UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20 - F
(MARK ONE)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ or __________
Commission file number: 0-32359
MERIDIAN CO., LTD.
(Exact name of registrant as specified in its charter)
The Republic of Korea
(Jurisdiction of incorporation or organization)
9FL., Seoil Bldg. 222, Jamsilbon-dong, songpa-Gu, Seoul, Korea
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -------------------
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common shares
(Title of Class)
(Title of Class)
1
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Common shares outstanding December 31, 2001: 15,899,875
_
_________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
----
Indicate by check mark which financial statement item the registrant has
selected to follow.
Item 17 [ ] Item 18 [X]
REFERENCES
All references to "Korea" herein are references to The Republic of Korea. All
references to "Meridian," "we," "us" or "our" herein are references to Meridian
Co., Ltd. All references to the "Government" are references to the government of
Korea. All references to the "shares" are references to the common shares of
15,899,875, par value of Won 200 (US$0.15 at December 31, 2001).
CURRENCY TRANSLATION
In this annual report, references to "Won" or "W" are to the currency of Korea
and all references to "Dollars," "$" or "US$" are to the currency of the United
States of America. Our financial statements are prepared in Won, translated into
U.S. dollars and presented in accordance with accounting principles generally
accepted in the United States for the fiscal years ended December 31, 1999, 2000
and 2001. Solely for the convenience of the reader and to improve clarity,
certain Items in this annual report contains translations of certain Won amounts
into Dollars at specified rates (see also note 2c to the Company's audited
financial statements, included in Item 18, for the Company's accounting policies
with regard to foreign exchange conversion). All translations from Won to
Dollars were made (unless otherwise indicated) at the noon buying rate in The
City of New York for cable transfers in Won per US$1.00 as certified for customs
purposes by the Federal Reserve Bank of New York in effect on December 31, 2001,
which was Won 1,313.50 to US$1.00. No representation is made that the Won or US$
amounts referred to in this annual report could have been or could be converted
into US$ or Won, as the case may be, at any particular rate or at all. See also
Item 3, Key Information, Exchange Rates Information, for information regarding
the rates of exchange between the Won and the Dollar. On July 12, 2002 the noon
buying rate was Won 1,177.0 to US$1.00.
2
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIORMANAGEMENT AND ADVISERS
- -------------------------------------------------------------------
A. DIRECTORS AND SENIOR MANAGEMENT
See Item 4.C.
B. ADVISERS
Principal bankers: Chohung Bank
72-3, Hongchun-Eup, Hongchun-Kun, Kangwon-Do, Korea
Legal advisors: J. Bennett Grocock
455 S. Orange Avenue Suite 500, Orlando, Florida, USA
C. AUDITORS
SamDuk Accounting Corporation
12/F SeoHeung Bldg.
68 Keonji-Dong, Jongro-Ku
Seoul, Korea
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
- -----------------------------------------------------
Not Applicable
ITEM 3. KEY INFORMATION
- --------------------------
A. SELECTED FINANCIAL DATA
The selected consolidated financial and other data set forth below should be
read in conjunction with the consolidated financial statements of Meridian Co.,
Ltd. as of December 31, 2001 and 2000 and for each of the years in the
three-year period ended December 31, 2001, including the notes thereto, and
"Item 5Operating and Financial Review and Prospects" included in this annual
report. The selected consolidated financial data set forth below for the fiscal
years ended December 31, 2001,2000 and 1999 are derived from the audited
consolidated financial statements of Meridian, which have been audited by SamDuk
Accounting Corporation, independent accountants. The report of SamDuk Accounting
Corp. covering the December 31, 2001 financial statements contains an emphasis
paragraph related to the adverse economic conditions in the Republic of Korea in
recent years and in the Asia Pacific region in general. Especially, the
auditors' report also describes the uncertainty about our ability to continue as
a going concern, based on negative cash flows from operations, accumulated
deficit and negative net assets. Our consolidated financial statements are
expressed in US dollars and presented in accordance with accounting principles
generally accepted in the United States.
3
MERIDIAN CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in U.S. dollars)
For the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,289,561 $ 5,304,040 $ 5,367,091
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 2,478,106 2,978,975 3,988,964
Gross profit. . . . . . . . . . . . . . . . . . . . . . . 2,811,455 2,325,065 1,378,127
------------ ------------ ------------
Operating expenses. . . . . . . . . . . . . . . . . . . . 3,996,150 3,338,976 2,396,014
Operating loss . . . . . . . . . . . . . . . . . . . . . (1,184,695) (1,013,911) (1,017,887)
Other income . . . . . . . . . . . . . . . . . . . . . . 188,925 400,473 1,216,384
Other expenses . . . . . . . . . . . . . . . . .. . . . (929,442) (445,877) (441,223)
Minority interest in net loss of consolidated affiliates 19,302 367,789 14,074
Income tax expense . . . . . . . . . . . . . . . . . . . - (11,551) (130,037)
Extraordinary items. . . . . . . . . . . . . . . . . . . (10,212) 6,391 (13,918)
Other comprehensive gain (loss). . . . . . . . . . . . . (43,252) (158,508) 81,290
Comprehensive loss . . . . . . . . . . . . . . . . . . . $(1,959,374) $ (855,194) $ (291,317)
Weighted average number of common shares . . . . . . . . 15,703,850 14,071,325 8,371,325
Basic and diluted loss per common share. . . . . . . . $ (0.12) $ (0.05) $ (0.04)
4
CONSOLIDATED BALANCE SHEETS (in U.S. dollars)
As of December 31, 2001, 2000 and 1999
2001 2000 1999
Cash and cash equivalents. . . . . . . . . $ 105,216 $ 398,625 $1,428,090
Accounts receivable.- trade. . . . . . . . 1,759,821 2,708,607 1,895,453
Inventories. . . . . . . . . . . . . . . . 1,187,989 1,093,137 509,633
Other. . . . . . . . . . . . . . . . . . . 1,074,919 587,827 119,658
Total current assets . . . . . . . . . . 4,127,945 4,788,196 3,952,834
Investments and other assets . . . . . . . 433,653 693,331 872,284
Property, plant and equipment - net. . . . 1,455,295 1,528,395 1,237,090
Goodwill and other intangible assets - net 932 75,273 77,792
TOTAL ASSETS . . . . . . . . . . . . . . $6,017,825 $7,085,195 $6,140,000
Trade accounts payable and current debt. . $3,653,326 $3,779,553 $1,850,493
Long-term borrowings . . . . . . . . . . . 2,568,413 1,486,641 2,275,676
---------- --------- ---------
Total liabilities. . . . . . . . . . . . 6,221,739 5,266,194 4,126,169
Minority interest. . . . . . . . . . . . . 6,593 26,691 35,669
Shareholders' equity . . . . . . . . . . . (210,507) 1,792,310 1,978,162
---------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY. . . . . . . . . . $6,017,825 $7,085,195 $6,140,000
5
EXCHANGE RATE INFORMATION
The following table sets forth, for the periods and dates indicated, certain
information concerning the noon buying rate of US dollar in Won. No
representation is made that the Won or Dollar amounts referred to herein could
have been or could be converted into Dollars or Won, as the case may be, at any
particular rate, or at all.
YEAR AT DECEMBER 31 ANNUAL AVERAGE RATE PER $1.00 US* ANNUAL HIGH ANNUAL LOW
===========
1997 1695.0 988.1 1960 845.5
- ---- -------------- --------------------------------- ----------- ----------
1998 1206.0 1367.3 1812 1196.0
- ---- -------------- --------------------------------- ----------- ----------
1999 1136.0 1188.2 1243 1124.5
- ---- -------------- --------------------------------- ----------- ----------
2000 1267.0 1140.0 1267 1105.5
- ---- -------------- --------------------------------- ----------- ----------
2001 1313.5 1293.4 1369 1234.0
- ---- -------------- --------------------------------- ----------- ----------
* The average of the noon buying rates on the last date of each month (or a
portion thereof) during the period.
6
B. CAPITALIZATION AND INDEBTEDNESS
See above
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable
D. RISK FACTORS
The following risks relate specifically to the Company's business and should be
considered carefully. The Company's business, financial condition and results
of operations could be materially and adversely affected by any of the following
risks. In particular, the Company is a Korean Company and is governed by a legal
and regulatory environment which in some respects may differ from that which
prevails in other countries.
LIMITED OPERATING HISTORY
The Company's limited operating history makes the evaluation of the Company's
current business and the forecasting of the Company's future results difficult.
The Company has only a limited operating history on which to base an evaluation
of the Company's current business and prospects, each of which should be
considered in light of the risks, expenses and problems frequently encountered
in the early stages of development of all companies. This limited operating
history leads the Company to believe that period-to-period comparisons of its
operating results may not be meaningful and that the results for any particular
period should not be relied upon as an indication of future performance. There
is no assurance that the Company's products will achieve acceptance in the
marketplace on commercially acceptable terms. If revenues do not grow at
anticipated rates, the Company's business, results of operations and financial
condition would be materially and adversely affected.
THE COMPANY'S ADDITIONAL FUNDING REQUIREMENTS
The Company has limited financial resources. The Company will require
additional cash to implement its business strategies, including cash for (i)
payment of increased operating expenses, (ii) costs associated with bringing new
products to market, iii) continued research and development and (iv) further
implementation of those business strategies. The Company anticipates raising
such additional capital through public or private financings, as well as through
loans and other resources. There is no assurance that the necessary funds would
be available to the Company on terms acceptable to it. Failure to obtain such
additional funding could result in delay or indefinite postponement of some or
all of the Company's products to the market place or the ability to supply
sufficient product to the market place on a continual and profitable basis.
Additional funds raised by the Company through the issuance of equity or
convertible debt securities will cause the Company's current stockholders to
experience dilution. Such securities may grant rights, preferences or privileges
senior to those of the Company's common stockholders.
The Company does not have any contractual restrictions on the Company's ability
to incur debt and, accordingly, the Company could incur significant amounts of
indebtedness to finance its operations. Any such indebtedness could contain
covenants which would restrict the Company's operations.
7
THE COMPANY ANTICIPATES THAT LOSSES MAY CONTINUE
For the year ended December 31, 2001 the Company had a net loss of $1,916,122
and an accumulated deficit of $3,869,737. The Company anticipates incurring
losses for the foreseeable future. The extent of future losses will depend, in
part, on the amount of growth in revenues from the Company's products. The
Company expects that operating costs will increase during the next several
years, especially in the areas of sales and marketing, product development and
general and administrative expenses as it pursues its business strategy. Thus,
the Company will need to generate increased revenues faster than the rate of
growth in costs to achieve profitability. To the extent that increases in its
operating expenses precede or are not subsequently followed by corresponding
increases in revenues, or if it is unable to adjust operating expense levels
accordingly, the Company's business, results of operations and financial
condition would be materially and adversely affected. There can be no assurance
that the Company will sustain profitability or that its operating losses will
not increase in the future.
COMPETITION FROM LARGER COMPANIES
The industries in which the Company competes are intensely competitive and the
Company competes and will compete with companies having greater financial and
technical resources. Therefore, to the extent that the Company is able to
establish sales, revenues and profits, there is no assurance that it would be
able to sustain such sales, revenues and profits. Moreover, although not a
major factor today, if and when the Company begins achieving its objectives,
larger, better financed companies in peripheral businesses may be attracted to
the Company's markets. They may be prepared to spend large sums quickly to
develop competitive products and to mount major marketing campaigns. The
Company is aware of this possibility and hopes to establish itself as an
industry leader early on. Time is of the essence and the Company's financing
and marketing programs are essential to minimize this risk.
NEED TO UPGRADE PRODUCTS AND DEVELOP NEW TECHNOLOGIES
Continued participation by the Company in its market may require the investment
of the Company's resources in upgrading of its products and technology for the
Company to compete and to meet regulatory and statutory standards. There can be
no assurance that such resources will be available to the Company or that the
pace of product and technology development established by management will be
appropriate to the competitive requirements of the marketplace. The Company's
success will depend to a substantial degree on its ability to develop and
introduce in a timely manner new products and enhancements that meet changing
customer requirements and emerging industry standards. The development of new,
technologically advanced products and enhancements is a complex and uncertain
process requiring high levels of innovation as well as the anticipation of
technology and market trends.
THE COMPANY CURRENTLY DEPENDS ON A LIMITED NUMBER OF FOREIGN SUPPLIERS TO
MANUFACTURE CERTAIN KEY COMPONENTS AND THESE MANUFACTURERS MAY NOT BE ABLE TO
SATISFY ITS REQUIREMENTS AND COULD CAUSE THE COMPANY'S POTENTIAL REVENUES TO
DECLINE
The Company currently buys certain key components from a limited number of
suppliers. The Company anticipates that these suppliers will manufacture these
key components in sufficient amounts to meet its production requirements. If
these suppliers fail to satisfy the Company's requirements on a timely basis and
at competitive prices, the Company could suffer manufacturing delays, a possible
loss of revenues or higher than anticipated costs of revenues, any of which
could seriously harm its operating results. There can be no assurance that the
Company will be able to identify, develop, manufacture, market, sell, or support
new products and enhancements successfully, that new products or enhancements
will achieve market acceptance, or that the Company will be able to respond
effectively to technology changes, emerging industry standards or product
announcements by competitors. New product announcements by the Company could
cause its customers to defer purchases of existing products or cause
distributors to request price protection credits or stock rotations. Any
significant deterioration in the general economic conditions would have an
adverse effect on the Company's business, result of operations, or financial
condition
8
The success of the Company's operations depends to a significant extent upon a
number of factors relating to discretionary consumer spending, including
economic conditions (and perceptions of such conditions by consumers) affecting
disposable consumer income such as employment, wages, salaries, business
conditions, interest rates, availability of credit and taxation for the economy
as a whole and in regional and local markets where the Company operates. There
can be no assurance that consumer spending will not be adversely affected by
general economic conditions, which could negatively impact the Company's results
of operations and financial conditions. Any significant deterioration in general
economic conditions or increases in interest rates may inhibit consumers' use of
credit and cause a material adverse effect on the Company's revenues and
profitability. Any significant deterioration in general economic conditions
that adversely affects these companies could also have a material adverse effect
on the Company's business, results of operations and financial condition.
NO DIVIDENDS DECLARED OR ANY LIKELY TO BE DECLARED IN THE FUTURE
The Company has not declared any dividends since inception, and has no present
intention of paying any cash dividends on its common stock in the foreseeable
future. The payment by the Company of dividends, if any, in the future, rests
in the discretion of the Company's Board of Directors and will depend, among
other things, upon the Company's earnings, its capital requirements and
financial condition, as well as other relevant factors.
THE POSSIBLE ISSUANCE OF ADDITIONAL SHARES MAY IMPACT THE VALUE OF THE COMPANY
STOCK
The Company is authorized to issue up to 50,000,000 shares of common stock. It
is the Company's intention to issue more shares. Sales of substantial amounts
of common stock (including shares issuable upon the exercise of stock options,
the conversion of notes and the exercise of warrants), or the perception that
such sales could occur, could materially adversely affect prevailing market
prices for the common stock and the ability of the Company to raise equity
capital in the future.
PREEMPTIVE RIGHTS
The Company is authorized to issue shares at such times and upon such terms as
the board of directors of the Company may determine. The new shares must be
offered on uniform terms to all shareholders who have pre-emptive rights and who
are listed on the shareholders' register as of the record date. The Company's
shareholders are entitled to subscribe for any newly issued shares in proportion
to their existing shareholdings, provided that pursuant to the Company's
Articles of Incorporation, new shares that are (i) issued by public offering in
accordance with the Securities and Exchange Law of Korea, (ii) represented by
depositary receipts, (iii) issued to foreigners in accordance with the Foreign
Investment Promotion Law of Korea within 33% of the total number of shares
outstanding, (iv) issued to the Company's employee stock ownership association
up to 20% of the newly issued shares (to the extent the total number of shares
so subscribed and held by the members of the employee stock ownership
association does not exceed 20% of the total number of shares), (v) issued
outside Korea for listing on a foreign stock exchange or foreign securities
market trading securities by means of an electronic or a quotation system, (vi)
issued according to a stock option plan, (vii) issued to a domestic corporation
having a strategic relationship with the Company in connection with the
Company's management or technology of up to 5% of the total number of issued and
outstanding shares after such issuance, (viii) issued as consideration for the
acquisition of the stock or assets of another company up to less than 20% of the
total number of issued and outstanding shares, or (ix) issued through general
public offering in accordance with the Securities and Exchange Law of Korea may
be issued pursuant to a resolution of the board of directors to persons other
than existing shareholders. The limited circumstances where the Company may
issue shares to persons who are not shareholders of the Company could cause the
Company difficulty in carrying out its corporate functions.
9
SALES AND DISTRIBUTION
The Company has yet to establish a significant distribution and support network
in certain markets. Failure on the part of the Company to put into place an
experienced and effective marketing infrastructure in a timely manner could act
to delay or negate the realization of anticipated revenues.
MARKET ACCEPTANCE
The viability of the Company is dependent upon the market acceptance of its
current and future products. There is no assurance that these will attain a
level of market acceptance that will allow for continuation and growth of its
business operations. In addition, the Company will need to develop new
processes and products to maintain its operations in the longer term. The
development and launching of such processes and products can involve significant
expenditure. There can be no assurance that the Company will have sufficient
financial resources to fund such programs and whether such undertaking will be
commercially successful.
ADEQUATE LABOR AND DEPENDENCE UPON KEY PERSONNEL; NO EMPLOYMENT AGREEMENTS
The Company will depend upon recruiting and maintaining qualified personnel to
staff its operations. The Company believes that such personnel are currently
available at reasonable salaries and wages. There can be no assurance, however,
that such personnel will always be available in the future. The continuing
development of the Company's products has been almost entirely dependent on the
skills of management and certain key employees of the Company with which the
Company has no employment agreements. Loss of the services of any of this
management team and key employees could have a material adverse effect upon the
Company.
THE COMPANY'S FINANCING REQUIREMENTS MAY INCREASE IN ORDER TO OBTAIN ADDITIONAL
MANUFACTURING CAPACITY IN THE FUTURE
To obtain additional manufacturing capacity, the Company may be required to make
deposits, equipment purchases, loans, joint ventures, equity investments or
technology licenses in or with other companies. These transactions could involve
a commitment of substantial amounts of the Company's capital and technology
licenses in return for production capacity. The Company may be required to seek
additional debt or equity financing if the Company needs substantial capital in
order to secure this capacity and the Company cannot be assured that it will be
able to obtain such financing. If the Company's suppliers discontinue the
products needed to meet the Company's demands, or fail to upgrade the
technologies needed to manufacture the Company's products, the Company may face
production delays and lower the Company's anticipated revenues. The Company's
products requirements may represent a small portion of the total production of
the suppliers that manufacture the Company's components. As a result, the
Company is subject to the risk that a supplier may cease production on an older
or lower-volume manufacturing process that it uses to produce the Company's
parts. Each of these events could increase the Company's costs and harm the
Company's ability to deliver its products on time.
10
THE COMPANY'S GROWTH DEPENDS ON ITS ABILITY TO COMMERCIALIZE PRODUCTS
Currently a significant amount of the Company's revenue comes from the Meridian
product line that is central to the Company's growth strategy. This line of
products encounters competition and is price sensitive. While the Company is
currently developing new products, the Company cannot be assured that these
products will reach the market on time, will satisfactorily address customer
needs, will be sold in high volume, or will be sold at profitable margins.
THE COMPANY'S OPERATING EXPENSES ARE ANTICIPATED TO BE RELATIVELY FIXED AND
THEREFORE THE COMPANY MAY HAVE LIMITED ABILITY TO REDUCE EXPENSES QUICKLY IN
RESPONSE TO ANY REVENUE SHORTFALL
The Company anticipates that its operating expenses will be relatively fixed,
and the Company therefore has limited ability to reduce expenses quickly in
response to any revenue shortfalls. Consequently, the Company's operating
results will be harmed if the Company's revenues do not meet its revenue
projections. The Company may experience revenue shortfalls for the following
reasons:
- - significant pricing pressures that occur due to competition, over supply,
or other reasons;
- - sudden shortages of raw materials or fabrication, test or assembly
capacity constraints that lead the Company's suppliers to allocate available
supplies or capacity to other customers which, in turn, harm the Company's
ability to meet its sales obligations; and
- - the reduction, rescheduling or cancellation of customer orders.
