
Accrued creditors and other creditors 29,524 30,904 3,729
------ ------ ------
66,297 64,012 7,724
====== ====== ======
10. BANKING FACILITIES
The Group had various lines of credit under banking facilities as follows:
AS OF DECEMBER 31,
-----------------------
2001 2002 2002
RMB RMB USD
FACILITIES GRANTED
Committed credit lines 41,000 33,000 3,982
====== ====== =====
UTILIZED
Committed credit lines 41,000 26,000 3,137
====== ====== =====
UNUTILIZED FACILITIES
Committed credit lines -- 7,000 845
====== ====== =====
There are no significant commitment fees or requirements for compensating
balances associated with any lines of credit.
Under the banking facilities arrangements, the Group's banking facilities
amounted to RMB5,000 and RMB10,000 (USD1,207) as of December 31, 2001 and
2002 respectively were collateralized by guarantees of a related company,
Shenzhen Wonderland Communication Science & Technology Company Limited
("Wondial"), details of relationship were disclosed in note 16. The
interests on amounts borrowed under the various loan agreements are at
market rates.
The Group's banking facilities amounted to RMB36,000 and RMB23,000
(USD2,775) as of December 31, 2001 and 2002 respectively were
collateralized by certain Group's fixed assets.
The remaining Group's banking facilities were not collateralized.
11. DEBTS MATURING WITHIN ONE YEAR
Debts maturing within one year represented mainly short-term bank loans and
were summarized as follows:
OUTSTANDING DEBTS
WEIGHTED-AVERAGE MATURING
INTEREST RATES WITHIN ONE YEAR
----------------- ------------------------------
% RMB USD
As of December 31,
2002 5.91 26,000 3,137
Amounts of RMB3,000 (USD362) and RMB10,000 (USD1,207) have been falling due
in January and March 2003 respectively, and the remaining of RMB13,000
(USD1,568) will be matured in August 2003.
12. ISSUED CAPITAL
As of December 31, 2001 and 2002, the authorized capital of the Company is
US$50 divided into 50,000 shares of common stock, par value US$1.00 each,
with one vote of each share.
On February 23, 2001, one share of common stock, par value US$1.00 each,
was allotted to Mr. Tsui Kit for cash. As of December 31, 2001 and 2002,
one share of common stock, par value USD1.00 each was issued and
outstanding.
13. RESERVES
Statutory reserves
Statutory reserves of WLPS include the statutory common reserve fund and
the statutory common welfare fund. Pursuant to regulations in the PRC, WLPS
sets aside 10% of its profit after tax for the statutory common reserve
fund (except when the fund has reached 50% of the WLPS's registered
capital) and 5% of its profit after tax for the statutory common welfare
fund. The statutory common reserve fund can be used for the following
purposes:
o to make good losses in previous years; or
o to convert into capital, provided such conversion is approved by a
resolution at a shareholders' general meeting and the balance of the
statutory common reserve fund does not fall below 25% of the
registered capital.
The statutory common welfare fund, which is to be used for the welfare of
the staff and workers of the Company, is of a capital nature.
Being a sino-foreign joint venture enterprise, WLTP is required to maintain
a reserve fund, an enterprise development fund and a staff welfare and
bonus fund as a percentage of profit after tax. Pursuant to the PRC rules
and regulations applicable to a sino-foreign joint venture enterprise, the
Articles of Association of WLTP stipulate that the percentage of
appropriations to these funds cannot exceed 20% of its profit after tax,
and is determined at the discretion of the board of directors. The nature
and purposes of the reserve fund and the staff welfare and bonus fund are
similar to the statutory common reserve fund and the statutory common
welfare fund respectively. The enterprise development fund is set aside for
future development of the entity.
14. INCOME TAXES
The Group is subject to income taxes on an entity basis on income arising
in or derived from the tax jurisdictions in which it operates.
The Company
The Company has no assessable income in the years ended December 31, 2001
and 2002.
WLPS
WLPS is registered and approved as a new technology enterprise in Wuhan
East Lake Technology Development Zone, of which WLPS is entitled to a
preferential tax rate of 15%.
WLTP
Pursuant to the relevant income tax laws of the PRC applicable to a
sino-foreign joint venture enterprise, WLTP is exempted from the PRC
enterprise income tax ("EIT") for two years starting from the first year of
profitable operations after offsetting prior years' losses, followed by a
50% reduction on the EIT for the next three years. The first year of
profitable operations commenced in the year ended December 31, 2000 and
accordingly no provision for income taxes has been made during the 2000 and
2001 and tax is calculated at the applicable tax rate of 7.5% after a 50%
reduction in 2002.
YEARS ENDED DECEMBER 31,
-------------------
2001 2002 2002
RMB RMB USD
Current tax - EIT 1,658 4,521 546
===== ===== ===
There was no significant unprovided deferred taxation for the relevant
years.
A reconciliation between the provision for income taxes computed by
applying the standard PRC income tax rate to income before taxes and the
actual provision for income taxes is as follows:
YEARS ENDED DECEMBER 31,
----------------------------
2001 2002 2002
RMB RMB USD
Tax calculated at the applicable tax rate of 15% 3,935 5,711 689
Adjustment due to the translation from accounting
profit calculated using the local standards to
accounting profit calculated using US GAAP 176 (70) (8)
Adjustment to accounting profit on consolidation 964 (22) (3)
Non-taxable subsidy from the PRC government (1,800) -- --
Non-taxable income of the Company (4) -- --
Loss incurred by the Company -- 1 --
Loss incurred by the subsidiary -- 62 8
Exemption of EIT of the subsidiary (1,613) -- --
50% reduction on the EIT of the subsidiary -- (1,161) (140)
------ ------ ------
1,658 4,521 546
====== ====== ======
15. SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Analysis of the net cash inflow in respect of the acquisitions during the
following fiscal year
YEAR ENDED
DECEMBER 31,
2001
------------
RMB
Cash consideration (note 2) 48,405
Settled by advance from related parties (note 16(b)) (18,250)
Unsettled balance (30,155)
Bank balances and cash acquired 41,035
------------
Net cash inflow from the acquisitions 41,035
============
As the consideration was either unsettled or settled by advance for a
related party, the amount was disclosed as non-cash activities in the
consolidated statements of cash flows.
16. RELATED PARTY TRANSACTIONS
(a) Name and relationship of related parties
NAME Existing relationships with the Company
Under common control of the stockholder of the
Shenzhen Kexuntong Industrial Company Limited ("SKI") Company
Wondial A subsidiary of SKI
Wuhan Lixing Power Source Company Limited - battery retail
shop ("Retail shop") A branch of WLPS
Chang Jiang Economic Joint Development Company Limited, Wuhan
Branch ("CJEJ")* A stockholder of WLPS
Zhu Chao Ying A stockholder of WLPS
Tsui Kit The sole stockholder of the Company
Shenzhen City Xing Zhicheng Industrial Limited ("SCXZC") A stockholder of SCLP
* Direct translation for identification purpose only.
(b) Related party transactions
YEARS ENDED DECEMBER 31,
---------------------------------------------------
2001 2002 2002
RMB RMB USD
Sales of goods to Wondial - 516 62
Payment made by SKI for the acquisition of subsidiary (note 15) 18,250 - -
=============== ============== ==============
The management of the Group based on the estimated market value to determine the
transaction price.
(c) Due from related parties
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2002 2002
RMB RMB USD
Retail shop 720 2,197 265
CJEJ 7 7 1
-------------- -------------- --------------
727 2,204 266
============== ============== ==============
(d) Due to related parties
SKI 30,128 30,128 3,636
Tsui Kit 2,085 1,948 235
Zhu Chao Ying - 103 11
SCXZC - 1,000 121
-------------- -------------- --------------
32,213 33,179 4,003
============== ============== ==============
(e) All amounts due are unsecured and repayable on demand.
17. PENSION COSTS
As stipulated by PRC regulations, the Group maintains a defined
contribution retirement plan for all of its employees who are residents of
PRC. All retired employees of the Group are entitled to an annual pension
equal to their basic annual salary upon retirement. The Group contributed
to a state sponsored retirement plan approximately 20% of the basic salary
of its employees and has no further obligations for the actual pension
payments or post-retirement benefits beyond the annual contributions. The
state sponsored retirement plan is responsible for the entire pension
obligations payable to all employees. The pension expense for the years
ended December 31, 2001 and 2002 were RMB66 and RMB521 (USD63)
respectively.
18. CONTINGENT LIABILITIES
As of December 31, 2001 and 2002, the Group had contingent liabilities not
provided for in the consolidated financial statements in respect of
guarantee of a bank loan to company controlled by a stockholder of the
Company amounting to RMBNil and RMB23,000 respectively.
19. POST BALANCE SHEET EVENT
On March 10, 2003, the sole stockholder, Mr. Tsui Kit entered into a
conditional agreement for the sale of shares in the Company with Industries
International, Incorporated, a company in which Mr. Tsui Kit is a majority
stockholder. The agreement provides for a closing date of the transaction
in May 2003.