THE COMPANY'S MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND, THEREFORE,
ITS SUCCESS DEPENDS UPON THE COMPANY'S ABILITY TO DEVELOP AND INTRODUCE NEW
PRODUCTS
The markets for the Company's products are characterized by:
- - rapidly changing technologies;
- - evolving and competing industry standards;
- - changing customer needs; and
- - frequent new product introductions and enhancements.
To develop new products for its target markets, the Company must develop, gain
access to and use leading technologies in a cost-effective and timely manner and
continue to expand its technical and design expertise. In addition, the Company
must have its products designed into its customers' future products and maintain
close working relationships with key customers in order to develop new products
that meet their changing needs. The Company cannot be assured that it will be
able to identify new product opportunities successfully, develop and bring to
market new products, achieve design wins or respond effectively to new
technological changes or product announcements by its competitors. In addition,
the Company may not be successful in developing or using new technologies or in
developing new products or product enhancements that achieve market acceptance.
The pursuit of necessary technological advances may require substantial time and
expense. Failure in any of these areas could harm the Company's anticipated
operating results.
THE COMPANY'S ABILITY TO COMPETE SUCCESSFULLY WILL DEPEND, IN PART, ON ITS
ABILITY TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS, WHICH THE COMPANY MAY NOT
BE ABLE TO PROTECT
The Company relies on a combination of patent, trade secrets, and copyright,
nondisclosure agreements and other contractual provisions and technical measures
to protect its intellectual property rights. Policing unauthorized use of the
Company's products is difficult, especially in foreign countries. Litigations
may continue to be necessary in the future to enforce its intellectual property
rights, to protect its trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Litigation could result in substantial costs and diversion of
resources and could harm its business, operating results and financial condition
regardless of the outcome of the litigation.
11
THE COMPANY CANNOT BE ASSURED THAT ANY PENDING PATENT APPLICATION WILL BE
GRANTED
The Company has acquired ownership or exclusive license to a number of patents
or patent applications related to its products. However, the Company cannot be
assured that any pending patent application will be granted, or that all such
patents can provide adequate protection for its intellectual property. The
Company's operating results could be seriously harmed by the failure to protect
its intellectual property. If the Company is accused of infringing the
intellectual property rights of other parties, it may become subject to
time-consuming and costly litigation. If the Company loses, it could suffer a
significant impact on its business and it may be forced to pay damages. Third
parties may assert that the Company's products infringe their proprietary
rights, or may assert claims for indemnification resulting from infringement
claims against it. Any such claims may cause the Company to delay or cancel
shipment of its products or pay damages that could seriously harm its business,
financial condition and results of operations. In addition, irrespective of the
validity or the successful assertion of such claims, the Company could incur
significant costs in defending against such claims. The Company's litigation
may be expensive, may be protracted, and confidential information may be
compromised Whether or not the Company is successful in any litigation, the
Company expects the litigation to consume substantial amounts of its financial
and managerial resources. Further, because of the substantial amount of
discovery required in connection with this type of litigation, there is a risk
that some of the Company's confidential information could be compromised by
disclosure.
THE COMPANY'S BUSINESS MAY SUFFER DUE TO RISKS ASSOCIATED WITH INTERNATIONAL
SALES AND OPERATIONS
The Company anticipates that export products will account for most of its
revenues. International business activities are subject to a number of risks,
each of which could impose unexpected costs of the Company that would have an
adverse effect on its operating results. These risks include:
- - difficulties in complying with regulatory requirements and standards;
- - tariffs and other trade barriers;
- - costs and risks of localizing products for foreign countries;
- - reliance on third parties to distribute the Company's products;
- - longer accounts receivable payment cycles;
- - potentially adverse tax consequences;
- - limits on repatriation of earnings; and
- - burdens of complying with a wide variety of foreign laws.
THE COMPANY ANTICIPATES THAT IT WILL HAVE TO CONTINUE TO DEPEND ON
MANUFACTURERS' REPRESENTATIVES AGENTS, AND DISTRIBUTORS TO GENERATE SUBSTANTIAL
AMOUNTS OF ITS REVENUES
The Company anticipates that it will have to continue to rely on manufacturers'
representatives, agents, and distributors to sell a significant portion of its
products, and these entities could discontinue selling its products at any time.
The loss of any significant agent could seriously harm the Company's operating
results.
THE COMPANY'S SUCCESS MAY BE AFFECTED BY UNUSUAL GROWTH OF CERTAIN NEW PRODUCTS
There may be new products being introduced in the future which meet unusually
high global demands. If the new products' customer base overlaps a substantial
portion of the Company's products' customer base, or that the new products use
the same key component as the Company's products, the demand for the Company's
products or the supply of their key component may be reduced, which may
seriously harm the Company's operations.
12
ITS OFFICERS, DIRECTORS AND ENTITIES AFFILIATED WITH THEM CONTROL THE COMPANY
In the aggregate, ownership of the Company's shares by management and entities
affiliated with the Company own collectively 45.12% of the Company's issued and
outstanding shares of common stock. These stockholders, if acting together, will
be able to significantly influence all matters requiring approval by the
Company's stockholders, including the election of directors and the approval of
mergers or other business combination transactions.
THE VALUE AND TRANSFERABILITY OF THE COMPANY'S SHARES MAY BE ADVERSELY IMPACTED
BY THE LIMITED TRADING MARKET FOR THE COMPANY'S COMMON STOCK, THE PENNY STOCK
RULES AND FUTURE SHARE ISSUANCES. THERE IS A LIMITED MARKET FOR THE COMPANY'S
COMMON STOCK IN THE U.S.
No assurance can be given that a market for the Company's common stock will
develop on the NASD Over-the-Counter Bulletin Board ("NASD OTC-BB"). The sale or
transfer of the Company's common stock by shareholders in the U.S. may be
subject to the so-called "penny stock rules."
Under Rule 15g-9 of the 1934 Act, a broker or dealer may not sell a "penny
stock" (as defined in Rule 3a51-1) to or effect the purchase of a penny stock by
any person unless:
(a) such sale or purchase is exempt from Rule 15g-9;
(b) prior to the transaction the broker or dealer has (i) approved the person's
account for transaction in penny stocks in accordance with Rule 15g-9, and (ii)
received from the person a written agreement to the transaction setting forth
the identity and quantity of the penny stock to be purchased; and
(c) the purchaser has been provided an appropriate disclosure statement as to
penny stock investment.
The SEC adopted regulations that generally define a penny stock to be an equity
security other than a security excluded from such definition by Rule 3a51-1.
Such exemptions include, but are not limited to (i) and equity security issued
by an issuer that has (A) net tangible assets of at least $2,000,000, if such
issuer has been in continuous operations for at least three years, (B) net
tangible assets of at least $5,000,000, if such issuer has been in continuous
operation for less than three years, or (C) average revenue of at least
$6,000,000 for the preceding three years; (ii) except for purposes of Section
7(b) of the 1934 Act and Rule 419, any security that has a price of $5.00 or
more; and (iii) a security that is authorized or approved for authorization upon
notice of issuance for quotation on the NASDAQ Stock Market, Inc.'s Automated
Quotation System.
It is likely that shares of the Company's common stock, assuming a market were
to develop in the U.S. therefore, will be subject to the regulations on penny
stocks; consequently, the market liquidity for the common stock may be adversely
affected by such regulations limiting the ability of broker/dealers to sell the
Company's common stock and the ability of shareholders to sell their securities
in the secondary market in the U.S. Moreover, the Company's shares may only be
sold or transferred by the Company's shareholders in those jurisdictions in the
U.S. in which an exemption for such "secondary trading" exists or in which the
shares may have been registered.
13
CONFLICTS OF INTEREST OF CERTAIN DIRECTORS AND OFFICERS OF THE COMPANY
From time to time certain of the directors and executive officers of the Company
may serve as directors or executive officers of other companies and, to the
extent that such other companies may participate in the industries in which the
Company may participate, the directors of the Company may have a conflict of
interest. In addition, the Company's dependence on directors and officers who
devote time to other business interests may create conflicts of interest, i.e.
that the fiduciary obligations of an individual to the other company conflicts
with the individual fiduciary obligations of the Company and vice versa.
Directors and officers must exercise their judgment to resolve all conflicts of
interest in a manner consistent with their fiduciary duties to the Company. In
the event that such a conflict of interest arises at a meeting of the directors
of the Company, a director who has such a conflict will abstain from voting for
or against the approval of such participation or such terms. In appropriate
cases, the Company will establish a special committee of independent directors
to review a matter in which several directors, or management, may have a
conflict. The Company is not aware of the existence of any conflict of interest
as described herein.
FORWARD LOOKING STATEMENTS
All statements, other than statements of historical facts, included in this
registration statement, including, without limitation, the statements under and
located elsewhere herein regarding industry prospects and the Company's
financial position are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectation will prove to have
been correct. A shareholder or prospective shareholder should bear this in mind
when assessing the Company's business.
SHARES ELIGIBLE FOR FUTURE SALES
There has been no market for the Company's shares, and there can be no assurance
that a significant market will develop or be sustained. Future sales of
substantial amounts of the Company's shares (including shares issued upon
exercise of outstanding options and warrants) in the public market could
adversely affect market prices prevailing from time to time and could impair the
Company's ability to raise capital through sales of the Company's equity
securities.
COUNTRY RISKS
There are unique economic and political risks associated with investing in
companies from Korea: Some of Korea's recent financial and economic difficulties
have included:
- - exchange rate fluctuations;
- - interest rate fluctuations;
- - reduced credit from foreign banks;
- - reduced liquidity in the economy;
- - volatile stock prices; and
- - higher unemployment.
14
The Consumer Price Index ("CPI") published by the central Bank of Korea (the
Korean equivalents of the U.S. Federal Reserve Board) for the period between
1995 (base year) and 2001 is as follows:
Year CPI Annual increase (%)
1995 (Base) 100 -
1996. . . . 104.9 4.9
1997. . . . 109.6 4.5
1998. . . . 117.8 7.5
1999. . . . 118.8 0.8
2000. . . . 121.5 2.3
2001. . . . 126.5 1.04
The Korean Government has recently taken a number of steps in response to recent
State economic developments, including the following:
- - negotiation with the International Monetary Fund of a financial aid package
involving loans to Korea in an aggregate amount of approximately US$58 billion;
- - negotiation of an agreement with a substantial number of international
creditors of Korean financial institutions to extend the maturities of an
aggregate of approximately US$21.8 billion of Korean financial institutions'
short-term foreign currency obligations owed to those international creditors by
exchanging the obligations for longer-term floating rate loans guaranteed by the
Korean Government;
- - the Government's issuance of Dollar-denominated bonds in the aggregate
principal amount of US$4 billion in April 1998; and
- - the announcement and implementation of a number of important economic,
financial sector, labour and other reforms.
While the Government's reforms of the Korean economy may alleviate its current
economic difficulties and improve the economy over time, in the short-term,
implementation of the reform measures may:
- - slow economic growth;
- - cause a budget deficit because of a decrease in tax revenues;
- - increase the rate of inflation;
- - increase the number of bankruptcies of Korean companies; and
- - increase unemployment.
In addition, the continuing weakness of the Japanese economy and recent
volatility of the Japanese Yen against the Dollar increases the uncertainty of
economic stability in Asia in general and may hinder Korea's ability to recover
quickly from its own economic difficulties. Future adverse developments in
Southeast Asia, Japan and elsewhere in the world could worsen Korea's economic
difficulties. Other developments that could occur in Korea include social and
labor unrest resulting from economic difficulties and higher unemployment, a
substantial increase in the Government's expenditures for unemployment
compensation and other costs for social programs. Korea may need to increase
reliance on exports to service foreign currency debts, which cause friction with
Korea's trading partners. In addition, the economies of neighboring countries,
including Japan, China and Russia, could deteriorate further. Any such
developments would hurt Korea's plans for economic recovery.
Finally, relations between South Korea and North Korea have been tense over most
of Korea's history. The level of tension between the two Koreas has fluctuated
and may increase or change abruptly as a result of current or future events.
The occurrence of such events could have a material adverse effect on the
Company's operations and the price of its shares.
15
OWNERSHIP OF SHARES MAY BE SUBJECT TO CERTAIN RESTRICTIONS UNDER KOREAN LAW
Prior to making an investment in 10% or more of the outstanding shares of a
Korean company, foreign investors are generally required under Foreign
Investment Promotion Law of Korea to submit a report to a Korean bank pursuant
to a delegation by the Ministry of Commerce, Industry and Energy of Korea.
Failure to comply with this reporting requirement may result in the imposition
of criminal sanctions. Subsequent sales by such investors of its shares in such
company will also require a prior report to such bank.
THE COMPANY MAY NOT BE ABLE TO CONVERT AND REMIT DIVIDENDS IN DOLLARS IF THE
GOVERNMENT IMPOSES CERTAIN EMERGENCY MEASURES
The Company does not intend to pay dividends on its shares in the foreseeable
future. However, if it declares cash dividends, such dividends will be declared
in Won. In order for the Company to pay such dividends outside Korea, such
dividends will be converted into Dollars and remitted to the shareholders,
subject to certain conditions. Fluctuations in the exchange rate between the Won
and the Dollar will affect, among other things, the amounts a holder of shares
of the Company will receive as dividends. Under Korean law, if the Government
deems that certain emergency circumstances including, but not limited to, sudden
fluctuations in interest rates or exchange rates, extreme difficulty in
stabilizing the balance of payments or a substantial disturbance in the Korean
financial and capital markets are likely to occur, it may impose any necessary
restrictions such as requiring foreign investors to obtain prior approval from
the Ministry of Finance and Economy for the acquisition of Korean securities or
for the repatriation of interest, dividends or sales proceeds arising fro Korean
securities or from disposition of such securities, including the Company's
shares. The Company cannot give any assurance that it can secure such prior
approval from the Ministry of Finance and Economy for payment of dividends to
foreign investors in the future when the Government deems that there are
emergency circumstances in the Korean financial market.
THE COMPANY'S ABILITY TO RAISE MONEY IN EQUITY OFFERINGS MAY BE CONSTRAINED BY
THE NEED TO REGISTER THOSE OFFERINGS WITH THE SEC
The Commercial Code of Korea and the Company's Articles of Incorporation require
the Company, with certain exceptions, to offer shareholders the right to
subscribe for new shares in proportion to their existing ownership percentage
whenever new shares are issued. The Company cannot exclude U.S. holders of
shares from these offers, and must thus register those offers with the SEC. If
the Company cannot, or chooses not to register these offerings, the Company will
be unable to consummate them, which will restrict the range of capital raising
options available to the Company.
EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE COMPANY'S RESULTS OF
OPERATIONS
As a result of such sharp depreciation, the Government was forced to effectively
suspend its efforts to support the value of the Won, and on December 16, 1997,
the Government allowed the Won to float freely. Such depreciation of the Won
relative to the Dollar increased the cost of imported goods and services and the
Won revenue needed by Korean companies to service foreign currency denominated
debt. Since then, however, the Won, while it has fluctuated, has generally
appreciated relative to the Dollar and other major foreign currencies.
16
ITEM 4. INFORMATION ON THE COMPANY
- ---------------------------------------
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company was incorporated in Korea on April 19, 1994 for the purpose of
developing and manufacturing medical devices, particularly in the Oriental and
Natural/Alternative Medicinal fields. In July 1998, the Company completed the
acquisition of Hippo Medical Devices Co. Ltd. ("Hippo"), a Korean company that
was engaged in selling medical equipment. The acquisition of Hippo by Meridian
was a synergistic union whereby the sales and distribution offices of Hippo were
consolidated with the research and manufacturing divisions of the Company.
On August 30, 1999, the Company agreed to sell, in an arm's length transaction,
certain assets amounting to $1,284,556 relating to two product lines that it had
sold since the 1998 acquisition of Hippo, to Medicore Co. Ltd., an unrelated
Korean company. In return, Medicore assumed certain liabilities, primarily
attributed to the two product lines, of the Company in the same amount. These
product lines are the Urea Breath Test Device (UBT) and Infra-Red Imaging System
(IR-2000). This transaction was completed on December 31, 1999.
Pursuant to an Agreement and Plan of Reorganization (the Merger Agreement) dated
February 6, 2001, The Company acquired all the outstanding shares of common
stock of By George Holding, Corp. (By George), a Georgia corporation, from the
shareholders thereof in an exchange of an aggregate of 68,142 shares (equivalent
to 1,703,550 post split shares) of common stock of the Company and other
consideration of payments of certain fees and expenses. Immediately following
the Acquisition, ABR Meridian (Georgia) Inc. (Subco), a Georgia corporation and
a wholly-owned subsidiary of the Company, merged with By George (the Merger) in
a transaction in which the Subco became the surviving corporation.
Upon effectiveness of the Acquisition and Merger, pursuant to Rule 12g-13(a) of
the General Rules and Regulations of the Securities and Exchange Commission
(SEC), the Company elected to become the successor issuer to By George for
reporting purposes under the Securities Exchange Act of 1934, as amended (the
1934 Act) and elects to report under the 1934 Act effective February 12, 2001.
On September 26, 2001 the Company incorporated Meridian Chinese Corporation and
Beijing Meridian Medical Equipment Co., Ltd., partially owned subsidiaries to
initiate and establish its business in China. The Company also incorporated its
US subsidiary, as Meridian America Medical Inc (MAMI), in February 2002, in
preparation for the launch of the Meridian products into the US market.
On February 13, 2002, the Company was accepted for trading on the OTC Bulletin
Board under the symbol MRDAF.
The Company's Corporate head office is located at 9th Flour, Seoil Bldg. 222,
Jamsilbon-dong, Songpa-gu Seoul, Korea.
17
B. BUSINESS OVERVIEW
The Company is engaged in the research, development, manufacturing and sales of
medical devices for the Oriental and Natural/Alternative Medicine industries.
The Company's major customers are Oriental medical hospitals and clinics as well
as Western medical hospitals and clinics. The Company is currently selling its
products in Korea, China, ASEAN, Latin America and North America. Through a
strategic acquisition, the Company has expanded and gained domestic sales force
and channels. The Company intends to continuously expand its sales efforts in
several countries through establishing additional branch offices and
distribution and sales agencies.
The Company's products cross all boundaries of health care disciplines and are
useful in the practice of medicine, osteopathy, homeopathy, naturopathy,
acupuncture and other complementary disciplines. If stress or imbalance is
detected in a patient, the Company's products can identify the meridian
imbalances in a person's body and assist the practitioner in recommending a
course of treatment or therapy to alleviate the stress or to restore balance to
the body's meridian systems.
The Company currently sells four different products to healthcare practitioners
throughout the domestic and overseas market. These include the MERIDIAN lines,
the McPulse, the ABR-2000 and the LAPEX. The MERIDIAN medical devices perform
meridian stress analysis through measuring electronic feedback at acupuncture
points by using non-invasive electro-acupuncture principles. The McPulse
analyzes heart function, arterial elasticity, dilations, resistance, and aging
through measuring pulse waveform. The ABR-2000 automatically analyzes stress
related body problems by measuring the autonomic electro-physiological response
of skin. The LAPEX-2000 is a low power semiconductor laser device for
non-invasive therapy of blood and tissue.
On September 26, 2001 the Meridian Chinese Corporation and the Beijing Meridian
Medical Equipment Co., Ltd. (hereafter BMMEC) were established to initiate the
Company's business in China. BMMEC (Mr. Trigon Jung; investor and president of
BMMEC) is a joint corporation of Meridian Co., Ltd. and Mr. Trigon Jung. Main
businesses of BMMEC are publicity activities and setting up dealership networks
for the sales in China. Also Meridian is planning to give BMMEC the
manufacturing license of its products in the future. Meridian has made over US
$600,000 direct sales in China since 1999.
The Company incorporated its US entity as Meridian America Medical Inc (MAMI),
in February 2002, in preparation for the launch of the Meridian products into
the US market. The newly formed company MAMI managed to achieve US $150,000
sales in the initial two months after incorporation and expects a significant
increase in sales during the next quarter. MAMI currently sells 3 meridian
lines, Meridian II, Meridian - plus, and Meridian - portable; they expect to
sell ABR - 2000, an automatic whole body-screening device and McPulse, a pulse
waveform analyzer in second half of this year in the US market when they obtain
FDA approval.
As of Mar. 19, 2002, LAPEX - 2000, Laser therapy device, has qualified for a CE
(Conformities European) Marking which is the unification standard of the
European Union (EU) for products concerning the safety of the human body, health
and the protection of the environment. The CE Marking is the certification
necessary to sell the Meridian products in the EU market.
A California University, South Baylor University Research Center, has requested
the Meridian II for clinical testing, on May 2002. The Meridian II is a
computer-assisted meridian assessment and evaluation device. After the first
month of testing the University requested several more of the Meridian II, which
will be placed in Anaheim and Los Angeles campuses as training equipment for
Oriental Medical Intern Program. South Baylor University is one of the major
Oriental Medical / Acupuncture Schools in California, which is one of the
largest Oriental and alternative medical States in the US.
18
PRODUCTS OF THE COMPANY
MERIDIAN LINE OF PRODUCTS
The Meridian line of products includes the Meridian-II, Meridian Plus, Meridian
- -Portable and ABR 2000. These products are computer assisted assessment and
diagnostic devices, which are based on the analysis technique, pioneered by Dr.
Reinhold Voll, a German medical doctor. Termed Electro-Acupuncture according to
Voll (E.A.V.), the assessment process incorporates elements of Western science
and principles of traditional Chinese medicine. Practitioners use electrical,
magnetic, sonic, acoustic, microwave and infrared devices to screen for or treat
health conditions by detecting imbalances in the body's energy field and then
correcting them. E.A.V. works by measuring the meridian lines on the hands and
feet that correspond to the different organs in the body. The purpose of E.A.V.
is to establish a functional testing of organs and tissues by measuring their
respective acupuncture points. The conductance (capacity to let the stimulation
current through) of an organ or a tissue is measured in order to discover
energetically unbalanced points knowing that the energetic equilibrium of the
human organism is altered, among other things, by the negative ambiance
influence exercised by some medications, stress, poisons, insecticides, viruses,
bacteria, harmful electromagnetic fields and inflammations as well as certain
aliments.
MERIDIAN-II
The Meridian-II is a computer assisted assessment and diagnostic device that
establishes a functional testing of organs and tissues by measuring their
respective acupuncture points and delivers a complete computer drafted
evaluation for analysis. If stress or imbalance is detected in a patient, the
Meridian-II can identify the meridian imbalances in a person's body and also
assist the practitioner in recommending a course of treatment or therapy to
alleviate the stress or to restore balance to the body's meridian systems. This
provides the health practitioner with the ability to detect a potential health
problem and to treat it early before the problem manifests itself. The device
also allows the practitioner to monitor the progress of corrective therapies.
The device is in the structure of a cart that includes a touch screen monitor,
computer, printer, a set of medical instruments and supplemental parts including
hand and foot electrodes.
ASPECTS MERIDIAN-II DESCRIPTION
Features
Point finder (ARC)
MS WINDOWS 98
Better curative effect (UPM)
Easy operation (TOUCH SCREEN)
Single body design
Structure
Main body: CART in exclusive use
19
PC:
CPU: P-233MHz, MEMORY: 32MB, HDD: 6.4GB
OS: WINDOWS 98, CD ROM: 40X, VGA AGP 4MB
15 inch Colour Monitor (Speaker inside), HP 930 C
Inkjet Printer
A set of medical instruments:
PB-Electrode: DR/R/L/ST/TS
Cable Set
Band: S.L. 2ea
Parts:
Hand electrode (BAZ 2ea, CMP 1ea): 3 ea
Foot electrodes (left, right, foot stool): 1 set
Upper limited frequency of cable: 1set
ARC PB: 1ea
OPERATIONAL MANUAL: 1sheet
MULTI TAP: 1 set
MOUSE PAD: 1 ea
MERIDIAN-PLUS
Similar to the Meridian-II, the Meridian-Plus is a computer assisted assessment
and diagnostic device, however, it comes in a different design and offers a
computer as an option.
ASPECTS MERIDIAN-PLUS DESCRIPTION
Features
Point finder (ARC)
MS WINDOWS 98
Better curative effect (UPM)
Popular design
Structure
Main Body: CART in exclusive use
PC: (Optional)
CPU: PIII-667MHz, MEMORY: 128MB, HDD: 10.2GB
OS: WINDOWS 98, CD ROM: 40X, VGA AGP 4MB
MODEM: 56K FAX MODEM
15 inch Color Monitor (Speaker inside), HP 930 C
Inkjet Printer
A set of medical instruments:
PB-Electrode: DR/R/L/ST/TS
Cable Set
Band: S.L. each 2ea
20
Parts:
Hand electrode (BAZ 2ea, CMP 1ea): 3ea
Foot electrodes (left, right, footstool): 1set
Upper limited frequency of cable: 1set
ARC PB: 1ea
OPERATIONAL MANUAL: 1sheet
MULTI TAP: 1set
MOUSE PAD: 1ea
MERIDIAN-PORTABLE
15 The MERIDIAN-Portable is structured as a compact and transportable
console unit separate from but packaged with the assistant computer. It is very
similar in features and structure with other currently selling products of
competitor manufactures in the Unite States and the European Union.
ASPECTS MERIDIAN-PORTABLE DESCRIPTION
Features
Measurement probe with point finder
Expert software based on MS WINDOWS 95/98
(English, Spanish, Chinese, Korean version)
Treatment signal with better penetration effect
Remedy test with honeycomb electrode
Transportable separate console with compact design
Structure
System console with computer interface (RS-232C)
Electrodes set
Measurement probes
Hand electrodes
Clip electrode for hand-free point treatment
Electrodes cable set
ABR-2000
The ABR-2000 is a whole body screening stress assessment and diagnostic device
that identifies the areas of the human body which are experiencing trauma due to
the effects of stress. The device traces autonomic responsive conditions of the
different types of stress-related diseases.
The device sends a low-frequency impulse throughout the human body and detects
minute physical changes by measuring electrophysiological responses of the
autonomic nervous system. Irregular responses may indicate areas where organs or
parts of the body are deteriorating due to stress. The patient stress analysis
report is automatically produced in 5 minutes, allowing the health practitioner
to quickly make recommendations to the patient.
21
The device comes equipped with a one-touch assessment and diagnostic system and
a printer.
ASPECTS ABR-2000 DESCRIPTION
Features
To diagnose the differentiation of pathological conditions in accordance
with the eight principal syndromes
Easy to operate
One-touch automatic system allows the beginner to operate it easily
A medical assistant is able to measure it for the medical specialist
Very Positive Response from the Patients
Right after measurement, the results print out in real time
Automatic measurement in 5 minutes
No stress, non-invasive, and comfortable diagnosis
Print paper is reusable - available for chart storage and patient's chart
Structure
Body: Single body
A set of electrodes: Copper electrodes (a set of head, hand, and foot
electrodes)
Plotter: Magnetic
Pen: Red, blue, black
Print paper: 300 papers
LAPEX-2000
The LAPEX-2000 is a semiconductor laser therapeutic device, which applies a
laser to the foci of the human body without damaging the skin tissue and in
turn, promotes healing of any damaged skin tissue. The use of laser therapy
facilities, among other things, increase of blood flow, vitalization of cells
and increase of protein synthesis which can assist in the treatment of soft
tissue damage, acute and chronic joint diseases, chronic pain and improvement of
circulation.
The LAPEX-2000 comes equipped with an advanced digital semiconductor laser.
ASPECT LAPEX-2000 DESCRIPTION
Features
Advanced digital semiconductor laser, solid curative effect, semi-permanent
No other supplies are necessary
Non-invasive laser
Practical for small spaces, easy to move
Structure
Single Laser Probe (PW: Pulsed Wave): Trigger Point Monitoring Function and
Applying Laser to Trigger Point
Multi Laser Probe (CW: Continuous Wave): To address the largely affected
parts
Non-LIB/LIB Laser Probe (Intra/vascular Laser Irradiation of Blood):
Non-invasive/Invasive venous blood, easy to operate, solid curative effect
22
MCPULSE
McPulse is medical equipment, which can be used for measurement and analysis
pulse waveform. The pulse wave is the arterial pressure change that originates
from heart beat and transmits through an artery. The pulse wave is changed with
the systolic power of heart and the vascular condition (the arterial elasticity,
resistance, etc.), followed by, the pulse wave reflects the functional status of
cardio-vascular circulation. McPulse irradiates IR (infrared) to finger-tip and
obtains pulse wave information with the light absorbing characteristics of HbO2
of arterial blood. All procedure of measurement, calculations, analysis and
print-out can be performed automatically less than a minute with fully
non-invasive method.
AUTOMATED DIGITAL PULSE WAVEFORM EXAM
- -----------------------------------------
- - Exam that need for preventing geriatric diseases.
- - Hardening the arteries, arterial elasticity, and obstruction of periphery
can be detected in early stage.
- - The Pulse can be seen while analysing the pulse waveform.
- - No harmful to human body whatsoever
- - Diagnosis can be done within a minute.
- - Results can be obtained right after diagnosis.
DPA
The DPA (Digital Arterial Pulsewave Analyzer) is a computer-based model
succeeding McPulse series. It supports all the functions of McPulse as well as,
it can analyze heart rate variability (HRV) from EKG data. Computer can store
all patient's Data. Structure is configured with McPulse console, EKG
electrodes, computer software with WINDOWS base, and cart.
OTHER PRODUCTS OF THE COMPANY
HEMOSCOPE - BLOOD ANALYZER
The Hemoscope is a digital-based blood analysis system. The system works by
analyzing one drop of blood for conditions of red and white blood cells,
clearness and nutritive conditions, as well as development of the immune bodies
& diseases. It utilizes a powerful microscope using phase differences and dark
vision to assess a person's blood for the possible detection of the causes of
functional diseases.
The Hemoscope comes equipped with microscope and ancillary components, a
computer, monitor, modem and printer.
23
INDUSTRY BACKGROUND
The medical instruments industry is characterized by low-volume production of
various medical equipment and apparatus. It contains components from a diverse
range of industries such as electronics, advanced materials and information
technology and includes the fields of physics, chemistry, biology and medicine.
In many countries, government support is provided in the medical instruments
industry as a priority industry. This industry tends to be technology-intensive,
low energy consuming and non-polluting.
INDUSTRY TRENDS
Throughout the world, the medicine environment is changing. In Korea, for
example, the popularity of Oriental medicine is rising rapidly. The importance
of alternative medicine has been acknowledged in Europe, North America and in
Asia, and accordingly, these markets have been expanding. As a result, the
interest in Oriental medicine is growing worldwide with the demand for Oriental
medical instruments increasing. Therefore, as an Oriental medical instruments
manufacturer, the Company is well positioned in an expanding market.
SIZE OF INDUSTRY
KOREAN MARKET
According to information obtained from the World Health Organization in 1997
that was prepared by the Korean Institute of Oriental Medicine ("Korean
Institute"), the size of the Korean medical instrument industry was estimated to
be almost $1 billion in 2000. The domestic medical instrument market has
sustained an average annual growth rate of approximately 12% for the past
several years.
WORLD MARKET
The size of the world medical instrument industry was estimated to be $169
billion in 2000, according to the Korean Institute. Its annual average growth
rate has been approximately 7%. Oriental medical instruments and biorhythm
recorders have approximately $5.4 billion and $4.6 billion of market share in
2000, translating to approximately 3.2% and 2.7% of the total world medical
instrument market, respectively. It is expected that over the next five years
the total medical instrument market will continually increase.
C. ORGANIZATIONAL STRUCTURE
MANAGEMENT TEAM
HYEON-SEONG MYEONG, PRESIDENT, CEO
Mr. Myeong graduated from the Seoul National University in 1982 with a degree in
Electronic Engineering. From 1983 to 1988 he was Section Chief of Research
Center for the GoldStar (LG Electronics) Company. From 1990 to 1991 Mr. Myeong
was Division Chief of Research for Medison Co. Ltd., a large Korean medical
device company. From 1992 to 1993 he was the Chief of the International
Technical Corporation and the Vice President of a Joint Corporation with Russia
(Ultramed). Since 1994, Mr. Myeong has been the President and CEO of the Company
and was the founder of the Company.
SOO-RANG LEE, DIRECTOR OF RESEARCH AND DEVELOPMENT
Mr. Lee graduated in 1990 from the Seoul National University, Korea with
a degree in Electronic Engineering. Mr. Lee was a senior researcher for Medison
Co. Ltd. from 1990 to 1994. He joined the Company as a research and development
manager at the formation of the Company. He was appointed the Director of
Research and Development in 1998.
24
SANG-YEUL PARK, DIRECTOR OF MANUFACTURING AFFAIRS
Mr. Park graduated from the Konkuk University, Korea with a degree in Electronic
Engineering. From 1986 to 1992 he was the manager of production technology for
the Oriental Precision Company(OPC). He was a senior engineer for Medison Co.
Ltd from 1992 to 1995. He has been a factory manager for the Company since 1995
and was appointed the Director of Manufacturing Affairs for the Company in 2000.
KI-WON KIM, DIRECTOR OF DOMESTIC BUSINESS
Mr. Kim graduated from The Han-yang University, Korea with a degree in
Electronic Engineering. He was research and development manager and head of the
domestic sales department for Medison Co., Ltd. He has been president of the
Taegu Meridian Company since 1997 until joining with the Company as the Director
of Domestic Business in 2000.
HEE-YO PARK, GENERAL MANAGER
Mr. Park was head of the planning department in Chonbang Corp from December 1992
to February 1995. Since February 1995 he has been General Manager, Secretary and
Treasurer of the Company
D. PROPERTY, PLANT AND EQUIPMENT
The Company's products are assembled from purchased and manufactured components
at its factory in Kangwon Province (687 - 6, Sangohan - Ri, Hongchun - Eup,
Hongchun - Kun, Kangwon - Do, Korea). Virtually all of the components making up
the Company's products are readily available from outside domestic suppliers.
Some of the components have been designed by the Company and/or are custom
manufactured to its specifications. The following table sets forth the offices
and their addresses presently located in Korea.
Office Location
- -------------- -------------------
Kangwon. . . . Owned 687 - 6, Sangohan - Ri, Hongchun - Eup, Hongchun - Kun,
Factory. . . . Kangwon - Do, Korea
Seoul. . . . . Leased 9th Floor, Seoil Bldg. 222, Jamsilbon-dong, Songpa-gu Seoul,
Meridian. . . Korea
Daegu. . . . . Leased Gyeongsangbuk-do, Daegu, Korea
Meridian
- --------------
Busan. . . . . Leased Gyeongsangnam-do, Busan, Korea
Meridian
- --------------
Gwangju. . . . Leased Jeola-do, Korea
Meridian
- --------------
Jejung Medical Leased Gyeonggi-do, Gangwon-do, Korea
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
- -----------------------------------------------------------
The following discussion and analysis is based on and should be read in
conjunction with the Company's audited consolidated financial statements,
including the notes thereto, and other financial information appearing elsewhere
herein. The audited consolidated financial statements have been translated in US
dollars and prepared in accordance with accounting principles generally accepted
in the United States.
25
OVERVIEW
The Company was incorporated in Korea on November 9, 1994 for the purpose of
developing and manufacturing medical devices, particularly in the Oriental and
Natural medicine fields. On August 30, 1999, the Company transferred certain
assets and liabilities relating to two product lines that it was carrying on
behalf of other companies, to Medicore Co. Ltd., a Korean company. These product
lines included the Urea Breath Test Device ("UBT") and Infra-Red Imaging System
("IR-2000"). The transfer resulted in the reduction of certain liabilities of
the Company in the amount of $1,284,956. The transfer was completed on December
31, 1999. On November 3, 2000 the Company received clearance from the Food and
Drug Administration of the United States Public Health Service (the "FDA") to
market three of its products: the Meridian-II, Meridian-Plus, and
Meridian-Portable as Class 2 products in the United States.
BUSINESS OF THE COMPANY
The Company is engaged in the research, development, manufacturing and sales of
medical devices for the Oriental and Natural/Alternative Medicine markets. The
Company's products cross all the boundaries of health care disciplines and are
useful in the practice of medicine, osteopathy, homeopathy, naturopathy,
acupuncture and other complementary disciplines. If stress or imbalance is
detected in a patient, the Company's products can identify the meridian
imbalances in a person's body and assist the practitioner in recommending a
course of treatment or therapy to alleviate the stress or to restore balance to
the body's meridian systems. The Company currently sells four different product
lines, including Meridian, ABR-2000, LAPEX-200, and McPulse, DPA, to healthcare
practitioners throughout the world. The Meridian lines of products are computer
assisted assessment and diagnostic devices. The ABR-2000 is a stress assessment
and diagnostic device that identifies the areas of the human body that are
experiencing trauma due to the effects of stress. The LAPEX-2000 is a
semiconductor laser therapeutic device. The McPulse analyzes heart function,
arterial elasticity, dilations, resistance, and aging through measuring pulse
waveform. The Company's major customers are public health centers, Oriental
medicine hospitals and clinics as well as Western hospitals and clinics. The
Company is currently selling its products in Korea, China, United States, South
America and Southeast Asia. The Company intends to expand its sales efforts
internationally through establishing additional branch offices and sales and
distribution agencies. The Company's goal is to become a leading supplier of
medical devices to the Oriental and Natural/Alternative Medicine markets. The
Company expects to accomplish this goal by:
- - focusing on growing market applications;
- - maintaining technological advances in product development;
- - developing products aimed at new markets; and
- - establishing strategic relationships with key suppliers and customers.
26
A. OPERATING RESULTS
YEAR COMPARISON 2001 TO 2000
For the year ended December 31, 2001, the Company achieved sales revenues of $
5,289,561 resulted in a gross profit of $ 2,811,455 compared with sales revenues
of $5,304,040 that resulted in a gross profit of $2,325,065 for the year ended
December 31, 2000. The Company's operating loss increased to $1,184,695 in 2001
from a loss of $1,013,911 in 2000. Such increase in the operating loss was due
primarily to the increased expenditure of funds for certain selling, general and
administrative expenses such as bad debt expense and commissions. The increase
in bad debt expense results from the Company's conservative evaluation of its
trade accounts receivable in the light of uncertain economic times. The increase
in commissions is reflection of the Company's increased selling and marketing
efforts. Total selling, general and administrative expenses increased to
$3,996,150 for the year ended December 31, 2001 from $3,338,976 for the year
ended December 31, 2000. The Company spent $555,865 on research and development
for the year ended December 31, 2001 as compared to $540,671 for the previous
year. For the year ended December 31, 2001 the Company recorded inventory
write-down due to decline in market value amounting to $140,936 as compared to
$516,312 for 2000. The loss in value of inventory and the consequent write-down
to a new cost basis represents approximately 2.7% of gross sales for 2001.
Although material in amount, the inventory is still on hand and salable, and the
Company moves into the year 2002 with a strong balance sheet based on solid,
realizable assets. The Company expects that the future loss in value of
inventory and the consequent write-down will be stabilized at approximately 2%
of gross sales. In pursuit of continuing increasing sales levels, the Company
was building inventories concurrently with its expanded marketing efforts. As a
result, inventories increased to 2000 levels. The Company's selling, general
and administrative expenses and inventory increases were incurred due to the
efforts expended by the Company in bringing its products on stream and expanding
to other markets. In the same period, working capital decreased to $ 474,619 in
2001 from working capital of $1,008,643 in 2000. As of the year ended December
31, 2001, the Company had an accumulated deficit of $3,869,737. The current
year's contribution to the deficit was financed in part by working capital and
in part by the issuance of a series of bonds for net proceeds to the Company of
$1,136,448.
B. LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of liquidity have historically been cash from operations,
capital working lines of credit, debt and equity financing. The Company has
generated revenues for the last three years but expanding operations of the
Company has required significant amounts of cash in excess of cash generated
from operations. Therefore, the Company has continued to seek additional debt
and equity financing opportunities.
On May 7, 1999 the Company issued bonds in the aggregate amount of $788,491. In
December 1999 the Company converted the Bonds into 53,853 (1,346,325 post Stock
Split shares) shares of the Company.
During 1999 the Company issued 5,000,000 post split shares of common stock for
net proceeds to the Company of $825,764. In the month of March 2000, the Company
raised by way of the sale of 750,000 post Stock Splits shares of its common
stock for net proceeds of $669,344. During 2001, the Company sold two new series
of non-guaranteed bonds for net proceeds of $1,136,448 at interest between
12.15% and 13.92%. The maturity dates of non-guaranteed debentures is $757,632
in the year 2003 and $378,816 in the year 2004. For the year ending December 31,
2001, cash flow from operations did not satisfy all of the Company's operational
requirements and cash commitments.
For the year ended December 31, 2001 the Company had long- term debt obligations
with various lending institutions totalling $1,345,592 as compared to $1,607,048
for the year ended December 31, 2000. The maturity dates of the long term debt
is $251,535 in the year 2002, $392,985 in the year 2003, $447,332 in the year
2004, $233,400 in the year 2005 and $20,340 in the year 2006 and thereafter. The
Company's land and buildings were pledged as collateral for the Company's
short-term and long-term borrowings.
As of December 31, 2001 the Company had working capital of $474,619.
27
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
RESEARCH AND DEVELOPMENT
It is the goal of the Company to continually make enhancements and improvements
to its products. Costs incurred to make routine enhancements or improvements,
design changes to existing products and trouble shooting in production are
excluded from research and development expenses.
PROPRIETARY TECHNOLOGY
The Company has 6 registered patents at the Korea Industrial Property Office.
The Company believes that Korean intellectual property laws and regulations
afford owners of intellectual property protections similar to those enjoyed by
owners of intellectual property in the United States. Korean intellectual
property laws were amended at the end of 1995 to harmonize them with the
Trade-Related Aspects of Intellectual Property Rights Agreement.
The Company's registered patents are as follows:
TECHNOLOGY DESCRIPTION REGISTRATION NUMBER DATE OF REGISTRATION
- ------------------------------ ------------------- --------------------
Electrode ring device for home
99 treatment . . . . . . . . . 236277 September - 99
- ------------------------------ ------------------- --------------------
Electrode clamp device for
home 99 treatment. . . . . . . 236276 September - 99
- ------------------------------ ------------------- --------------------
Automatic detection of
meridians by probe device. . . 210233 April - 99
- ------------------------------ ------------------- --------------------
Medicament energy
information transferring
system . . . . . . . . . . . . 171667 October - 98
- ------------------------------ ------------------- --------------------
Insulation device of meridian
remedial apparatus . . . . . . 144993 April - 98
- ------------------------------ ------------------- --------------------
Diagnostic device using the
electric features of the human
body . . . . . . . . . . . . . 130791 November - 97
- ------------------------------ ------------------- --------------------
The Company relies on a combination of patent and trade secrets to establish and
protect the proprietary rights in its products. In order to protect and support
current and future development of its products, the Company expects that it will
continue to make application for patents at the Korea Industrial Property
Office. The Company believes that the ownership of patents will be a significant
factor in contributing to its business. However, the success of the Company will
depend primarily on the innovative skills, technical competence and marketing
abilities of its personal. In addition, there can be no assurances that the
Company's current and future patent applications will be granted, or if granted,
that the claims covered by the patents will not be reduced from those included
in the Company's applications. Claims by third parties that the Company's
current or future products infringe upon their intellectual property rights may
have a material adverse effect on the Company. Intellectual property litigation
is complex and expensive and the outcome of this litigation is difficult to
predict. Any future litigation, regardless of outcome, may result in substantial
expense to the Company and significant diversion of the Company's management and
technical personal.
28
REGULATORY RESTRICTIONS
Use of the Company's products internationally is subject to various government
regulatory requirements on a country-by-country basis. Europe, the U.S.,
Canada, Australia, Japan and China each have their own product certification
systems. As a result, this has slowed the process for the Company to expand in
the world market. Even if there are no technical difficulties, its products are
directly involved with human life, and require that the Company obtain
government approval in clinical safety of the products through various analysis
and testing procedures. As noted above, the Meridian-II and the Meridian-Plus
have received FDA approval to be sold as Class 2 products in the U.S. The table
below includes all the regions in the world where Meridian's products have been
approved for sale.
REGION REGULATION PRODUCTS APPROVED
Korea . . . . . . . . . . . . . . KFDA Meridian - II, Meridian Plus, Meridian, ABR -
2000, Lapex - 2000, Hemoscope
China . . . . . . . . . . . . . . SDA Meridian - II, ABR - 2000
U.S.A.. . . . . . . . . . . . . . FDA Meridian - II, Meridian Plus, Meridian Portable
Canada. . . . . . . . . . . . . . CSA Meridian Portable
South America . . . . . . . . . . FIP Meridian - II, Meridian Plus, ABR - 2000, Lapex -
2000
EU. . . . . . . . . . . . . . . . IEC (CE) MERIDIAN-II, MERIDIAN-Plus, MERIDIAN-
Portable
ABR-2000, LAPEX - 2000
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
- --------------------------------------------------------
A. DIRECTORS AND SENIOR MANAGEMENT
See Item 4.C.
B. COMPENSATION
Name & Principal Year Salary ($) Bonus ($) Other Annual All Other
Position . . . Compensation ($) Compensation
Myeong, Hyeon-
seon, (Director,
President, CEO). . 1998 34,000 Nil Nil Nil
1999 49,000 Nil Nil Nil
2000 49,000 Nil Nil Nil
2001 45,500 Nil Nil Nil
Park, Sang - yeul
(Director of
Manufacturing
Affairs). . . . . . 1998 Nil Nil Nil Nil
1999 Nil Nil Nil Nil
2000 42,000 Nil Nil Nil
2001 39,000 Nil Nil Nil
Lee, Soo-rang
(Director of
Manager of
Research and
Development) . . . 1998 30,000 Nil Nil Nil
1999 43,000 Nil Nil Nil
42,000 Nil Nil Nil
2000
------
2001 39,000 Nil Nil Nil
29
Kim, Ki-Won
(Director of
Domestic Sales). . 1998 Nil Nil Nil Nil
1999 Nil Nil Nil Nil
2000 Nil Nil Nil Nil
2001 Nil Nil Nil
39,000
------
Min, Jae -Ki
(Statutory Auditor) 1998 Nil Nil Nil Nil
1999 Nil Nil Nil Nil
2000 Nil Nil Nil Nil
2001 Nil Nil Nil Nil
Park, Hee-yo
(General Manager) . 1998 25,000 Nil Nil Nil
1999 30,500 Nil Nil Nil
2000 30,500 Nil Nil Nil
2001 29,200 Nil Nil Nil
- - Mr. Park, Sang-yeul received an interest free loan from the Company in the
amount of $8,500 which he fully paid off in March 2000.
COMPENSATION OF DIRECTORS
Directors and directors who are also employees of the Company receive no extra
compensation for their service on the Board of Directors of the Company.
EMPLOYMENT CONTRACTS WITH EMPLOYEES AND OFFICERS
The Company has not entered into any employment contracts, but anticipates
entering into employment contracts with certain management and other key
personnel.
D. EMPLOYEES
As of July 12, 2002, the Company had 35 employees; 6 employees in administration
and finance; 11 employees in sales and marketing; 10 employees in manufacturing,
operations and engineering; and 8 employees in research and development.
30
E. SHARE OWNERSHIP
STOCK OPTION PLANS
Under the Company's Articles of Incorporation, the Company may grant options for
the purchase of its shares to certain qualified officers and employees. Set
forth below are the details of the Company's stock option plan as currently
contained in its Articles of Incorporation (the "Stock Option Plan"). In order
to qualify for participation in the Stock Option Plan, officers and employees
must have the ability to contribute to, the establishment, development or
technological innovation of the Company. Notwithstanding the foregoing, the
following criteria shall not be eligible to receive options under the Stock
Option Plan; (i) the Company's largest shareholder and its specially related
parties, as defined in the Securities and Exchange Act of Korea (the "Securities
Act of Korea"), (ii) major shareholders and their specially related parties, as
defined in the Securities Act of Korea, and (iii) any shareholder who would
become a major shareholder upon exercise of stock options granted under the
Stock Option Plan. Under the Securities Act of Korea, a major shareholder is
defined as a shareholder who (i) holds 10% or more of shares issued and
outstanding or (ii) has actual control over major management decisions. Under
the Securities Act of Korea the largest shareholder of a company is the person
who holds the largest number of issued and outstanding shares of the company.
The specific terms and conditions of stock options granted under the Stock
Option Plan shall be approved at a duly convened shareholders' meeting. Under
the Company's Articles of Incorporation, stock options shall be offered through
(i) issuance of new shares, or (ii) payment in cash or treasury stock held by
the Company of the difference between the market price of its shares and the
option exercise price. The maximum aggregate number of the Company's shares
available for issuance under the Stock Option Plan shall not exceed 15% of the
total number of its shares outstanding. The stock options may not be granted to
all officers and employees at the same time. Any single officer or employee may
not be granted stock options for the shares exceeding 10% of the shares issued
and outstanding. Stock options granted under the Stock Option Plan will have a
minimum exercise price equal to the arithmetic mean of (i) the weighted average
of the daily market share prices for the two-month period prior to the date on
which the stock options are granted, (ii) the weighted average of the daily
market share prices for the one-month period prior to such date and (iii) the
weighted average of the daily market share prices for the one-week period prior
to such date. When new shares are issued upon the exercise of the stock options,
the option exercise price shall not be less than the par value of the Company's
shares. Stock options granted under the Stock Option Plan may be exercised
after the third anniversary date of the shareholders' meeting at which the grant
of stock options under the Stock Option Plan is approved but prior to the
seventh anniversary date thereof, unless otherwise revoked by the board of
directors. The board of directors may revoke stock options granted under the
Stock Option Plan if (i) a beneficiary resigns prior to the exercise of the
stock options, (ii) the beneficiary causes significant loss to the Company by
his or her negligence or wilful misconduct, or (iii) an event of termination
specified in the Stock Option Plan occur. Shares purchased upon the exercise of
stock options granted under the Stock Option Plan will not, at the time of their
issuance, be registered with the Securities and Exchange Commission but may be
salable in the public market in the United States in accordance with Rule 144
under the Securities Act and applicable Korean laws and regulations.
The Company adopted the following material changes with respect to its Stock
Option Plan:
- - persons entitled to receive stock options has been expanded to include
researchers, faculty members of a university, practising lawyers, certified
public accountants who possess technological or managerial capabilities and
Universities and Research Institutes;
- - the number of stock options granted at any one time cannot exceed 50% of the
total issued and outstanding shares of the Company;
- - stock option holders shall be entitled to exercise their stock options only
after having served in the Company for two (2) years; and
- - the exercise price per share upon exercise of stock options shall not be less
than the greater of the market price of shares valued as of the date of the
grant of the stock options or the par value of the shares concerned.
31
On February 23, 2000, the Company granted stock options to its executive
officers, directors and 16 employees to purchase 19,874 (496,850 post Stock
Split shares) of its common shares at a price of $22.00 per shares ($.88 per
post Share Split). Stock options granted to its executive officers and directors
will vest on February 23, 2003 and are exercisable until February 22, 2007. On
March 19, 2001, the Company granted stock option to its executive officers,
directors and 13 employees to purchase 425,250 common shares at an exercise
price of Won 680 (equivalent to $0.53 at the spot exchange rate of Won 1,298 to
$1) per share. The options will vest on March 19, 2004 and are exercisable until
March 18, 2008.
SHARE OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of the common stock of the Company as of July 12, 2002, after taking
into effect the Acquisition and the Stock Splits of: (a) each person who is
known to the Company to own beneficially more than 5% of the Company's
outstanding common stock, (b) each of the Company's directors and officers, and
(c) all directors and officers of the Company, as a group:
Name and address of beneficial owner Amount Stock Beneficially Owned Percentage of Class
and position with the company . .
Myeong, Hyeong-seong. . . . . . . . . 1,281,100 common shares 8.06%
(President, CEO and Director)
#997-4 Daechi-dong
Gangnam-gu, Seoul, Korea
Park, Sang-yeul (Director). . . . . . 87,500 common shares 0.55%
687-6 Sangoan-ri, Hongchun-eup,
Hongchun- kun, Kangwon-do, Korea
Lee Soo-rang. . . . . . . . . . . . . 205,175 common shares 1.29%
(Director, Manager of
Research and Development)
#997-4 Daechi-dong Gangnam-
gu,Seoul, Korea
Kim, Ki-won . . . . . . . . . . . . . 265,000 common shares 1.67%
(Diector, Domestic Sales)
#997-4 Daechi-dong
Gangnam-gu, Seoul, Korea
Min, Jae-ki . . . . . . . . . . . . . Nil Nil
(Statutory Auditor)
#997-4 Daechi-dong
Gangnam-gu
Seoul, Korea
Park, Hee-yo. . . . . . . . . . . . . 107,575 common shares 0.67%
(General Manager)
#974-4 Daechi-dong
Gangnam-gu, Seoul, Korea
32
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
----------------------------------------------------------------
A. MAJOR SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our shares as of June 27, 2002, by (1) each person known to us to
own beneficially more than five percent (5%) of our shares, and (2) all of our
directors and executive officers as a group.
Name and address Amount Stock Beneficially Percentage of Class
Owned
Terasource Kosdaq Venture Investment.
8FR Dongshin Bldg. 141-30 Samseong-. . . . . . . . . . . . . . 2,066,700 common shares 12.99%
dong Kangnam-gu Seoul Korea
Terasource Venture Investment Capital
8FR Dongshin Bldg. 141-30 Samseong-. . . . . . . . . . . . . . 403,900 common shares 2.5%
dong Kangnam-gu Seoul Korea
Terasource Venture Capital Fund 2
8FR Dongshin Bldg. 141-30 Samseong-. . . . . . . . . . . . . . 1,070,270 common shares 6.7%
dong Kangnam-gu Seoul Korea
Terasource Venture Capital Fund 3
8FR Dongshin Bldg. 141-30 Samseong-. . . . . . . . . . . . . . 1,551,350 common shares 9.7%
dong Kangnam-gu Seoul Korea
Terasource Venture Capital Fund 4
8FR Dongshin Bldg. 141-30 Samseong-. . . . . . . . . . . . . . 378,380 common shares 2.37%
dong Kangnam-gu Seoul Korea
The Hong Group of Companies
including:
Serome Investment Co. Ltd. (as to
1,085,675shares), 151-7 Samseong-
Dong Kangnam-Gu Seoul Korea; . . . . . . . . . . . . . . . . . 3,325,900 common shares 20.91%
Mok-Won Assets Management Co. Ltd
(as to 1,375,000 shares),2004 Ho, Anam
tower 702-10 Yuksam-dong Kangnam-
ku, Seoul, Korea;
Bio & Medical Research Co. Ltd. (as to
524,425 shares), 702-10 Yuksam-dong, Kangnam-ku, Seoul, Korea;
Ki-tae Hong (as to 127,800 shares) and
Hye-sook Lee (as to 213,000
shares).151-7 Samseong-Dong
Kangnam-Gu Seoul Korea
All Officers and Directors as a Group. . . . . . . . . . . . . 1,946,350 common shares 12.24%
B. RELATED PARTY TRANSACTIONS
There is no known relationship between any of the Directors and Officers of the
Company with major clients or provider of essential products and technology.
33
In the event conflicts do arise the Company will attempt to resolve any such
conflicts of interest in favor of the Company. The officers and directors of the
Company are accountable to the Company and its shareholders as fiduciaries,
which requires that such officers and directors exercise good faith and
integrity in handling the Company's affairs. A shareholder may be able to
institute legal action on behalf of the Company on or behalf of that shareholder
and all other similarly situated shareholders to recover damages or for other
relief in cases of the resolution of conflicts in any manner prejudicial to the
Company.
ITEM 8. FINANCIAL INFORMATION
--------------------------------
See "Item 18- Financial Statements"
LEGAL PROCEEDINGS
We are not party to any material legal proceedings.
DIVIDEND POLICY
We intend to retain any earnings for use in our business. We do not intend to
pay dividends on our shares for the foreseeable future. Dividends, if any, on
the outstanding shares are recommended by the board of directors and must be
approved at our annual general meeting of shareholders. This meeting is
generally held in March each year, and the dividend in respect of the preceding
year is generally paid shortly thereafter. The declaration of dividends is
subject to the discretion of the shareholders, and consequently, no assurance
can be given to the amount of dividends per share or that any such dividends
will be declared. Future cash dividends, if any, will also depend upon our
future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions and other factors as may deem
relevant. Loan agreements and contractual arrangements entered into by Meridian
may also restrict distributions of dividends.
ITEM 9. THE OFFER AND LISTING
----------------------------------
Not Applicable
ITEM 10. ADDITIONAL INFORMATION
----------------------------------
A. SHARE CAPITAL
The Company had 567,853 shares of common stock issued and outstanding prior to
the Acquisition of By George, and 635,995 shares issued and outstanding
following the Acquisition. Effective February 15, 2001 the Company forward split
all of its outstanding common shares on the basis of 10 new shares of common
stock of the Company for each issued share of common stock of the Company
resulting in a total of 6,359,950 shares of common shares par value 500 Won per
share in the capital stock of the Company being issued and outstanding (the
"First Stock Split"). Effective March 19, 2001 the Company forward split all of
its outstanding common shares on the basis of 5 new shares of common stock of
the Company for every 2 issued shares of common stock of the Company resulting
in a total of 15,899,875 shares of common shares par value 200 Won per share in
the capital stock of the Company being issued and outstanding (the "Second Stock
Split") (the First Stock Split and the Second Stock Split collectively referred
to as the "Stock Split").
34
B. ARTICLES OF INCORPORATION
GENERAL
The Company is authorized to issue 50,000,000 shares of common stock, each share
of common stock having equal rights and preferences, including voting
privileges. The Company is not authorized to issue shares of preferred stock.
As of April 26, 2001 and taking into account the Merger, and the Stock Split
there were 15,899,875 shares of the Company's stock issued and outstanding. The
shares of common stock of the Company constitute equity interests in the Company
entitling each shareholder to a pro rata share of cash distributions made to
shareholders, including dividend payments. The holders of the Company's common
stock are entitled to one vote for each share of record on all matters to be
voted on by shareholders. There is no cumulative voting with respect to
election of directors of the Company or any other matter, with the result that
the holders of more than 50% of the shares voted for the election of those
directors can elect all of the directors. The holders of the Company's common
stock are entitled to receive dividends when, as and if declared by the
Company's Board of Directors from funds legally available therefore; provided,
however, that cash dividends are at the sole discretion of the Company's Board
of Directors. In the event of liquidation, dissolution or winding up of the
Company, the holders of common stock are entitled to share rateably in all
assets remaining available for distribution to them after payment of liabilities
of the Company and after provision has been made for each class of stock, if
any, having preference in relation to the Company's common stock. Holders of
the shares of the Company's common stock have no conversion, pre-emptive or
other subscription rights, and there are no redemption provisions applicable to
the Company's common stock. All of the outstanding shares of the Company's
common stock are duly authorized, validly issued, fully paid and non-assessable.
DIVIDENDS
Dividends are distributed to shareholders in proportion to the number of shares
of capital stock owned by each shareholder following approval by the
shareholders at a general meeting of shareholders. Under the Commercial Code
and the Company's Articles of Incorporation, the Company will pay, to the extent
declared, full annual dividends on newly issued shares. The Company may declare
dividends annually ("annual dividends") at the annual general meeting of
shareholders which is held within three months after the end of the fiscal year.
Shortly after the annual general meeting, the annual dividend is paid to the
shareholders of record as of the end of the preceding fiscal year. Annual
dividends may be distributed either in cash or in shares provided that shares
must be distributed at par value and dividends in shares may not exceed one-half
of the annual dividend. Under the Commercial Code and the Company's Articles of
Incorporation, the Company does have an obligation to pay any annual dividend
unclaimed for five years from the payment date. The Commercial Code provides
that a company shall not pay an annual dividend unless it has set aside in its
legal reserve an amount equal to at least one-tenth of the cash portion of such
annual dividend or has a legal reserve of not less than one-half of its stated
capital. The Commercial Code also provides that a company may pay an annual
dividend out of the excess of its net assets over the sum of (i) its stated
capital, (ii) the aggregate amount of its capital surplus reserve and legal
reserve which have been accumulated up to the end of the relevant dividend
period, and (iii) the legal reserve to be set aside in respect of such annual
dividend. Such reserves are not available for payment of cash dividends but may
be transferred to capital stock or used to reduce an accumulated deficit through
a shareholder action.
35
DISTRIBUTION OF FREE SHARES
In addition to dividends in the form of shares to be paid out of retained or
current earnings, the Commercial Code permits a company to distribute to is
shareholders an amount transferred form the capital surplus or legal reserve to
stated capital in the form of free shares. Such distribution must be made pro
rata.
PREEMPTIVE RIGHTS AND ISSUANCE OF ADDITIONAL SHARES
The authorized but unissued shares may be issued at such times and, unless
otherwise provided in the Commercial Code, upon such terms as the board of
directors of a company may determine. The new shares must be offered on uniform
terms to all shareholders who have preemptive rights and who are listed on the
shareholders' register as of the record date. The Company's shareholders are
entitled to subscribe for any newly issued shares in proportion to their
existing shareholdings, provided that pursuant to the Articles of Incorporation,
new share that are (i) issued by public offering in accordance with the
Securities and Exchange Law of Korea, (ii) represented by depositary receipts,
(iii) issued to foreigners in accordance with the Foreign Investment Promotion
Law of Korea within 33% of the total number of shares outstanding, (iv) issued
to the Company's employee stock ownership association up to 20% of the newly
issued shares (to the extent the total number of shares so subscribed and held
by the members of the employee stock ownership association does not exceed 20%
of the total number of shares), (v)issued outside Korea for listing on a foreign
stock exchange or foreign securities market trading securities by means of an
electronic or a quotation system, (vi) issued according to a stock option plan,
(vii) issued to a domestic corporation having a strategic relationship with the
Company in connection with the Company's management or technology of up to 5% of
the total number of issued and outstanding shares after such issuance,
(viii)issued as consideration for the acquisition of the stock or assets of
another company up to less than 20% of the total number of issued and
outstanding shares, or (ix) issued through general public offering in accordance
with the Securities and Exchange Law of Korea may be issued pursuant to a
resolution of the board of directors to persons other than existing
shareholders. Under the Commercial Code, a company may vary, without
shareholder approval, the terms of such pre-emptive rights for different classes
of shares. Public notice of the preemptive rights to new shares and the
transferability thereof must be given not less than two weeks (excluding the
period during which the shareholders' register is closed) prior to the record
date. The Company will notify the shareholders who are entitled to subscribe
for newly issued shares of the deadline for subscription at least two weeks
prior to such deadline. If a shareholder fails to subscribe on or before such
deadline, such shareholder's preemptive rights will lapse. The board of
directors may determine how to distribute shares in respect of which preemptive
rights have not been exercised or where fractions of shares occur. If the
Company adopts the New Articles of Incorporation newly issued shares can be
issued pursuant to a resolution of the board of directors of the Company to
persons other than existing shareholders of the Company under the following
cases (i) the Company offers new shares or allows underwriters to underwrite new
shares in accordance with Article 2 and Article 8 of the Securities Exchange Act
of Korea;(ii) the Company issues new shares through a public offering by the
resolution of the Board of Directors in accordance with Article 189-3 of the
Securities Exchange Act of Korea; (iii) the Company issues new shares through
exercises of stock options in accordance with Article 16-3 of the Venture
Company Promotion Special Measures Act of Korea; (iv) the Company issues new
shares for the purpose of listing or registration on or with a foreign
securities exchange or market;(v) the Company issues new shares for foreign
direct investments in accordance with the Foreign Investment Promotion Act as
needed for business purposes, including but not limited to improvement of the
financial structure;(vi) the Company issues new shares to another company with
which the Company forms or intends to form a business alliance relationship for
the purpose of technology transfer; or (vii) the Company issues new shares for
consideration for the acquisition of the shares or assets of another company or
the assets of a person.
36
GENERAL MEETING OF SHAREHOLDERS
Under the Commercial Code, the ordinary general meeting of shareholders is held
within three months after the end of each fiscal year and, subject to board
resolution or court approval, an extraordinary general meeting of shareholders
may be held as necessary or at the request of holders of an aggregate of 3% or
more of the outstanding shares of a company or at the request of a company's
statutory auditor or audit committee. Under the Commercial Code, written
notices setting forth the date, place and agenda of the meeting must be given to
shareholders at least two weeks prior to the date of the general meeting of
shareholders. Currently, the Company uses The Korean Economic Daily for the
purpose of providing public notices. Shareholders not on the shareholders'
register as of the record date are not entitled to receive notice of the annual
general meeting of shareholders or attend or vote at such meeting. The agenda
of the general meeting of shareholders is determined at the meeting of the board
of directors. In addition, shareholders holding an aggregate of 3% or more of
the outstanding shares may propose an agenda for the general meeting of
shareholders. Such proposal should be made in writing at least six weeks prior
to the meeting. The board of directors may decline such proposal if it is in
violation of the relevant laws and regulations of the Company's Articles of
Incorporation. The general meeting of shareholders is held at the Company's
headquarters or, if necessary, may be held anywhere in the vicinity of the
Company's headquarters.
VOTING RIGHTS
Holders of the Company's shares are entitled to one vote for each share, except
that voting rights with respect to shares held by the Company and shares held by
a corporate shareholder, more than one-tenth of whose outstanding capital stock
is directly or indirectly owned by the Company, may not be exercised.
Cumulative voting is precluded in the Company's Articles of Incorporation. Under
the Commercial Code, for the purpose of electing the Company's statutory
auditors, a shareholder holding more than 3% of the total shares may not
exercise voting rights with respect to such shares in excess of such 3% limit.
The Commercial Code also provides that in order to amend the Company's Articles
of Incorporation (which is required for any change to the Company's authorized
share capital) and for certain other instances, including removal of any of the
Company's director and statutory auditor, dissolution, merger or consolidation,
transfer of the whole or a significant part of the Company's business,
acquisition of all of the business of any other company or issuance of new
shares at a price lower than their par value, an approval from holders of at
least two-thirds of those shares present or represented at such meeting is
required, provided that such super-majority also represents at least one-third
of the total issued and outstanding shares. A shareholder may exercise his
voting by proxy given to any person. The proxy must present a document
evidencing the power of attorney prior to the start of the general meeting of
shareholders.
REGISTRATION OF SHAREHOLDERS AND RECORD DATE
Pacific Corporate Trust Company of Vancouver BC Canada ("Pacific Corporate")
will be the Company's sole transfer agent. Pacific Corporate will maintain the
register of the Company's shareholders and register of transfers of registered
shares traded. For the purpose of determining the
holders of the Company's shares entitled to annual dividends, the register of
shareholders is closed for a period following December 31 and ending on the
close of the ordinary general shareholders' meeting for such fiscal year. The
record date for annual dividends is December 31. Further, the Commercial Code
and the Company's Articles of Incorporation permit the Company, upon at least
two weeks' public notice, to set a record date and/or close the register of
shareholders entitled to certain rights pertaining to the Company's shares. The
trading of the Company's shares and the delivery of certificates in respect
thereof may continue while the register of shareholders is closed.
37
ANNUAL AND PERIODIC REPORTS
At least one week prior to the annual general meeting of shareholders, the
Company's annual report and audited non-consolidated financial statements must
be made available for inspection at the Company's principal office and at all
branch offices. Copies of annual reports, the audited consolidated financial
statements and any resolutions adopted at the general meeting of shareholders
will be available to the Company's shareholders. In addition, the Company will
dispatch the copies of its financials and statements and business report to its
shareholders at least two weeks prior to the date of the annual general meeting
of shareholders.
TRANSFER OF SHARES
Under the Commercial Code, the transfer of shares is effected by delivery of
share certificates but, in order to assert shareholders' rights against the
Company, the transferee must have his name and address registered on the
register of shareholders. For this purpose, shareholders are required to file
their name, address and seal or specimen signature with the Company. Under the
regulations of the Financial Supervisory Commission of Korea, non-resident
shareholders may appoint a standing proxy and may not allow any person other
than such standing proxy to exercise rights regarding the acquired shares or
perform any task related thereto on his behalf, subject to certain exceptions.
Under current Korean regulations, securities companies and banks in Korea
(including licensed branches of non-Korean securities companies and banks),
investment management companies in Korea, internationally recognized foreign
custodians and the Korean Securities Depository are authorized to act as agents
and provide related services.
ACQUISITION BY THE COMPANY OF SHARES
The Company generally may not acquire its own shares except in certain limited
circumstances, including, without limitation, a reduction in capital. Under the
Commercial Code, except in case of a reduction in capital, any of the Company's
own shares acquired by it must be sold or otherwise transferred to a third party
within a reasonable time.
LIQUIDATION RIGHTS
In the event of a liquidation of the Company remaining after payment of all
debts, liquidation expenses and taxes will be distributed among shareholders in
proportion to the number of the Company's shares held.
INSPECTION OF BOOKS AND RECORDS
Under the Commercial Code, any individual shareholder or shareholders having at
least 3% of all outstanding shares (irrespective of voting or non-voting shares)
of a Korean corporation may inspect books and records of the corporation.
C. MATERIAL CONTRACTS
None
38
D. EXCHANGE CONTROLS
GENERAL
The Foreign Exchange Transaction Law of Korea and the Presidential Decree and
regulations established there under (collectively the "Foreign Exchange
Transaction Laws") regulate investment in Korean securities by non-residents and
issuance of securities outside Korea by Korean companies. Under the Foreign
Exchange Transaction Laws, non-residents may invest in Korean securities only to
the extent specifically allowed by such laws or otherwise permitted by the
Ministry of Finance and Economy. The Financial Supervisory Commission also has
adopted, pursuant to the delegated authority under the Securities and Exchange
Law of Korea, regulations that restrict investment by foreigners in Korean
securities and regulate issuance of securities outside Korea by Korean
companies. Under the Foreign Exchange Transaction Laws, if the Government deems
that certain emergency circumstances are likely to occur, it may require certain
investors to obtain prior approval for certain Capital Transactions as defined
in the Foreign Exchange Transaction Laws from the relevant Korean authority or
to deposit a certain portion of the investors' holdings in Korea. Such emergency
circumstances include sudden fluctuations in interest rates or exchange rates,
extreme difficulty in stabilizing the balance of payments or a substantial
disturbance in the Korean financial and capital markets.
GOVERNMENT REPORTING REQUIREMENTS
In order for the Company to issue its shares outside of Korea, the Company is
required to file a prior report of such issuance with the Ministry of Finance
and Economy. No further approval from the Government is necessary fort he
issuance of the Company's shares. Furthermore, prior to making an investment to
10% or more of the outstanding shares of a Korean company, foreign investors are
generally required under the Foreign Investment Promotion Law to submit a report
to a Korean bank pursuant to a delegation by the Ministry of Commerce, Industry
and Energy. Subsequent sale by such investor of the shares will also require a
prior report to such bank.
DIVIDEND TO BE DECLARED IN WON
The Company currently is not in the position to pay dividends on its shares for
the foreseeable future. However, if the Company declares cash dividends, such
dividends will be declared in Won. In order for the Company to pay such
dividends outside Korea, such dividends will be converted into Dollars and
remitted to the shareholders, subject to certain conditions. The Company will
convert dividend amounts in foreign currency and remit them to shareholders
abroad. No governmental approval is required for foreign investors to receive
dividends. However, in order for the Company to convert the Won amount in
foreign currency and to remit such amount abroad, relevant documents must be
submitted to the foreign exchange bank to verify (i) that the amount being paid
conforms to the amount required to be paid and (ii) whether all necessary legal
procedures have been completed.
E. TAXATION
KOREAN TAXATION
The following is a summary of the principal Korean tax consequences to owners of
our shares that are non-resident individuals or non-Korean corporations without
a permanent establishment in Korea to which the relevant income is attributable
("non-resident holders"). The statements regarding Korean tax laws set forth
below are based on the laws in force and as interpreted by the Korean taxation
authorities as of the date hereof. This summary is not exhaustive of all
possible tax consideration which may apply to a particular investor and
prospective investors are advised to satisfy themselves as to the overall tax
consequences of the acquisition, ownership and disposition of our shares,
including specifically the tax consequences under Korean law, the laws of the
jurisdiction of which they are resident, and any tax treaty between Korea and
their country of residence, by consulting their own tax advisors.
39
TAXATION OF DIVIDENDS
For the purposes of Korean taxation of distributions of profits either in cash
or shares made on the Company's shares, a non-resident holder will be treated as
the owner of the Company's shares. Dividends paid (whether in cash or in
shares) to a non-resident holder are generally subject to withholding tax at a
rate of 27.5% or such lower rate as is applicable under a treaty between Korean
and such non-resident holder's country of tax residence. Such tax is required
to be deducted from such dividends and only the net amount is paid to the
non-resident holder of the Company's shares. Under the U.S. - Korea Tax Treaty,
the maximum rate of withholding on dividends paid to United States residents
eligible for treaty benefits and beneficial owners of such dividend generally is
15% (10% if the recipient of the dividends is a U.S. corporation and owned at
least 10% of the outstanding shares of voting stock of the relevant Korean
company during any part of its taxable year which precedes the date of payment
of the dividend and during the whole of its prior taxable year {if any} and
certain other conditions are satisfied) which does not include withholding of
local tax. In addition, a local surtax will be included in the withholding,
therefore the maximum rate of withholding is generally 16.5%. The
aforementioned maximum rate on withholding of dividends does not apply if the
United States resident has a permanent establishment in Korea and the shares to
which the dividends are paid are connected with such permanent establishment.
Distribution of free shares representing a transfer of certain capital reserves
or asset revaluation reserves into paid-in capital may be treated as dividends
subject to Korean tax. However, stock splits, if any, will not be treated as
dividends.
TAXATION OF CAPITAL GAINS
A non-resident holder will be subject to Korean taxation on capital gains
realized on a sale of our shares unless the non-resident holder is eligible for
the benefits of an applicable tax treaty exempting such capital tax. In
addition, the capital gains realized from the transfer of shares listed on
certain foreign stock exchanges (including the Nasdaq National Market), insofar
as the transfer is completed through such stock exchange, are exempted from
Korean income taxation by virtue of the Tax Exemption and Limitation Law. Under
the U.S.-Korea tax treaty, capital gains realized by holders that are residents
of the United States eligible for treaty benefits will not be subject to Korean
taxation upon the disposition of our shares, with certain exceptions. In the
absence of any applicable treaty or the exemption under the Tax Exemption and
Limitation Law, a non-resident holder will generally be subject to Korean
taxation on capital gains realized on a sale of our shares at the rate of the
lesser of 27.5% of the gains or 11% of the gross sales proceeds until December
31, 2000 and the lesser of 26 7/8% of the gains and 10 3/4% of the gross sales
proceeds thereafter. See "-Withholding of Taxes."
APPLICATION OF THE U.S.-KOREA TAX TREATY
Under the U.S.-Korea tax treaty, a resident of the United States means (i) a
United States corporation and, (ii) any other person (except a corporation or
any entity treated under United States law as a corporation) resident in the
United States for purposes of its tax, but in the case of a person acting as
partner or fiduciary only to the extent that the income derived by such person
is subject to United States tax as the income of a resident. Further, the
reduced Korean withholding tax rate on dividends and capital gains under the
U.S.-Korea Tax Treaty would not be available if (a) the U.S. resident holders
are certain investment or holding companies or (b) the dividends or capital
gains derived by residents of the United States from our shares are effectively
connected with the United States residents' permanent establishment in Korea or,
in the case of capital gains derived by an individual, (i) such United States
resident maintains a fixed base in Korea for a period aggregating 183 days or
more during the taxable year and our shares are effectively connected with such
fixed base or (ii) such United States resident is present in Korea for 183 days
or more during the taxable year.
40
SECURITIES TRANSACTION TAX
Under the Securities Transaction Tax Law of Korea, securities transaction tax to
be imposed at the rate of 0.5% (this rate may be reduced to 0.3%, including
other surtax, if traded through the Korea Stock Exchange or KOSDAQ) will not be
imposed on the trading of shares through a foreign stock exchange on which the
shares are listed. Although there has been no established precedent on the point
of whether the Nasdaq National Market will be included in the definition of
"foreign stock exchange" for the purpose of Securities Transaction Tax Law, it
is likely that the securities transaction tax will not be imposed on the trading
through the Nasdaq National Market. Further, securities transaction tax will not
be applied if the sale is executed between non-residents without permanent
establishments in Korea and the non-resident holder (together with our shares
held by any entity which has a certain special relationship with such
non-resident) did not own 10% or more of the total issued and outstanding shares
at any time during the five years before the year within which the transfer
occurs and the non-resident holder did not sell such shares through a securities
broker in Korea.
INHERITANCE TAX AND GIFT TAX
Under Korean inheritance and gift tax laws, shares issued by Korean corporations
are deemed located in Korea irrespective of where they are physically located or
by whom they are owned. Therefore, Korean inheritance tax and gift tax are
imposed with respect to our shares. The taxes are imposed currently at the rate
of 10% to 50%, if the value of the relevant property is above a certain limit
and vary according to the identity of the parties involved. At present, Korea
has not entered into any tax treaty with respect to inheritance or gift tax.
WITHHOLDING OF TAXES
Under Korean tax law, holders of our shares in the United States will generally
be subject to Korean withholding taxes on the capital gains and dividend
payments by us in respect of those shares, unless exempted by a relevant tax
treaty or the Tax Exemption and Limitation Law. Failure to withhold Korean taxes
may result in the imposition of the withholding tax itself and 10% penalty tax,
and, if prosecuted, a criminal penalty of an imprisonment up to one year and/or
a fine up to the tax amount, on the relevant withholding agent. We, as payer of
dividends, will act as withholding agent for the collection of Korean tax on
such dividend payment. The capital gains realized from the transfer of shares
listed and traded on the Nasdaq National Market are exempt from Korean income
taxation by virtue of the Tax Exemption and Limitation Law. Korean tax law
provides that, in case of transfer of Korean shares, the Korean securities
broker broking such transfer, or if there is no such securities broker, the
purchaser is required to withhold the relevant Korean capital gains taxes.
41
UNITED STATES FEDERAL INCOME TAXATION
The following is a general discussion of the material United States federal
income tax consequences of purchasing, owning, and disposing the common shares
if you are a U.S. Holder (as defined below) and hold the common shares as
capital assets for United States federal income tax purposes. This discussion
does not address all of the tax consequences relating to the ownership of the
common shares, and does not take into account U.S. Holders subject to special
rules including:
- - dealers in securities or currencies;
- - financial institutions;
- - tax-exempt entities;
- - banks;
- - life insurance companies;
- - traders in securities that elect to mark-to-market their securities;
- - persons that hold common shares as a part of a straddle or a hedging, or
conversion transaction;
- - persons liable for the alternative minimum tax;
- - persons that actually or constructively owns 10% or more of our voting
stock; or
- - persons whose "functional currency" is not the U.S. dollar.
This discussion is based on the Internal Revenue Code of 1986, as amended, its
legislative history, final, temporary, and proposed Treasury regulations,
published rulings and court decisions, all as currently in effect. These laws
are subject to change, possibly on a retroactive basis.
You are a "U.S. Holder" if you are:
- - a citizen or resident of the United States;
- - a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof;
- - an estate the income of which is subject to United States federal income
taxation regardless of its source;
- - a trust:
- - if a United States court can exercise primary supervision over the trust's
administration and one or more United States persons are authorized to control
all substantial decisions of the trust; or
- - that has elected to be treated as a United States person under applicable
Treasury regulations.
This discussion addresses only United States federal income taxation.
F. DIVIDENDS AND PAYING AGENT
Not Applicable
G. STATEMENTS BY EXPERTS
Not Applicable
H. DOCUMENTS ON DISPLAY
Not Applicable
I. SUBSIDIARY INFORMATION
See Item 18. Notes to Financial Statements
42
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------------
MARKET RISK DISCLOSURE
Market risk generally represents the risk that losses may occur in the value of
financial instruments as a result of movements in market rates of interest and
foreign exchange. The Company's primary market risk exposures are fluctuations
in exchange rates, interest rates and equity prices. The Company is exposed to
foreign exchange risk related to export sales denominated in foreign currency.
All of the Company's export sales are denominated in U.S. Dollars, regardless of
the currencies of the countries/regions in which the purchasers are located.
For the year ended December 31, 2001, the Company had an aggregate of Won 689.4
million in Dollar- denominated export sales, accounting for 10.1% of the
Company's total revenues. The Company has no other significant foreign currency
denominated revenue. As a result, changes in the foreign exchange rate
between the Won and the Dollar may significantly affect the Company due to the
effect of such changes on the amount of payment, denominated in Won, the Company
receives from foreign purchasers on the export sales. As of December 31, 2001,
all of the Company's liabilities are denominated in Won. Therefore, if the Won
depreciates against the Dollar by 10% and all other variables are held constant
from their levels for the year ended December 31, 2001, the Company estimates
that the payment receivable from its overseas customers will decrease by
approximately Won 68.9 million (US$53,301) in 2002. The Company is exposed to
interest rate risk due to significant amounts of short-term and long-term debt.
Upward fluctuations in interest rates increase the cost of additional debt.
However, as of December 31, 2001, the Company had no floating rate borrowings.
Currently the Company does not use any derivatives or other financial
instruments to mitigate these risks discussed above.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
- -----------------------------------------------------------------------
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
- --------------------------------------------------------------
The Company is not currently in default, arrears or delinquent with respect to
any of its debt obligations or other responsibilities.
ITEM 14. MATERIAL MODIFICATIONS TOTHE RIGHTS OFSECURITY HOLDERS AND USE OF
- --------------------------------------------------------------------------
PROCEEDS
- --------
Not Applicable
ITEM 15.
- ---------
Not Applicable
ITEM 16.
- ---------
Not Applicable
ITEM 17.
- ---------
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
- --------------------------------
43
INDEPENDENT AUDITORS' REPORT
---------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
MERIDIAN CO., LTD.
We have audited the accompanying consolidated balance sheets of Meridian Co.,
Ltd.("the Company") and its subsidiaries as of December 31, 2001 and 2000 and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 Meridian Co., Ltd.
and its subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
(Continued)
INDEPENDENT AUDITORS' REPORT, CONTINUED
As discussed in Note 26 to the consolidated financial statements, the operations
of the Company have been significantly affected, and will continue to be
affected for the foreseeable future, by the general unstable economic conditions
in Korea and in the Asia Pacific region. It is currently uncertain what the
resulting effect will be on the future operations and financial position of the
Company and its subsidiaries. The ultimate outcome of this matter cannot
presently be determined. Accordingly, the accompanying consolidated financial
statements do not include any adjustments that might result from those
uncertainties.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's negative cash flows from
operations, cumulative deficit and negative net assets raise substantial doubt
about its ability to continue as a going concern. The consolidated financial
statements do not contain any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 15 to the consolidated financial statements, certain errors
resulting in understatement of net loss for the year ended December 31, 1999 and
overstatement of net loss for the year ended December 31, 2000, were discovered
by management of the Company during the current year. Accordingly, an adjustment
has been made to accumulated deficit as of December 31, 1999 and 2000, to
correct the error.
44
SamDuk Accounting Corporation
Republic of Korea
April 27, 2002
12/F SeoHeung Bldg.
68 Keonji-Dong, Jongro-Ku
Seoul, Korea
45
MERIDIAN CO., LTD.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2000
(in U.S. dollars)
A S S E T S 2001 2000
Current assets :
Cash and cash equivalents (Note 2e). . . . . . . . . . . . . . . $ 105,216 $ 398,625
Short-term investments(Notes 2f, 2t, 9) . . . . . . . . . . . . 841,476 2,647
Accounts receivable - trade, net of allowance for doubtful
accounts of $863,327 and $116,322, respectively (Notes 2g, 17) 1,759,821 2,708,607
Short-term loans-net (Note 3). . . . . . . . . . . . . . . . . . 89,798 146,327
Accounts receivable - other (Note 16). . . . . . . . . . . . . . 20,231 274,539
Inventories (Notes 2h, 4). . . . . . . . . . . . . . . . . . . . 1,187,989 1,093,137
Other current assets (Note 5). . . . . . . . . . . . . . . . . . 123,414 164,314
Total current assets . . . . . . . . . . . . . . . . . . . . . 4,127,945 4,788,196
Investments and other assets
Investments (Notes 2i, 2t, 6, 20). . . . . . . . . . . . . . . . 41,216 115,470
Long-term and restricted bank deposits . . . . . . . . . . . . . 80,929 108,524
Long-term loans-net (Notes 2g, 2k, 3). . . . . . . . . . . . . . 220,672 383,695
Guaranty deposits. . . . . . . . . . . . . . . . . . . . . . . . 90,836 85,642
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433,653 693,331
Property, plant and equipment - net (Notes 2l, 7)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 706,591 732,524
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 524,198 543,436
Furniture and fixture. . . . . . . . . . . . . . . . . . . . . . 752,628 690,627
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,675 144,876
2,126,092 2,111,463
------------
Less accumulated depreciation. . . . . . . . . . . . . . . . . . (670,797) (583,068)
Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,455,295 1,528,395
Intangible assets
Goodwill (note20). . . . . . . . . . . . . . . . . . . . . . . . . - 74,024
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 932 1,249
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 932 75,273
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,017,825 $ 7,085,195
LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . 2001 2000
Current liabilities
Accounts payable - trade (Note17). . . . . . . . . . . . . . . . $ 965,502 $ 1,215,433
Short-term borrowings (Notes 8,17) . . . . . . . . . . . . . . . 1,587,573 1,491,875
Accounts payable - other (Note17). . . . . . . . . . . . . . . . 636,342 487,582
Current portion of long-term debt (Note 9) . . . . . . . . . . . 251,535 425,667
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,374 158,996
Total current liabilities. . . . . . . . . . . . . . . . . . . 3,653,326 3,779,553
Long-term borrowings (Note 9). . . . . . . . . . . . . . . . . . . 1,094,057 1,181,381
Debentures-net(Notes 1, 10). . . . . . . . . . . . . . . . . . . . 1,136,448 -
Long-term accounts payable-other (Notes 11, 21). . . . . . . . . . 90,207 133,868
Retirement and severance indemnities-net (Note 12) . . . . . . . . 247,701 171,392
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 6,221,739 5,266,194
Commitments and contingencies (Note 16)
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . 6,593 26,691
Shareholders' equity
Common stock - par value $0.17 per share : issued and
outstanding 15,899,875 shares and 14,196,325 shares
as of December 31, 2001 and 2000 (Note 13) . . . . . . . . . . 3,011,984 2,741,364
Additional paid-in capital (Note 13) . . . . . . . . . . . . . . 817,769 1,088,389
Appropriation for business rationalization . . . . . . . . . . . 224,659 247,854
Accumulated deficit (Note 15). . . . . . . . . . . . . . . . . . (3,869,737) (1,976,810)
Accumulated other comprehensive loss (Notes 2c, 2s). . . . . . . (395,182) (308,487)
Total shareholders' equity,. . . . . . . . . . . . . . . . . . (210,507) 1,792,310
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . $ 6,017,825 $ 7,085,195
<FN>
See accompanying Notes to Consolidated Financial Statements
46
MERIDIAN CO., LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the years ended December 31, 2001, 2000 and 1999
(in U.S. dollars)
2001 2000 1999
Sales (Notes 2o,23)
Product. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,289,561 $ 5,176,544 $ 5,212,887
Services - R&D performed for third parties . . . . . . . . . . . - - 17,609
Grant on government-sponsored R&D. . . . . . . . . . . . . . . . - 127,496 136,595
5,289,561 5,304,040 5,367,091
Cost of sales
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 2,337,170 2,462,663 3,263,380
Inventory write-down due to decline in market value (Note 2h). . 140,936 516,312 725,584
2,478,106 2,978,975 3,988,964
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,811,455 2,325,065 1,378,127
Selling, general and administrative expenses
Advertising. . . . . . . . . . . . . . . . . . . . . . . . . . . 94,664 98,275 80,833
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . 791,118 109,683 8,259
Commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . 518,484 301,789 205,977
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 103,026 135,051 31,130
Employee benefit . . . . . . . . . . . . . . . . . . . . . . . . 163,351 184,338 147,390
Entertainment. . . . . . . . . . . . . . . . . . . . . . . . . . 135,333 155,958 59,704
Overseas market development. . . . . . . . . . . . . . . . . . . 96,664 204,198 78,987
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,618 100,686 69,738
Research and development . . . . . . . . . . . . . . . . . . . . 555,865 540,671 855,151
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 854,137 960,253 545,005
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617,890 548,074 313,840
3,996,150 3,338,976 2,396,014
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . (1,184,695) (1,013,911) (1,017,887)
Other income
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . 60,520 84,883 17,673
Gain on disposal of investment securities (Note 6). . . . . . . 41,372 230,302 1,146,009
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,033 85,288 52,702
188,925 400,473 1,216,384
Other expenses
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 360,239 322,271 244,364
Non-trade bad debt expense . . . . . . . . . . . . . . . . . . . 460,889 92,832 177,810
Write off of goodwill. . . . . . . . . . . . . . . . . . . . . . 30,020 - -
Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,294 30,774 19,049
929,422 445,877 441,223
Minority interest in net loss of consolidated affiliates . . . . . 19,302 367,789 14,074
Loss before provision for income taxes . . . . . . . . . . . . . . (1,905,910) (691,526) (228,652)
Income tax expense (Notes 2r, 18). . . . . . . . . . . . . . . . - 11,551 130,037
Loss before extraordinary items. . . . . . . . . . . . . . . . . . (1,905,910) (703,077) (358,689)
Extraordinary items
Loss on bankruptcy of a subsidiary . . . . . . . . . . . . . . . (10,212) - -
Gain on exemption of debt
- less applicable taxes of $1,185 in 2000 and $2,549 in 1999. - 6,391 11,932
Loss on repayment of debt
- less applicable taxes of $4,141 in 1999 . . . . . . . . . . - - (25,850)
(10,212) 6,391 (13,918)
------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,916,122) (696,686) (372,607)
Other comprehensive loss
Foreign currency translation gain (loss) . . . . . . . . . . . . (43,252) (218,967) 81,290
Unrealized holding gain. . . . . . . . . . . . . . . . . . . . . - 60,459 -
(43,252) (158,508) 81,290
Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . ($1,959,374) ($855,194) ($291,317)
Weighted average number of common shares . . . . . . . . . . . . . 15,703,850 14,071,325 8,371,325
Basic and diluted loss per common share (Note 2p)
Loss before extraordinary items. . . . . . . . . . . . . . . . . ($0.12) ($0.05) ($0.04)
Extraordinary items. . . . . . . . . . . . . . . . . . . . . . . - - -
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . ($0.12) ($0.05) ($0.04)
- ------------------------------------------------------------------
<FN>
See accompanying Notes to Consolidated Financial Statements
47
MERIDIAN CO.,LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2000 and 1999
( in U.S. dollars )
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES :
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . ($1,916,122) ($696,686) ($372,607)
Add (deduct) items not using (providing) cash
Depreciation and amortization . . . . . . . . . . . . . . . . . 203,737 261,245 135,024
Provision for severance indemnities . . . . . . . . . . . . . . 120,972 113,777 77,294
Provision for doubtful accounts . . . . . . . . . . . . . . . . 1,252,007 202,515 186,069
Inventory write-down due to decline in market value . . . . . . 140,936 516,312 725,584
Gain on sale of investment securities . . . . . . . . . . . . . (41,372) (230,302) (1,146,009)
Decrease (increase) in accounts receivable - trade. . . . . . . 100,475 (1,174,177) (877,353)
Decrease (increase) in accounts receivable - other. . . . . . . 191,914 (136,847) 70,289
Decrease (increase) in inventory. . . . . . . . . . . . . . . . (387,744) (1,223,384) (313,901)
Decrease (increase) in other current assets . . . . . . . . . . 35,629 (138,336) 28,395
Increase (decrease) in accounts payable - trade . . . . . . . . (210,125) 684,795 568,270
Increase (decrease) in accounts payable - other . . . . . . . . 168,607 297,968 (536,913)
Increase (decrease) in other current liabilities. . . . . . . . 56,301 (229,226) (129,853)
Increase in long-term accounts payable - other. . . . . . . . . (39,528) 24,269 119,459
Retirement and severance payment. . . . . . . . . . . . . . . . (31,961) (47,415) (92,764)
Minority interest in net loss of consolidated affiliates. . . . (19,302) (367,789) (14,074)
Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,179 (84,181) 26,021
Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . 1,568,725 (1,530,776) (1,174,462)
-------------
(347,397) (2,227,462) (1,547,069)
CASH FLOWS FROM INVESTING ACTIVITIES :
Decrease in short-term loans. . . . . . . . . . . . . . . . . . . 37,023 78,947 1,692,224
Proceeds from sale of investment securities . . . . . . . . . . . 74,137 342,532 1,383,582
Decrease in long-term and restricted bank deposits. . . . . . . . 24,123 60,000 290,981
Decrease in long-term loans . . . . . . . . . . . . . . . . . . . - 13,158 14,838
Increase in short-term investments. . . . . . . . . . . . . . . . (852,273) - -
Increase in short-term loans. . . . . . . . . . . . . . . . . . . (201,781) (234,843) (1,741,712)
Acquisition of investment securities. . . . . . . . . . . . . . . (59,501) (4,386) (107,394)
Increase in long-term and restricted bank deposits. . . . . . . . - (106,588) (8,416)
Increase in long-term loans . . . . . . . . . . . . . . . . . . . - - (597,532)
Acquisition of property, plant and equipment. . . . . . . . . . . (64,282) (706,245) (58,085)
Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,581 (78,237) 454,185
(1,029,973) (635,662) 1,322,671
CASH FLOWS FROM FINANCING ACTIVITIES :
Increase in short-term borrowings . . . . . . . . . . . . . . . . 1,360,659 1,240,833 1,167,862
Increase in long-term borrowings. . . . . . . . . . . . . . . . . 209,242 342,105 193,567
Proceeds from issuance of debentures. . . . . . . . . . . . . . . 1,150,646 - -
Contribution from minority interest of consolidated subsidiaries. - 315,965 49,399
Proceeds from issuance of common stock. . . . . . . . . . . . . . - 669,344 825,764
Repayment of short-term borrowings. . . . . . . . . . . . . . . . (1,209,833) (29,686) (1,152,172)
Repayment of current portion of long-term debt. . . . . . . . . . (416,991) (43,860) (31,560)
Repayment of long-term borrowings . . . . . . . . . . . . . . . . - (616,552) (9,258)
1,093,723 1,878,149 1,043,602
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . (283,647) (984,975) 819,204
EFFECT OF EXCHANGE RATE ON CASH . . . . . . . . . . . . . . . . . . (9,762) (44,490) 86,961
CASH AT BEGINNING OF THE PERIOD . . . . . . . . . . . . . . . . . . 398,625 1,428,090 521,925
CASH AT END OF THE PERIOD . . . . . . . . . . . . . . . . . . . . . $ 105,216 $ 398,625 $ 1,428,090
Cash and cash equivalents are comprised of :
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,682 $ 15,070 $ 1,102
Term deposits . . . . . . . . . . . . . . . . . . . . . . . . . 94,534 383,555 1,426,988
$ 105,216 $ 398,625 $ 1,428,090
48
MERIDIAN CO., LTD
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2001, 2000 and 1999
(in U.S. dollars)
Accumulated
Common Stock Issued Additional Appropriation Other Accumulated
Paid-in for Business Accumulated Comprehensive Shareholders'
Shares Amount Capital Rationalization (Deficit) Income(Loss) Equity Deficit)
Balance at January 1, 1999 . 7,100,000 $ 1,546,154 $ 95,315 ($754,978) ($231,268) $ 655,223
Issuance to sell
new shares . . . . . . . . . 5,000,000 825,764 825,764
Conversion of
convertible bonds. . . . . 1,346,325 235,577 $ 552,914 788,491
Net loss . . . . . . . . . . (372,607) (372,607)
Other comprehensive
income (loss):
Foreign currency
translation gain . . . . 81,290 81,290
Reclassification
adjustment pursuant
to legal appropriation
requirement. . . . . . . . . 156,856 (156,856)
----------- ----------- ------------ --------- ------------ ----------- -------------
Balance at December 31, 1999 13,446,325 2,607,495 552,914 252,171 (1,284,441) (149,978) 1,978,161
Issuance of sell
new shares . . . . . . . . . 750,000 133,869 535,475 669,344
Net loss . . . . . . . . . . (696,686) (696,686)
Other comprehensive
income (loss):
Foreign currency
translation loss . . . . . . (218,968) (218,968)
Unrealized holding gain. 60,459 60,459
Reclassification adjustment
pursuant
to legal appropriation
requirement. . . . . . . . . (4,317) 4,317
----------- ----------- ------------ --------- ------------ ----------- -------------
Balance at December 31, 2000 14,196,325 2,741,364 1,088,389 247,854 (1,976,810) (308,487) 1,792,310
Issuance of new shares . . . 1,703,550 270,620 (270,620)
Net loss . . . . . . . . . . (1,916,122) (1,916,122)
Other comprehensive
income (loss):
Foreign currency
translation loss . . . . (26,236) (26,236)
Reclassification
adjustment for gains
included in net income . (60,459) (60,459)
Reclassification
adjustment pursuant
to legal appropriation
requirement. . . . . . . (23,195) 23,195
----------- ----------- ------------ --------- ------------ ----------- -------------
Balance at
December 31, 2001. . . . . . 15,899,875 $ 3,011,984 $817,769 $224,659 ($3,869,737) ($395,182) ($210,507)
----------- ----------- ------------ --------- ------------ ----------- -------------
<FN>
See accompanying Notes to Consolidated Financial Statements
49
MERIDIAN CO., LTD.
------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the years ended December 31, 2001, 2000 and 1999
----------------------------------------------------
1. ORGANIZATION AND BASIS OF ACCOUNTING
- --------------------------------------------
Meridian Co., Ltd. (the "Company") was incorporated on April 19, 1994 under the
- --------------------------------------------------------------------------------
laws of the Republic of Korea ("Korea") and is currently engaged in the
- --------------------------------------------------------------------------------
manufacture of alternative medicine equipment for sale in domestic and overseas
- --------------------------------------------------------------------------------
markets.
- --------
The company has negative cash flow from operations, an accumulated deficit and
- --------------------------------------------------------------------------------
negative net assets. The ability of the Company to continue as a going concern
- --------------------------------------------------------------------------------
is dependent upon its ability to obtain adequate financing to reach profitable
- --------------------------------------------------------------------------------
levels of operations. It is not possible to estimate whether financing efforts
- --------------------------------------------------------------------------------
will be successful or if the Company will attain profitable levels of
- --------------------------------------------------------------------------------
operations. For the purpose of obtaining adequate operating funds, the Company
- --------------------------------------------------------------------------------
issued non-guaranteed debentures of Won 1,500 million ($1,136,448 - net of issue
- --------------------------------------------------------------------------------
cost $5,539 by the exchange rate at balance sheet date) during the year ended
- --------------------------------------------------------------------------------
December 31, 2001 and is planning a direct public offering of common shares.
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------
Significant accounting policies followed by the Company in the preparation of
- --------------------------------------------------------------------------------
the accompanying consolidated financial statements are summarized as follows:
- --------------------------------------------------------------------------------
a. Basis of Financial Statements
- ------------------------------------
The Company and its subsidiaries maintain their statutory books of account in
accordance with accounting principles generally accepted in Korea. However these
consolidated financial statements have been prepared in a manner, and reflects
the adjustments which management believes are necessary, to conform to
accounting principles generally accepted in the United States of America ("U.S.
GAAP").
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant inter-company accounts and transaction have been
eliminated on consolidation.
The Company consolidates companies of which it owns, directly or indirectly,
more than 50% of the outstanding voting shares and/or over which it can and does
exercise control.
50
b. Changes in Reporting Entity
------------------------------
The following table shows the Company's ownership percentages and acquisition
dates of its consolidated subsidiaries as of December 31, 2000.
Date of Percentage
acquisition ownership
---------------- ----------
Subsidiaries Primary business
----------------
Pusanmeridian Co., Ltd 2000.3. 3 54.5 % Distributing medical equip.
Meridian Asia Co., Ltd 1999.4.12 51.0 Distributing medical equip
Chuneesoft Co., Ltd. . 2000.3.29 50.0 Software service
True World Co., Ltd. . 2000.1.30 47.9 Distributing medical equip
Effective January 1, 2002, the Company will change from consolidation to equity
accounting for its interest in Meridian Asia, True World, and ChuneeSoft. The
details of transactions and events, which caused the changes in the reporting
entity, are as follows:
(a) In December 2001, the Company has disposed of 2% of its original 51%
shareholding in Meridian Asia Co., Ltd ("MACL"), resulting in a 49% share
ownership in MACL.
(b) In December 2001, three members of management of the Company disposed
of their 1% share ownership in True world (3% in total). As a result, the
Company was no longer able to exercise the significant control over True World.
(c) ChuneeSoft went bankrupt and ceased its operation during December 2001.
All transactions and events described above occurred in December 2001, and the
management of the Company believes that the effects on the financial statements,
which would have been reported if equity methods were applied from the date of
changes to the end of the fiscal year, are not material as a related loss on
equity investments for the intervening period to year end was $464. Therefore,
all periods presented for the years ended December 31, 2001, 2000, and 1999
continue to account for MACL, True World, and ChuneeSoft on a consolidated
basis.
On November 10, 2001, the Company acquired 45% of the share ownership in Beijing
Meridian Medicals Equipment Co., Ltd. for $59,981(by the spot exchange rate of
Won 1,283 to $1) in cash. Investments in Beijing Meridian has been accounted for
by using the equity method.(Refer to Note 6 and 20)
c. Translation of Financial Statements
--------------------------------------
The accompanying consolidated financial statements have been translated into
U.S. dollars in accordance with SFAS 52. As such, assets and liabilities have
been translated into U.S. dollars at the exchange rate in effect on the balance
sheet dates. Shareholders' equity figures have been converted at historical
exchange rates. Elements of income have been translated using the average
exchange rate in effect during the period the transactions occurred. The gain or
loss from foreign currency translation forms a component of other comprehensive
income or loss of each period presented and a component of other accumulated
comprehensive income or loss.
51
The functional currency of the Company and its subsidiary is the Korean won ("W"
or "won"). The primary economic environment in which the Company operates is
Korea. The Korean economy was not highly inflationary during the periods for
which consolidated financial statements are presented.
d. Estimates and Assumptions
---------------------------
The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates
e. Cash and Cash Equivalents
----------------------------
Cash and cash equivalents consist of cash on hand, deposits in banks and highly
liquid investments with an original maturity of three months or less
f. Short-term Investments
-----------------------
Short-term investments consist of marketable securities and short-term financial
instruments which have an original maturity exceeding three months and are
readily convertible into cash within one year. If the Company has debt or equity
securities (with readily determinable fair value) that it intends to actively
and frequently buy and sell for short-term profits, those securities are
considered "trading securities" and classified as short-term investments.
Unrealized holding gains and losses related to these securities are included in
income from continuing operations.
If the Company has debt or equity securities with a readily determinable fair
value that it intends to hold on a long-term basis, but are considered
"available for sale", those securities are classified as investments in
non-current assets. Unrealized holding gains and losses related to these
securities are excluded from current earnings and are included in other
comprehensive income (loss) for the period.
The Company uses the average cost method to account for trading securities.
g. Allowance for Doubtful Accounts
----------------------------------
Amounts receivable are assessed for impairment on a regular, periodic
basis. When circumstances indicate collection of an amount receivable is
doubtful, an allowance and a charge against earnings are recognized immediately.
When circumstances indicate a doubtful amount receivable is unlikely to be
realized, the outstanding amount and the associated allowance are written off.
52
h. Inventories
-----------
Inventories are stated at the lower of cost and net realizable value, with
cost determined based on the weighted average method and net realizable value
determined based on the estimate selling price, less estimated completion and
selling costs. The Company recorded a loss from valuation of inventories
totaling $140,936, $516,312 and $725,584 for the years ended December 31, 2001,
2000 and 1999, respectively. These write-downs establish new cost basis for the
written down inventory items and may not be reversed in the future.
i. Investments
-----------
Investments in marketable equity securities are stated at fair value, with
unrealized gains and losses excluded from current operations and reported in
other comprehensive income (loss) as a separate component of shareholders'
equity.
Investments in business entities over which the Company exercises significant
influence are accounted for using the equity method. Under the equity method,
the original investment is recorded at cost and is adjusted annually by the
Company's equity in earnings or losses of the investee. Dividends paid, if any,
reduce the investment. Unrealized gains and losses on intercompany transactions
are eliminated. Differentials between the cost of the investment and the fair
value of the net assets of the investee at the date of acquisition are recorded
as part of investments and are amortized over five years on a straight-line
basis.
Investments in equity securities of non-public companies are carried at
acquisition cost less provision for impairment in value, if any. If a decline in
net book value of an investment appears to be of other than temporary nature, a
provision for impairment in value is recognized and is charged against earnings
of the current period. The Company recorded loss on impairment of investment
amounting to $27,061 for the year ended December 31, 2001. The Company did not
recognize a loss on impairment of investment in 2000 and 1999.
The Company uses the average cost method to account for the investments.
53
j. Long-lived Assets
------------------
When events and circumstances warrant a review, the Company evaluates the
carrying value of its long-lived assets. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash flow from
use is less than its carrying value. In that event, an impairment charge is
recognized based on the amount by which the carrying value exceeds the estimated
fair value. No such impairment charges have been identified by the Company, but
for the impairment of investment referred in Note 2(i).
k. Valuation of Receivables and Payables at Present Value
-------------------------------------------------------------
Receivables and payables arising from long-term cash loans/borrowings and other
similar transactions are stated at present value if the difference between book
value and present value is material. The difference between the book value and
present value of amounts receivable or payable is deducted from the book value
of the related receivable or payable. The present value discount is amortized to
interest income (expense) using the effective interest rate method.
In determining the discount rate, the Company individually assesses the
creditworthiness of the counterparty based upon the credit standing of the
issuer, restrictive covenants, the collateral, payment and other terms
pertaining to the debt, and the tax consequences to the Company.
l. Property, Plant and Equipment
--------------------------------
Property, plant and equipment is stated at cost less accumulated depreciation.
Routine maintenance and repairs are expensed as incurred. Expenditures resulting
in enhancement of the value or extension of the useful life of the facilities
involved are capitalized.
Depreciation is computed using the declining balance method (except for
buildings and structures which are depreciated using the straight-line method)
over the estimated useful lives (4 to 40 years) of the related assets.
For the years ended December 31, 2001, 2000 and 1999, the Company recorded total
depreciation of $174,194, $227,727 and $110,386, respectively.
m. Goodwill and Intangible Assets
-------------------------------
Goodwill is amortized on a straight-line basis over 5 years. Intangible assets,
which consist of intellectual proprietary rights, are stated at cost less
accumulated amortization computed using the straight-line method over the useful
lives(5 to 10 years).
54
n. Stock Based Compensation
--------------------------
The Company applies the intrinsic value-based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock issued to Employees", and related
interpretations, in accounting for its fixed stock option plan. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS 123,
"Accounting for Stock-Based Compensation", established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS 123, the Company elected to
apply the intrinsic value-based method of accounting described above, and has
adopted the disclosure requirement of SFAS 123.
o. Revenue Recognition
--------------------
Product and merchandise revenues are recognized upon shipment or delivery to the
purchaser and when all significant contractual obligations have been satisfied
and collection is reasonably assured. Revenues from software sales contracts are
recognized upon delivery and when collection is reasonably assured. The
Company's software sales contract does not provide for significant production,
modification or customization work to the software after sale. Service fees are
recognized when delivered in accordance with all terms and conditions of
customer contracts, upon acceptance by the customer, and when collection is
reasonably assured. The Company's contracts generally provide for return of
products within three months from the date of sales. The Company's past
experience indicates that returns are negligible, less than 1% of total sales,
and accordingly the Company does not provide an allowance for returned product.
p. Loss Per Common Share
------------------
Basic and diluted loss per common share is calculated by dividing net loss by
the weighted average number of common shares outstanding during the year , in
accordance with SFAS 128. Stock options granted on March 19, 2001 and February
23, 2000 have not been included in the calculation of loss per share for the
year ended December 31, 2001 and 2000 as their effect is anti-dilutive.
q. Dividends
---------
Dividends, if any, would be declared in Won.
55
r. Income Taxes
-------------
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases and operating loss carry
forwards. Future tax assets are not recognized unless their realization is
considered more likely than not.
s. Other Comprehensive Income
----------------------------
The Company applies the provisions of SFAS 130 "Reporting Comprehensive Income"
with respect to the reporting and display of comprehensive income and its
components for each period presented. Other comprehensive income(loss) consists
of foreign currency translation gain(loss) and unrealized holding gain(loss) as
follows :
(a) Foreign Currency Translation Gains and Losses
These translation gains and losses are the result of converting the financial
statements in accordance with US GAAP; therefore, there is no tax on these
items. The translation gains and losses are not included in determining net
income. Therefore, there is no reclassification adjustment for the period.
(b) Unrealized Holding Gains
The Korean government does not impose taxes on unrealized holding gains;
therefore, before and after tax amount of this item remains the same. The
Company included realized gain of $60,459 on sale of the securities in net
income for the year ended December 31, 2001. Therefore, the same amount of
reclassification adjustment is recorded for the period.
t. Fair Value and Financial Instruments
----------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate that
value.
(i) Cash and cash equivalents, accounts receivable(trade and other), accounts
payable(trade and other), short-term loans and short-term borrowings : The
carrying amount approximates fair value due to the short maturity of those
instruments.
(ii) Marketable securities and investments : The fair value of market-traded
investments are estimated based on quoted market prices for those or similar
investments. For other investments for which there are no quoted market prices,
a reasonable estimate of fair value could not be made without incurring
excessive costs.
56
(iii) Long-term bank deposits and long-term borrowings : The carrying amount
approximates fair value based on a review of interest rates currently available
for similar instruments.
(iv) Long-term loans : The carrying amount approximates fair value because it
was
calculated by discounting the future cash flows using the effective interest
rate of the Company.
(v) Long-term payables : The fair value of long-term payables is estimated
by discounting
the future cash flows using the current interest rate of time deposit with a
maturity of one year.
u. Research and Development
--------------------------
Research and development expenditures are charged to income as incurred.
3. SHORT-TERM AND LONG-TERM LOANS
Short-term and long-term loans as of December 31, 2001 and 2000 are as follows
(in U.S. dollars):
Final Annual December 31,
... Maturity Interest
... Year Rate(%) 2001 2000
Short-term loans
Meridian Oriental Clinic 2002 - $158,333 $159,763
Sales agent 2002 11.0% 160,100 33,544
Other 2002 37,081 7,069
--------- --------
355,514 200,376
Allowance for doubtful accounts (265,716) (54,049)
---------- -------
Net $ 89,798 $146,327
--------- --------
59
57
Long-term loans
Meridian Oriental Clinic 2006 - $519,505 $538,571
Other 2003 7,614 7,893
-------------- --------
527,119 546,464
---------- --------
Allowance for doubtful accounts (213,059) (29,479)
Present value discounts (93,388) (133,290)
Net $ 220,672 $ 383,695
----------- --------
In calculating the present value of long-term loans, the Company applied 9%, the
weighted average interest rate of short-term and long-term borrowings as the
imputed rate.
During the year ended December 31, 1999, the Company made an organization
development loan available to Meridian Oriental Clinic (Clinic), an independent
and unrelated company, who, in return, agreed to demonstrate the Company's
products and perform clinical experiments. The loan is non-interest bearing and
will be repaid annually until 2006. The amount of repayment is determined
annually by offsetting clinical experiment expense incurred by the Clinic on
behalf of the Company and only the difference will be paid. Such expenses
incurred by the Clinic are $25,515, $35,088 and nil for the years ended December
31, 2001, 2000 and 1999, respectively and these amounts were offset against the
short-term loan made to the Clinic in the respective years.
The Company's management believes a series of annual expenses will further
reduce the balance of the loan as described above. A portion of the loan made
to the Clinic is secured by a refundable lease deposit and medical equipments of
the Clinic with value of $255,435 in total. Based on the management's estimates,
the Company provides allowance for doubtful accounts, amounting to $238,932
(equivalent to 50% of net book value less secured lease deposit), in relation
with the loan to the Clinic as of December 31, 2001.
During the years ended December 31, 2001 and 2000, the Company advanced a loan
to its sales agent, amounting to $160,100 and $ 33,544, respectively. These
loans bear interest of 11% per annum and will be repaid within the next 12
months.
Interest income arising from these loans is classified as other income. Any
provision for bad debts is classified as non-trade bad debt expense as a
component of other expenses.
58
4. INVENTORIES
Inventories as of December 31, 2001 and 2000 are as follows (in U.S. dollars):
December 31,
--------------
2001 2000
----- ----
Merchandise . . $ 448,622 $ 803,786
Finished goods. 325,200 107,518
Work in-process 223,650 48,968
Raw materials . 190,517 132,865
$ 1,187,989 $1,093,137
Merchandise consists of medical equipment, medical supplies and electronic
equipment purchased and held for resale by the Company. Finished goods is
principally oriental or alternative medical equipment the Company has produced.
5. OTHER CURRENT ASSETS
Other current assets as of December 31, 2001 and 2000 are as follows (in U.S.
dollars) :
December 31,
============
2001 2000
-------- ------
Accrued interest income $ 9,510 $ 24,009
Advance payments. . . . 96,894 86,360
Prepaid income taxes. . 8,301 45,938
Prepaid expenses. . . . 8,709 8,007
$123,414 $164,314
59
6. INVESTMENTS
Investments as of December 31, 2001 and 2000 are as follows(in U.S.dollars) :
Ownership
Percentage December 31,
---------- ------------
Dec. 31, Dec. 31, Original
2001 2000 Cost 2001 2000
(1) Equity-method Investments
Beijing Meridian Medicals
Equipment Co., Ltd.
45.00. . . . - $ 58,588 $ 41,216 -
(2) Other Investments
Terasource Venture Capital. Co.,
Ltd.
-. . . . . 0.16 - - 87,845
Medicapital Co., Ltd.
-. . . . . 0.15 22,840 - 23,679
Neoest Co., Ltd.
2.87 . . . . . 3,807 - 3,946
-------- ------ -----------
26,647 . - 115,470
-------- ------ -----------
Total. . . . . . . . . . . . . $85,235 $ 41,216 $115,470
-------- ------ -----------
In 2000, investments in Terasource Venture Capital Co., Ltd and Medicapital Co.,
Ltd, with book value of $112,625 and $180,458, were disposed of at $342,532 and
179,825, respectively. The Company recorded a gain on disposal of these
investments of 230,302 (including translation adjustments of $1,028).
In 2001, investments in Terasource Venture Capital Co., Ltd with book value of
$33,447 were disposed of at $73,529. The Company recorded a gain on disposal of
these investments of 41,372 (including translation adjustments of $1,290).
As of December 31, 2000, the investment in listed, and hence readily marketable,
equity securities of Terasource Venture Capital Co., Ltd. had a carrying value
of $33,447 and a fair value of $87,845. Accordingly, the Company recorded an
unrealized holding gain of $60,459(including translation adjustments of $6,061)
as at December 31, 2000, as a part of stockholders' equity. Since Terasource
Venture Capital was first listed on KOSDAQ during 2000, the Company did not
recognize any unrealized holding gain/loss as at December 31, 1999.
Investments in equity securities of nonpublic companies, Medicapital Co., Ltd.
and Neoest Co., Ltd., which are not readily marketable, had carrying values of
$27,061 and $27,625 as of December 31, 2001 and 2000, respectively. In 2001, the
Company recognized impairment loss of $ 27,061 on investments in Medicapital
Co., Ltd. and Neoest Co., Ltd.
60
7. PLEDGED ASSETS
As of December 31, 2001, the Company's land and buildings were pledged as
collateral for the Company's lines of credit totaling $790,255 with ChoHung Bank
and Hanvit Bank.
8. SHORT-TERM BORROWINGS
Short-term borrowings denominated in Korean won as of December 31, 2001 and 2000
are as follows (in U.S. dollars):
Annual Final December 31,
Interest Maturity
Lender rate (%) Date 2001 2000
---------- ---------- ------ -----
ChoHung Bank 8.0 - 10.0 Aug.28.2002 $1,040,142 $715,049
Korea First Bank - - - 157,853
Shinhan Bank 10.0 Aug. 17,2002 70,774 78,891
Hanvit Bank 12.97 May 15,2002 159,968 290,109
Korea Exchange Bank 7.06 Sep. 5, 2002 190,331 -
Small/Medium Ind. Bank 8.0 Aug.20, 2002 20,556 -
Medison Co., Ltd. - Jun. 30,2002 926 162,759
Other - - 104,876 87,214
------- -------
$ 1,587,573 $1,491,875
Korea Technology Credit Guarantee Fund has provided a guarantee in the amount
of $194,138 to secure repayment of short-term borrowings of the Company.
9. LONG-TERM BORROWINGS
Long-term borrowings denominated in Korean won as of December 31, 2001 and 2000
are as follows (in U.S. dollars):
61
Final Annual December 31,
==============
Maturity Interest
Lender Year rate(%) 2001 2000
----------
ChoHung Bank. . . . . . . . . . . 03 to 06 4-6.25 $ 1,029,928 $1,382,897
Peace Bank of Korea 08 6.0 29,692 30,781
Small and Med. Industry Promotion 04 7.5 247,431 138,121
Shinhan Bank 02 4.0 30,453 55,249
Daewoo Capital Co., Ltd 03 - 8,088 -
-------- ----------
1,345,592 1,607,048
Less portion due within one year (251,535) (425,667)
-------- ----------
Long-term portion $1,094,057 $ 1,181,381
The Company was provided payment guarantees amounting to $1,032,356 and $555,006
by Korea Technology Credit Guarantee Fund and Medison Co., Ltd., respectively,
in relation to the above long-term borrowings.
As of December 31, 2001, short-term investments of $839,204 and long-term bank
deposits of $73,316 are subject to withdrawal restrictions in relation to
short-term and long-term bank borrowings
The future scheduled maturities of long-term borrowings at December 31, 2001 are
as follows:
YEARS ENDING
December 31 In U.S. dollars
2002 . . . . . . . . $ 251,535
2003 . . . . . . . . 392,985
2004 . . . . . . . . 447,332
2005 . . . . . . . . 233,400
2006 and thereafter. 20,340
---------
$1,345,592
62
10. DEBENTURES
The Company issued two series of non-guaranteed corporate bonds for the year
ended December 31, 2001. Details of debentures as of December 31, 2001 are as
follows (in U.S. dollars):
Maturity Annual Interest Rate Amount
================= ==================== =======
1st. . . . . . . . . January 31, 2003 12.15 % $761,325
2nd. . . . . . . . . August 14, 2004 13.92 % 380,662
--------
1,141,987
Debenture Issue Cost (5,539)
-----------
$ 1,136,448
11. LONG-TERM ACCOUNTS PAYABLE-OTHER
A number of external research institutes owned by the Korean government, who are
interested in the Company's research and development projects, furnish grants
for the projects by providing the Company with certain initial lump sum
payments. The total grant recognized as sales in 2000 and 1999 was $127,496 and
$136,595, respectively and related costs incurred by the Company in 2000 and
1999 was $417,983 and $470,956, respectively and the related costs incurred by
the Company in 2000 and 1999, which are included in research and development
expenses, were $ 417,983 and $ 470,956, respectively. There were no grants or
expenses in 2001.
The contracts between the Company and each of these parties provides that,
depending on the contract, 50 to 70% of the initial payment, which the Company
recognizes as income upon completion of the projects, is retained by the Company
regardless of the result of the research and development projects. However, the
Company is required to repay, over a 3 to 5 year period, the remainder only if
the results are successful. Accordingly, the Company accrues such amounts as
long-term accounts payable-other.
Details of long-term accounts payable-other as of December 31, 2001 and
2000 are as follows(in U.S. dollars) :
63
Final December 31,
--------------
Maturity
Year 2001 2000
------------- ------ ------
Korea Institute of Industrial Technology
Evaluation and Planning. . . . . . . . . 2005 $ 72,312 $97,672
Wonkwang University Research Institute . 2004 35,165 48,607
Small and Medium Business Administration 2004 21,652 24,956
-------- --------
129,129 171,235
Less current portion due within one year (38,922) (37,367)
-------- --------
Long-term portion. . . . . . . . . . . . $ 90,207 $ 133,868
The above long-term accounts payable-other have no interest terms but have not
been discounted at present value as the difference between book value and
present value is not material. The current portion is included in accounts
payable-other.
The future scheduled maturities of long-term accounts payable-other at December
31, 2001 are as follows:
Years ending
December 31 In U.S. dollars
2002 . . . . . . . . $ 38,922
2003 . . . . . . . . 38,922
2004 . . . . . . . . 38,922
2005 . . . . . . . . 9,485
2006 and thereafter. 2,878
----------
129,129
-----------
12. RETIREMENT AND SEVERANCE INDEMNITIES
Employees with more than one year of service are entitled to receive severance
indemnities, based on length of service and rate of pay, upon termination of
their employment.
Although the term Pension is used in the National Pension Law (Law) and National
Pension Fund (NPF), a Korean Pension is a one-time lump sum payment upon the
termination of an employment, rather than a series of payments in annuity.
The Company's estimated liability under the plan, equal to the amount which
would be payable if all employees were to terminate at the balance sheet date,
has been accrued. The following is the formula used to determine the amount of
the benefit payable:
Amount payable = (Certain percentage, as provided by the Law, of the person's
latest annual salary or wage) X (Number of years employed)
64
The application of the Law is the same for both retirements and layoffs. That
is, there is no difference between retirement benefits and severance benefits in
Korea.
The Company transferred a portion of its accrued severance indemnities in cash
to the National Pension Fund as provided by the National Pension Law of Korea.
The amount transferred will reduce the retirement and severance benefit amount
payable to the employees when they leave the Company and is reflected as a
direct deduction from the retirement and severance benefits liability in the
accompanying consolidated financial statements. However, the requirement for
transfer to NPF was repealed in April 2000.
Changes in retirement and severance indemnities for the years ended December 31,
2001, 2000 and 1999 are as follows (in U.S. dollars):
Year ended December 31,
----------------------------
2001 2000 1999
-------------------------
Beginning balance. . . $238,067 $198,926 $202,622
Provision. . . . . . . 120,972 113,777 77,294
Payments . . . . . . . (31,961) (47,415) (92,764)
Translation adjustment (9,793) (27,221) 11,774
-------------- --------- ---------
Ending balance . . . . 317,285 238,067 198,926
Transferred to NPF . . 25,368 27,615 34,982
-------------- --------- ---------
291,917 $210,452 $163,944
Less current portion. . 44,216 39,060 36,986
-------------- --------- ---------
Net. . . . . . . . . . $ 247,701 $171,392 $126,958
Current portion of retirement and severance indemnities is included in other
current liabilities.
13. SHARE CAPITAL
(a) On September 27, 1999, the Company amended its authorized capital stock
from 11,000,000 shares to 50,000,000 shares, and issued 5,000,000 shares at par
value ($0.17 per share) for cash on October 1, 1999.
(b) On December 29, 1999, the Company converted its convertible bonds to
common stock and issued 1,346,325 shares of common stock at $0.58 (par value
$0.17 at the spot exchange rate).
65
(c) On March 2, 2000, the Company issued 750,000 shares of common stock (par
value $0.18 at the spot exchange rate) at $0.89 per share for cash.
(d) On February 6, 2001, the Company acquired a 100% equity interest in a
U.S. corporation named By George Holding, Corp. and issued 1,703,550 shares of
common stock in consideration of the acquisition.(Refer to Note 20)
(e) In accordance with a resolution of the shareholders' on February 15,
2001, the Company split its common stock on a ten-for-one basis. The
shareholders' also authorized a splitting of the Company's common stock on a
five-for-two basis on March 19, 2001. All references in the consolidated
financial statements to number of shares, per share amounts and stock option
data have been adjusted to give effect to these stock splits.
14. ACCUMULATED DEFICIT
The Company appropriated $224,659 and $247,854 as of December 31, 2001 and 2000,
respectively, for business rationalization pursuant to Korean Commercial Law. In
accordance with the Special Tax Treatment Control Law, the amount of tax benefit
associated with certain tax exemptions and tax credits must be appropriated as a
reserve for business rationalization. The purpose of the legal mandate is to
prevent companies from paying out all of their earnings as dividends to their
shareholders and, thereby, to motivate companies to make reserves for future
investment and development. The appropriation for business rationalization may
not be utilized for cash dividends, but may be used to offset a deficit, if any,
or transferred to capital stock. However, the requirement for appropriation for
business rationalization was repealed in 2001.
15. PRIOR PERIOD ADJUSTMENTS
The Company had understated its purchase from Medison Co., Ltd. and foreign
currency transaction gain by $102,453 and $7,937(net of $1,596 loss),
respectively, in 1999. Foreign currency transaction gain of $58,707(net of $80
loss) was understated for the year ended December 31, 2000. The financial data
for all periods presented was restated to the correct basis as follows(in U.S.
dollars):
Prior Period Adjusted
Previously reported Adjustments Balance
==================== ============
Accumulated deficit at January 1, 1999 . ($659,663) ($659,663)
Net income . . . . . . . . . . . . . . (278,091)
Prior period adjustments
- Purchase . . . . . . . . . . . . . (102,453)
- Foreign currency transaction gain. 7,937
Adjusted net income. . . . . . . . . . (372,607)
Accumulated deficit at December 31, 1999 (937,754) (94,516) (1,032,270)
Net income . . . . . . . . . . . . . . (755,393)
Prior period adjustments
- Foreign currency transaction gain. 58,707
Adjusted net income. . . . . . . . . . (696,686)
Accumulated deficit at December 31, 2000 ($1,693,147) ($35,809) ($1,728,956)
Previously Prior Period Adjusted
----------- ------------ ---------
reported Adjustments Balance
------------ ------------ ------------
Accumulated deficit at January 1, 1999. ($659,663) ($659,663)
Net income. . . . . . . . . . . . . . (278,091)
Prior period adjustments
- Purchase. . . . . . . . . . . . . (102,453)
- Foreign currency transaction gain 7,937
Adjusted net income . . . . . . . . . (372,607)
----------- ------------ ---------
Accumulated deficit at December 31,
1999 . . . . . . . . . . . . . . . . . (937,754) (94,516) (1,032,270)
Net income. . . . . . . . . . . . . . (755,393)
Prior period adjustments
- Foreign currency transaction gain 58,707
Adjusted net income . . . . . . . . . (696,686)
----------- ------------ -----------
Accumulated deficit at December 31,
2000. . . . . . . . . . . . . . . . . . ($1,693,147) ($35,809) ($1,728,956)
============ =========== ============
16. COMMITMENTS AND CONTINGENCIES
As of December 31, 2001, The Company is contingently liable for promissory notes
of $911,643 sold to banks with recourse. The Company's management believes that,
based upon its past history of similar transactions, the possibility of the
issuers' defaults on the notes is remote.
At December 31, 2001, the Company is contingently liable for guarantees of
indebtedness, principally for customers, amounting to $76,551.
17. RELATED PARTY TRANSACTIONS
The Company's transactions and account balances with related parties for the
years ended December 31, 2000 and 1999 are summarized as follows (in U.S.
dollars):
66
Year ended December 31,
2001 2000 1999
-------- ------- -------
TRANSACTIONS
Sales to:
Medison Co., Ltd.. . . . . - $267,367 $ 68,858
Medicapital Co., Ltd . . . 18,697 - 717,425
Medison Do Brazil. . . . . - 116,208 31,568
Purchases from:
Medison Co., Ltd . . . . . 96,861 102,453
Medichems Co.,Ltd. . . - 423,246
69
67
Account Balances
Accounts receivable-trade:
Medison Co., Ltd . . . . . - 240,567 -
Medicapital Co., Ltd . . . 17,206 - 33,761
Medison Do Brazil. . . . . - 88,318 26,812
Short-term loans:
Beijing Meridian Medicals. 28,771 - -
Accounts receivable-other:
Medison Co., Ltd . . . . . - 50,610 -
Medicapital Co., Ltd . . . - 161,799 -
Accounts payable-trade:
Medidas Co., Ltd . . . . . - - 6,507
Medison Co., Ltd . . . . . 92,681 99,174 110,611
Account payable-other:
Medison Co., Ltd . . . . . - 198,792 114,793
Short-term borrowings:
Medison Co., Ltd.. . . . . - 162,759 181,528
Medicapital Co., Ltd.. . . - - 2,889
As of December 31, 2000, Medison was the largest shareholder of the Company and
therefore treated as a related party. During 2001, Medison disposed of its
investment in the Company and, as a result, Medison is no longer considered to
be a related party. Accordingly, Medison and its affiliates, such as Medison Do
Brazil, Medicapital and Medidas have been excluded from the related party
disclosure for the year ended December 31, 2001.
18. INCOME TAXES
The Company is subject to corporate income tax and resident surtax normally at
an aggregate rate of 17.6% on taxable income up to W100,000,000 and 30.8% on
taxable income over that amount.
68
At December 31, 2001, the Company had technology and human resources development
tax credit carryforwards of $179,025($145,274 in 2000). It is expected that the
Company could not realize a tax benefit from such tax credit carryforwards
before their expiration in 2007 (2006 for 2000). A valuation allowance of
$816,816 ($232,135 in 2000) has been recognized to offset the deferred tax
assets related to these tax credit carryforwards and other temporary
differences. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purpose. Significant
components of the Company's deferred tax assets as of December 31, 2001, 2000
and 1999 are as follows:
2001 2000 1999
---------- ---------- ----------
Deferred tax assets
Accruals and reserves. . . . . . . . . $ 637,791 $ 166,881 $ 156,208
Technology and human resources
development tax credit carry forwards. 179,025 145,038 104,857
---------- ---------- ----------
Total deferred tax asset(liability). . 816,816 261,919 261,065
Valuation allowance for deferred
Tax asset. . . . . . . . . . . . . . . (816,816) (261,919) (261,065)
---------- ---------- ----------
Net deferred tax asset(liability). . . - - -
---------- ---------- ----------
Reconciliation between the income tax expense (benefit) computed using the
Korean statutory income tax rate and the Company's actual income tax expense
(benefit) for the fiscal years ended December 31, 2001, 2000 and 1999 is as
follows:
2001 2000 1999
---------- ---------- ----------
Income tax recovery at statutory rate. . . . . . . . . $(577,774) $(212,990) $ (70,425)
Reduction of income tax benefit due to lower tax rate
on first W100,000,000
10,206 11,579 11,109
Temporary differences - primarily non-deductible
expenses under Korean Tax Law
557,214 (25,759) 137,518
Permanent differences - expenses (primarily
entertainment and others) in excess of tax deductible
limitation
35,473 33,479 (7,279)
Others - net
529,778 206,096 274,585
Changes in valuation allowances
(554,897) (854) (215,472)
---------- ---------- ----------
Income tax expense
- $ 11,551 $ 130,037
19. STOCK OPTIONS
Under the Company's Articles of Incorporation, the Company may grant options for
the purchase of shares to certain qualified officers and employees. In order to
qualify for participation in the Stock Option Plan, officers and employees must
have the ability to contribute to the establishment, development or
technological innovation of the Company.
69
The specific terms and conditions of stock options granted under the Stock
Option Plan shall be approved at a duly convened shareholders' meeting. The
maximum aggregate number of shares available for issuance under the Stock Option
Plan may not exceed 50% of the total number of shares outstanding. Stock options
may not be granted to all officers and employees at the same time. Any single
officer or employee may not be granted stock options for shares exceeding 10% of
shares issued and outstanding.
Stock options granted under the Stock Option Plan will have a minimum exercise
price equal to the arithmetic mean of (i) the weighted average of the daily
market prices for the two-month period prior to the date of grant, (ii) the
weighted average of the daily market prices for the one-month period prior to
such date, (iii) the weighted average of the daily market prices for the
one-week period prior to such date. When new shares are issued upon the exercise
of the stock options, the option exercise price shall not be less than the
greater of the market price of shares valued as of the date of the grant or the
par value of the shares concerned.
A summary of the status of the Company's two fixed stock option plans as of
December 31, 2001 is presented below :
Grant Date Options Exercise Price (by the Spot Fair Value per Share Vesting Period
Outstanding Exchange rate) of Options Granted
------------ ---------------------------- ---------------------
Feb. 23, . Feb. 2003 to
2000. . . 471,050 W1000 ($0.88) $ 0.26 Feb. 2007
Mar. 19, Mar.2004 to
2001. . . 425,250 W680 ($0.52) $ 0.47 Mar. 2008
----------
896,300
----------
The Company applies APB Opinion 25 and related interpretations in accounting for
its plan. No compensation cost has been recognized for its fixed stock option
plan. Although compensation cost for the Company's stock-based compensation plan
is determined based on the fair value at the grant date consistent with the
method of SFAS 123, the Company's net loss and loss per share are not changed as
the exercise price of the stock option exceeds the estimated fair value thereof.
The weighted average fair value per share of options granted was $0.47 and $0.26
during 2001 and 2000, respectively. The fair value of the option grant is
estimated on the grant date using the Black-Scholes option pricing model with
the following assumptions: dividend yield and expected volatility of nil for all
years, risk-free interest rate of 9 percent, and expected life of 4 years.
20. ACQUISITION
As shown in Note 2a, the Company acquired a controlling ownership interest in
three sales agent companies and one other company engaging in medical software
service, for an aggregate amount of $389,792 in cash and $49,872 in products,
for the years ended December 31, 2000 and 1999, respectively. These acquisitions
were recorded under the purchase method of accounting and, therefore the
purchase prices have been allocated to assets acquired and liabilities assumed
based on estimated fair values. The results of operations of these entities are
included in the consolidated financial statements of the Company from the date
of acquisition.
The estimated fair values of net assets and goodwill relating to acquisitions
are summarized as follows(in U.S. dollars) :
2001 2000 1999
---- ---------------------------------------- ----
Beijing Pusan Chunee True Meridian
Meridian Meridian Soft World Total Asia
--------- --------- --------
Net assets. . $ 33,665 $ 53,547 $ 99,073 $199,024 $351,644 $49,872
Goodwill* . . . 26,316 - 23,256 14,892 38,148 -
--------- --------- -------- -------- -------- -------
Acquisition
price 59,981 $ 53,547 $122,329 $213,916 $389,792 $49,872
*The purchased goodwill, amounting to $30,020, was written off in 2001.
At December 15, 2001, the Company has disposed of 2% of its original 51%
shareholding in Meridian Asia Co., Ltd ("MACL"), resulting in a 49% share
ownership in MACL.
Three members of management of the Company disposed of their 1% share ownership
in True world (3% in total) on December 22, 2001. As a result, the Company was
no longer able to exercise the significant control over True World
70
ChuneeSoft filed for bankruptcy during December 2001 and as of December 31,
2001. ChuneeSoft practically ceased its entire operation. As a result,
ChuneeSoft was consolidated as of the date of bankruptcy. As the Company was no
longer able to exercise control over ChuneeSoft, net assets of ChuneeSoft were
removed from the balance sheet and the resulting loss of $10,212 was included in
extraordinary items.
On February 6, 2001, the Company acquired a 100% equity interest in a U.S.
corporation named By George Holding, Corp.("By George") in consideration for
1,703,550 common shares issued from treasury. By George is an inactive
corporation that has no assets or liabilities. This transaction will be
accounted for as a capital transaction in substance but will have no impact on
the Company's consolidated financial statements other than to reduce the
reported loss per share to $0.04 for the year ended December 31, 2000.
On November 10, 2001, the Company acquired 45% of the share ownership in Beijing
Meridian Medicals Equipment Co., Ltd. for $59,981(by the spot exchange rate of
Won 1,283 to $1) in cash.(Refer to Note 6)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of financial instruments as of December 31, 2001 and 2000 are as
follows (in U.S.dollars) :
Dec. 31, 2001 Dec. 31, 2000
============= =============
Carrying Fair Carrying Fair
amount value amount value
---------- ------ --------- ------
Financial assets :
Cash and cash equivalents . $ 105,216 $ 105,216 $ 398,625 $ 398,625
Short-term investments. . . 841,476 841,476 2,647 2,647
Accounts receivable
- - trade and other . . . . . . 1,780,052 1,780,052 2,983,147 2,983,147
Short-term loans. . . . . . 89,798 89,798 146,327 146,327
Investments
Market-traded securities. - - 87,845 87,845
Non-marketable securities - 41,216 (note a) 27,625 (note a)
Long-term bank deposits . . 80,929 80,929 108,524 108,524
Long-term loans . . . . . . 220,672 220,672 383,695 383,695
---------- ---------
$ 3,159,359 $ 4,138,435
---------- -------------
Financial liabilities :
Accounts payable
- - trade and other . . . . . . $ 1,601,844 $ 1,601,844 $1,703,015 $ 1,703,015
Short-term borrowings . . . 1,587,573 1,587,573 1,491,875 1,491,875
Long-term borrowings
including current portion 1,345,592 1,345,592 1,607,048 1,607,048
Debentures. . . . . . . . . 1,136,448 1,136,448 - -
Long-term accounts payable. 90,207 90,207 133,868 133,868
---------- ----------
$ 5,761,664 $ 4,935,806
(note a) Fair value of these investments was not available as they are not
publicly traded. Accordingly it is not practicable to determine the fair value
of such securities.
Credit risk arises from the potential for customers and other debtors to default
on their contractual obligations to the Company. The Company does not anticipate
customers and other debtors will default on their obligations to any greater
extent than that currently provided for. The Company limits its credit risk by
granting credit only to customers and other debtors that are considered to be of
high quality.
22. STATEMENTS OF CASH FLOWS
(a) Non-cash investing and financing transactions
Important non-cash investing and financing transactions for the year ended
December 31, 1999 are as follows (in U.S. dollars) :
71
Year ended
Dec. 31, 1999
Conversion of convertible bonds into common stock. $ 788,491
Acquisition of investments in exchange of products 49,872
Also, during 1999, the Company sold certain of its assets and liabilities
relating to two non-core product lines to an unrelated party, Medicore, Co.,
Ltd. and this non-cash involving transaction is summarized as follows:
Assets Liabilities
Inventory. . . . . . $ 784,646 Accounts payable-trade $1,253,851
Accounts receivable. 109,950 Accounts payable-other 30,705
Goodwill(note 1) . . 389,960
----------- -----------
$ 1,284,556 $ 1,284,556
(note 1) The two parties agreed that $389,960, 80% of the goodwill acquired in
the 1998 acquisition of Hippo was related to these two product lines based on
the inventory-based computation method. The percentage of the goodwill
transferred approximated that of the inventory transferred to Medicore Co. Ltd.
During 2000, the Company received non-cash contributions from its minority
investors, which was primarily inventory amounting to $46,815.
(b) Interest and income taxes paid and received
Interest and income taxes paid and received in cash for the years ended December
31, 2001, 2000 and 1999 are as follows (in U.S. dollars) :
Year ended December 31,
=======================
2001 2000 1999
----- ----- -----
Interest paid for the year . . $333,084 $340,930 $238,085
Income taxes paid for the year (36,571) 186,148 10,063
Interest received. . . . . . . 38,641 41,173 46,143
72
23. SEGMENT INFORMATION
The Company operates in a single reportable operating segment, that is, the
development and manufacture of alternative medicine equipment. The single
reportable operating segment derives its revenue from the sale of its
alternative medicine equipment, software and other related products. As at
December 31, 2001, substantially all of the assets related to the Company's
operations were located in Korea. Net revenue is attributable to geographic
locations based on the location of the customer, as follows:
December 31,
-------------------------------
2001 2000 1999
---------- ------ -------
Export
U.S.A.. . . . $ 139,693 $ 129,151 $ 248,000
Canada. . . . 135,794 - -
South America 57,119 111,216 31,567
South Asia. . 26,291 68,597 166,514
China . . . . 90,710 332,466 226,188
Japan . . . . - - 21,667
Other . . . . 83,407 2,476 33,845
533,014 643,906 727,781
---------- ---------- ----------
Domestic Sales . 4,756,547 4,660,134 4,639,310
$5,289,561 $5,304,040 $5,367,091
24. NEW TECHNICAL PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." Under these new standards, all
acquisitions subsequent to June 30, 2001 must be accounted for under the
purchase method of accounting, and purchased goodwill is no longer amortized
over its useful life. Rather, goodwill will be subject to a periodic impairment
test based upon its fair value.
73
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the asset.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
discontinued operations.
The Company is currently evaluating the impact of these pronouncements to
determine the effect, if any, they may have on the consolidated financial
position and results of operations.
25. SUBSEQUENT EVENTS
On January 16, 2002, the Company established "Meridian America Medicals Inc
(MAMI)", a foreign based subsidiary located in the United States, for the sake
of promoting sales in North America.
26. UNCERTAINTIES IN BUSINESS ENVIRONMENT
The Asia Pacific region, including Korea, has been experiencing significant
economic difficulties. The operations of the Company, and those of other
companies in Korea have been significantly affected, and will continue to be
affected for the foreseeable future, by the general unstable economic conditions
in the country and in the Asia Pacific region. It is currently uncertain what
the resulting effect will be on the future operations and financial position of
the Company and its subsidiaries. The ultimate outcome of this matter cannot
presently be determined. Therefore, the consolidated financial statements do not
include any adjustments that might result from those uncertainties.
ITEM 19. EXHIBITS
- -------------------
None
74
SIGNATURES
The registrant hereby certifiers that it meets all of the requirements for
filing on Form 20 - F and that it has duly caused and authorized the undersigned
to sign this registration statement [annual report] on its behalf.
Meridian Co., Ltd
By: /s/ Hyeon-seong Myeong
--------------------------------
Name: Hyeon-seong Myeong
Title : President, CEO
Date: July 12, 2002
75